Invisible Real Estate Costs

How to root out "invisible" real estate costs lurking in your portfolio

Many costs necessary to operate commercial properties are visible but many potentially significant costs are nearly invisible. Even though not readily seen, these costs are very real.

Following is a discussion of these “invisible” costs and three proven techniques to drive them from your financial results. 

Problems You Can See

Recently the CFO of a regional retailer described the challenges he faces managing his company’s corporate real estate locations.  His company operates more than 300  locations spread over 35 states.  The company had grown successfully for several years until recently, when lower sales signaled the recession.  Realizing what was happening, the CFO directed his in-house team to aggressively reduce their occupancy expenses.

His team began by attacking the costs reflected on their financial statements.  First, they began changing the store mix, i.e. reducing the number of expensive mall stores in favor of less expensive neighborhood and regional shopping centers. Then they restructured leases to include more percentage rent or hybrid rent structures. This tactic   converted a portion of their fixed costs to variable costs (tied to sales). They did a great job.  However, they missed some very important costs.  

Invisible Challenges

While focusing on real estate lease costs, don’t overlook some important hidden costs. These challenges include:  

  • Staffing appropriately for your necessary corporate real estate functions while recognizing that you may need more resources during peak periods and less when things are routine,  
  • Avoiding overpaying costs required by your leases but which are often under-reviewed or misinterpreted in the bustle of ongoing operations, and  
  • Accessing accurate information about your leases and properties when you need it so you can make informed, effective decisions.

So, what are these hidden challenges and how do you tame them?

The Staffing Equation

So, how do you staff your corporate real  estate function to achieve maximum efficiency?  Answer:  by using the “staffing equation”, which says: Maximum efficiency = staffing in-house with all, but only, the experienced personnel resources you need. To optimize your staffing equation, you must address three variables:  “all”, “only”, and “need”.

First address the “all” variable.  Determine what processes are required to effectively manage your corporate real estate.  Some of these processes are obvious and straight-forward.  Others are more subtle and may involve interaction with other corporate departments.  Organizational consultants can analyze your real estate function and benchmark what you are doing versus industry best practices.  

Once you have articulated your corporate real estate  processes, evaluate what resources are required to perform the ongoing required daily and monthly tasks.  Often hidden are the costs of the resources required at times of peak    demand.  For example, one peak demand is the time necessary to thoroughly review and abstract new leases,  particularly if your business is cyclical and you open locations in bunches.  Another peak demand can occur when annual common area maintenance (CAM) statements are delivered and reconciled.  

When these situations occur, the company can either overstaff during the less demanding times to have on-call resources available at peak demand times, or squeeze more out of existing resources by requiring late nights or weekends.  Further, for maximum efficiency, these activities require a  certain level of experience and real estate knowledge.  Experienced real estate professionals can be expensive to warehouse for peak demand, or to replace should they get burned out from excessive overtime.  

The sum of these required resources the “all” variable.  

Next, analyze what resources you “need”.  The company must decide whether it is more valuable to handle the day-to-day details, or use its resources for analysis, strategy, and problem-solving.  The former may be addressed with less  experienced, less expensive staff. The latter requires more experienced, more expensive resources.  The final experience mix you choose defines your “need”.

Lastly, consider whether in-house or outside resources are most efficient. By carefully defining who handles day-to-day tasks and who handles strategy, analysis, and problem-solving, the company can ensure the most cost-appropriate resources are applied where and when needed.  Outside consultants can provide additional resources during peak demand.  Deciding on the mix of in-house (fixed) and outside (variable) resources will define “only”.  

Judicious use of outside resources can squeeze the invisible costs of undermanned or overstaffed corporate real estate functions out of your operations.  Getting the mix right will also improve efficiency by applying the appropriately experienced (and priced) resources when needed.  

Corral Lease Overpayments

A recent research report claimed 90% of all leases contain billing errors.  Some landlords even treat CAM as a profit-center. Incorrectly billed lease charges can be an expensive hidden cost in your real estate portfolio.  One straight-forward technique to address potentially significant overpayments is to engage a lease audit specialist.  Lease audit consultants can quickly evaluate the potential for errors and the likelihood of their recovery.  Lease audit firms will usually work on a contingent fee basis (within certain parameters) and fees typically range from 30% to 50% of amounts recovered.

You might consider engaging a lease audit firm on a fixed-fee or fixed-plus-incentive fee basis.  Under these non-traditional arrangements, the company keeps all or a larger portion of the amounts recovered.  Consider the fixed fee portion as a “staffing cost”, i.e., engaging consultants rather than keeping a larger in-house staff to review all lease CAM statements.  While either fee arrangement can help you reduce lease overpayments, to really maximize expense control, you need timely, accurate and consolidated information about your leases.  

Information is Power

Hopefully, you have not suffered the all-too-common mistake of missing a crucial lease deadline because you lacked timely information.  We were engaged by one company that missed an option to purchase its leased  distribution center at a significant bargain value.  The property was worth more than $12 Million, and the option price was less than $2 Million. This company made a $10 Million dollar mistake simply by not knowing the date by which they had to exercise their option.  What is the invisible cost of each of the critical dates in your lease agreements?

There are many corporate real estate information systems on the market capable of organizing and tracking critical dates and other lease information.  The investment required to acquire, install and maintain these systems can seem costly.  However, these dollars pale in comparison to the hidden costs of missed deadlines, inefficient administration (i.e. extra staffing required), and poor management decisions based on incomplete or inaccurate information.

If you have a system in place, reevaluate the completeness and accuracy of the information in your database:  Are all lease options and related deadlines captured?  Are lease clauses thoroughly abstracted so you know what your     obligations include and exclude?  Are portfolio reports regularly reviewed by management?

If you don’t have a system in place, consider this.  Some portfolio management consultants include access to a     sophisticated lease information system as part of their lease administration service and fees.  The company gets timely, accurate information without having to make a major upfront investment in software.  In either scenario, relying on an accurate lease information system will help avoid costly mistakes and support maximum efficiencies in the management of your company’s real estate portfolio.  

Conclusion

Getting your staffing right, avoiding or recovering lease overpayments and using thorough, accurate information about your leases and properties will help you make the invisible costs visible and improve your operating results.


Galaxy Partners is a national corporate real estate firm headquartered in Atlanta, Georgia. Galaxy provides Consulting, Transaction, and Management services exclusively to corporate clients throughout the USA.

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