With real estate and facilities representing the second- or third-largest expense on the average company's balance sheet, how the real estate is handled prior to, during, and after a transaction can be critical to the success of the overall transaction.
One of the keys to help maximize shareholder value is to carefully evaluate the entire real estate portfolio - both owned and leased facilities - as early as possible, solidify a real estate strategy that is in alignment with your business goals and objectives, and then ensure that the necessary resources are in place to implement once the transaction is complete.
There are three critical steps or phases of a merger or an acquisition; preliminary due diligence, prior to the transaction; portfolio assessment and strategy, during the transaction; and integration and implementation, after the transaction has closed.
Phase 1- Preliminary Due Diligence
Taking the initiative early when the potential transaction is still in the infancy phase will help you maximize the corporate real estate value opportunities that lie within a potential transaction. It is critical to create and utilize tool sets that allow your team to effectively manage the transaction while at the same time positioning the real estate and facilities as a strategic resource and shareholder value creator.
It is important to be prepared for almost anything at this stage. You would be surprised at how onerous many lease agreements are and how many companies do not keep good records of their real estate and facilities. Thus, in addition to the fact that your access to the other company's data at this stage is often very limited, often the real estate and facility data itself is scarce, lacking in consistency, and fragmented.
One very important point to emphasize at this phase is to bring in partners early. Often, companies wait until the last minute to bring in real estate advisors, project managers, appraisers, attorneys, etc. This is a mistake. Bringing these partners in early gives them the time that they need to provide you with reliable data as you evaluate the pros and cons of any given transaction. It is commonplace for service providers to sign non-disclosure agreements at this stage, due to the confidential nature of these types of transactions.
You will want to work very closely at this stage with your real estate service provider. Having an external real estate team in place to perform research and make educated assumptions about missing information will be critical. Your service provider will help you to identify your high-level opportunities, quantify your potential risks and problems, and perform summary property and portfolio reviews. This analysis should provide you with a reasonably accurate assessment of the current portfolio, and identify lease expirations, approximate values, and current and potential asset utilization.
One recommendation at this phase is to create an evaluation matrix ranking each of the properties on such factors as location, security, infrastructure, access, availability of skilled work force, parking, and operating expenses. This will provide you with an objective evaluation standard and will help to kick-start the process of determining which facilities may be expendable and which will be important to keep moving forward. The more standardized your processes are at this point, the easier it is for everyone involved to get on the same page and add value.
Phase 2 - Portfolio Assessment and Strategy
Once the transaction moves beyond the exploratory phase and into full negotiations, property leases will need to be abstracted in detail, buildings physically inspected, property valuations completed, adaptability of facilities assessed, asset utilization and occupancy costs evaluated, leases benchmarked, and property records explored. You will want to work with your service provider to develop a strategy and a process map for the housing of people, inventory, and logistics. It is important to create both primary and backup plans, prioritize the plans, and gain business approval for each plan in sequential order. Having your contingency plans in place early will ensure that you can work from a robust yet flexible process map.
Once the map is created, it is important to identify critical action items that focus on aligning the real estate with the business. Note that I said align the real estate with the business, NOT try to create a business strategy that aligns with the existing real estate. This is a mistake that many companies make. It is very important to evaluate what is best for the business first and then decide how the existing real estate does or does not fit into that plan.
It is also necessary at this phase to create a strategy to potentially reposition each of properties - sale, sublease, lease termination, lease re-negotiations, site re-development, etc. Things to consider as you do this are market conditions, sublease and sale timelines, viability of lease terminations, recapture possibilities, lease renegotiation opportunities, environmental liabilities, and potential costs involved. I cannot overemphasize the importance of looking realistically at the potentially integrated real estate portfolio and determining where you can cut and where you cannot. Being able to put a realistic plan in place to eliminate redundancies and reduce your real estate cost and liability will only drop more dollars to the bottom line and help to ensure that your transaction is a success.
Phase 3 - Integration and Implementation
you have completed your due diligence, have your process map in place
and the transaction closes, you are now thrust into the integration
phase where all of your planning is now in need of implementation. The
most important thing to know at this phase is to be prepared and ready
to act quickly, as success or failure is often realized early on. You
will need to be decisive, responsive, scalable, and flexible as you
implement, and this speed of implementation will become more and more
important as the overall speed of transactions increases. Additionally,
most transactions involve a high degree of financial exposure, so
realistic budgeting and timely implementation will be critical.
is imperative to have been in regular communication with the various
business units so that once you receive final approval to move forward,
there are no delays and you can immediately begin your implementation
plan to move people, shift inventory, handle logistics, and dispose of
excess space. Here again, it is important to re-emphasize that having
all of your vendors in place, up to speed, and ready to act is critical
and will help to facilitate a smooth and successful integration. Make
sure that you view your vendors as true partners and compensate them
fairly. A good real estate team will be your best ally during this
process, and you want to make sure that they are fully motivated to
accomplish the goals you set out for them.
In the end, it boils
down to a lot of hard work, research, planning, and relentless
implementation, but if you follow the steps outlined above and the keys
that are critical for each phase, you will find that your transactions
will run more smoothly, there will be less surprises, and most
importantly, you will consistently improve the profitability of your
transactions through the proactive management of the real estate and
Jonathan A. Keyser
is a principal with CRESA Partners, an international corporate real
estate advisory firm that exclusively represents tenants. Worldwide,
the firm provides services through 35 countries, including 44 North
American CRESA Partners locations. For more information, you can
contact Mr. Keyser at (602) 648-7353; email@example.com.