Decentralization at Berkshire is strategic and necessary. “These (managers) are people who are .400 batters. I do not need to tell them how to swing. I tell them just one thing: to send me a letter, that I will keep in a private place, in case they are to die, what I am to do”. – Warren Buffett. The severity of Berkshire’s decentralization is founded on the principle that the economics and management teams of Warren’s businesses are so good, that Warren has no business tinkering with them. His job is to allocate excess capital that the businesses spin off, and to provide his wisdom when it is requested.

The important benefit of being a Berkshire company is not that Warren is at the helm; rather it is the low cost of capital (AAA credit rating that only a handful of companies in the world share) and the long-term perspective of its owners. To wrench additional efficiencies out of independently operated and unrelated companies that have already mastered their respective economics is fruitless. However, for companies with related businesses or units, it can be very profitable. And centralization of real estate asset management can be a good place to start.

Selling the concept of corporate real estate centralization is like selling the concept of one-stop-shopping. The value is in efficiency and purchasing-power. Instead of independently shopping for similar resources, why not collectively shop for resources in a consolidated effort? In corporate real estate, this means relieving operating managers of their real estate duty, and allowing them to maintain focus on operations. The caveat being the connection between business-unit manager’s incentive structures, which commonly include the real estate expense and are linked to the unit’s P&L, and how it is restructured to reflect the changes. The good news is that the purpose of real estate centralization is to save money.

The question becomes whether the centralization effort is worth the reward. In my previous post An Uncoordinated Effort this was clearly the case. Under less extreme circumstances, the benefits can include accountability, synergy and economies-of-scale. McDonald’s for example, operates owned and franchised stores. But the franchisees don’t secure the convenient intersection locations for their restaurants, how could they? They lack the expertise and capacity to do so. Instead, McDonald’s has regional real estate teams. Accountability resides with those who are set up to manage real estate, not operating managers who are set up to oversee operations.

Other than credit, economies-of-scale is most prevalent with corporate real estate provider relationships. The local CRE provider and business unit relationship is only as good as the next deal. When deals are few and far between, incentives and motivation is limited. Conversely, when an individual deal is only a fraction of the overall pie, that deal receives the same attention as if it were the pie itself. For example, a company with multiple locations, leased and owned, might receive strategic planning and space utilization services that it would otherwise not receive had it not been part of a “centralized” partnership. Furthermore, such services are likely to be free to the corporation as the service provider might offer it as a value-add service, subsidized via a commissionable event. (i.e. a market-driven and landlord-paid transaction commission).

Like at Berkshire Hathaway, it becomes difficult to regress when great operating managers are enabled to focus on operations. If real estate falls outside of their circle-of-competence, as is does for McDonald’s owners/operators, centralization of real estate asset management may have merit. If internal resources are lacking corporate real estate expertise or capacity, partnering with a firm that does may have merit as well. For McDonald’s, centralization of real estate became part of their competitive advantage.

Rory Johnson 10/12/2007

rory@intelligentcre.com

CPP North America provides products that help people cope with the challenges of modern life. Their products range from Identity Theft Protection and Gadget Protection to Purchase Protection and Discount Plans that help people get the most out of life. CPP North America is part of CPP Group Plc, a UK-based leading international provider of assistance products and services with over 10 million customers worldwide.

In April 2004, CPP entered into a sixty-six month lease at 5100 Gamble Drive, in St. Louis Park MN, for 43,878 sq. ft. The nature of CPP’s operation changed shortly after lease commencement, leaving a significant portion of their space vacant. CPP engaged ULG Equis’ Workplace Integration and Transaction Management team to analyze CPP’s space needs, develop and implement occupancy cost reduction strategies, achieve necessary tenant improvements, landlord improvements to the building, and to maintain exterior building signage along Highway 100, an important Twin-Cities Highway.

Solutions

UGL Equis’ Workplace Integration team determined that 29,223 sq. ft would accommodate CPP’s operation and that expansion rights would suffice for anticipated growth. The Transaction Advisors engaged the landlord in restructuring discussions regarding the disposition of 14,655 sq. ft., tenant improvements, signage and building improvements, including common area renovations and building entry upgrades.

The team negotiated the lease and secured termination/renewal/expansion options. CPP shed the 14,655 sq. ft. of unneeded space (representing 33% of the obligation) and saved $750,000. In addition, CPP received a generous concession package with $200,000 in tenant improvements, building signage, additional underground parking stalls, and an upgrade to the buildings appearance.

Benefits

· Mitigation of $750,000 in lease obligation

· Alignment of real estate with CPP’s business drivers

· Enhanced building appearance

· Free underground parking

· Exterior building signage

Rory Johnson 10/09/2007

rory@intelligentcre.com

In a classic “What Would Jesus Do” event, a landlord offered me a generous real estate commission in exchange for advising my client (the tenant) to accept the landlords’ proposal.

A large non-profit had one year left on a five-year lease in a building that was 98% occupied. The lease had a renewal option at “market” rental rates. The buildings’ remaining vacancies, two windowless and undesirable suites, were listed at artificially high rental rates to establish high market rates for lease renewals.

The non-profit tried to negotiate on their own, but weren’t able to talk the landlord down. As a result, I was engaged to persuade the landlord that its’ in the landlords’ best interest to lower asking rents, or my client would relocate to a competitive building, which would be a less profitable alternative for the landlord. Unbenounced to me, this was a bluff. My client led me to believe that relocation was an option, and omitted several critical facts about previous communications with the landlord.

Handicapped as I was, I set out to create a competitive environment for my clients’ tenancy. Proposals were received and I was ready to see who wanted them the most. What I didn’t know was that my client was only interested in one building, the one they already occupied, and that they revealed this position to the landlord three months before my involvement.

I was about to become the one-legged man in an ass-kicking contest, only I didn’t know I was missing a leg until I went to strike.

Negotiations with the incumbent landlord didn’t get off the ground. They said if the tenant doesn’t accept the proposal in the next week, the deal would be off and the space would be put back on the market. The landlord continued, saying my client already revealed their “steadfast” position on not relocating, and other details that worked against us. However, if I convinced my client to sign accept the proposal; the landlord would pay me a $60,000 commission.

The client set me up for failure, and the money was enticing. But it was ethically repulsive. I would not accept something for achieving nothing on behalf of my client, even though my client wasn’t straight with me. In an email, I detailed to my client the incumbent landlords’ position, and stated that if they accept the proposal, I would give them the lion’s share of the fee, keeping only a fraction for myself. I also described the landlords’ comments on prior landlord-tenant communications and how I was preempted.

I proceeded to describe the progress with the competitive buildings and economic benefits of each, including the $750,000 net-effective spread between renewal and relocation scenarios.

The following morning my primary contact, the non-profit’s CFO, said he was terribly sorry, and wished relocation was an option, but if he pursues this any further, his job may be at stake, and he doesn’t have a back-up employment option. Furthermore, he asked me to “bow out” of the renewal negotiation, and give-up the entire fee to the non-profit. As a consellation, they would compensate me with a miniscule amount for my time.

Later that day, the non-profit’s President called and thanked me for my hard work and effort. She continued, saying she spoke with the landlord again, and the landlord would not pay a fee since they were no longer represented, and that they now had six days to accept the proposal. She then asked if I had any recommendations. I said “no”. While I still would’ve liked to help, my only recommendation was to relocate, and I now knew that was not an option.

Rory Johnson 8/31/2007

rory@intelligentcre.com

]]> http://intelligentcre.com/2007/08/31/sixty-grand-to-walk-that%e2%80%99s-a-step-too-far/rory-johnson/feed/ http://intelligentcre.com/2007/08/12/the-greater-sucker-theory-and-consequences-for-tenants/rory-johnson/ http://intelligentcre.com/2007/08/12/the-greater-sucker-theory-and-consequences-for-tenants/rory-johnson/#comments Sun, 12 Aug 2007 19:54:01 +0000 Rory Johnson Taxes and Operating Expenses http://intelligentcre.com/2007/08/12/the-greater-sucker-theory-and-consequences-for-tenants/rory-johnson/ Commercial real estate has seen a tidal wave of activity this year. Sam Zell sold his darling, Equity Office Properties (the nation’s largest office REIT) to Steve Schwarzman’s private equity group, The Blackstone Group, for $39 million. In less than two months, 50% of the properties were “flipped”, mitigating nearly 70% of the purchase price.

In an ironic twist similar to that found on a reality show, Schwarzman continued his game by selling 10% of The Blackstone Group in an IPO, and a similar portion directly to the Chinese Government. Since then (two months ago), the publicly traded, private equity firm’s stock dropped by 20% on fears of new, less favorable tax treatment for private equity firms. The Chinese Government is not happy, nor are the speculators who bought in, as they are finding themselves to be the greater suckers.

The Greater Sucker Theory was the driving force behind the Dot Com Bubble, the housing bubble, and much of the speculative activity in commercial real estate today.

In real estate, as each round of speculation raises the assets book value, so too does it lift the brow on the face of the county tax assessor. An unfortunate consequence, passed-through to tenants, is the incremental tax increase. To add insult to injury, these greater-sucker landlords, who had no regard for the underlying economics of the asset, are now raising rents to cover their increasing cost of capital and to justify the purchase to shareholders.

But tenants don’t have to be spectators in this game. Relocating to a building with a long-term holder is recourse, but for tenants with term on their leases, the increased taxes are inevitable. As far as increasing rents to appease the greater sucker landlord, well that’s negotiable.

Rory Johnson 8/12/2007

rory@intelligentcre.com

How can an attorney or law firm represent the plaintiff AND the defendant in the same case without a conflict-of-interest? How can a landlord’s agent, who controls and manages 1.8 billion square feet, ALSO represent tenants without a conflict-of interest?

Like Little Red Riding Hood taking advice from the Big Bad Wolf, corporations across America and around the world have partnered with behemoth landlord reps that also represent tenants. To justify this bass-ackwards reasoning, companies tell themselves “the breadth and depth of So-and-So-Conflicted-Service-Provider helps because they can service us in all these markets. Furthermore, they know when space is coming available before it even it hits market”. This sounds frighteningly similar to wolf-speak. The scary part being that it’s coming from the tenants’ mouth. So long as the tenant doesn’t ask about all those razor-sharp teeth, the conflicted service provider should be in good shape.

The wolf is good at hiding those sharp teeth. Just look at the websites of four largest corporate real estate services firms (by revenue), who all happen to represent landlords and tenants. They are all the best at what they do, and they do everything for everyone. That’s great, but what about that fiduciary thing? Whose interest are they really looking after, the 150 million square foot institutional landlord or REIT, whose buildings they manage and lease, or the tenant with 50 locations on ten-year leases?

The moral of the Little Red Riding Hood Story is that a charming and apparently friendly wolf can do you harm. The moral of the lawyer story is that they have one.

Disclaimer: I work with a non-conflicted, corporate real estate services firm. And I do have lawyer friends.

Rory Johnson 7/31/2007

rory@intelligentcre.com

Rory Johnson 7/13/2007

Over a cup of coffee and a warm meal, a CRE manager recently told the poignant tale of how his former employer, a massive multinational in the paper and publishing industry, reasoned that centralization of the real estate function would be a good thing.

The company was expanding into emerging markets at a brisk pace. Real Estate was managed by business unit, and the only corporate approval required was that of the legal team, to confirm and reject terms and conditions. With no redundancy and a decentralized real estate model, the company unwittingly competed against itself in negotiations for a significant real estate property.

After the transaction took place, and after they realized what happened, the company hired my CRE companion. It was his job to centralize real estate and, among other things, prevent such missteps from happening.

My companion has since moved on to bigger and better things, but assured me he left his former company centralized, and coordinated. After all, the left hand not knowing what the right hand is doing makes for a sloppy meal.

Rory Johnson 07/09/2007

rory@intelligentcre.com

]]> http://intelligentcre.com/2007/07/09/an-uncoordinated-effort-two-units-compete-for-the-same-asset/rory-johnson/feed/ http://intelligentcre.com/2007/06/28/the-patsy-why-unrepresented-tenants-suffer-in-lease-negotiations/rory-johnson/ http://intelligentcre.com/2007/06/28/the-patsy-why-unrepresented-tenants-suffer-in-lease-negotiations/rory-johnson/#comments Thu, 28 Jun 2007 20:07:32 +0000 Rory Johnson Transaction Advisory Tenant Representation http://intelligentcre.com/2007/06/28/the-patsy-why-unrepresented-tenants-suffer-in-lease-negotiations/rory-johnson/ “If you’ve been playing poker for half an hour and you don’t know who the patsy at the table is—you are the patsy” – Warren Buffett.

I was recently engaged by a local (Minneapolis) company to extract additional saving from a lease proposal in which my client (the tenant) had negotiated as far as he could. The landlord said it was his best and final offer, take it or leave it. My client happened to be a former real estate attorney at one of the area’s larger law firms, and had a backup plan: a professional tenant representative waiting in the wings.

After getting the landlord to agree to significant improvements beyond his “best and final”, my client provided this colorful quote: “You can know your way around a lease, where all of the commas and parenthesis go, but without a competitive building and leverage, the landlord will tell you that he is taking you seriously, but he really isn’t. I am pissed-off with a smile on my face. The landlord would have screwed me back in November. And you earned the same fee had you represented us from the beginning” – Client Company General Counsel and Former Real Estate Attorney.

It is conventional that a tenant representative be engaged from the beginning, before commencement of negotiations, and for the landlord to compensate the tenant representative (“procuring broker” in lingo) a market commission. Instead, being the shrewd businessman-attorney that he is, my client opted to engage tenant representation after negotiating what he thought he could achieve. The landlord was baffled when I informed him that I was representing the tenant. “There is no commission in this for you, and your client has already negotiated a tight lease” he barked. But I am no patsy, nor is my client. Knowing the landlord wouldn’t take the tenant-negotiated deal off the table, and that there was no procuring brokerage commission, I had an agreement with my client: To share the economic savings I achieved over the life of the lease, and discount it back at a reasonable rate.

Like introducing your big brother to the playground bully, my client gained perceived power (read this article, it’s good!) by the mere fact that negotiations were to be professional-on-professional. But I wasn’t going to stop there. Having parallel negotiations is what any good tenant rep would do. And I was bent on creating an environment in which landlords compete for their tenancy. Needless to say, we found another building of genuine interested to my client, set the table for an arm-wrestling match, and let them go at it.

In the end my client saved a bundle; I made the equivalent of a market commission, and the landlord earned a tenant. My client could have spared the time and emotions he invested in the process by engaging me in the beginning. By the smile on his face, I think he enjoyed ride.

Rory Johnson 6/28/2007

rory@intelligentcre.com

When asked, the aging CEO implied that his long-term plan is to keep the company as it is and where it is. With cheaper industrial land just five miles to the South, the advent of lean manufacturing, the horde of deep-pocketed developers banging on his door, and 100 years time, one would consider this CEO irrational. This was my thought, but I didn’t have all the facts.

The ensuing conversation revealed a potential deal-killer, the 30+ operating permits the company was grandfathered in to. Do operational efficiencies of a new facility and the economic benefit of selling (or leasing) the real estate asset at the height of the market justify relocation costs and the hassle of obtaining new permits? I don’t know. But I am fairly confident the CEO is asking himself “Will the company survive relocation, and is it worth the chance?” And he is best to know the answer of that.

Rory Johnson 6/22/2007

rory@intelligentcre.com