COVID-19 and CRE

Corporate real estate often plays an important role in ensuring the safety and security of corporate employees, not just the real estate itself. Efforts such as increased cleaning of work spaces, remote worker infrastructure, security/screening of office employees and visitors, and other seemingly non-real estate related functions often are lead by corporate real estate professionals. As the COVID-19 virus spreads in the U.S. and world, I thought I would take a moment to recognize and thank the corporate real estate professionals who are leading the way in efforts to minimize the virus’ impact to their companies and everyone else.

Keeping Track

Everyone seems to have different ways of keeping track of their obligations, daily events, etc. so I thought I would share what I am currently using today. Of course, I am always open to suggestions for improvement.

Evernote

Every morning at 5:45 AM I have a scheduled block of 15 minutes to create a note within Evernote for the day. That note is a template which has four sections:

-What did I learn yesterday?

-What kind of experiments do you want to run today?

-Today’s most important question

-Today’s notes

The first three sections incorporate some of the best suggestions for awareness and learning I have run across. The fourth obviously is to keep track of what happens during the day.

Evernote also allows you to upload handwritten notes in searchable formats, which is a necessity because I often am unable to take notes within the program for various reasons.

Salesforce

My company has a customized version but most companies I encounter these days use Salesforce for customer relationship management. I keep all of my business related information and task-tracking here.

Things

Things is a task tracker I use on my iPhone to keep track of mostly personal tasks I need to complete during the week. I have tried so many task trackers over the years and Things provided the most utility and functionality.

Gantt Charts in Excel

Over the years I have utilized gantt charts for numerous projects because they can accurately delineate, schedule, and track each step in a project timeline. The excel templates made by Vertex42 are really good and worth the money if you use gantt charts frequently.

Why Split Roll Taxes will Drive More Business Out of California

On November 3rd Californians will decide whether to partially remove property tax protections, granted under Proposition 13 in 1978, for most non-residential properties. The initiative they will vote on, the California Tax on Commercial and Industrial Properties for Education and Local Government Funding Initiative (2020), would amend the state constitution to require commercial and industrial properties be taxed at their market value.

Currently all property in California is protected by Proposition 13 (1978), which limits property taxes to 1% of the purchase price plus up to 2% of inflation per year. By removing such protections for commercial properties, some estimate the initiative will generate another $13 billion of property taxes in California. While not arguing the merits of the initiative’s objective, should the initiative pass I do think it will negatively impact California businesses in ways familiar to corporate real estate but perhaps not the general public.

The obvious impact of increasing property taxes on non-residential property is on the non-residential property owners themselves. Some of the largest commercial employers in California also have large property holdings in California. For companies who own their real estate, an increase in property tax is shown on income statement as an increase in operating costs. Which means when property taxes are increased, all sorts of indicators of company health are negatively impacted like EBITA, profitability ratios, price-earnings ratios, etc. That may be acceptable if you are a tech company whose investors may focus more on the cash flow statement, but not OK if you are an established aerospace company heavily penalized for any indication of being unprofitable.

Perhaps less known are the impacts on companies leasing space when property taxes are increased. The vast majority of leases stipulate that any increases in property taxes are “passed-through” to the tenant leasing the space. This means the tenant, not the landlord, is responsible for the increased tax. For the impacts to corporations who lease space, the negative impact of property tax increases on their income statement is the same as the ownership example above.

While proponents of this initiative have argued the initiative will target wealthy investors and large corporations, small and medium sized businesses will likely get impacted the most. Small and medium sized businesses in office buildings, multi-tenant industrial parks, and shopping centers likely do not have any protections from property tax increases in their leases. Their landlords will pass along the cost of the additional property tax to them.

Do you know who is much more likely to have protection against tax increases in their leases? Typically large corporations, who had substantial negotiating leverage with the landlord when they entered into their lease, and wealthy investors savvy enough to include them in leases when they purchased a business and leased back from the Seller.

2020 Ballot Initiatives by State

To help companies understand their potential exposure, the following are the published 2020 state ballot initiatives which could impact industrial firms and industrial real estate.

Arkansas

The Arkansas Transportation Sales Tax Continuation Amendment (2020) would continue to amend the state constitution to make permanent a 0.5% sales tax towards the funding of state and local tax infrastructure. For more information, click here.

California

The California Tax on Commercial and Industrial Properties for Education and Local Government Funding Initiative (2020) would amend the state constitution to require commercial and industrial properties to be taxed at their market value. Currently, California Proposition 13 limits all property assessments to 1% of the purchase price at the time of purchase and then the lesser of 2% or inflation per year thereafter.

Should the Initiative pass, it is estimated to cost companies and commercial real estate property owners $6.5 to $10.5 billion per year in additional property taxes. For more information, click here.

Florida

Amendment 2 would raise the minimum wage from $8.56 in 2020 to $15.00 by 2026. For more information, click here.

Idaho

The Idaho Minimum Wage Increase Initiative would raise the minimum wage incrementally to $12 per hour by 2023. For more information, click here.

Illinois

The Illinois Allow for Graduated Income Tax Amendment would repeal a state constitutional requirement that the state personal income tax be flat and instead allow the state to enact a graduated personal income tax. It also would change the limits for corporate income taxes to a ratio based on the highest personal income tax rate. For more information, click here.

Nevada

The Nevada Renewable Energy Standards Initiative would require electric utilities to obtain a minimum of 50% of their electricity from renewable sources by 2030. The increase would come in increments as follows: 26% by 2023; 34% by 2026; and 42% by 2029. This would amend the current standard which requires electric utilities to obtain a minimum of 25% of their electricity from renewable sources by 2025. For more information, click here.

CRE Services

Corporate real estate has developed distinct service categories to meet the real estate needs of business units and organize talent by skill sets. These services often work closely with each other. Portfolio administration continuously interacts with transaction management, facilities management and legal. Facilities management can frequently work with project management and space planning, or assume their functions within the facilities management department.

These services will often report directly to the corporate real estate management or account leaders in CRE service organizations, who can monitor their success with clearly defined key performance indicators or KPIs. While the names of the services may vary by organization, in practice they have similar functions in today’s CRE.

Portfolio Administration

Portfolio administration creates, manages, and communicates real estate information accurately and effectively to the entire corporate real estate organization. Referred to as lease administration in some companies, portfolio administrators can have many responsibilities other than managing contractual data. Today’s portfolio administrators can also share responsibility for strategic oversight, accounting, legal, and human resources functions in the modern corporation.

Transaction Management

Transaction management’s general function is to achieve company objectives through the oversight of real estate events. Rarely is transaction management only responsible for the successful completion of a real estate transaction. Most transaction managers today are tasked with assisting with strategic oversight of the company’s real estate portfolio and have a “cradle-to-grave” process for real estate events which involves responsibilities before and after transactions are complete.

Facilities Management

Facilities management has evolved from a property management function to becoming an increasingly important part of a company’s success. Today’s facilities management professionals are tasked with creating and maintaining environments in which company employees and equipment can thrive. They often track a variety of measurements of company space and how it is being utilized. Such data creates visibility in the organization about how space is being used. It allows the organization to communicate important messages to outside parties about its role as a caretaker of shareholders, employees, society, and the environment.

Project Management

Project management is the oversight of the design, build, furnish, redevelopment, re-furbish, and budgeting for company real estate projects. When corporate real estate needs real estate to be built or altered, a project management team usually is responsible. Project managers are also important resources for the other services. For example, project management can supply improvement costs, project timelines, and other construction related information to help transaction managers negotiate effectively, and facility managers plan for future upgrades.

Space Planning & Design

Space planning and design may be a function under project management or facilities management, but could also be a separate function in some organizations. Space planning can involve many different types of space. While many may think of space planners as designing office and site plans, space planners are also critical in manufacturing and warehouse environments as well.

Legal

Legal departments are typically responsible for the review of contractual agreements and hiring of outside counsels. Whether legal is a part of the real estate organization or a separate entity can have a significant influence on its function. Attorneys in legal departments which are separate from real estate often have responsibilities for documents outside of just real estate related contracts. With the possible exception of space planning, legal services usually interact with all of the other service lines and are a critical part of the overall success of the CRE organization.

Selecting and Hiring a Market Brokerage Partner

The selection and hiring of a market broker to represent a client as a fiduciary is one of the most significant responsibilities of a corporate real estate account manager. A market broker is typically an expert in a given geographic market or vertical, such as cold storage or truck terminals, while the corporate real estate account manager oversees the overall real estate services to the client.

Without the proper process in place, the odds of selecting the wrong market broker greatly increase along with the chances of frustration for the client, the market broker, and the account manager. There are a host of variables to consider in any market broker selection process. Without a defined process in place, many account managers simply do not have the time or resources to appropriately conduct a market broker search from scratch.

That’s why it is important for the account manager and the client to have an agreed upon plan and process for selecting a local brokerage team. Such a plan would ideally be simple, adjustable guidelines for selecting and working with market brokers. Some of the plan elements usually would include:

  • Criteria for market broker selection
  • Brokerage standards of conduct
  • Responsibilities of the client, account manager, and market broker
  • Confidentiality
  • How requirements are presented to the market broker
  • Expected compensation structure including fee sharing

Most clients want the best broker for their requirement in a given market. For the account manager, fulfilling this requirement means considering market brokers affiliated with their firm and those who are not affiliated with their firm.

Practically speaking, most account managers affiliated with large national brokerage firms will limit their search for market brokers to those within their company. Exceptions to this include areas where their company has limited coverage, such as tertiary markets, and when the client directs the account manager to use a certain local market broker.

Whether the account manager considers market brokers outside if their firm is ultimately not as important as making sure the selected market broker meets the client’s agreed upon criteria. If such standards are not met, the account manager should be responsible.

Brokerage standards of conduct and market broker responsibilities should be clear and concise. They should be communicated in writing shortly after initial contact and certainly before engaging the market broker. A brief summary of expectations, such as reporting, confidentiality or dual agency concerns, along with a matrix showing the responsibilities of all relevant parties is usually sufficient.

Client requirements should also be communicated clearly and in writing to the market brokers prior to engagement. It does not make any sense to hire a market broker for an assignment until the account manager can accurately describe what the client needs. This communication is sometimes assisted by visual aids such as prototype site plans, maps, and photos of current properties similar to the required facility. Once a market broker understands the requirements, the account manager should allow them the opportunity of declining to be considered for the assignment.

Lastly, the account manager should communicate the anticipated brokerage fee sharing along with the standards of conduct and client requirements in writing. This includes the nature of any exclusivity, fee sharing with a client, and other matters related to their compensation. It is vital that the market broker and account manager have agreement on compensation concerns prior to the hiring of the market broker for the assignment.

The above does not include every consideration for selecting a market broker in every situation. Therefore, it is critical that the account manager and client have a general plan in place to review and modify prior to starting the search for a market brokerage partner. By doing so, they will greatly increase the likelihood of hiring a qualified, motivated, and invested market brokerage partner to work on their behalf.

Learning from Leon

This past Saturday my wife and I said farewell to our loyal friend and companion, our dog Leon. Leon passed away in our arms, fighting the pre-euthanasia sedatives as hard as he fought the cancer which ultimately ended his seven years of life. While I am deeply saddened by his passing, Leon taught us many great lessons, a few of which I wanted to share in this post. I hope that I can use these lessons for the rest of my life in remembrance of him.

When we adopted Leon, we were told he was found in a junkyard with his mother and a handful of siblings. The rescue organization said he was several weeks old when he was rescued, so who knows what kind of hardships the mother and puppies had to endure. From the onset of our adoption at around eighteen weeks, it was obvious that whatever events had taken place had left their mark on Leon’s psyche. He was scared of nearly everything and exhibited so called fear-aggression to us and nearly everyone who came near him.

Leon’s picture from the rescue agency website

But Leon’s story is one of redemption. As hard to handle as he was, an adolescent hell on four legs, he did not give up on change. After considering giving up on him, my wife and I hired a trainer, the late Jack Pitt, to work with Leon and help him deal with his fears in a less aggressive manner. With Jack’s assistance, Leon began to become de-sensitized to the things that scared him so deeply before. His true nature, a loving dog with some quirks, started to emerge.

Along the way, Leon’s journey from the junkyard to becoming a “good boy” will encourage me to believe in redemption for others. To consider someone’s past as a reason for their behavior and to practice empathy. And to not give up on someone being capable of change, merely because their past is a little muddy.

Leon loved routines. Starting when he was a puppy, he was keenly aware of the time we usually took a walk, when he would eat breakfast, lunch and dinner, and when we threw him the ball. By his pleadings, he helped encourage us to become more structured in our routines. Structuring our days to make sure Leon’s routines were met, we avoided his disapproving barks and whines but also encouraged us to become better stewards of our time.

In addition to his daily routine reminders, Leon also gave us unconditional love throughout his life. It didn’t matter if we were in a bad mood, busy, walking his sister doggie Kaya, forgot to feed him, or had not played catch with him; he wanted to be with us. Dogs assuredly watch and assess us all the time. It’s their ability to not predicate their affection for their owners on anything but the most basic requirements that is most admirable. Leon was no different and I hope I can follow his lesson in caring for others and expecting little, if anything, in return.

I will miss Leon greatly but the pain of the last few months since he was diagnosed is far outweighed by the love and value he brought in return over seven years. I hope that others will have similar experiences and learn just as much from their love ones and we learned from Leon.

Avoiding the Bad

Last week I was listening to the Art of Manliness podcast with guest John Tierney, who recently co-wrote a book called The Power of Bad: How the Negativity Effect Rules Us and How We can Rule It.

As the title would indicate, John and host Brett McCay discussed how humans are much more sensitive to bad events than good ones, and how this sensitivity shows itself in our daily lives. For example, John cited research that showed that it takes at least three good events to outweigh one bad one in our minds.

As companies consider future real estate decisions, it may be helpful to think about how to avoid bad outcomes before achieving outstanding ones. Most of us are in positions where we are in service to something or someone else, whether it be a business unit, client, or shareholders. While it may not fit our current narrative to the customer, the truth might be that the customer really wants to avoid negative outcomes much more than receiving great service.

Avoiding negative outcomes and great services are not mutually exclusive. But if we can design our systems, processes, and tasks in a way that protects against negative outcomes first, at least the research shows that we are tailoring our services to what people care about most.

Maintenance Responsibilities for Industrial Occupiers

One of the main areas I recommend industrial occupiers pay close attention to in lease negotiations are the responsibilities of who maintains, repairs, and replaces building systems and components under a lease.

Leases follow the 80/20 rule. 80% of lease content most likely won’t impact operations or P&L. 20% of lease content will. Maintenance, repair, and replacement provisions are always in the 20%. Therefore, it is smart for companies to conduct due diligence and structure maintenance, repair, and replacement provisions in a way most suitable for operations.

As a starting point, I suggest companies assess what the impact will be if operations dedicates the time and resources to maintaining, repairing, and replacing building systems during the lease. Would the company be better off if the landlord was responsible and passed through the costs? Are there reasons the company would prefer responsibility, such as site security or, for larger firms, potential cost savings. Whatever the answer, it will help to inform any initial discussions with prospective landlords.

Next, companies should conduct due diligence on what the age, condition, and useful life are of the components of the space being potentially leased. It should be standard practice to find out the age, condition, and useful life of the major building systems (structural, roof, HVAC, electrical, parking areas, etc.) before agreeing to maintain anything in the letter of intent or proposal. A property condition assessment report can be helpful in this area.

Lastly, companies should protect themselves against unfair replacement practices. Exposure to capital replacement costs should typically be limited to the amount of time remaining on the lease term and amortized according to GAAP or other reasonable useful-life schedules. Normal wear and tear should be expected in exchange for the rent.

Nothing is free. The landlord and/or the tenant will bear the costs of maintaining, repairing, and replacing within a property. Therefore, I would suggest the focus for industrial tenants should be:

  • What general maintenance, repair, and replacement arrangement is best for the operation
  • What property systems or components should not be the tenant’s responsibility
  • Preventing operational disruption by addressing the near-term replacement of building systems or components prior to signing a lease
  • Outside of requirements caused by tenant improvements, are there requirements such as ADA which are not being met in the space currently
  • Making sure there is limited exposure to unamortized capital replacements
  • If a property management fee is charged, it is commensurate with the market rate and justified by the responsibilities of the property manager

First Principles

Today I was thinking about first principles and what first principles exist in my business as an industrial real estate resource and representative. A first principle is basically a concept which cannot be divided further. In other words, it is a foundational concept and leads to other concepts which are based upon something that cannot be further deduced.

I think one first principle for my business is the notion of service to individuals not organizations. When I represent XYZ Company, I am really representing and furthering the interests of the individual stakeholders at XYZ Company. This way of thinking helps me focus on building a personal relationship with the client where I understand their particular ideas, needs, and wants-not just the company’s objectives.

While it is great to have a reference board of the companies I represent, I really should have one that has just names of the people I work with at those companies. To me, they are a first principle for my business.