Summarizing the Real Estate Acquisition Decision
1/11/2012 10:52 AM
Submitted by A. Smith
Whether owned or leased, a company’s real estate costs are often its second most significant annual expense, just behind its payroll commitments. In order to confidently make decisions on matters that will have such a significant financial impact to the organization, a company will want to make sure that 1) due diligence has been completed on the requirements, opportunities and terms for an agreement and that 2) the financial details of an agreement are understood and supported from within the organization.
If an organization is large, it can be very difficult to keep all interested parties aware of each step in the real estate acquisition process. If the organization is small, it can be difficult for one or two people to focus enough of their time on these real estate matters. To streamline the process, companies will hire the services of a real estate advisor to assist them in developing a set of requirements, analyzing opportunities in the marketplace and negotiating the best possible business terms for a lease or purchase of a property. Prior to an agreement being drafted and signed, the information is summarized by the real estate advisor and fed back to the company’s key decision maker(s) for review and approval.
To facilitate this internal approval process the advisor should provide a tool (an “Abstract”) to summarize key information about the agreement. In the case of a lease, the Abstract should contain concise info on the property, the entities involved (landlord and tenant), the intended use, critical dates, projected rent costs, comments regarding any special options (purchase, renewals, early termination, etc.), as well as a total estimated value of the lease commitment through the end of the initial term.
Under all of these details there should be a list of key people from the various levels within the organization (business managers, COO, CFO, and CEO) that will be held responsible for the additional financial obligation. Depending on the size of the organization, this list could be 2 people long or it could be 10 people long. Also, depending on the structure of the organization, these internal approvals may not necessarily be required before the final decision maker can move forward with a lease or purchase commitment. In many cases the Abstract will simply serve as a heads up to those people/divisions/business units who will be held accountable for these new or additional real estate expenses within their business plans. And in some cases, it can even be one last chance for someone to raise concerns for the company’s ability to afford or support a new real estate commitment.
Ultimately, the signed Abstract can help the final decision maker move confidently forward with major real estate decisions, as it indicates to that person that their team has reviewed the terms of the forthcoming agreement and has committed to supporting those future costs in their respective operating budgets.