Top Ten Myths of Corporate Real Estate
David Letterman may not be on TV anymore but his popular Top Ten lists are the inspiration for this myth busting list of Corporate Real Estate misconceptions.
10. Corporations Should Own Real Estate
No, real estate ownership is best left to the investors. Real estate ownership of generic assets like a warehouse or an office building by a corporation presents three problems:
Depreciation offsets earnings;
Real estate is illiquid, especially in the many remote markets where corporations own plants;
Maintenance costs are higher as the owner. You become responsible for the entire property.
9. Corporations should be passive in selling idled assets.
No, corporations should never be passive in selling anything, their products or their real estate. Define your customer and give them a product to buy.
8. Sell corporate real estate when the building is empty.
No, an empty building is an empty building is an empty building! Why is your empty building different than the one down the street or across the country? If you lease out your empty building you are now selling cash flow.
7. Corporations should make a plant-closing announcement by press release.
No, negative Public relations is a surefire way to antagonize the community and state where the real estate is located. Strive to close up gracefully and the community will be energized to assist in the process.
6. Corporations shouldn’t quantify their environmental impairments upfront
No, the Ostrich Syndrome will not make the issues disappear. Stick your head in the sand and it will only come back and hurt the sales effort. You cannot manage what you don’t know and you certainly do not want someone else to manage it for you.
5. Real Estate Brokers are the only method to market and sell real estate.
The real estate brokers are your sales force. Plain and Simple! Brokers are paid on the transaction so they must list many buildings to close a percentage of those listings to profit. With all those listings out there, this means you will most likely not get their full attention. Your sales force is only as good as the product you give them. Would you give your own sales force raw materials to bring to the customer? Create a product to motivate your sales force.
4. A national contract with a global real estate brokerage is the only way to go.
No, there are lots of great real estate brokers, but they may not all work for one firm. You may love the broker in Cincinnati, but the same firm’s broker in Dallas may not thrill you. I recommend you find the one local guy who knows everything about the market. Don’t be blinded by the sales pitch that a firm has offices in 50 countries. Approximately 77% of all deals come from within 150 miles of your property.
3. Appraisals establish the value of the real estate.
No, only "Use" can establish value. A “comparable” building across town may not be comparable, the layout the zoning the neighborhood may all be different even if the square footage is the same. Wouldn’t you agree that a mall on your property has a different value than a warehouse?
2. Book Value is the target sales price
No, this trips up more companies than any other issue. In the majority of cases the book value of the legacy property will more than likely not be equal to the true market value of the property established by use. More properties languish on the market because the company does not want to take a book loss.
1. Location, Location, Location
Hogwash, Hogwash, Hogwash! Walt Disney didn’t believe it. He had a product that his customers would travel to. He put Orlando, FL on the map. You located your plant for a reason. If you can figure out who the customer for your plant is and what your property represents to them, then it shouldn’t matter where it is located.
Your assets are just that assets and you can and should expect a return on capital employed when you no longer need them.
All views expressed in this article are my own.