What the CFO Needs to Know: Real Estate

Understand the assets covered by your leases: Taken together, leases are more than just one of a chain’s largest costs — they are the largest fixed expense, and they are fixed for the long term. As a rule, individual leases average seven to 10 years.

“Understanding that is critical,” said Michael P. Glimcher, chairman and CEO, Glimcher Realty Trust, Columbus, Ohio. “For a cost so large, you should have a strong knowledge about the assets covered by your leases.”

See locations for yourself: Glimcher noted that while CFOs should staff real estate departments and rely on real estate experts when making decisions, they should get out from time to time and check out sites.

“Real estate happens in the field,” he said. “Go out and walk the property, drive the market and talk to experts. The savviest senior executives that I’ve met learn their real estate and evaluate pluses and minuses from a vantage point in the field.”

Play offense and defense: A chain can manage a retail real estate portfolio proactively or defensively.

“Proactive management looks for growth opportunities,” said Mark Richardson, principal, Huntley, Mullaney, Spargo & Sullivan, a San Francisco-based real estate and financial restructuring firm. “Perhaps, for example, a certain trade area is attracting more of your customers and can support another store. Defensive management protects assets that are doing well and maximizes the time they can contribute to the brand,” he explained.

“Defensive management also trims poor locations out of a portfolio or looks for problems that have cropped up. Changes in a trade area, for example, could mean you need a smaller
store,” added Richardson, who recommends periodic portfolio reviews that look for proactive and defensive opportunities.

Close problem units: A portfolio review with the real estate department or a consultant is likely to turn up good locations that are out-of-lease options coming up on expiration.

“Currently, good available locations can be hard to find, so those leases should probably renegotiate those leases now,” Richardson said. “Where rent costs are more than 33% of EBITDA before rent in any location, the bottom-line profit prospects for that store will be low or negative. Close them. Problem locations drag down the whole portfolio.”

Utilize construction contracts: Stores may be scheduled for renovations or expansions, and that entails construction contract documents. You can develop your own with legal counsel, or purchase industry standard documents from the American Institute of Architects for a reasonable fee.

“The architecture, engineering and construction associations jointly developed these [industry-standard] documents, and industry players are familiar with them,” said Robert D. Benda, CEO, Westwood Contractors, Fort Worth, Texas, a national builder specializing in retail. “You and your attorneys can also tailor the documents for individual jobs.”

Industry-standard contract documents form an integrated suite. The prime contract, along with the subcontractor and vendor contracts (all of the many contract documents a project may require), employ the same concepts and language in order to avoid misunderstandings and conflicts of responsibility, Benda explained.

The industry-standard documents “also reflect a national legal perspective, making them less likely to conflict with local jurisdictional statutes,” he added.

Mall Trends

Class A malls are hot, with quality space hard to find and rents rising aggressively for trophy centers, according to a report by Cassidy Turley, while older Class B centers are under pressure to upgrade lest they fall into the C sector, where vacancy is at the 10% level. For most retail real estate companies, redevelopment, as opposed to ground-up development, is the name of the game — with the exception of the outlet center sector and in cities. In general, landlords are working hard to create tenant mixes that give shoppers more reasons to visit, with a big emphasis on restaurants and other food purveyors, entertainment and beauty and wellness concepts.

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