The Leader - November/December 2008 - (Page 85)

C A PITA L C OR NER By Richard McBlaine Richard McBlaine, President of Strategic Consulting, Jones Lang LaSalle Adding Value in Challenging Times OPPORTUNITIES FOR FINANCIAL SERVICES CORPORATE REAL ESTATE EXECUTIVES Corporate real estate (CRE) directors at financial services firms face challenges today greater than at any time in generations. While all CRE departments are under increasing pressure to deliver financial value to their organizations, the sense of urgency is strongest in the financial services industry. Fortunately, CRE directors have raised their game dramatically in the past decade, and those at financial firms have often been at the forefront of innovation, becoming more financially astute and attuned to their companies’ strategy, leveraging the strengths of alliance partners, and using technology and innovation to greater effect. These factors have allowed financial services CRE directors to contribute to reductions in expense ratios and to avoid overextending their space needs. While it’s good that companies are not going into a down cycle with an overabundance of space or a burdensome cost structure, it also means CRE directors must look beyond the low-hanging fruit to find new ways to add value. In addition to these challenges, financial services CRE directors know they must be prepared to navigate a wave of consolidation in their industry. The operational challenge of integrating portfolios after a merger or acquisition is likely to create tremendous opportunity for the real estate function to deliver value proactively. Sale-leasebacks. Banks must monetize corporate assets to raise capital to add to their Tier 1 equity capital base and convert property from an expense drag due to depreciation to an earnings generator. In spite of the declines in commercial real estate values this year, banks can still realize gains on sale of assets. Although the credit crunch has made outright dispositions more difficult, the market for sale-leasebacks is still strong. Sale-leasebacks can also give the bank long-term control through structured renewal options, while eliminating future real estate market exposure and allowing for exit flexibility. Dispositions. Merger and acquisition activity occurring with lightning speed is producing surplus assets from consolidation. Likely candidates for disposition will be administrative offices including call centers and data centers as well as retail branches where there is overlapping footprint. In one recent bank acquisition, the buyer reportedly expects to realize $1 billion in real estate savings, an amount that will necessarily include a robust disposition strategy. Dispositions are an easy way to reduce operating cost while generating much needed capital to restore an institution’s capital base. An exit/sale-leaseback entails selling an asset in anticipation of future vacancy, but with a short-term leaseback that allows the bank to occupy it for a time. This strategy increases the sale price by increasing the universe of investors with interest in the property and providing a buyer with rental income while repositioning or re-tenanting the property. Redevelopment. This is arguably the largest untapped opportunity for bank CRE directors. Banks frequently own and occupy branches in desirable locations where real estate values have skyrocketed while the bank’s space could benefit from a refresh. By selling or becoming a partner in expanding sites to include retail, high-rise office or apartment units, banks can improve their operational competitiveness while generating millions of dollars in capital. Most banks have not explored redevelopment opportunities in any systematic way because it requires out-ofthe-box thinking and strategic development expertise that is generally not found within CRE teams. Lease Restructuring. A variety of tactics allow financial services firms to re-engineer lease obligations to lower operating costs and/or better align with corporate objectives. These opportunities are far from universal, and require some time and effort to comb though leased portfolios looking for indicators such as purchase options, abovemarket rents and leases that are approaching their expiration dates. For example, a lease with above-market rents might be extended at a lower rate, creating a new lease that enables the bank to report the “blended” rental rate over the remainder of the original term for accounting purposes. Banks can use these and other financial strategies to harvest considerable value from their owned and leased portfolio. It requires creative, tailored solutions and dedicating significant resources, including technical tax, accounting, and legal, to identify and evaluate the opportunities in order to structure and manage the execution. And above all, strategies must align with the financial goals of the institution. 2 0 0 8 T H E LE ADE R 85 NOVEMBER / DECEMBER

Table of Contents Feed for the Digital Edition of The Leader - November/December 2008

The Leader - November/December 2008 Leadership Contents Message from the CEO Real Estate in the News Leveraging Business Geography My Work @ Bank of America Blending the Old with the New A Tool for Growth Creating Real Estate Value Nokia-Siemens Networks’ Peter Doran DTZ’s James Maddock Annual Economic Development Directory The Georgia Report Location Profile: Magdeburg, Germany Linking Corporate Real Estate to the Enterprise 3rd Quarter 2008 Adding Value in Challenging Times Australia and New York Shell’s Paul Huston Economic Development in the News A Look Ahead In our Next Issue Calendar of Seminars Index of Advertisers Chapter Learning: The Global Perspective

The Leader - November/December 2008

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