How to save costs
and thrive during
Immediate and post-COVID corporate real estate strategies
Part 2 of 2: In this second installment of our cost-saving series, Michael Billing outlines the steps CFOs should take to maximize their cash on hand
COVID-19 may have created the current global financial crisis but it has also created opportunities for companies to take specific actions to reduce their real estate portfolio costs — typically an organization’s second largest cost item behind labor. By critically evaluating that footprint, CFOs can meet their short-term financial targets while positioning their company for continued success. Those that act quickly and focus on their future will rebound much stronger.
In the medium-term, business operations will change to reflect the “next normal.” According to a PwC Pulse Survey in June of over 300 CFOs in the U.S., 47% anticipate a 10% or greater decline in revenue and/or profits in 2020. The survey also indicates that cost containment is top of mind for many.
Now is the time to for CFOs to take advantage of cost saving opportunities that might have been overlooked pre-COVID. In the short-term, they may be able to uncover anywhere from 20% to 40% savings within their commercial real estate portfolios.
In the long-term, those same CFOs will have to understand that offices are changing, and there’s a pressing need to invest in both people and technology. By considering both defensive and offensive strategic moves today, savvy financial leads will be able to reduce costs and position their organizations for success.
Start with defensive strategies
How can you help your organization weather the negative financial impacts of the pandemic? There are steps you can take to immediately reduce real estate-related costs to create much-needed cash flow:
1. Drive cost savings and eliminate waste by leveraging various commercial, legal and accounting strategies
a. Take advantage of any new government programs being offered. The CARES Act, passed on March 27, 2020, set out new rules that reclassify a Qualified Improvement Property (QIP) as 15-year property, resulting in 100% bonus depreciation in the year placed in service. The new provisions related to QIP can substantially help owners reduce taxes, increase liquidity and may generate net operating loss (NOL) claims to tax years with higher tax rates.
b. Look for economic incentives from public entities for any major new facility, space renewal or major capital expenditure.
c. Look for opportunities to restructure your lease terms to more favorable ones due to market conditions.
2. Align real estate spend to your revised financial outlook
One way you can do so is through restructuring, which is viewed as a one-time line item within a company’s financial statement; meaning it’s not part of their ongoing business operations.
Examples of restructuring-related cost savings include:
a. Asset impairment charges: Write-off sold, abandoned, or obsolete assets resulting from restructuring actions, i.e. exiting a leased/owned property due to a strategic business initiative.
b. Contractual termination and asset retirement costs: terminating a contract prior to the end of its term, and asset retirement associated with sold or abandoned property, e.g. lease buyouts — both have up-front costs but will improve profitability.
The impact: accelerating certain restructuring charges such as asset impairments will eliminate recurring future year operating costs and may position the enterprise for post-pandemic financial success.
3. Unlock hidden value and generate cash
a. Conduct energy assessments to improve efficiency.
b. Drive real estate performance by defining and implementing key metrics across your organization — including total occupancy costs, user satisfaction, and real estate ROI — managing them regularly through automated dashboards.
c. Use cost benchmarking and competitive bidding to reduce costs for renovations or fit outs.
d. Take advantage of facility technology, such as computer-based maintenance or automated work order management systems.
Move into offense
Position for the future
In order to sustain long-term savings and grow your business as you move into 2021, you’ll need address pre-COVID inefficiencies and reimagine how you’ll use your real estate going forward.
1. Optimize and reposition your real estate footprint to align to your company’s future needs
a. Defer or eliminate non-essential or non-critical capital expenditures (short-term).
b. Identify and eliminate space inefficiencies in your current portfolio.
c. Put a sustainability plan in place for energy savings and reduced waste to save costs and meet sustainability goals.
2. Achieve future operating expense savings by leveraging current economic downturn opportunities
a. Prioritize investments in people and technology to meet future ROI objectives (long-term).
b. Implement predictive maintenance techniques to maintain equipment and prevent expensive repairs.
c. Review the energy use of existing lighting systems and retrofit lighting fixtures to reduce energy costs.
Enable investment for the future that supports business growth
Create more cash flow with sale leasebacks
One of the key ways to access cash for many companies would be to implement a sale-leaseback. In a typical sale-leaseback, a property owner sells real estate used in its business to an unrelated private or institutional investor. Simultaneously with the sale, the property is leased back to the seller for a mutually agreed-upon time period, usually greater than 10 to 15 years but shorter-term leasebacks are also possible. The seller usually receives more cash with a sale-leaseback than through conventional mortgage financing. They also regain use of the capital that otherwise would be tied up in property ownership while retaining possession and continued use of the property for the lease term.
In times of turmoil, the health of the company, as measured by its balance sheet, will be critical. Amid increased uncertainty, strategic capital planning allows companies to quantify how much money, specifically capital expenditures, their organization needs to achieve its strategic objectives and then prioritize them based on the ability to meet short-term and long-term objectives.
It will not be enough to just survive the downturn: companies need to win the downturn. Winning the downturn means building resilience. This is easier said than done and some companies may not get a second chance. How quickly and well they execute and implement cost saving strategies will determine their future.