Keeping a careful eye on operating expenses is crucial when managing a corporate real estate strategy. Paying the overall cost for real estate that your company occupies is difficult. The best strategy is to generate cash to pay the operating expenses that impact your company's bottom line. Here are 3 superb tactics that generate cash to improve your bottom line:
1) Convert Tenants to Net Leases
Companies that own real estate and have additional space usually lease out to third-party tenants. Leasing space in this manner is an excellent corporate real estate strategy – it allows companies to control expansion space at little or no cost and in some markets, it generates profit.
However, if those leases aren't structured on a triple net basis, your company is subjected to paying operating expenses for all of your tenants. Converting your tenants to triple net leases shifts the burden of OpEx to tenants. While you may have to lower your base rent, you'll have a commensurate decrease in expenses. Furthermore, as expenses grow, your tenants will bear the brunt of the cost.
Net leases also provide opportunity to earn additional income. Many net leases allow landlords to charge administration or management fees. If your business self-manages, you can add these costs to your triple net leases and get your tenants to help pay for some of your corporate real estate department's operating expenses.
2) Invest in Capital Expenditures
Capital expenditures can directly reduce your operating expenses. Investing in high payback efficiency upgrades like insulation, lighting and water conservation are excellent examples of this. With one to five year payback periods, these investments can free up cash very quickly.
Moving your company to occupy smaller and more flexible spaces is a corporate real estate strategy that also frees additional cash. Done right, an office that mixes small, open work spaces with areas for collaboration can cost less per square foot to build and furnish than a traditional office. This saves capital and allows you to negotiate more aggressively for lower rent since you need fewer TI contributions from landlords. Since it's smaller, you'll also pay less rent.
3) Aggressively Sublease Vacant Space
Subleasing vacant space is a necessary piece of your corporate real estate strategy. It can turn total losses into less impactful blows, and it frees up all of that money to pay other operating expenses. However, some companies don't get aggressive enough to sublease vacant space.
For example, consider a company that is carrying an unused 5,000 square foot midwestern office with $18 net rent, $10 in CAMs and four years left. If it got an offer at $16 rent, it would probably jump on it, since the tenant would be covering $520,000 of the $560,000 of remaining obligation (assuming CAMs don't change and the rent is flat). However, the same company might not accept an offer at $4 net. However, that $4 offer works out to $280,000 over the remaining life of the lease - eliminating half of the company's liability.
Given the high rate of office vacancy in many markets across the country, accepting almost any sublease offer is a good corporate real estate strategy. Given that many companies are shrinking their spaces (see #2), the vacancy rate is unlikely to change, so it's better to take something than to wait for better times.
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