A corporate real estate portfolio is frequently one of a company's largest assets, but isn't always one of the most productive ones. While good locations are extremely valuable, the capital invested in real estate doesn't always have the highest return. This is why many companies choose to lease their spaces. If your company is sitting on a large portfolio that isn't generating returns in-line with other capital investments, you have options that can free up the capital for better use elsewhere in your operation.
While owning real estate can have strategic and cash flow benefits, corporate real estate offers a weak return. Over most of the 20th century, income represented 99% of the income from commercial real estate. Without the investment income, owner-occupied assets provide little, if any, real capital return. As such, retaining non-strategic locations is rarely the wisest use of your company's capital.
Selling Underutilized or Unproductive Locations
Over a period of years, it's relatively common for companies to build up a portfolio of legacy properties that are underutilized. Others may seem to be important and useful, but are in fact relatively unproductive when compared to the rest of your portfolio. Undertaking a detailed survey of all of your locations can help you to identify which assets in your corporate real estate portfolio can be culled, freeing up both capital as well as eliminating the cash flow drain of maintaining and operating them.
Locations with high vacancy are usually good candidates for disposition. Looking at other metrics, like sales or employees per square foot can help you identify underutilized locations when you occupy the entire property and don't track occupancy with traditional metrics. You can also look at profitability on a per-location basis to identify locations that may need to be eliminated. Finally, demographics can help you identify properties that are likely to become underutilized in the future.
Sale Leaseback Financing
In a sale leaseback, you sell properties to investors and immediately lease them back for an extended period of time under a triple net lease structure. Lease terms typically range between 10 and 25 years, with additional time available at your option. You can quickly conduct bulk sale leasebacks with large real estate capital firms and real estate investment banks or work with commercial real estate brokers to directly sell individual properties to investors.
Sale leasebacks free up capital from your corporate real estate portfolio at the expense of requiring you to make lease payments in perpetuity. As such, this strategy works especially well with assets in your corporate real estate portfolio that you may want to vacate at some point in the relatively distant future.
Cash-Out Financing
For the assets that you want to retain in your corporate real estate portfolio, the final option is to pull cash out of them through mortgage financing. This strategy is most suitable when you meet these two criteria:
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Real estate financing offers your company a lower cost of capital than any other type of debt.
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You can achieve a return on capital that is higher than your cost of real estate financing.
If these two factors apply, cash-out financing lets your company continue to control strategic corporate real estate assets while maximizing its return on its assets. It gives you the best of both worlds - ownership and free capital.
Culling a corporate real estate portfolio is a complicated undertaking that requires both clear direction from the boardroom as well as an expert team. The benefits of the process are significant. Your company can come out with better financial performance and more available capital.
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