How The CFO Sees Corporate Real Estate
Have you ever been involved in what you knew was a great real estate transactions only to discover that your company’s Chief Financial Officer (CFO) did not approve it? Your initial thoughts were that the CFO could not possibly know the importance of the transaction to the business unit nor the level of negotiated detail you have already performed. Why, you ask, is the CFO impeding my progress?
Incredible as it may seem, there is more to it! The interference relates to the effect that the proposed real estate transactions would have on the company’s market financial profile and the factors driving the incentive compensation of the company’s senior management team. Possibly, several key indicators for the corporation are being adversely affected such as the return on assets ratio, the return on invested capital, earnings per share and ultimately the market valuation as evidenced in the price of the stock. Every CFO has their own belief system based upon experience, background, personality, industry, and their company’s product/service life cycle. In making a real estate decision, the CFO will consider, at minimum, the following:
- The corporate objectives and whether the transaction fills them or veers the company in the wrong direction. Questions like “Is the investment’s anticipated return greater or less than the corporate capital hurdle rate?” are sure to play in the CFO’s decision.
- The corporation’s cash flow management and its impact by this and other transactions.
- GAAP financial accounting issues on both a quarterly and annual basis.
- Tax accounting issues
- The effect on shareholder value and Wall Street’s interpretation of the transaction.
- The directional support of the Chief Executive Officer and the Board of Directors.
Each topic above is more involved than illustrated, and frequently a transaction is beneficial in one area while detrimental in another. For example, a transaction which increases available cash may negatively impact the corporate long-term financial statements and its market valuation. Or a win in the cash flow and GAAP accounting areas may be tempered by a confusing interpretation of the FAR (Federal Acquisition Regulation) or taxation concern.
In carrying out fiduciary obligations to the company, the CFO will often utilize not only an understanding of the financial but also operational aspects of the company in approving real estate transactions. For example, a transaction which produces the lowest overall cost my be unacceptable to the CFO because of the lengthy lease term required. In this case it is better to pay more for a shorter term lease than to be saddled with office space and potentially no business-unit offsetting income.
In addition, a CFO considers:
- Capital requirements and financial risk
- The company’s long term strategic plan and business projections
- The business unit and/or its product life cycle
- Industry benchmarks
- Other governmental regulations
- Human resource issues
In reviewing the entire impact of real estate decisions, it becomes logical that the CFO is increasingly involved in real estate decisions - however, the value and use of the real estate will obviously influence the scope of review. As an action point, since the CFO will be involved in the real estate transaction, it is crucial that the Corporate Real Estate Department and its advisors (presumably Larsen Commercial) understand the CFOs’ needs, be knowledgeable of concerns, and model issues to these concerns, before being asked. This skill set of “talking their talk” combined with sensible real estate wisdom is essential to structuring an acceptable transaction.
The real estate department should be a partner with the CFO early on to format a transaction that creates bottom line value for the corporation. Then the CFO will happily give his corporate blessing!
Mark Larsen is president of Larsen Commercial Real Estate Services in Reston. Phone: 703/ 716-1000
E-mail: mlarsen@larsencommercial. com