Todd Anderson, senior managing director in the global corporate services group of CB Richard Ellis, traces his interest in real estate to “a company that I started rather inadvertently.” That was during his college years at the University of Minnesota, and his business, which he sold shortly after graduation, was paint contracting.
In college Anderson had focused on investment banking, receiving a bachelor of science with a triple major in finance, economics, and history in 1983. But as his business took on increasingly large projects — with developers building condominium and apartment projects as well as the owners of those projects — he was drawn instead to real estate.
His exposure to the commercial and corporate side of real estate created an Ahah! moment. He explains: “I realized that, for me, investment banking was a very analytical type of job and real estate was a very entrepreneurial type of job. Almost by definition — inadvertently starting a company — I felt more comfortable on the entrepreneurial side of the business.”
As his career has evolved, what Anderson has enjoyed most are the financial implications of real estate transactions, which is why he suggested a course on the subject to CoreNetNJ (Corporate Real Estate Executives Network of New Jersey). He will be teaching a seminar on “Real Estate Transactions’ Impact on Corporate Financial Statements,” on Tuesday, June 10, at 8:30 a.m. at the Eisenhower Corporate Campus, 290 West Mount Pleasant Avenue, Livingston. Cost: $50. For further information or to register, contact Eric Friedman at 908-663-2708 or go to www.corenetnj.org.
Corporations often have extensive real estate holdings — headquarters buildings, distribution centers, manufacturing plants, sales offices, and retail units — that they either own or lease. These real estate transactions appear on financial statements, and their impact on these statements and on other significant corporate performance measures should always be considered in decisions on whether to purchase, sell, or lease . At a given moment, a company may be more concerned with its income statement or its balance sheet, and this focus in turn determines its preferences for different kinds of real estate transactions. Companies that are income statement driven are looking to make a profit in the short term; they are wary of any real estate transactions that will add expenses to the income statement, which will reduce profits.
“Rarely does real estate impact revenue, which is derived mostly from product,” says Anderson. “Where real estate can come into play is on the expense side: if revenue stays the same and you are able to lower expenses, then profits will increase.”
One important decision businesses face, for example, is between an operating lease and a real estate purchase. “Whether you own or lease real estate is represented very differently on financial statements,” says Anderson, “and, depending on what a corporation’s objectives are, can either contribute to the performance measures or detract from them.”
For operating leases, the only part of the transaction that is represented on the financial statements is one year’s worth of rent expense on the income statement, which may increase the company’s profits.
For companies that choose to purchase real estate rather than lease, the acquisition price of the real estate is going to be represented on the balance sheet as an asset and an annual depreciation amount will be recorded as an expense on the income statement. If the company is financing the purchase, that financing will show up on the balance sheet as a liability, and interest payments on the financing will appear on the income statement as an interest expense.
Sometimes a business may have a lot of cash, and if it is income statement-driven, it may use that cash to reduce expenses by purchasing real estate with the cash. “If you do that, the only expense that shows up on the income statement is depreciation expense,” says Anderson, “and in virtually every case, depreciation expense is gong to be lower than the rent expense that you would pay a landlord.” So if raising profits is critical, don’t lease but go out and buy for cash.
Typical situations where companies may be balance sheet-driven rather than income statement-driven are either new companies trying to reach a break-even point or established companies that have completed an acquisition and as a result have a significant debt. Internet companies from the 1990s, for example, were not making money. “Their primary concern wasn’t profits, but whether they could stay in business long enough, with the money they had, to try to get to the point of making a profit,” says Anderson. The failure of most of those products to bring in money led to the economic collapse at end of 1990s.
Established companies also may become balance sheet-driven, Anderson explains, in the wake of big mergers, which required them to borrow a lot of money. “The purchase could be the best thing in the world, but they take on a lot of debt,” he says. “They would like to reduce the debt and may be more focused on that than on profits.”
A company that has acquired debt in the wake of an acquisition will be working hard to pay down that debt. Instead of purchasing and financing an office building, it might want to sell the building, lease the space back from the buyer, and use the money from the sale to pay down debt.
Usually real estate decisions are directly related to factors internal to the company and what, from a financial perspective, is important to the business’s success. Therefore, observes Anderson, “a company is usually making real estate decisions not based on the real estate market but based on their business needs; just because it is a great time to buy or sell real estate — that is not usually how businesses make their decisions. They make decisions relative to what is in the best interest of their business — they are not looking at real estate as an investment.”
Choices on whether to buy or lease also depend on the type of real estate facility and how critical it is to the business. A manufacturing plant is often worth owning so that the business has the flexibility to modify the facility whenever it needs to, without concern about restrictions placed by a third-party owner.
If a company is acquiring real estate that is not core to its business, like a sales office, it may choose to have a short-term lease. This gives the business a different kind of flexibility — the ability to change its location, or to enlarge or contract, depending on market conditions.
Anderson grew up predominantly in Minnesota, where his father was responsible for 3M Corporation’s recording materials division, which made cassette and eight-track tapes.
After graduating from college and selling his business, Anderson moved to Los Angeles, where he took a job with the Faulkner Company. In the 1980s that company sold an interest in itself to an international real estate company, Knight, Frank, Baillieu, and Anderson observes, “It was pretty forward thinking to go global in real estate.”
In the early 1990s, after 10 years with Faulkner, Anderson moved to Cushman Realty Corporation, which in 2001 merged with Cushman and Wakefield. In 2006 he accepted offer from CB Richard Ellis, where he has responsibilities in two groups: the global client development group, which markets the company’s services national and globally, developing contractual business across multiple real estate disciplines — transaction management, facilities management, project management of a company’s real estate, and lease administration; and the firm’s global account team that handles the real estate portfolio for the Boeing Company.
Because the business is changing so fast, Anderson puts in a plug for involvement in CoreNet Global, which offers an executive development program leading to either a master of corporate real estate designation or a senior leader of corporate real estate certificate. Anderson not only has earned both, but he also recommended that a course by the same name as his upcoming presentation be part of the curriculum, and today it is a required course for the corporate real estate designation.
What is most important about real estate decisions, says Anderson, is that they be aligned with the performance measures a company thinks are important. “Real estate is akin to a tool of their business. When they need it, they have to get it, and when they don’t need it anymore, they have to get rid of it — regardless of what the market is doing.”