DATA DRIVEN MERGERS

A CASE STUDY

By David Stephenson

It seems there is an announcement every week about two companies merging or a company spinning a part of themselves off into a new company. The constant coupling and decoupling of companies means that real estate managers always need to know exactly what they have, how well its being used and how long they are legally obligated to pay for it. When you go into a merger without a good handle on these elements, planning quickly devolves into a mad scramble to gather data. This scenario is exactly why I received a frantic call from a client in August of 2018 requesting I join a call the next day with their executive merger team. Talk about pressure under short notice.

Let’s back up two years. This entertainment company is a valued client of ours. They own a large studio lot and office and studio space across the United States, and we had been working with them to elevate their Integrated Workplace Management System (IWMS) to the next level. We had integrated new space standards within the system to help with space allocation and future planning and had standardized their reporting so there were fewer reports, but with more accurate data. We were embarking on a project to improve their new hire onboarding process that tied closely with the HR system when "BAM!", the merger was announced.

The department we were working with did not track real estate for the entire company, only one division of it. Another division had their own homegrown legacy system, and in some cases, the two systems were carrying different data about the same floor in a building. It was quickly apparent that there would be issues in providing an accurate list of real estate holdings for the merger – which is what precipitated the frantic call.

It was clear from the report generated by the homegrown system that there were gaps and differences in how space was being categorized and accounted for. In order to provide a consistent accounting of space across the entire organization, our first recommendation was to migrate the homegrown system’s data into the IWMS. This enabled us to standardize the categorization and allocation of space across the portfolio, resulting in much clearer descriptions of the spaces that were not typical office buildings. The studio lot contained an interesting mix of buildings, such as sound stages, bungalows being used as office space and housing for A-list actors, parking decks, central mechanical plants and guard booths, each of which posed a challenge regarding how they should be accounted for in the IWMS. By leveraging our experience and existing industry standards, we were able to guide the merger team through this process, resulting in a clearly documented standard.

Speaking of standards, we recommended the client adopt the latest BOMA standard (BOMA 2017) when calculating their total rentable area for the portfolio because its provisions allow for previously non-rentable areas to be included in the calculation for total rentable area. It also outlines a new method for allocating support spaces across multiple buildings in a portfolio. Having an IWMS in place to crunch these numbers, accurately and on demand, allowed the merger team to run multiple occupancy scenarios as they negotiated the final terms of the deal.

The last challenge in the real estate planning process of this merger was the realignment of departments across the portfolio. This merger resulted in a portion of our client’s original company being spun off into a new company that retained ownership of the real estate assets on the studio lot, making them the landlord to the new company and creating the primary reason for the application of BOMA 2017 (refer to side bar for the BOMA 2017 value proposition). It also meant that, in some cases, employees of both future companies were co-located on the same floor. To visualize these non-compliant situations, we worked with the HR merger team to incorporate each employee’s future state into on-demand floor plan visualizations, which were subsequently used by the real estate team to develop the migration plan for segregating the two companies. As the merger progressed, we updated the IWMS with changes from HR so that the real estate team always had the latest data at their fingertips.

By standardizing the entire portfolio in one tool, utilizing industry-wide standards such as BOMA 2017, and partnering with other operational departments on data sharing, we provided our client with accurate on-demand reports and visualizations that streamlined the analysis and planning process, generating additional revenue for years to come.

EASY MONEY

Each time BOMA releases a new standard for measuring space in office buildings, there are changes that help clarify how spaces should be measured and calculated. There typically isn’t a big departure from which categories of space are rentable or not, but that wasn’t the case with the 2017 BOMA release. In that release, two significant changes resulted in previously non-rentable space becoming rentable, the biggest of which was the inclusion of the lowest level of vertical penetrations as rentable area. In other words, the level where stairs, elevators and shafts terminate all have a physical floor. In previous standards, those lowest levels were considered part of the vertical penetration and not rentable. Because this floor costs money to build and maintain, however, it makes sense to account for it as rentable area. So, let’s run through a couple of examples.

Example 1:

You own and lease a business park that contains five 4-story office buildings. Each building has one elevator bank, two exit stairs, and two vertical shafts. In this case, the footprint of these vertical penetrations is 500 square feet. In BOMA 2017, that 500 square feet is now rentable area, which can generate an additional $15,000 in rent per year per building. That’s $75,000/year for the business park as whole.

Example 2:

Our client owns a 10-story Class A office building directly adjacent to the Capitol Building in Washington, DC. This is one of the highest rent districts in the United States, demanding $100/square foot in rent. This building has two building cores due to the size of their floorplates, with the lowest level of the stairs, elevators and shafts representing 3,100 square feet. That math results in an additional $310,000 per year in rent, just for one building!

Example 3:

We assisted our client referred to in the article with a merger by standardizing their space categories across the portfolio. Since the new company was going to be a tenant, it was imperative that we ensure our client maximized their total rentable area before signing the master lease. Calculating the square footage of the lowest level of vertical penetrations across the buildings the new company is going to occupy amounts to 61,000 square feet. At the current rent rate of $54/ square foot, this rentable area will generate $3.3M per year in additional rental revenue.

When discussing these changes with landlords of existing buildings, we must consider the time it will take for all the leases to renew with the new rentable square footage. The increase in rental income is not instant, but with the trend in lease terms dropping to five years on average, it’s not out of the question to be able to reap these benefits in that timeframe.

So before you generate a new lease agreement, think about whether you should recalculate your entire building and start working toward fully realizing your additional income.

David Stephenson, CFM, is the Director of Smart Buildings Studio at Little and can be reached at david.stephenson@littleonline.com