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New Lease Accounting Influences Northrop Grumman to Buy HQ July 21, 2010

Posted by Bob Cook in Corporate HQ, Financial Planning & Analysis, Lease Accounting.
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Soon-to-be HQ

Today, The Wall Street Journal announced its “Deal of the Week” to be the Northrop Grumman purchase of a new headquarters building in Falls Church VA.  In “Northrop Is Flying East”, the WSJ writes that the company “looks to have gotten a pretty good deal” but that “Northrop also took into consideration the low cost of borrowing money and proposed new accounting standards that could make it less advantageous to lease real estate” (emphasis added for this post).

It is, of course, no coincidence that I’ve been proselytizing on the impact of the new accounting and that Northrop is one of my consulting clients.

Expect to see more such transactions from other companies as the impact of the accounting standards become clearer to those in corporate real estate.

Read more posts about lease accounting here.

TRIRIGA Webinar | The New Lease Accounting Standards and You — Strategic and Practical Implications June 20, 2010

Posted by Bob Cook in Financial Planning & Analysis, Lease Accounting, Profession of Corporate Real Estate.
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I’ll be conducting the second of three webinars on the New Lease Accounting on June 22nd   The focus of this second webinar is on Strategic and Practical Implications. 

Details here:   TRIRIGA Webinar | The New Lease Accounting Standards and You.

Webinar Series: “The New Lease Accounting Standards and You” June 8, 2010

Posted by Bob Cook in Financial Planning & Analysis, Lease Accounting, Profession of Corporate Real Estate.
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I’ll be holding a series of three webinars sponsored by Tririga.  The emphasis will be on how the new lease accounting standards are going to change the strategies, processes and professions of corporate real estate.

June 15, 1 to 2 pm EDT        The What, Why and Wherefore

June 22, 1 to 2 pm EDT        Strategic and Practical Implications

June 29 , 1 to 2 pm EDT       How It Will Change Your Life

Click here for more details and registration.

Mercury News’ columnist got it wrong. Headline should be: HP Grows Up ( … with corporate real estate playing role) June 2, 2010

Posted by Bob Cook in Company Case Studies, Financial Planning & Analysis, Profession of Corporate Real Estate, Silicon Valley.
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Today, Columnist Chris O’Brien lambasts HP for finding success – not from innovating like Apple or Google – but from implementing a “ruthless, brutally effective strategy” that he playfully characterizes as “Buy a company. Cut costs. Trim employees. Repeat.” His column was prompted by HP’s latest layoff announcement.

HP should, however, in fact, be lauded for maturing into a well-run enterprise that can successfully compete in a complex world where success – especially for a large company – requires more than just coming up with the latest and greatest. It requires business acumen, discipline, and management – something that has been missing from the many great product-focused, geekdom companies that are now R.I.P. in the Silicon Valley graveyard. Think (and weep, ’cause it was great in many ways): Sun Microsystems.

HP is showing an alternative way for a tech company to succeed – and to do it long term. It’s a way to build an enduring enterprise – a way away from the self-limiting strategy pursued by most tech companies and which I’ll playfully characterize as: “Design breakthrough product. Develop cult following. Sell before competitor catches up. Repeat first three steps as many times a possible, then (inevitably)…. Blink. Hiccup. Crash.”

HP has become a corporate juggenaut by realizing, under the five-year leadership of CEO Mark Hurd, that success requires the careful management of resources: capital, people, assets, infrastructure. The last of these is partially the domain the HP real estate group which is clearly busy with initiatives like the consolidation of HP’s data centers and which is proving its worth to the enterprise.

According to HP’s latest 10-K, of 77 million square feet of space, fully 10 million square feet had been vacated – probably significantly helping on-going P&L, albeit with some large one-time negative hits for write-offs and reserves. While only three million square feet had been sublet such that this vacated space continues to drain cash, once those unneeded leases burn off, the cash flow savings will become as permanent as are the P&L savings already in place. Having said that, subletting three million square feet is no small feat. (Pun intended.) Moreover, let me tell you, vacating 10 million square feet is an even bigger feat. (Yep, pun intended, again.) You might think, “what’s so hard about moving out of real estate”, but it must have involved thousands of decisions, hundreds of presentations, and dozens of approvals to decide which sites to vacate, when to do it, how to do it, who should should pay for it and who should profit from it.

As companies like HP become mature enterprises – managed by professional managers who leave product design and marketing to others and see their job as managing the enterprise – corporate real estate departments become more important. To manage an enterprise is to manage the company’s infrastructure – both hard (e.g. real estate, IT systems) and soft (e.g. culture) – and corporate real estate plays a central role in this area. Products come and go. People come and go. Infrastructure endures.

Corporate real estate execs before Congress. Could it happen? May 12, 2010

Posted by Bob Cook in Financial Planning & Analysis, Lease Accounting, Profession of Corporate Real Estate.
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A couple weeks ago, as I watched the Congressional interrogation of Fabulous Fab, I was struck by how this young guy, who toiled deep within Goldman Sachs’ 30,000-some-employee corporate hierarchy, had become so quickly notorious. This was not the Chairman or CEO or CFO or any other C-suite exec who was being drilled; this was a guy who was only 28 years old and barely out of grad school when he masterminded the trades that some think exemplify the greed of Wall Street and that landed him before Congress. 

This all got my mind to thinking whether or not a corporate real estate exec would ever be up in front of Congress. It’s clearly never happened before… but the new lease accounting standards are going to place corporate real estate smack-dab in the middle of preparing some of the biggest numbers on company balance sheets – the present value of existing lease obligations. Corporate real estate execs are going to be in the uncomfortable, unenviable, and sometime untenable position of having to attest, to their management, the reasonableness of forward-looking projections regarding existing leases – including hard-to-make assumptions like the likelihood of lease renewal and the likely rental rate at renewal. If their assumptions turn out to be wrong, no one will go back and check — unless, of course, their company ends up in bankruptcy and investors claim the company financial statements were erroneous – in which case – Look Out!

Never before, have corporate real estate execs been front and center on anything quite so large. For many companies, the present value of their lease obligations will exceed the amount of debt they have in the form of bonds, bank loans, etc. These companies are going to look a lot more risky to investors than they have previously. While companies have been showing lease obligation information in the notes to their financial statements, the new accounting will show it right on the balance sheet. And the number is likely to be larger – in some cases, much larger. Presently, companies only report the minimum lease obligations for existing leases (and, again, only buried in footnotes); the new accounting will show the likely lease obligation for existing leases, taking into account likely renewals (and, again, right on the balance sheet). It’s going to be a very large number. Some companies are going to see billions of dollars of obligations appear on their balance sheet.

And what’s going to keep corporate real estate execs up at night is the fact that they are likely to be the ones responsible for making and documenting assumptions that significantly impact the size of obligation recorded on the balance sheet. Fast forward twenty months or so to when the new standards will take effect. Take the case of a ten-year lease costing $1 million per year that has only, say, two years left to run but which gives the tenant the right to renew for another ten years at the same rate. If one assumes the lease is not renewed, $2 million of obligations go on the balance sheet. If one assumes the lease is renewed, then $12 million goes on. Quite a swing. Just imagine the pressure from management who will want the corporate real estate exec to find a way to legitimately opine that the lease will not have to be renewed. And imagine the pressure from auditors who will say “show me the plan” before they sign-off on a no-renewal assumption. It’s not hard to imagine that corporate real estate execs – when they are able to sleep, in spite of all this pressure – will have vivid nightmares of having to defend their renewal assumptions before Congress.

Some corporate real estate execs got a small taste of what it could be like back in 2005 when a slew of companies needed to restate their financial statements due to what-the-SEC-said-was faulty lease accounting. In that situation, though, the problem was one of technical accounting and how companies and their auditors thought leases should be accounted for. The practices that the SEC said were faulty were, in fact, widespread. The SEC set everyone straight, and while there was a lot of egg on faces and hands got slapped, there were no allegations of intentional wrong-doing. There were no Congressional hearings. No corporate real estate execs before Congress.

With the new lease accounting standards, though, corporate real estate will be cast in a new role – an important financial role.  Corporate real estate execs before Congress?  It could happen.

Are corporates getting serious about earthquake risk yet? March 15, 2010

Posted by Bob Cook in Financial Planning & Analysis, Silicon Valley.
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National Real Estate Investor reports that “Earthquakes Spur Interest in Seismic Risk for Properties”. It cites a grocery chain with stores along the San Andreas Fault in Southern California and how property insurance concerns led to a seismic risk evaluation. The big risk for companies, though — particularly in Silicon Valley — is business disruption. Companies won’t seriously address the concern, though, until there is an accepted way to quantify the risk such that stock investors can take it into account in valuing companies.