INVESTMENT ANALYSIS
By Moustafa Elsayed , CCIM , CSM
FAILING TO PLAN
Commercial real estate should be a profit generator whenever possible , which may require creative thinking .
Not to put too fine a point on it , but profit is the ultimate goal in commercial real estate transactions . All aspects of the industry , including donation , acquisition , disposition , build-to-suit , development , redevelopment , restructuring , lease buyout , sale-leaseback , M & A , investment , various accounting procedures , and so on , are designed to make commercial real estate into a profit center .
Taking this into account , why would an organization have to justify real estate as a cost center instead of a profit center ? These costs — sooner or later — will create financial challenges that contribute to an organization going out of business .
This concept is rather simple , but a straightforward case study can help add depth and perspective .
SKYROCKETING COST CENTER In 2008 , Apple had a store in the Third Street Promenade in Santa Monica , Calif . — one block from a 17,750-sf building occupied by a Borders bookstore . The Borders property sold in August 2010 for $ 24.8 million , was redeveloped to 10,352 sf , and then leased to Apple on an NNN lease . The building was sold again in July 2012 for $ 58 million and once more in July 2014 for $ 100 million .
Here are some basic facts : Apple was well acquainted with the location and the desirability of this property . From 2008 to 2014 , the property was resold four times , all while Apple leased the property on an NNN basis . The property is currently assessed at just over $ 112 million with a tax rate of 1.179 percent , which works out to $ 1.32 million .
• What did Apple fail to do ? In this case , Apple failed to conceptualize the
One of the most valuable yet often overlooked premiums by any organization in the U . S . is the intangible asset of goodwill related to real estate .
following : value , planning , strategizing , modeling , and intangible assets , and , most of all , they found themselves fighting the wrong battle .
• What could have been done differently ? Apple could have strategized to shift the store from a cost center to a profit center , but they actually passed on this opportunity multiple times .
• Is this the only case where Apple failed to plan ? How about the spaceship headquarters ? This is a much bigger discussion . The bigger the case , the bigger the variance . And they ’ re not alone in missing out on this opportunity .
How could Apple have capitalized on the commercial property ’ s additional value ? Every organization carefully crafts a business plan for the core business , yet they fall short when it comes to the strategy for optimizing the intangible asset premium in the real estate .
One of the most valuable yet often overlooked premiums by any organization in the U . S . is the intangible asset of goodwill related to real estate . This goodwill premium mostly is collected by investors rather than organizational stakeholders , as seen in the Apple example . The value skyrocketed because of the Apple brand name . Unfortunately , how to leverage an organization ’ s goodwill asset through strategic real estate planning is not a course taught by any financial school , leaving industry professionals to rely on their creative thinking skills .
Apple and other organizations can capitalize on their goodwill premium through a dynamic real estate strategic plan — one carefully coordinated with the core business milestones .
In this situation , Apple could have strategized to shift the store from a cost center to a profit center . This route is very similar to those of other major companies like Pan Am , Macy ’ s , Sears , and JCPenney , which have all fallen from top American brands to bankruptcy . But before going further , mistakes like this aren ’ t specific to one company or one market . It ’ s a common practice to use commercial real estate as a cost center rather than a profit center . No single actor can be blamed for this trend because it ’ s standard practice in the corporate real estate world .
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COMMERCIAL INVESTMENT REAL ESTATE MAGAZINE SPRING 2021