Bart Waldeck:
Hello, everyone, and welcome to Location is Everything – Tango’s podcast about store lifecycle management. As usual, I’m your host, Bart Waldeck. In today’s episode, we will dig into how the pandemic is changing the nature of real estate strategy for occupiers, and how this change has increased the importance of lease accounting and administration solutions in today’s environment. And to help us better understand how and why things are changing, we’ve invited Lou Battagliese and Dave Dilworth from Jackson Cross Partners, a leading real estate services firm, to help us unpack this changing dynamic.
Why don’t you give us a little bit of background on Jackson Cross Partners, and then your respective roles and experience at the firm?
Lou Battagliese:
I’m Lou Battagliese and I am one of the founding partners here at Jackson Cross. Company was formed in 2003 and at our core, we are a real estate service company, but we’ve built a specialty practice around corporate real estate. And it is really built to support corporate clients and organizations all the way through their real estate and lease accounting life cycle. We do everything from what we call intelligent imaging, which is scanning and coding paper files to digital, all the way through leasing administration, lease accounting preparation, to consulting and transaction management. And we have done that across various industries of real estate, commercial real estate, from industrial office, retail, and investment.
Dave Dilworth:
Hi, my name is Dave Dilworth. I’m our head of strategic alliances here at Jackson Cross. And I spent a lot of time working with partners like Tango, to help bring solutions to the market and help our clients manage their lease portfolio, manage their lease data, and really start to drive financial returns from using those systems. So glad to be here.
Bart:
Obviously we’re all very busy, in the last year in particular, things have picked up. There’s a lot of change and change typically means a lot of business. So you’re in there, in the rooms, in the boardrooms, or I should say the Zoom calls now, talking with folks as they’re wrestling through the last year from, I know we had discussions last year where everybody was focused on, “Oh my gosh, what are my rights? What are my obligations? What can I do given the fact that I’m not utilizing the space that I’m paying for?” And that has evolved over the year, I think people have gotten their arms more around it and we’re slowly approaching, on the corporate real estate side, the reopening of the offices. Obviously stores have been open for a while in most places, but there’s still a lot of dynamics going on.
What are some of the main changes or major changes I should say, that you’ve seen created over the last year as a result of the pandemic?
Lou:
Well, there’ve been a whole series of changes, both short-term and reactive to work from home and all of the restrictions across all of the different real estate groups. From an overall standpoint, I think a lot of the short-term changes have been fairly well-documented. Companies trying to conserve cash, to prioritize safety, to figure out how to address portfolio changes and options. And the longer term effects that we’re seeing and your folks are definitely involved in this, is starting to design what the new post pandemic office or retail stores look like and how people are going to deal with this. But it’s also affected landlords in a great way to, and I’m sure we’ll talk about that a little bit later.
Bart:
I know you mentioned in the kickoff Lou, that lease accounting is part of the services you provide for many companies, obviously a very important topic over the last several years since the change in the accounting standards. Is there any kind of nuance to it in this environment of COVID? What are the implications for lease accounting in a COVID type of environment? There’s a lot of change going on and change usually means you need to account for things differently.
Dave:
That’s right, Bart. And the biggest challenge, I think, certainly was the volume, as stores were closing and restrictions came in, a lot of tenants were going directly to the landlords, trying to renegotiate and get that relief, as they weren’t able to produce any revenue and work through that. So just the volume of keeping up on that was probably the biggest change. Although the boards did eventually provide some relief regarding rent concessions during COVID basically, as long as you were going to pay back that money later under the term of the lease, it could be treated as a variable expense and go through. But for the folks who were really proactive with this, they adjusted their portfolio before that.
And what that involved was, any re-measurement will involve re-deciding on the likely term, which may be a little bit easier, but if there had been an option included in the likely term previously, taking that shorter term will have a pretty significant impact on the balance sheet and trying to determine a borrowing rate for all of your leases back in March and April of last year, could it be a very challenging endeavor as you had to do that. So that early on piece, the volume and keeping up with it, has been very difficult.
And now as year end, trying to get back to the normal management of leases and accounting, those same decisions about likely term are going to be critical in making the right posting, the right decisions, and now with all eyes on this coming back.
Bart:
Yeah, and you mentioned relief, it reminded me of the fact that FASB has given private organizations an additional year, when COVID hit, they were going to need to report, I think, the first reporting period after mid-December of last year, and they gave an additional year. And so far, it looks like that’s holding. I haven’t seen anything that looks like they may give additional time. But with the pandemic going on, a lot of these businesses, private organizations were really just trying to keep the lights on. And as we all know in our world, it often takes time to get these folks motivated, to understand the lift that needs to happen to be compliant with the new lease accounting standards. And it’s not something you can start in November and get it done by the end of the fiscal year, calendar year. Are you seeing on the private side, a little more sense of urgency and understanding of what they’re up against to try to get to the new standard by the deadline?
Dave:
The urgency, I think, is starting to come back as folks are looking to get back to normal. But I think the difficult part is because of this compliance, that’s not an exciting topic for these companies to go after, it’s not about revenue, it’s not about any of that. So generally it’s, how quickly can we it done? Let’s keep the costs down and try to get this through, especially now coming out of a tough year.
But we’re starting to see some of the urgency, and fortunately from some of the companies who had adopted previously, they’ve been able to show some success and some returns by using the data that they have to do better deals, make better decisions and help operate. So hopefully there’s a little bit of a view that this can be a good thing to help run the company, but it is tough to get over that initial hurdle of a compliance project with a deadline.
Lou:
For private companies, it’s a broader field, for the public companies, a lot of big companies that have a lot of locations, a lot of equipment that was put together for the 2019 transition. With private companies, it’s all over the map, there’s a lot of people that don’t have a lot of locations and it’s more of a nuisance. For those that do have a lot of locations, some of the larger portfolio private companies, one of the things that we’ve started to hear about that’s coming back, as they are finally looking at testing out their lease inventory and what it’s going to do to their balance sheet, is more about debt covenants than it is about the balance sheet. A lot of these private companies, again, since they don’t have to publicly report, aren’t as worried about EBITDA impact or some of the other things that the public companies were worried about.
But for people that have larger portfolios, all of the things that we’re going to talk about today about what’s the right term of lease, what’s your turnover, how many locations do you have? Those types of things are going to affect their balance sheet and could affect their debt covenants. And they’re in discussions now with the lenders because the delay, frankly, just put it on the back burner for both the lenders and the companies, for the last couple of years.
Bart:
Yeah, absolutely. And I think you hit on something that we’re seeing as well is, in the large organizations, the public entities, they tend to have a department. They’ve got a group that focuses on lease administration and maybe even some folks in accounting and finance dedicated too. But when you get into the private organizations, they’re not necessarily staffed to do that.
I know this is a service you guys provide, so I’m just curious, have you seen an increased demand for your outsource services for lease administration and accounting from the private sector, given everything they’re wrestling with, with COVID and whatnot, where they just, “Just take care of this problem for me, please?”
Lou:
Especially at the lower end, for the people that have under maybe 200 locations, people are looking for relief. And we’re also starting to see some of the public companies who made the transition, but are starting to say, “This looks better as a managed service,” staffing it, maintaining it, managing it, doing those types of things. So we’re starting to see some activity for those that were in compliance, but are struggling to keep everything updated, that they’re looking for some help.
So at both ends of the scale, we’re starting to see some activity pickup. Again, for the last year and a half, it’s been slow because everyone just stopped making decisions. We don’t want to do new contracts, we don’t want to start new projects. Let’s just tread water until we see when we’re out of this thing. But hopefully there’s brighter days ahead.
Bart:
When the pandemic hit, I think a lot of companies were caught flat-footed as it related to this part of their business and really understanding, well, how many leases do we have, and what obligations and rights do we have under this type of unnatural situation? Did you guys witness that, did you see a lot of people swimming to try to understand what exactly they can and can’t do in this environment, because they didn’t have the systems that may be kicked out the data or allowed them to query a database to understand exposure or other types of things?
Dave:
We did. We saw that a bit, but maybe for the right reasons, it wasn’t that the companies were being negligent on this. But when you look at a compliance project and a system project, this is all about financials. So rent, term dates, options, and working through that. So when the closures came and the pandemic hit, things like, there’s force majeure, include government restrictions and does that excuse my performance, just wasn’t available in the systems. And it may be because the legacy systems didn’t have places for that information, in which case it couldn’t be brought over or in standing up a new system, using available migrated data cut back on the amount of abstraction companies wanted to do. And again, with compliance, it’s, let’s get it done quickly, let’s keep the cost down and pulling in some of that information, probably didn’t make sense as part of a compliance project.
But then when a large section of the portfolio is impacted, then there’s calls to law firms and they just have associates reading leases to go and try to make good decisions. But we saw some companies who just didn’t know which leases to start with, at the beginning. And over the years, any type of massive issue like this, would probably be caused by a hurricane or an earthquake or something else. So the entire town is impacted and it’s not that people aren’t going to your store because it’s closed, it’s because of the roads flooded out. And there was, I think, probably a different mindset around doing that, it was more concentrated, it doesn’t happen as often and the whole area is impacted. And for a single story, you just go to the lease, or a single building, you can just go to the lease.
So I think companies did get caught a little bit flat-footed, but certainly that’s to be expected and not an area to point blame on, but I think we will see companies start to look at what benefits we have capturing some of that information, if we can be the first to reopen, or the first to get out, or the first to contact our landlord for relief and some of those more strategic decisions going forward, in updating and maintaining these systems.
Bart:
It begs the question, have you seen some of the lease language change as a result of the pandemic? In other words, write your COVID clause now, or something of that effect, that maybe force majeure did not cover. Are you seeing any type of change in language between landlords and tenants in this area?
Dave:
Yes, some, definitely. We’d see some leases had government restrictions in there and inserting “comma pandemic” into that list of things, including, but not limited to, and more attention paid to that. Especially as signing renewals in places where companies already are, or for some of these companies that have grown during the pandemic, where do they want to be in their leases? So definitely, the long-term view is an important one, especially if you’re going to sign a 10-year lease, to make sure you’re covered and then addressing insurance provisions to make sure that everyone’s made whole, if there is a business interruption or a shutdown and there’s just no more revenue coming in.
Lou:
I think that it’s interesting that the lease accounting transition and the pandemic, were like a one-two punch of visibility and a spotlight on real estate leasing. Prior to the lease accounting, a lot of times the finance folks weren’t really in the loop of how decisions were made about real estate. Whether we exercised renewals, we took more space, whether we consolidate space, that was done and the accounting folks just reported out what it cost.
Lease accounting changed that, people started looking at the size of the commitments and started to look at more capital appropriation for long-term leases. And the pandemic put a spotlight on how leases are constructed, I think one of the things and you know this Bart, from your experience, that one of the most difficult challenges about creating systems, managing systems, is all of the variation in the construction of leases.
For as many attorneys, as there are around the world, there are very few standard terms. Landlords usually have strong leases if they’re using their paper, tenants have been trying to fight back, but not always been successful. And a great example of that is people said, do we have force majeure clause in our account, as Dave was saying. Well, yeah, we do have that in the lease, but force majeure in 95% of the leases, is a protection for the landlord against delivery. If their ability to deliver the use of the property or that deliver construction is delayed due to natural causes, then they get relief. There were very few, when we started to look at abstracting some of these clauses out, there were very, very few situations where force majeure provided relief to a tenant of performance. Other than a sales kick-out clause in a retail lease, which may have been able to be enacted if a whole center was closed. That was pretty much the only place that folks could look to their lease.
So going forward, both of those things are going to start to change how leases are negotiated and how they get financed and priced. So, there will be change coming from this.
Bart:
Yeah. And I think Lou, you had mentioned a lot of companies are frozen right now, as far as making real estate decisions, whether that’s short-term or long-term. Obviously the short-term, you have to make those decisions, then renewals coming up, there’s a lot of uncertainty. And one of the two of you had mentioned a term that I thought was really interesting last time we spoke, was this concept of flexibility premium. So if you’re going into renewal or even a new negotiation, if you want flexibility, you’re going to need to pay for that flexibility. Can one of you to expand on that?
Lou:
Over time, what we have seen with large client portfolios, is that there was an imbalance between their average length of stay and their average remaining term, to the extent that we actually ran some models after we had abstracted data on a couple of big portfolios and the variants, their average length of stay was somewhere north of 14, 15 years. And that included a lot of new locations that had just opened up, so that skewed the number lower. But their average length of term was something like three years. And so, clearly, companies valued having flexibility if they needed to get out of a location, relocate or shut it down.
However, the statistics and the data showed that they very, very rarely used it. When most investors look at a real estate, a multi-tenant building, for example, they would use, again, prior to COVID, but they would use an 80%, 85% retention that the tenants would renew. And that’s almost an industry standard.
And so what we started to do was model, well, if you can identify those locations where you’re not moving, it’s a valuable location on a corner for a retailer, or for a logistics company, it’s next to the airport or something like that. Then if you can go to your landlord and offer longer term than the traditional three or five year renewal, you can share in some of that value creation. And so, we tried to put a number on what that flexibility premium was, and we were making some progress with companies and now it’s turned upside down because no one’s quite sure.
There are still core assets that you can still pay attention to, but now everyone is thinking, “Wow, it would have been nice to have that flexibility or we’re glad that we have the flexibility.” But it very rarely lines up with when you need to do it. So our example, we just renewed our lease for five years last December, and we haven’t been in the space for 18 months. So, the timing of when you renew and when this happens, very rarely are perfect alignment.
Bart:
That makes a lot of sense. Dave, any additional thoughts on that concept of the flexible premium?
Dave:
It is interesting Bart, with the way companies look at this and make some of these decisions about how much longer do we want to be there. When you look at starting a new location, whether it’s because a CFO says on an earnings call, that we’re going to add 10% to our stores for retail or office users or taking over a new lease at a flagship location, new buildings in Manhattan or wherever it may be. Those decisions are made on those leases, in large part with demographics, a projection model, and this need to move. And then you get, say 14 years into a lease and you start looking at how much longer do we want to be here, and there’s a lot of hesitancy to go beyond five.
Where now, in addition to demographic models and projections, you have 14 years of operating history at the location, there’s this hesitancy towards the end, when there’s not a type of mandate to push or a lot of emphasis behind it and the day to day to be far more conservative.
And if you do that a couple of times, exercise a couple of short-term options, that premium starts to compound on itself. And you may be three or four renewal options in at 35% more than you could have been paying had you taken that operating history and made a better decision, aligned with the corporate strategy, to determine what that right extension term is.
Bart:
Yeah. What it’s worth. Well, I’m sure in this environment, a lot of the existing options that are coming up for renewal, don’t really fit the need, or the uncertainty is so high that they don’t necessarily want to take that. Are you seeing that at all, where the options don’t really fit the need?
Lou:
I think we are. And the fact is that options in a lease, tenant options for renewal, have always been about protection of control of the property, so the landlord couldn’t boot you out or unreasonably increase the rent. So a lot of retailers, especially quick serve restaurants or convenience stores or those types of things, will have leases with four or five, six, a series of options, particularly when they’re ground leases in they’re building the improvements, a CVS or a Walgreens is a good example. And they’ll have a series of options, usually five years. And five years was arrived at as an arbitrary compromise, landlord didn’t want a lot of one-year renewals because that really limited it, and the tenant didn’t want to put 10-year commitments out there, so three to five years became the standard.
Now, the issue that people are having in offices or industrial buildings, is if they have to reconfigure their space – and we have a few clients who are in this situation – they might have 20,000 feet of office space and they’ve got a five year renewal coming up to control the space. Even if it’s fair market value rent, they have control. But if they don’t need 20,000 feet, the option really doesn’t do them any good. And so, you are put into a situation where you have to now do an arm’s length deal with your landlord, or you have to be prepared that you might have to move. And that is where a lot of these options where companies have managed to notice dates. A lot of office leases, for example, might have a six-month notice to exercise the option. However, six months is not enough time, if you have to move 10,000 or 12,000 feet of office space.
So now, companies that are still trying to catch up and figure out what they’re doing, need to be looking at their planning horizon and look at these things and say, “We might need 12 months, or we might need 18 months if we have to relocate this. Or at a minimum, to feel out our landlord, to figure out if they’re going to work with us on cutting back space or reconfiguring the space, or if they’re going to play hardball once they know we can’t do anything.” So, the awareness factor now with these options, where they were always a point of control, now you might be losing that control and companies need to be aware of that.
Bart:
That makes sense. And being on the tenant side of the business, for us and largely I think for you guys as well, we tend to think out of the lens of an occupant and there’s obviously a different side of the equation. Landlords, they have a mortgage to pay and if rent’s not coming in, they’re not going to be able to service the debt or do what they need to do. So the problem, just this pandemic, the problem hasn’t been only on the tenant side, it’s been on the landlord side as well.
Do you see that dynamic coming to play in what’s going on in the environment, that both sides are hurting and is it, we both acknowledge that this is a bad situation, let’s figure it out, or is it every man for themselves?
Dave:
It definitely has hit landlords also, like you said, trying to pay debt, trying to restructure that, trying to keep their people employed as they’re going through this. And the, let’s get through this together, I think, is the right approach, and I think you’ll see it out there, especially with the larger companies, the larger landlords who really do view the tenants as their customers. And the competition for good credit tenants, long-term leases, there’s just not a lot of value now in trying to really put the screws to somebody and try to make up a year’s worth of losses in a month or in the next year, and try to double that up.
And it depends on the business too, industrial property is doing great with the rise of the logistics industry and all the shipping. Some of the smaller, a lot of the stores that maybe went out in a retail center were small businesses, similarly, in an office building, people that maybe took half of a floor are probably more likely to be out than somebody that had the top five and the penthouse.
So that type of maneuvering and seeing who can backfill. So if you have a company that was growing and you lost a few, I think these landlords are going to be in competition to try to attract the companies that have grown and be a good place for companies that may start in the next six to 12 months come up. And if it’s a very contentious relationship, then I think that’s going to be very difficult. Not to say that … Everyone’s going to have their eye on the number either, we’re this short, we’re this far below, and it can be difficult. One thing that may compounder for landlords, is the ability to refinance. With fewer tenants, that’s more risky for a lender and with historically low interest rates, the next refi deal you get, you can’t really count on saving half a point or so on that deal.
So, it is going to be tough, I think negotiations will take a little bit longer, but I think you’ll see a lot of competition for good tenants to come and backfill downtown office space or in between anchors in a shopping center.
Bart:
Absolutely. And with this frozen nature of either not being ahead of it enough, as you were saying, Lou, it’s just managing to the notice states, or not being able to make a decision because you just don’t know, for example, in an office dynamic, how many people are going to come in the office, how much space do I really need? Or if you’re a retailer it’s like, is this the right location, given there’s so much delivery and pickup now, is there a better spot that we’d want to be in? Is there a risk of running out the clock on landlords, where you lose a high-quality location, whether that’s the situation like you said before, where you don’t have enough time to react, so you’re stuck, or you don’t make a decision and they exercise their rights and bring in a new tenant?
Lou:
That dynamic is going to absolutely exist, and every market will be different. I think office and retail will be the two product categories that will have most of the change. From an office standpoint, attracting labor is still going to be one of the big locational drivers. And so the higher quality buildings, for higher paid salary positions, high intellect positions, are going to still be in demand. And the landlords are going to have the challenge, as Dave said, on reconstructing their capital stack. Because think of all the money that was spent on collaboration, open office, desk sharing and how much the new normal of social distancing, sanitation, privacy. Now that flips that on its head and either companies funded it or they had their landlords fund it and rolled it into the rent, now before they can go back and reoccupy, they need to do that.
And I know, again, your team is doing a lot of work around what does the new metric look like as square foot per person? And so you might’ve had 20,000 feet and you may have had 120 people in there, and now you may need 20,000 feet to fit 75 people, depending on the design of the space. And that even creates a bigger issue, which is, how do we work while we’re rebuilding out the space? Do we need temporary space? Do we need to have people continue to work from home while we go and make this investment? So there are more questions than answers for both the landlords and the tenants, but it’s going to be a dynamic time. And again, I’m not sure that a lot of companies are yet ready to put a firm pencil on, this is exactly what we need. I think everyone’s still feeling their way a bit.
Bart:
Yeah, I completely agree. And I think we’ve been dancing around the elephant in the room behind all this, which is the data, the systems and the processes that you need to be on top of your game to make some of these decisions and have them be data driven decisions, versus what you think is going on. I think the pandemic obviously has brought a spotlight, as well as the accounting, to the need for these types of systems, in ways that companies of certain sizes maybe could get away with it, not having a dedicated purpose built system for this. And then you mix in this fact that everybody was forced to work from home, you don’t have those file cabinets to necessarily go in and look at, you needed a system, preferably accessible from anywhere, in order to understand what’s going on with the leases and react in this pandemic, let alone deal with complying with lease accounting and then managing a portfolio.
I’m assuming you guys have seen that as well, has the need for a system accelerated or become more important, in your opinion, for companies?
Dave:
Absolutely. And we’ll talk about lease systems, but in general, there’s no more walking down the hallway to ask the HR person about your PTO policy. Everything is now through emails or Teams or whatever it may be. And it’s called work from home, but I had a few years of actually working from home, everything was online, everything’s accessible, my wife wasn’t here working right, the baby wasn’t home, all these types of things. So this really is this work while quarantined, you can’t go out and get a cup of coffee, so it’s much different. And in trying to balance out all those other family issues, health issues with being in your home and trying to respect the other people have that, it wasn’t 9-5 as much anymore either. So you may be getting emails at 7:30 at night because that’s after someone put their kids to bed.
So, having a system accessible and a common base of knowledge, because people aren’t as available anymore, is really critical to make sure that when you do get together, you’re all prepared and you’re all relying on the same data to make decisions. And no one on that call says, “No, but I have this other spreadsheet that says something different that would change all of this.” So basing it all on that, on a good core set of data that everyone has access to and commits to updating and keeping in place, is really critical.
One of the good things that may come out of all this is, as companies are working to restructure and make the decisions about what does the new office look like, what’s my new store look like, how am I going to do this? If those systems were built to withstand pandemic, working while quarantined, they’re going to only be more effective when people will get back. So let’s not abandon them because they can walk down the hallway now, but to have those and have those disciplines in place, can be really more productive as you’re trying to figure out how it’s going to look in the future.
Bart:
It reminds me of what I call “Lou-isms”. So I think Lou, you said data systems and processes are the strings that hold all the pearls. For non-Lou’s, what does that mean?
Lou:
Well, there’s plenty of those, Bart. But data and systems are the link in a cross-functional organization. And prior to our getting involved with the lease accounting and just doing lease admin, a lot of times the lease admin customer was a real estate group and they had their data and they worried about expiration dates or some of their legal obligations or those type of things. And the accounting folks and the finance folks just accounted for it after it happened, this is who we pay, this is what we paid. And if it ever got out of line, people would try to put together a committee to put things together. Now, again, that one two punch we talked about, between accounting, finance and the operational issues of the pandemic, there’s a greater need for everybody to be singing out of the same hymnbook and looking at the same data. And one of the things that this pandemic did, is it stopped that progress.
We’ve talked about this in other sessions with you, but a lot of companies were sold in 2016, ’17, ’18 when they were preparing for lease accounting, on the idea of a single system of truth. And that single system of truth was that string that would hold the pearls, and it made all the sense in the world at an executive level. In its implementation however, it didn’t get there. They either didn’t complete all the data, the compliance dates came up, accounting went and they got an alternative solution. And now what we’re seeing in a lot of companies is they’ve gone back to their corners, the cross-functional team got disbanded at transition and then someone said, “I need an Excel spreadsheet. I need Smartsheets. I need another lease accounting tool because I’m not getting it out of my system of truth.” Or the system of truth is too complicated for the end users, and they don’t like using it.
And all those things have evolved, so the string’s getting broken. And the way people are making up for it is throwing people at it, the labor costs, the cost of compliance every month. If you’ve got a dynamic portfolio every quarter, and you’ve got a lot of changes, particularly if you have assets, not just real estate, I don’t know that people are yet tracking how much time is being spent trying to get those numbers right. Or whether or not anybody’s looking real, real closely to see if they’re right, or if they’ve fallen back to the old footnotes of the pre-transition. Because I think we all know that those footnotes never accomplished everything, but they were just a broad idea and a broad brush.
So the idea is whether or not an organization can create something that everyone can look at and rely on, and then it becomes real time data. It’s not just compliance, it’s using that data to understand what your planning is, to tie it into space planning or those type of things, what’s your real cost per seat. So we always say it’s a journey, not a destination, but that’s really what it is, which is, is there value and we all think there is, both in better decision-making, better information, but also in productivity and lower cost of overhead, of application of this, in having that single system.
Bart:
Yeah. And I think maybe that’s a good segue to my next question is, what are the two sides of the coins? And you’ve highlighted some of these. What is the downside of not having a system, what are the problems and challenges you run into? And then what’s the upside, the benefit of having them? And I think you hit on a couple of them, but how would you guys contrast that?
Dave:
I think the downsides are pretty clear, the amount of time you’re spending, but it’s the opportunity cost of what that time could be. So if it takes you a month to put together your quarterly numbers for the lease accounting to get out there, what else could you have been doing? If you have to pull manual reports for a different group, because you never finished the rollout of the system and got people trained and logged in, what could you be doing otherwise, rather than running the same report out? And the answer is really just making better decisions about the portfolio and about how long you’re going to be in a location, or which locations are more important.
We talk about lease language and looking to standardize some of that and minimize risk. As companies have acquired others, as they’ve signed leases with dozens of different landlords, something as simple as how much insurance coverage do we need, is something that has to be managed, but if you can scorecard it and report out on some of these items, we should only be paying a million dollars, or paying for a million dollars in coverage.
Then when you get to do your transactions, you’re not looking six months out, you’re looking a year and a half out, and you’re not just talking about the last 25 cents per square foot. You’re really talking about strengthening the entire leasing department, the entire corporation, to minimize risk, save money, and have the right real estate plan to support the business. I think that opportunity cost is the area that doesn’t get enough focus on throwing bodies at, trying to get the rent paid and the numbers posted.
Lou:
I think the challenges that the companies, our clients face, are really at multiple levels. The first is that just locating all the leases and contracts and keeping everything together in a decentralized organization, is a challenge. We talked earlier about how, particularly for equipment, when people are contracting for equipment, an asset leases, a lot of that does not go through central procurement.
So, one of the biggest challenges that you have is they don’t have a standing cross functional team to implement these types of things. And invariably, whoever can get budget or who identifies a need, gets a project. So whether it’s real estate and a new lease admin system, whether it’s legal, whether it is accounting or finance, whether it is operations or procurement. And then the other folks try to take whatever system it is they’re going to look at and bolt on, I’d like it to be able to do this, this and this, and as a result, you start to boil the ocean. And again, your folks have a lot of experience with folks trying to get the system to do more than it’s designed. And sometimes it gets just pushed to the IT group, who are more worried about the functional and security piece of it, and really don’t have an end user point of view. So the challenges with implementing these systems, really have to do with sponsorship and aligning the right people who have a vision of what the end game is, and not just trying to serve a particular need.
There are a lot of these systems that have gotten installed, stood up and are left in a silo and they do what they do, but they haven’t really achieved what the ultimate goal that we’re all looking for. And it’s funny because in this space, one of the biggest issues is people don’t have budget, we don’t have to resource this or to spend this. But then you look at the ERP world and you look at the hundreds of millions of dollars that people spend on an Oracle or an SAP upgrade and how long it takes and how many consultants they have to hire, this is a speck compared to that. And when you look at the spend around real estate, around facilities, around all the associated occupancy costs, and then all of your asset leases and their costs, this can have a much higher return on investment if you can get to the right people who understand that value.
Bart:
Yeah, absolutely. I think you guys, in wrapping up here, I want to thank Dave and Lou from Jackson Cross for joining us today, I think you’ve made the case a quite strong case for the need for processes, systems, and then the data that’s managed within those, in order to thrive in an environment such as a pandemic that we’re dealing with now, and also to make the strategic decisions that are needed. And, oh, by the way, you have to do it anyways because of the lease accounting standards, so you might as well get the full benefit of a lease accounting administration system. So again, gentlemen, thanks for joining today. And we hope to have you back as the ground continues to shift, fast forward a couple of months here, we’ll be hopefully more back to how things used to be, but at the same time, reshaping a new normal, and I know you guys will be front and center.
Lou:
Thanks Bart. We appreciate this, and it was fun. And I look forward to seeing you in person.
