Six ways to make your commercial property more cost-efficient

Real estate can be a large cost to any business but knowing where to reduce risk and maximise value could transform your business property into a much greaterasset.

Whatever your organisation, issues relating to real estate will almost certainly touch upon it in one way or another – whether you are an owner-occupier or a tenant with a lease. Real estate can represent a significant cost and is often over looked. So, as finance director, is it your responsibility? If not, perhaps it should be.

Although you might not have direct responsibility for real estate, having asuccessful strategy can maximise efficiencies or facilitate expansionplans.

Failure to realise the implications of decisions related to your real estate platform can create significant risks for your operations and compromise the overall value of your group. Remember, some value aspects of real estate are harder to measure. If the place of work is not liked by your employees, you may lose talent to companies that can offer a more attractive place to spend their working day.

So, how should you review for value? Start by thinking about your ideal realestate platform from scratch and what would it look like. How does it compareto what you have now and are there any quick wins you could implement to tie itin to your optimal strategy? In addition, the six points below offer some cost efficient ways in which to optimise the value of the real estate in your portfolio.

1.Align your real estate planning with corporate strategy

One of the first steps to address when assessing your real estate portfolio is to ask whether you are using your premises to enhance and facilitate your organisation’s key objectives. While the answer is unlikely to be straight forward, successful real estate strategies tend to have three common characteristics: minimising cost, minimising risk and maximising value.

2.Make the most of your assets

Does your business trade out of real estate you own? If so, the premises couldbe used as collateral to finance business expansion. Employing a sale and lease back model could unlock this value. If you opt for this approach, it’simportant to work with a landlord who understands your business model and fully supports your expansion plans. The right partner will appreciate that having a successful tenant will maximise the value of the real estate over the longer term. This may place you in a more favourable position when negotiating theterms of the lease.

3.Run an assessment of your sites

If you operate across multiple sites, consider if this is an efficient approach and if the sites are fit for purpose. Are there potential customers you are notable to reach from your existing sites? What compromises are you having to make and how do these affect your business?

Consider conducting a feasibility study of your locations, or even reviewredevelopment options-allowing you to transform these older buildings fromliabilities into assets. If you’re considering redevelopment, how will this befinanced? How can you demonstrate the increase in profitability to prospective lenders?

4.Understand the risks and costs of real estate

Poorly maintained real estate can significantly compromise the effectiveness of your operations. When dealing with constant maintenance issues you may find your attention focused on day-to-day operational problems rather than your macro strategy. Think about the opportunities you are missing out on as a result.  

5.When acquiring a new business

Many businesses do not fully consider the real estate aspects to a transaction when evaluating a purchase of a business. When buying a business, it is essential to factor potential real estate financial commitments into your due diligence, for example, dilapidations, a future and often material liability that is often ignored. How should you treat these liabilities? Will you be able to negotiatea  lower price for the acquisition?

If your acquisition target is leasing its real estate, there may be an opportunity for negotiation with the landlord at the point of acquisition. For instance,the landlord may be looking to redevelop the site, which would place you at an advantage if you were keen to surrender the lease.

6.Plan for tax incentives and risks

The tax environment has changed significantly over the past couple of years and continues to be challenging. It is therefore important to consider the taximplications of any transaction carefully.

A number of tax incentives exist in the UK for existing and newly acquired property portfolios. Capital allowances, for instance, are a tax deduction available for certain capital expenditure and can prove a valuable incentive for businesses. Special reliefs, such as research and development (R&D)allowances, can result in an upfront tax deduction for the entire qualifying expenditure.

Also remember to consider transactions between landlords and tenants. Incentive payments often result in different tax treatment for both parties and can significantly increase the tax cost. Effective modelling before a transactionis key to establishing the tax cost and planning accordingly.

The role of the FD

So who has responsibility for ensuring your business is getting the maximum possible value from its real estate? While some businesses have large teams to coordinate maintenance, others have little understanding of such issues and deal with them in a reactive way. To maximise value and efficiencies it is essential that you understand the risks and value drivers, and that you are able to implement suitable solutions that ultimately drive your enterprise’s value.