A Leasing Strategy to End All Leasing Strategies

By August 17, 2015Lease Accounting

            At the time I was the Corporate Real Estate Director of a major multinational corporation with a headquarters in New York City. It was the mid 1990s, and the real estate market in midtown Manhattan was a bit soft. Senior management wanted to move out of New York to an owned (and relatively vacant) office building in suburban Connecticut. Most of the senior staff lived in Fairfield County, Connecticut and wanted to reduce their daily commute. I was faced with a serious dilemma: the lease on the 200,000 square foot headquarters office had at least ten more years and its rental rate was at least $10 over the current market rate. Thus, the possibility of a sublease was remote since accounting rules required that the difference between the sublease rate and the face rate of the lease would mean roughly $2 million per year for 10 years or $20 Million in rental that we would have to write off as a lump sum payment. Obviously management was loathe to take that kind of hit to their bottom line. What to do?

            Our real estate team studied the leasing data for the corporation’s divisions in Manhattan, Long Island, and neighboring New Jersey. As it turned out, there were 3 different leases in mid town Manhattan that expired over a 2-3 year time frame. Would it be possible to move the headquarters staff to the owned facility in Fairfield County and then move the divisions into the Headquarters space? This would theoretically work, but we would have to subsidize the rental as an incentive for the business units to make the move. The other challenge is that we needed to renovate the Connecticut building for corporate headquarters staff, a project that would take at least two years. Thus, we had to lease a temporary facility in Connecticut, to make room for the midtown location to be re-configured for the operating divisions.

            When I explained the strategy to the CEO, he rolled his eyes. “Bell,” he said, “This is not a ‘No Brainer’, this is a “Brainer!” But he told me to go back and develop detailed plans and financials for the over-all strategy. A month later, we presented the plan to the senior management team, and they gave us the “go ahead.”

            We worked closely with the operating divisions and eventually got their reluctant agreement to make the move. Needless to say, they were getting a good deal: prime midtown Manhattan offices on Park Avenue, only blocks from Grand Central, and a rental rate substantially below what they were paying in their current locations.  The task ahead was daunting. We needed to renovate the Connecticut building, and the good news was that it would require 70,000 sq feet less, thus reducing the headquarters footprint from 200,000 sq. ft. of expensive occupancy to 130,000 square feet of low cost owned space. We would have to take a short term rental for two years, while we renovated the permanent building as well as reconfigure the Park Avenue headquarters for the operating division offices. Finally, we had to negotiate with the State of Connecticut incentives to move the headquarters from New York to Connecticut. The payroll was substantial and I had no trouble exacting a meaningful grant from the state.

            All in all, we completed all the pieces of the strategy on time and on budget. The key to success was thinking outside the box. Rather than figure out ways to offset the huge accounting write-off, we allowed other leases to expire as scheduled and moved those operating unit tenants into the vacated corporate headquarters space. This strategy underscores the opportunities that reside in your lease portfolio. By aligning lease termination dates and other factors like market rental rates and space consolidations, there are opportunities to reduce space and costs while streamlining operations. Obviously having up to date and detailed lease data is crucial to any strategic planning exercise.

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