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Journal of Corporate Real Estate Emerald Article: Optimising real estate financing Greg Krzysko, Claudia Marciniak Article information: To cite this document: Greg Krzysko, Claudia Marciniak, (2001),"Optimising real estate financing", Journal of Corporate Real Estate, Vol. 3 Iss: 3 pp. 286 - 297 Permanent link to this document: http://dx.doi.org/10.1108/14630010110811643 Downloaded on: 08-11-2012 Citations: This document has been cited by 1 other documents To copy this document: [email protected] Access to this document was granted through an Emerald subscription provided by The University of British Columbia Library For Authors: If you would like to write for this, or any other Emerald publication, then please use our Emerald for Authors service. Information about how to choose which publication to write for and submission guidelines are available for all. Please visit www.emeraldinsight.com/authors for more information. About Emerald www.emeraldinsight.com With over forty years' experience, Emerald Group Publishing is a leading independent publisher of global research with impact in business, society, public policy and education. In total, Emerald publishes over 275 journals and more than 130 book series, as well as an extensive range of online products and services. Emerald is both COUNTER 3 and TRANSFER compliant. The organization is a partner of the Committee on Publication Ethics (COPE) and also works with Portico and the LOCKSS initiative for digital archive preservation. *Related content and download information correct at time of download. Journal of Corporate Real Estate Volume 3 Number 3 Optimising real estate financing *Greg Krzysko and Claudia Marciniak Received (in revised form): 30th March, 2001 *Equis Corporation, Corporate Headquarters, 321 N. Clark, Suite 1010, Chicago, IL 60610, USA; Tel: ϩ1(312) 424 8143; Fax: ϩ1(312) 424 8080; e-mail: [email protected] Greg Krzysko is Vice-President of the Financial The corporate real estate manager can most Consulting Group at Equis Corporation in effectively arrive at an optimal decision by Chicago. He provides for Equis clients, in- considering three perspectives: the corporate real cluding Ameritech/SBC, DaimlerChrysler, Delphi estate market, business unit needs, and investor Automotive and Xerox, creative financial struc- preferences. After gathering the relevant infor- turing strategies that achieve the best overall mation and evaluating the pros and cons of the business outcome. Greg has been successful in full range of financial structures, the real estate providing real estate solutions that enable manager can make a sound recommendation to clients to pursue new business ventures, to the business unit and the finance department. expand existing real estate assets and to reduce The manager knows that the solution is cost in existing client portfolios. He received his acceptable to the marketplace, can provide degree of Master of Business Administra- flexibility in the event of a changed business tion majoring in Finance and Strategy from model, and provides the space at the most Northwestern University’s J. L. Kellogg School reasonable cost. of Management in Evanston, Illinois. Keywords: finance, capital sources, Claudia Marciniak is Director of Portfolio financial structuring, financing alterna- Services at Equis Corporation. She provides tives Equis clients with analyses to administer and align their real estate portfolios with business and financial strategies. Claudia has significant THE MANAGER’S DILEMMA experience in financial structuring and strategic Financing real estate projects can be a planning, as well as project, construction and vexing experience for even the most risk management. She received her degree of seasoned corporate real estate manager. Master of Business Administration majoring in Corporate hurdle rates, capital budgets, Finance and Accounting from Northwestern discount rates, weighted average cost of University’s J. L. Kellogg School of Management capital, cost of debt, residual value in Evanston, Illinois. estimation and changing operating needs — the considerations are many, but no single approach helps corporate real estate ABSTRACT managers understand how to structure This paper discusses ways that corporate real financing for a given project. Corporate Journal of Corporate Real Estate Vol. 3 No. 3, 2001, pp. 286–297. estate managers can use creative financial struc- real estate managers often evaluate a Henry Stewart Publications, 1463–001X turing to optimise their real estate portfolios. project for the business unit merely by Page 286 Krzysko and Marciniak Figure 1 Commercial real estate funding — traditional model Corporation Capital Sources Figure 2 Commercial real Treasurer or CFO - Corporate Bonds - Stock estate funding — Corporate Financial Structuring strategic model Real Estate - Asset-backed Lending Individual Landlords Business Units determining the present value in an Landlords represent the creditworthiness own-or-lease scenario. Their analyses of the business unit’s tenancy to asset- rarely address the financial, market and based debt and equity capital sources, real estate factors that corporate finance a situation that creates inherent com- professionals need to develop a broader munication and agenda obstacles. range of financing alternatives in order to In addition, corporate real estate determine the best solution. managers commonly encounter transac- Corporate real estate managers essen- tional barriers. Given inconsistent finan- tially face two types of impediment to cial parameters and business unit demands, optimising their real estate: organisational how does a corporate real estate manager and transactional. Organisational barriers identify the best financing option? Banks are inherent in the way in which com- and corporate financiers have their own mercialrealestateistypicallyfinanced in agendas and typically do not provide this the USA. The landlord usually acts as the high level of analysis. Treasury profes- middleman between the individual busi- sionals are most familiar with corporate ness units’ real estate needs and the capi- level capital sourcing and have little tal sources. In this situation, the capital expertise in real estate funding. sources underwrite the landlord, and the In recognising the need to fulfila landlord therefore acts as the middleman financial structuring role, the real estate between the corporate real estate manager manager can make decisions by bridging and the capital sources. This situation these traditional barriers. By changing leaves the needs of the corporate busi- the landlord role, corporate real estate ness unit subject to multiple levels of managers can directly access the best capi- interpretation, as depicted in Figure 1. tal sources, as shown in Figure 2. Page 287 Optimising real estate financing This process employs strategic thinking tion to achieve its business objectives at that links corporate goals to real estate thebestpossiblecost. and directly accesses capital sources. Cor- Without embracing the opportunities porate real estate departments can place a and the dynamics of the real estate invest- quantifiable monetary value on the wide ment community, corporate real estate variety of financing options available for managers often create a ‘stock’ or ‘one- each transaction, turning real estate into a size-fits-all’ approach that results in a competitive asset. single answer or decision for all properties For example, corporate finance and of a particular type. For example, a com- real estate departments commonly pany assumes that office buildings ap- struggle when evaluating single-tenant preciate and that the company needs them buildings in an own-versus-lease scenario. for a very long time. The company then Typically, a business operating unit will performs an analysis that compares 100 budget for a lease at market rates and per cent debt ownership and selling the expect corporate real estate to secure that appreciated asset at the end of 15 years lease. When corporate real estate can with just leasing the office for 15 years. instead purchase the asset and still meet In this scenario, owning is clearly the thebusinessunitneedsinlieuofalease, best option because the company assumes a debate ensues as to how to consider an increase in value and continued oc- the project —financing of an asset that cupancy. Alternatively, a business may will be discounted at an after-tax cost need a call centre for ten years, over of debt, or a project to be discounted which time the company believes that the at the weighted average cost of capital? industry will change dramatically. The Corporate finance and real estate company then performs an analysis that departments further consider and debate compares a ten-year lease to a purchase whether the property will increase or with 100 per cent debt and no residual diminish in future value, how much value. In this scenario, leasing is clearly decrease can be tolerated, the length of the better of the two options because of time for which the business will need the the lack of value at the end of ten years. property, and whether the capital budget In all likelihood, the corporation will can accommodate a change from a leased pursue its next office as a purchase and its into an owned property. next call centre as a lease. However, the corporation’s financing options are influenced by a number of A LOOK AT THE FULL SPECTRUM other factors, including shifts within the By focusing on the internal corporate company (such as a merger or acquisition)

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