William J. Scarpino, a principal with the real estate and financial restructuring firm Huntley, Mullaney, Spargo & Sullivan, spoke with REIT.com about his concerns over corporate real estate practices and what should be done to reinvent the current culture surrounding such an important investment decision.
For Scarpino, who works with companies ranging from new start ups to corporate giants such as Starbucks, there is a lack of planning and forethought when it comes to real estate decisions. Not only does he believe that companies need to better train those charged with finding potential real estate assets, Scarpino is an advocate for changing the way companies examine their real estate decisions.
Whether it is buying a property outright for corporate expansion or negotiating leases for new store fronts or offices, Scarpino believes that most companies are doing themselves a disservice by not having a complete understanding of the long-term impact that any real estate deal can have on a company’s growth and brand.
REIT.com: What would you consider the biggest problems corporations encounter as they make their real estate decisions?
Scarpino: As I see it, the biggest problem in corporate real estate is that the people that who are hired and are made to go out and negotiate for sites are being motivated to produce only the greatest number of deals for their companies. They are not producing the best possible long-term business deals they can for their companies.
In order to make bonus, in order to make their bosses happy, in order to keep their jobs, production is seen as more important than quality by those making these deals. This has been an ongoing problem for the last number of decades, because growth is the paramount driving machine for most publicly held companies. When you get into tough economic times like we are now, and companies are laying people off (in their real estate department), you’re losing any basis of experience you have to make good decisions. Eventually, the companies will bring in new people when they start to grow again. It is my feeling that again and again, companies go through the same process of firing and hiring, but fail to really train their people on how to negotiate a lease that will benefit them most in the long run.
REIT.com: How do you create real change in the corporate real estate mindset when it comes to purchasing new property or signing a new lease?
Scarpino: I have long been an advocate that corporate real estate officers and executives need to have a stronger financial and legal background and they really need to understand the deal they are negotiating. They need to understand the short term and long-term financial impact of the terms they are negotiating. And what trade offs that they should be willing to give in exchange for future flexibility.
Too often, they are given a very brief overview of ”Get the prices as cheap as you can, let the committee decide whether or not it’s a good deal.“ In other words, the real estate practitioner, chief financial officer and chief executive officer, are all coming from different perspectives, so they assimilate a negotiated deal, rather than have the guy on the firing line saying, ”Okay, I’m gonna make this the best possible real estate deal for my company, because this is going to be one of the bigger investments we make for the brand.“ And then he brings in a well thought out, well-planned investment for the company, rather than bringing in the best possible site he can find. It is a whole different attitude.
REIT.com: How do you reconcile the need to improve training and the quality of the real estate staff with the expectation that the bottom line is always going to be a major consideration?
Scarpino: I think you need to change the incentive plans. And work on a model to keep people in place long term. In other words, if you have a company that is reinvesting in its staff in terms of education, training and understanding the legal, financial and operational sides of the business, they becomes a much greater asset as far as understanding the company’s business model and preserving it. When you turn people over every two to three years because they get a better offer from somebody else for doing the same type of job, you lose that investment.
One of the key things is retaining good people and culling out weak people. But to retain good people, they have to have a career path.
REIT.com: You have spoken about the lack of discipline from corporate decision makers when it comes to sticking to a solid business plan and the type of real estate they should acquire. How do you prove that staying disciplined will work out in the long run for companies?
Scarpino: That is a real challenge. I work with a lot of young, emerging companies. The thing that I try to relay back to them is that bigger isn’t always better in terms of space. You have to watch out for the type of real estate that you strive for, because if you really want that absolute premier site and lose sight of your business principals, you’re going to get the site but it is going to wind up eating your bottom line.
REIT.com: Do you think the current economic environment offers an opportunity to make these changes?
Scarpino: What I would love to see is companies looking at their real estate history and saying now that we have some time while we’re not growing, let’s take these people who are in place and build a really good real estate strategic model that fits in with our long-term business goals. By real estate model I mean real estate, legal, finance, operations, site selection, etc. So that when we start growing again, we have the discipline in place so that we don’t lose sight of what we’re doing.
