Mergers and acquisitions can have a significant impact on a company’s real estate portfolio. However, when engaged in a merger or acquisition, real estate managers often are not involved in the transaction. This decision can prove to be very costly to a firm looking to gain real estate efficiencies, maximize the transaction ROI, and reduce the overall risk of the transaction.
Corporate real estate managers should be involved as early as possible in the transaction, preferably in the preliminary due diligence phase. These managers, with the assistance of their outside brokers and real estate attorneys, can conduct a portfolio evaluation, carefully evaluating both leased and owned properties, assessing market conditions, and determining all remaining obligations associated with that portfolio. This role can also help determine:
- In what markets do the portfolios overlap?
- What locations can be consolidated?
- What are the market conditions in the cities where the real estate resides?
- Which obligations should or should not be included as part of the transaction?
- What risks exist in the portfolio that could prevent the synergies from being realized?
- Will the company have the ability to assign, sublease, or terminate a lease it acquires?
For example, let’s say that your company plans to acquire company X that has an office about 25 miles from your current office. During the preliminary due diligence phase, the real estate manager uncovers that the company just signed a lease extension and expansion for their office in a city with high vacancy rates. They are unable to terminate the lease for five years, and after five years, they can terminate it but will be assessed a hefty penalty. Couple this information with revenues that have not increased over the past few years and your company could be saddled with an additional $2 million in lease expense (or more) that might not have been known until later in the due diligence process.
The corporate real estate manager needs to remain involved throughout all phases of the due diligence. Additional information received during the diligence can change the initial analysis, research conducted, and overall cost impact to your company. As a deal progresses, the manager should prepare a real estate plan to implement once the transaction closes.
Involving the real estate manager in the due diligence of a transaction is critical, as the real estate portfolio is a key component in the financial value of the transaction.