Cash Flow Tips
Pin your hopes to these new revenue streams.
Business owners have been
cutting expenses, reducing payroll, and trying to chase down new sources of
cash flow for two years. Yet, as the economic recovery lags, many realize they
need to do even more. But what is left to cut? Where can they find new streams
Real estate is often a
first or second most valuable asset, so real estate-related moves have the
potential to provide the biggest return on investment. Here are 10 original —
and, in some cases, counterintuitive — strategies that commercial real estate
professionals and their clients can employ to find additional savings and new
avenues for cash flow, all based on real estate-related assets.
1. Pay 18 Percent Interest
— and Save
Hard-money lenders usually
are thought of as lenders of last resort, but savvy investors know when to use
them as lenders of choice. Having a strong relationship with a private lender
can help investors move quickly to seize fleeting opportunities before they
One client, a hard-money
lender, helped a borrower pay off his $32 million loan two years early for just
$21 million. The key was a quick closing. The original lender was struggling
and needed to raise capital. It offered to cut the principal owed by the
borrower in return for an early repayment. Scrambling, the borrower called up
my client, who supplied half of the $21 million needed, secured by a first
mortgage on the property, for 18 percent interest. The borrower supplied the
rest of the pay-off amount, and the whole deal closed in three weeks. Within
six months the borrower had refinanced with a new 6 percent loan. This was a
win-win-win: The lender received immediate cash, the hard-money lender earned
18 percent interest, and the borrower not only saved $11 million but ultimately
reduced its interest rate by four percentage points.
For opportunities that can’t wait for an institutional
lender, a hard-money lender can help make it happen.
2. Divide and Prosper
If the time has come to
sell off an asset, owners can maximize the chances of sale and total return by
selling off smaller parcels instead of a single large one. Not only do smaller
parcels typically sell for higher per-square-foot values, but their lower
overall prices attract more potential buyers.
In jurisdictions with
complex land-use regulations, simpler lot-tie terminations or lot-line
adjustments often work. For example, one national corporation needed only half
of its two-building Los Angeles campus for operations. It decided to
consolidate its personnel in one building and sell the other. All that was
needed was to terminate a single lot-tie covenant, a procedure processed at
building department staff level. In a matter of months, the client had secured
a permit to physically separate the formerly conjoined buildings, finished the
construction work, terminated the lot-tie covenant to separate the parcels, and
was able to sell one site separately.
3. Increase Value
The subdivision example
above illustrates an important land-use principle: Scale down complexity to
lower costs and enhance chances for approval. For example, if residential
construction will exceed square-footage maximums, instead of seeking a variance
— requiring a discretionary public hearing — convert part of the project into
basement space, which won’t count toward habitable square footage
calculations and requires no hearing.
And before selling assets,
owners should determine if they can quickly secure entitlements that will
increase the sales price. Entitlements to add density, renovate space, increase
parking, change use, or otherwise add to the value of a property before it is
placed for sale aren’t
always as hard, expensive, or uncertain as they might seem.
4. Find Power in Numbers
owners devote substantial time to selecting top legal counsel, but many times
they fail to recognize the tangible benefits a superior accountant may bring,
year after year. For example, most accountants know to depreciate a real estate
asset over a standard 39.5-year period, but accountants who specialize in real
estate investments can tell you when to perform a cost segregation —
accelerating depreciation of costs by segregating categories of improvements.
Parking lots, for example,
can be depreciated over 15 years, and individual improvements within offices or
apartment units — doors, for example — can be depreciated over just five years.
Such accounting techniques work particularly well for real estate developments
with divisible units: hotels, apartment complexes, and office buildings, for
And for owners whose
projects have turned into financial disasters during the recession, an
excellent accountant can help to maximize those losses against other gains.
For one client with an
underperforming project, my best advice ever was to refer him to a top quality,
creative accountant, who applied the techniques above to find $140,000 in
overpaid taxes that a previous accountant had failed to see.
5. Embrace This Audit
Some companies have begun
to adopt green practices, such as switching to fluorescent bulbs, or making
sure employees turn off lights and computers regularly at the end of each day.
But a comprehensive energy audit can help leverage the benefits of these
improved practices to achieve even greater savings.
A professional energy
audit will cover multiple approaches to reducing costs: operational changes,
technology upgrades, equipment retrofits, and energy control measures.
Importantly, a professional firm will provide benchmarks that compare an asset’s energy costs to the
competition. Since some states require owners to disclose to tenants, lenders,
and buyers the energy consumption rating for their commercial buildings, an
all-inclusive energy audit can be used for both purposes.
Some practices cost little
to nothing and can be implemented immediately. Power strips, for example,
automatically turn equipment off after a preset period of inactivity to reduce
plug load: This move can shave 10 percent to 15 percent off energy costs.
Operational changes such as shifting use of energy-intensive equipment to
off-peak hours (with less expensive rates) can often be implemented with little
Other retrofits require
capital but pay dividends over the future. Energy efficient windows, roofing,
and insulation all can have a significant impact on energy costs. A
comprehensive approach to energy savings can help owners schedule upgrades and
changes for maximum impact.
6. Bond with PACE
Property Assessed Clean
Energy bonds can make green retrofitting even easier, allowing cities to
finance a property owner’s
green improvements. The owner repays the loan through tax assessments on that
property over 20 years. In many cases, the money saved in reduced energy
expenses is enough to cover the loan and bring in cash flow.
Last summer, Fannie Mae
and Freddie Mac announced that they will no longer allow PACE financing on
mortgages they buy, freezing PACE financing for all residential projects. The
good news is that, as a result, funding for PACE bonds has migrated to the
commercial sector, creating more programs tailored to meet the needs of
7. Get Paid for Rays
electricity generated from solar panels on one’s property could only be used to offset the electricity
used on that site. Now, feed-in tariffs allow property owners to sell excess
solar power directly to a utility. The electricity generated on rooftops feeds
into the utility’s
power lines, for which the utility pays a tariff to the property owner.
A pay-for-rays program
like this has been used successfully in Germany since 2000 to produce enough
solar-generated electricity to power 750,000 homes, establishing Germany as the
world leader in solar production. Properties that use little on-site energy
(such as warehouses and parking lots) or whose owners are not otherwise able to
benefit from electric bill credits (such as apartment and office property
owners) would then have an incentive to add solar panels.
8. Increase Parking
Parking operation changes
hold enormous upside potential for properties located in high parking demand
areas. This is because the primary investment required to raise parking income
is in management and not physical construction. A change in operations can
unlock the hidden value in pricing for weekend, weekday, in-season,
out-of-season, reserved, and valet parking, increasing parking “turns” and, consequently,
revenues. Even changing the mix of just a portion of stalls from monthly
reserved parking to daily or hourly parking can have a substantial impact on
cash flow. Contact a parking professional for a look at just how much money can
9. Consolidate and Save
Many companies keep scores
of affiliated entities on the books — mainly title-holding limited liability
companies, corporations, and partnerships. Across multiple jurisdictions, it
becomes increasingly costly to track compliance, submit annual filings, keep
corporate records, and stay up-to-date on changes in each jurisdiction. The
penalty for not keeping an entity registered can be significant transaction
Some corporate services
offer volume discounts to handle all of a company’s registration and corporate maintenance
nationwide. One real estate developer, for example, has saved tens of thousands
of dollars in annual out-of-pocket and staff costs by outsourcing its corporate
maintenance for more than 100 entities.
10. Cut Litigation Risks
Litigation happens, but
there are intriguing new ways to manage the risks and minimize costs. For
example, insurance has recently become available for both plaintiffs and
defendants that will pay the other side’s attorneys’ fees in the event of an adverse judgment. This can
help make litigation costs more predictable.
Cutting expenses and
finding new revenue streams is not glamorous work. It is the “blocking and tackling” of real estate management.
But piecing together initiatives will advance the ball down the field — slowly
but surely — and, perhaps, even score a touchdown.
Martin N. Burton is a
partner in the real estate department of the law firm Eisner, Kahan & Gorry
in Beverly Hills, Calif. Contact him at firstname.lastname@example.org.