Volume Disposal Guide 2012

EMEA GLOBAL CORPORATE SERVICES TRANSACTION MANAGEMENT, VOLUME DISPOSALS GUIDE

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GLOBAL CORPORATE SERVICES TRANSACTION MANAGEMENT VOLUME DISPOSALS GUIDE

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For more information on this topic please contact the authors of the report:

Christian FarmerSenior DirectorGlobal Corporate Servicest: +44 (0)20 7182 2000e: [email protected]

Steve Cholerton Associate DirectorGlobal Corporate Servicest: +44 20 7182 3518e: [email protected]

CBRESt Martin’s Court10 Paternoster RowLondon EC4M 7HP



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EXECUTIVE SUMMARY

A large scale disposal programme can be a daunting proposition. Its processes touch a wide range of activities and it is easy to lose focus on the key areas that can deliver value creation and cost mitigation.

This reference document is designed as a “one stop shop” to equip Disposal Managers with the necessary tools and processes to help them navigate through what can be a tortuous road to successfully manage and execute a volume disposal programme.

There are eight key areas which need to be addressed:

1. Engagement and Transition Upon engagement it is fundamental that a transition timeline is established to allow the service provider to assess the portfolio for opportunities and agree an appropriate delivery structure.

2. Disposal Process Clear governance with all parties understanding their roles and responsibilities is essential. If this element is ignored, the energies and focus of the entire team is dissipated resulting in lost deals and lower cost savings.

3. Technology and Data Robust, accurate property and lease data are critical to the success of a volume disposal programme as they drive greater efficiencies throughout the whole process. Both proprietary and best-in-class technology platforms can facilitate better quality and accessibility of data.

4. Reporting Better technology also yields better reporting which can be both bespoke and automated to suit requirements. Requirements must be defined at the outset thereby ensuring visibility is maximized and the approval process is streamlined.

5. Provisioning This can be one of the first elements of the program which the real estate team must agree and CBRE’s involvement can vary from company to company. Broker opinions on recovery prospects must be coordinated and the provision often acts as a baseline for savings calculations.

6. Estates Management An effective Estates Management function is a hugely important element of the disposal process. A good Estates Manager will smooth the wheels of the disposal programme, close liaison and integration between the disposal and estates function is vital.

7. Use of Agents The strategy for agent engagement is determined by the size and spread of the portfolio and reporting lines must be clear. Diligent management and motivation of the agents is fundamental to success and any disposal is dependent on their effectiveness.

8. Disposal Strategies There are a wide range of strategies and their tactical execution that can be pursued. These range from a straightforward letting or sale through to complex portfolio wide asset swaps. Whilst this document does not examine the different merits and approaches of each potential disposal strategy, it does highlight them as the checklist of opportunities to follow.


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VOLUME DISPOSALS WHAT ARE VOLUME DISPOSALS?

As companies adjust to changes resulting from mergers, acquisitions and challenging trading environments, the need to dispose of surplus properties is often required. The scale will vary according to the individual circumstances and size of the organisation, but for the purposes of this paper we are assuming an excess of 50 properties are surplus to requirement and require disposing.

Whilst this paper is focused on “conventional” disposals i.e. sub-lettings, surrenders and assignments, it should be noted that larger portfolio deals such as portfolio asset and liability have (PAL) deals, whereby the entire surplus portfolio is disposed of rather than individual property disposals, could also be an option in some cases. For further information please consult the Corporate Strategies team within GCS who can provide mor detailed advice.

Where a company wishes to implement a volume disposal programme or inherits such a situation, it is often faced with not only multiple properties, but also disposing agents, markets, and landlords. There is however only one objective, which is to successfully dispose of the surplus accommodation whilst maximising potential savings. Given the multiple issues facing the Corporate Real Estate Executive charged with disposing of the surplus portfolio, it can be difficult to focus on where the real opportunities for value creation and cost savings exist.

The question is therefore posed – What should the Real Estate Executive do and how can CBRE help?

From our wide experience in dealing with such disposal programmes we believe there are eight key areas which need to be addressed:

1 Engagement and Transition .....page 4

2 Disposal Process .....page 5

3 Technology and Data .....page 6

4 Reporting .....page 9

5 Provisioning .....page 12

6 Estate Management .....page 15

7 Use of Agents .....page 16

8 Disposal Strategies .....page 18

This paper is intended to provide clarity on the issues faced by the disposal team and offer guidance on how to structure a disposal programme to ensure efficiencies and opportunities to achieve a successful conclusion to the process are maximised. ENGAGEMENT AND TRANSITION

At the point a company acknowledges a requirement exists to

dispose of a volume of surplus space or assets, it is important that the internal real estate team is able to clearly define the objectives they hope to achieve through any disposal activity. These objectives and how they are measured will act as the principal indicators of success and will therefore shape and influence the approach taken to initiate any program of disposal.

Key measures of success can vary from company to company but typically one can expect the following to be reasonably high on the list;

• Matching or saving against provision• Saving against total liability• Number of disposals• Total space (sqft) disposed• Run rate savings

The aspired targets above can often be set against an annual plan and therefore any positive variance (i.e. beating the targets) will be considered a success.

When the decision is taken to outsource the responsibility to manage a volume disposal programme one of the first actions is to develop a road map to allow a comprehensive engagement of the service provider, which will include both a transitional and transformational phase.

The starting point for any road mapping or strategic formulation is the provision of property portfolio data which may lay either with the client, the previous incumbent or both. Good quality, consolidated data is not something many occupiers can boast, especially those operating under a decentralised Corporate Real Estate model, but the data collection itself will be part of the initial transition phase. The importance of robust data is discussed later and remains a common theme throughout the whole disposal process.

The road map will include a carefully considered programme to lock in achievable timing of the various phases as well as attributing ownership to respective stake holders, often through process documents such as RACI charts (acronym derived from 4 key responsibilities typically used: Responsible, Accountable, Consulted and Informed).

It is also important to clearly identify the key stakeholders within both the client organisation and CBRE.

The remuneration structure will need to be agreed quickly and understood by all parties

Whilst a timeframe will need to be adhered to it is clear that certain individual disposals can be completed immediately if all relevant information is available and it does not undermine any wider strategic plan.


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DISPOSAL PROCESS

• Every process will need to be amended to the bespoke needs of the client• The process binds the functions together and ensures all act as a cohesive and collaborative unit• A clear process helps highlight and therefore aids the resolution of blockages and inefficiencies• A clear and defined process drives efficiencies• Recognise the role of the Transaction Manager is often one of a Project Manager rather than leasing expert.

The disposal process in such circumstances is frequently multi-faceted and complicated. It is in this section we have highlighted the key work flows and responsibilities for this to be used as a base template for subsequent refinement and amendment depending on the individual circumstances and requirements of the client.

Example: Disposal Workflow Process

The above illustrates in a simplified form the basic process often encountered in the disposal of a property. It is important to ensure there is clarity around the roles and responsibilities of the entire team. Representing the disposal process in such a manner puts definition and structure around the subject which will significantly improve the efficiency and smooth running of the process.

It is therfore important that all involved have a full understanding of the process and where necessary training is delivered.

This simplified process can be elaborated upon to produce a bespoke model to meet the individual needs of the client. Once the bespoke process is agreed the process flow chart can be amended so that it highlights each participant’s role in individual “swim lanes”.

* Lease = all relevant legal documents


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TECHNOLOGY AND DATA

• Accuracy and completeness of data is supremely important

• Robust data drives efficiencies in tactical delivery and operational reporting

• Client data frequently is imperfect• Common technology platforms streamline and centralise

portfolio analysis, management information and reporting• Governance around maintaining accuracy of data is

imperative• Recommend lease / document audit and verification

We have found that in order to first ascertain the scale, size and liability of any vacant portfolio it is critical to have robust and accurate property data. Typically the more centralised organisations have reliable data but the more de-centralised sometimes struggle as the control of real estate is so segmented at both country and even business level.

Certainly companies that have been active in the M&A arena tend to rely on the newly founded business units being autonomous in the short-term until real estate data can be consolidated.

One strong recommendation, if there are concerns over the reliability of the core data, as part of a data cleansing exercise a lease abstracting program is undertaken. This will at least provide certainty over the contractual liabilities and critical dates.

Information required

For the volume disposal programs which we manage, at the point of instruction the following information should be supplied by the client:

• Leases• Sub-leases• Lease abstracts• Title Deeds for freeholds• Schedules of Condition• Licenses for Alterations• Lease amendments/side letters• Rent review memorandums• Rating re-evaluations• Measurement surveys• Any pertinent correspondence between landlord and

tenant inc contact details• Service charge budgets and reconciliations• Planning documentation, i.e. change of use• Full break down of operating/lease costs with latest

invoices where relevant• Detailed floor plans

• Building specifications/drawings, i.e. M&E capacity etc.• Energy Performance Certificates (EPCs)• Dilapidations assessments/provisions

*N.B. If CBRE is involved in provisioning then all operating costs and expenses will already be supplied.

Many companies will already have a lease administration system in place for which access can be provided or the data may be migrated to a new system if part of a wider estate management contract. In any event, the fundamental message is that the accuracy of the data contained therein will have a significant bearing on the success of any disposal programme.

Once accurate, clean data has been provided then a disposal programme can really begin in earnest through the calculation of respective provisions and the formulation of a strategy at a site and regional level.

Given the huge volume of documentation that needs to flow between both internal and external decision makers, it is important to create a common portal which allows for both the upload and download of property-related files. For many CBRE clients, this portal is ‘Sharepoint’, a web-based tool which can be accessed from any internet linked location and allows real-time transfer of documents to an e-database.

The key functionality and benefits include:

• Scorecard and KPI reporting for the account• ‘Work in Progress’ lists, tracking and charting tools• Document repository for sharing, viewing and editing• Flexible security structure to enable service line and client

views• Client and CBRE announcements and blogs• Playbooks and tool links• Contacts and calendar


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Example: Technology platform interfaces


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Example: Quarterly Management Reporting

It is common for portfolio wide reports to be generated on a quarterly basis and the charts above are a typical example of the output submitted to the client.

Management reporting has been drastically improved over recent years through the implementation of bespoke technology which allows for an increased level of detailed analysis by more efficient means and this is covered in the next section.


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REPORTING

• Must meet the needs of both the tactical delivery of the disposal team and wider client management information requirements

• Agree reporting requirements at outset• Giving ownership and responsibility to brokers on site as

reporting binds them into the team• Automation ensures focus for disposal team remains on

delivering results not reports • Town Hall meetings are highly effective at disseminating

information and aiding collaboration and cross fertilisation of ideas and experiences

• Standardisation of reports and authorisations maximises consistency and efficiency

Clear concise and relevant reporting which provides not just the Corporate Real Estate Team with information they require but also stakeholders in the wider business the information and data they require is a key element to ensure the smooth running of any disposal programme.

Information is required on both the macro and micro scale, providing updates and information on both a portfolio wide basis and individual property basis. The manner in which the information is formally disseminated will be via typically written reports, meetings and a tracker detailing the status of all projects in the programme.

Agree the Client’s Requirements

It is important to discuss with the client at the outset and understand their needs and expectations. We recommend at the initial stages of any disposals programme meetings are held fortnightly, once established these can be moved to monthly. Initially it is inevitable that the focus of such meetings will drill into the detail however, the ambition should be that the monthly meetings become high level and more generic where general trends, issues, initiatives and the key projects are discussed.

It is important to recognise that some properties will be unlettable and whilst efforts must be made to remedy the situation, the disposal team should not waste time and resource trying to crack an unbreakable nut when other more productive avenues are available. This needs to be recognised by all parties in the reporting process.

Work in Progress Schedule

As properties are marketed, the Transaction Manager should report on marketing activity through constant communication with appointed brokers which is then collated and issued through a tracker or Work in Progress schedule.Where an approach that is more integrated with the Estates

Management Function is available, a tool such as Transaction Insight can be used. This is effectively a one-stop shop for any information related to a specific transaction or project. It can be engineered to meet different client requirements and also take uploads from other client databases or systems. All transaction data, comments, deals status and milestones are updated in real-time and can be seen by anyone who has access. A link to Microsoft outlook allows emails, reminders and reports to also be sent directly from it. The reporting functionality can create dashboards and graphics, which can be sent directly to clients, providing an instant snap-shot of progress against the provision, metrics by space and cost etc.

Example: Transaction Insight Front page

Where it is not possible to fully integrate the Transaction Management and Estate Management functions it is possible to use SharePoint, Insight or iShare platforms and the tracker will provide individual real time updates for both agent and client.

Technology in this field is continuously changing and advice should be sought from CBRE’s GCS Technology team.

The tracker should be the central plank upon which all reporting is undertaken. It is the central tool which will be used to manage the disposals process and report updates to the clients. It should contain information which both the agent and client wish to update and use.


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Strategic Disposal Report

Prior to any marketing activity, each property to be disposed of will require a disposal report. This should give the client clear comment and advice on the disposal strategy for any particular property and will also include detail on the following;

• The property to be disposed of• The wider market and particular sub market relevant to this

property• Lease terms (if leasehold) with particular attention to the

alienation provisions• Value – rental/freehold• Incentives required to successfully dispose of the

accommodation• Marketing void• Marketing costs and timing• An outline of the refurbishment works required to

successfully dispose of the space, together with a high level estimate of costs

• Disposal strategy highlighting the marketing programme and cost required to successfully complete the exercise

• Commentary on likely tenants/purchasers and how these will be directed to and secured

• Recommendation

The report should include a picture of the property, floor plans a high-level description of its layout, specification and a plan detailing its location within the wider geographic area and as such can be used as a standalone document. It is important that the disposal strategy recommended in the report is discussed and approved prior to the broker being formally instructed to commence with disposing of the property.

Once a deal has been negotiated, client approval must be sought and the format of these management recommendations or business cases vary greatly depending on the size or tenure of property, level of exposure and client specific requirements.

We have found that one key metric is how the deal compares to the provision and this is the basis upon which many real estate managers are measured. It is common to provide a summary of the property, history of the negotiation, financial analysis and a clear recommendation why management should approve the deal.

Transaction Authorisation Form

In order to ensure the quick approval of potential transactions, it is important to ensure the right information is presented in a precise and clear manner.

Where there are lots of relatively small deals, these need to be processed quickly and efficiently. The process should become a conveyor belt.

We have found that the following form works well, it gives the client a concise overview of the situation, the financial impact, the rationale for doing the deal and a recommendation. Whilst none of the information contained in the Transaction Authorisation Form should be a surprise to either client or agent, it provides the mechanism for a definitive approval for the deal which can be executed quickly.


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Example: Transaction Authorisation Form

Approval Process

Each company uses its own approval process for Real Estate decisions and the number of approvers in these chains can often vary depending on the degree of centralisation, structure and hierarchy as well as value of a particular transaction or action.

Clearly, anything that can be done to streamline this client process will be benefitial as it reduces any delay to decision making and this can be achieved through various means.

It is important that the relevant decision makers are known up front to allow any pre-communication to flow through and those with delegated authority can be kept informed, thereby minimizing the impact of any complex recommendations.

Understanding a client’s internal processes and associated timing can help set expectations with landlords and tenants alike thus reducing the risk of losing deals through missed deadlines etc.

Another prerequisite for a successful deal completion is a clear understanding of a client’s legal organisation and any partners - i.e. who will draft a new sublease? Subject to the country and legal set-up this could be a responsibility of the in-house lawyer or an external partner, it is not commonplace for companies to employ in-house lawyers who are qualified to advise on property specialist matters.

Management Information

As mentioned previously, management reporting has been drastically improved over recent years and the examples on page 10 illustrate best practice for account level reporting.The frequency is driven by the client’s requirements, but quarterly reporting is common and the metrics reported are the same as those recognised as the principal indicators of success and can be expanded to include the following;

• Matching or saving against provision • Saving against total liability• Number of disposals • Value – rental/freehold• Total space (sqft) disposed• Run rate savings• Dilapidations – savings against landlord claims• Freehold sales – saving against NBV• Value to fee ratios

Town Hall Meetings

The use of Town Hall style quarterly meetings attended by client and disposal team (both central account team and brokers) are a highly effective tool for reporting progress, discussing issues and cementing a collaborative approach to the programme. To maintain focus give careful thought to the invitee list to ensure the most relevant people attend.


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PROVISIONING

• Frequently used to measure transactions• Assesses outstanding financial liability• Governed by Accounting Standards• A provision is required if: - Present obligation has arisen as a result of a past

event, - Payment is probable (‘more likely than not’) and - The amount can be estimated reliably• Client CRE team typically calculates provision• Service Provider usually limited to providing supporting

data• The total provision available should be managed as a

whole either at a global or regional level• Frequency of updating provisions linked to size and relative

importance to the portfolio

Provisions frequently govern the parameters of any disposal deal. If the proposed disposal does not beat the provision it will be more difficult to justify and will be subject to increase rigor and scrutiny in terms of any approval. Provisions are also often used to measure the performance of the disposal team and as a consequence these issues need to be fully understood and correctly implemented. The provision for a certain property will reduce over time as the remaining term diminishes and therefore the number to beat, through disposal activity, is an ever-moving target.

When calculating provisions it is vital realistic/achievable assumptions are used, as provisions frequently form the basis of many disposal decisions. The use of “best case” and “worst case” scenarios can help manage client expectations.

Financial accounting rules require a company to review its operating data periodically and ensure that appropriate recognition criteria and measurement bases are applied to balance sheet provisions, contingent liabilities and contingent assets and that sufficient information is disclosed in the notes to the financial statements to enable users to understand their nature, timing and amount.

These rules vary slightly between US ‘Generally Accepted Accounting Principles’ (US GAAP) and ‘International Financial Reporting Standards’ (IFRS) and the term “reserve” is often interchanged with provision but in this paper we will refer to ‘provisions’ and adhere to the IAS definition, “a liability of uncertain timing or amount.”. Ref: IAS 37.10

It is important to note that under International Accounting Standard 37 (IAS 37) – Provisions, Contingent Liabilities and Contingent Assets:

An entity must recognise a provision if, and only if: [IAS 37.14]

• A present obligation (legal or constructive) has arisen as a result of a past event,

• Payment is probable (‘more likely than not’), and • The amount can be estimated reliably.

Provisions frequently govern the parameters of any disposal deal. If the proposed disposal does not beat the provision it will be more difficult to justify and will be subject to increase rigor and scrutiny in terms of any approval. Provisions are also often used to measure the performance of the disposal team and as a consequence these issues need to be fully understood and correctly implemented.

In Real Estate terms this places an obligation on the CRE function to make a true and fair assessment of the liabilities arising from their vacant portfolio, including both freehold and leasehold properties. A prerequisite for the initiation of this exercise is reliable baseline operating costs usually provided by the finance organisation. (See Data and Technology Section).Assuming robust financial and contractual information can be supplied, an initial provision for each vacant property can then be calculated taking into consideration both the actual costs and the timing, i.e. when the lease expires or if a break option exists.

Although the calculation of this baseline provision is usually undertaken by a combination of the finance and estates management teams, CBRE has in some cases been able to assist in the development of the cash flows to support this process. It is also useful to note that provisions may be calculated on a NPV or a non-discounted cash basis in either local currency or the currency of the company’s home country, but this is determined by whether it reports in accordance with IFRS or US GAAP.

In accordance with IAS37, “Where the effect of the time value of money is material, the amount of a provision should be the present value of the expenditures expected to be required to settle the obligation. Because of the time value of money, provisions relating to cash outflows that arise soon after the reporting period are more onerous than those where outflows of the same amount arise later. Provisions are therefore discounted, where the effect is material.” [IAS 37.46]Those companies reporting in line with US GAAP generally do not apply any discounting.


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A sample of a generic cash flow to track a provision can be found underneath:

Information Required

When creating the initial provision it is important to ensure all relevant costs have been considered and these typically include;

Costs

• Base rent• Property tax, i.e. UK business rates• Landlord service charge• Insurance, both landlord and tenant• Utilities• Management & maintenance cost, i.e. FM and property

managementy• Depreciation or asset write off• Contractual penalties, i.e. for operating a break option• Any known one-time costs• Dilapidation assessments

Lease Docs

• Lease/s and sublease/s• Rent review memorandums• Deeds of Variation or lease amendments

The majority of the above costs are known but dilapidations are always an estimation and not truly defined until lease end. The detail and granularity required will determine whether a simple rate per sqft/sqm is sufficient or if it is more appropriate to undertake a detailed assessment of this liability, including instructing a surveyor to make a physical inspection and prepare a provision report etc.

Our experience tells us that at a minimum, companies look to their Real Estate partner to provide formal Broker Opinion of Values (BOVs) which are then taken to complete the initial provisions by factoring in any income recovery, should the advice be that the property is capable of being let or sold.

Broker Opinions of Value (BOVs)

Whilst the actual BOV can take many formats (see Appendix I), we have found that typical broker assumptions will refer to the following:

• Void period to finding a (sub)tenant• Letting strategy, whole vs. single floors etc• Achievable base rent per sqft/sqm• Rent free period or equivalent incentive, i.e. capital

contribution• Recommended refurbishment works• Rates revaluation, if applicable• Likely caps, i.e. service charge• Rent reviews or indexation• Value of leaving current fit-out including furniture• Rent reviews or indexation• Value of leaving current fit-out including furniture• Separation costs• Service charge budget, i.e. multi-tenant building• Marketing costs• Broker, legal and landlord fees


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However, some of the above will have to be provided by the estates management team, such as the service charge budget etc.

One key to ensuring the BOV assumptions reflect the most achievable scenario is to make available both a copy of the lease and abstract thereby highlighting any onerous lease clauses which could have a material impact on the lettability of the vacant space. This can include alienation clauses which preclude the tenant from subletting or assigning on a certain basis or requiring landlord’s consent. For example, it is common to find clauses in Dutch leases which stipulate the tenant must always remain in physical occupation thereby resulting in making it difficult not only to dispose but also to vacate the space in the first instance.

Often, when dealing with large vacant portfolios, companies have found it beneficial to initially apply certain rules, such as assuming no income recovery at sites with less than two years remaining on the lease, however, the long-term objective is always to define the most accurate provision as soon as possible.

Freeholds

When making an assessment of the disposal prospects for a freehold building, it is important that the broker is informed whether a company is prepared to sell below the Net Book Value as this can have a material impact of the sale proceeds and timing.

The corporate Accounting Team will need to calculate the depreciation; asset write offs and book values that may be required in assessing any freehold disposals.

From the point a property becomes vacant and an associated provision is created, it is unusual to witness much change in the operating costs unless for example a rent review increases the rent or some major repair works are required. However, the income recovery assumptions can vary as supply and demand flex in each market.

Provision Process Efficiency

Calculating provisions is a time consuming process and we recommend that the core disposal team’s focus should remain on just that – disposing of the surplus space and identifying that elusive tenant and the Corporate Account Team focus on the calculation of provisions using data provided by the disposing agent.

In terms of how frequently provisions need to be updated, a balance needs to be struck to ensure that the provision is

not out of date and thereby stopping a potential deal, but are not completed so frequently so that provisioning becomes a dominant exercise in the disposal process.

We have found it useful to rank the importance and size of an individual property in terms of its provision and focus on the large properties. The 80:20 rule with 80% of the value being held by 20% of the properties is often a useful guide. Best practice dictates that the most significant property provisions should be reassessed monthly whilst the reminder of smaller properties should be updated quarterly. However, please note that under IAS 37.59, “Provisions shall be reviewed at the end of each reporting period and adjusted to reflect the current best estimate.” This means that the frequency by which the Real Estate managers must update each provision is determined by the company’s reporting period. This can be quarterly or even annually but as recommended above, monthly updates will ensure greater accuracy, especially in turbulent markets.

Ultimately it is important to work with the corporate’s finance team and to fashion the most suitable disposal provisioning methodology.

Provisions should not just be used on a piece meal basis and the disposal team should look to manage the entire provision figure allocated to the disposal portfolio as a whole as it will be inevitable that some deals will be over the provision figure however some will be under.

By tracking the forecast provisions against the actual provision incurred, an accurate assessment can be made whether a particular transaction can be pursued when it is under provided for (and is unlikely to bettered in the market), but can be compensated for by other deals which are over provision.


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ESTATES MANAGMENT

• An effective Estates Management function is integral to an effective disposal process

• The Estates Management Team has key responsibilities. The Disposal team’s focus should not be diverted by straying into the Estates Manager’s realm or area of expertise

• The Estates Manager often provides early warning of an impending disposal

• Ideally the same company should manage the disposal process and undertake the Estates Management function

Estates Management Team Responsibilities

The Estates Management team play a hugely important role in the successful and efficient running of any Volume Disposal situation. It is therefore vital that the disposal team and Estates Management operate as a cohesive and integrated unit. There is clearly an advantage in terms of efficiencies and communication where both functions are performed by the same company. However, regardless of which scenario is encountered, team work is vital. It is important that there is a clear definition around the roles and responsibilities of the Estates Management and Transaction Management functions.

Typically, we would expect the Estates Management function to be responsible for the following;

• Access arrangements, including providing keys and alarm codes etc

• Provision of service charge information• Replies to new pre-contract enquires• The provision of maintenance and condition documentation

in respect of the property to be disposed of, i.e. asbestos reports and maintenance programmes etc.

• Copies of lease/freehold documentation, including Licenses to Alter and Rent Review Memorandums

• Details of rents, rates and service charge payable• Copies of plans• Updating the central tracker following completion of any

disposal• Sub-tenant management include collection of rents in

conjunction with Client Accounting team.

The majority of the above is part of a site’s due diligence and relevant documentation should be stored in a central depository such as Sharepoint. However, when space becomes vacant the Estates Manager or Property Manager will also be accountable for the provision of Facilities Management services and has a duty to ensure the vacant space is inspected on a frequent basis, ensuring compliance of any statutory regulations and that the space is maintained in a clean and marketable condition so it presents in the best possible light for any viewings

Where the Transaction Management and Estates Management function are performed by different firms the need for open collaboration is even greater. The need for joint meetings and clear definition around roles and responsibilities become even more important.

Whilst the Estate Management function would usually deal with such matters, where a property is being disposed; the disposing team’s rent review and dilapidations surveyors should undertake such tasks to ensure the maximum convergence of opinion and integrated strategy.

To ensure increased connectivity the building consultancy team aligned to the disposal team should also have responsibility for sourcing EPCs.

Managing the Vacation of Premises

Vacating surplus premises should not be a question of turning off the lights and locking the door. A conscious effort should be made that when vacating a property the actions of the decommissioning team is aware of the needs and requirements of the disposal team. As such, there needs to be close liaison between the two teams whilst clarity and consistency around the process should be set and nderstood by all. Again clarity and consistency around the process should be set and understood by all. An example of a useful checklist for this important process can be found in Appendix 2.

The Estates Management team should also have responsibility for the management of critical dates, for example break notices and the like. The focus of the disposal team should be on just that – disposals and not the general property management of the disposal estate.

However, this will often depend on the structure of the account team as it is common for critical date reports to be issued directly by the Lease Admin team but the follow up with the client to be managed by both the Estates Manager and a Transaction Manager. This responsibility is fundamentally important to ensure additional obligations are not created through missing a critical date, for example, in many European countries, leases carry an automatic renewal clause under which if no notice is served by the tenant then the lease can extend for a new term committing them to considerable cost and risk.

Frequently in a Volume Disposal situation, new properties are identified for disposal and the sensitive issue of staff communications needs to be addressed. This should be managed by the client or the Estates Management function. The disposal team should be made aware of the impending


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announcements so that the necessary pre marketing actions can be made in confidence e.g. initial views on marketability and draft disposal particulars prepared. The disposal team is therefore immediately able to formally bring the space to market as soon as the formal announcement is made by the client.

Dilapidations / Reinstatement Works

A key element for close liaison between the Transaction Management and Estates Management function is in relation to dilapidations. Where the estates manager knows a sub tenant is vacating the Transaction Management team should be alerted at an early stage. Clear recommendation needs to be made to the client in respect of what works are required to successfully market the space and how these interlink with the dilapidations liability of the vacating sub-tenant.

The objective should be to ensure a speedy resolution of any dilapidations negotiations to ensure the refurbishment works required for marketing can be carried out without delay following the sub-tenant’s vacation.

Cost Mitigation through UK Business Rates Strategy

UK business rates tend to represent roughly 45% of the overall occupancy costs for a building so companies are always looking for ways to reduce this cost as part of a larger saving initiative. In April 2008 the old policy of empty rates for commercial buildings was abolished and replaced with a new directive which allows an occupier to claim three months of rates relief at 100% immediately after vacation but thereafter the full rates liability reverts.

We encourage clients to actively review their portfolios to ensure all claims are made to local authorities as soon as space is vacated and our Rating advisors can provide professional support on both a contracted and ad-hoc basis. In addition to the three months rates relief, there are further strategies available to reduce the longer term rates liability for vacant buildings. We have existing relationships with companies and charitable organisations which can subsequently take occupation through a short term license to occupy, thereby triggering a new period of occupancy which lasts 42 days and then they vacate the premises. This follow-on vacation allows a new claim for the three months of 100% rates relief and is therefore a highly beneficial mechanism of achieving significant savings for the occupier through reducing this exposure. This strategy is sometimes referred to as “intermittent occupancy”. Please also note that for industrial properties the rates relief period is increased to six months.

Sources of Efficiencies

There should also be close liaison between the Estates Management and Transaction Management function in respect of exploring and where beneficial, implementing short form leases and fixed services charges. Such approaches are extremely useful where the unit to be disposed of is small and part of a larger building that remains occupied by the client. In such circumstances there are real efficiencies to be gained by all parties in using these approaches. There is for example frequently inadequate information to prepare a fully accounted service charge and even where there is, the management of this is not cost effective. Whilst consent from the superior landlord will be required in respect of using short form leases, if this can be obtained, their use will significantly speed up the legal process of documenting any letting.

USE OF AGENTS

• Using regional clusters and SPOCs to drive efficiency, the portfolio defines the structure

• Consistent Terms of Engagement• Giving ownership and responsibility to brokers in field • Town Hall meetings drive collaboration and sense of

collective purpose• Ensuring agents are adequately incentivised in fee

agreement• Maintain personal contact with agents – don’t be too

remote

In all probability the portfolio will be dispersed across a wide geographic area and will be highly variable in terms of quality and size. It is therefore unlikely that one single firm of agents will be best placed to provide market advice, undertake viewings and negotiations with potentially interested parties. The key is to achieve a balance between market coverage and using best in class and not ending up with 200 agents reporting into the central account ream.Terms of Engagement

Fees will need to not only reflect any Master Services Agreement between the central account team and the client, but must also incentivise the disposal agent. It may therefore be necessary to seek exceptions to ensure a fee is offered to agents which both incentivises them to truly focus on the programme in question, but to also accept instructions on some of the more challenging disposals projects.

Terms of Engagement should be drafted for each sub-agent. We recommend the central account team prepares a consistent Terms of Engagement letter rather than accepting individual letters from each sub-agent. It is important when drafting such a letter that the central account team are cognisant of the


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needs and requirements of the sub-agent to ensure the clauses adequately reflect what a sub-agent could reasonably require and not just those of the client.

Agent Responsibilities

The sub-agents will be required to not only inspect the properties, but to check the measurements and prepare Strategic Disposal Reports, but to ensure full engagement they should have responsibility in respect of maintaining certain fields within the main tracker. This will require close liaison between the central account team and the sub-agents to ensure consistent standards of quality and accuracy are maintained. We have also found direct client contact motivates agents and as such the use of regional meetings with the sub-agents and conference calls ensure the necessary focus is maintained across the entire team.

There will be instances where even the most suitable agent “takes their eye off the ball” – typically where there is a secondary property and the condition of the vacant unit deteriorates, post builds up, marketing boards get damaged etc and it goes unnoticed. To ensure this does not happen, a monthly written declaration from the disposal agent confirming that they have inspected the property and it is fit for marketing should be part of their contractual obligations.

This will also help guard against the head of property getting uncomfortable calls from the Chairman who has recently driven past one of his properties where the board is hanging off and weeds are growing in the gutter!

It is also important to note that the Property Manager will be responsible for maintaining the vacant space, both to comply with ongoing repairing covenants in the lease and also to ensure it is presented in the best possible light to assist in the marketing efforts, but will need to take advice from the agent who can make recommendations in respect of potential refurbishment works.

Don’t Forget The Personal Touch

Property remains a people business. It is important to build good working relationships with the agents. They will perform much better if they feel part of a cohesive team, rather than if they feel isolated and remote.

We have found that judicious use of best in class agents and where ever possible conurbation clusters of agents with a single point of contact reporting into the central account team for each conurbation/region, maximises the bespoke needs of the portfolios more unique properties with the requirement for efficiency of process.


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DISPOSAL STRATEGIES

This paper’s primary objective is to provide guidance and advice in relation to the process and structure to maximise the success of a volume disposal programme. A summary of disposal strategies the team should consider in such a programme is outlined below and these are frequently determined by the type of property and circumstances. It should be noted that this section does not look at the wider issue of portfolio cost reduction, which is the topic of a separate CBRE paper.

Volume Disposal Programme – Conventional Transaction Approaches

Volume Disposal Programme – Creative Portfolio Transaction Structures

Strategy Description

1 Lease Buy-out / Termination • Negotiate termination price for lease

2 Sublease / Assign • Sublease or assign space to third party

3 Sell Surplus Asset • Sell asset once asset becomes vacant

Strategy Description

1 Acquire Leased Assets and Sell – Surplus Assets

• Compare sublease strategy / recovery with buying property and selling with restructured / downsized lease or as vacant asset

• Buy outright or restructure occupancy / lease with third-party buyer (probably requires cash payment

2a Short Term Sale Leaseback – Future Surplus• Sell asset with 1-3 year Sale Leaseback; higher proceeds than selling vacant• Provides buyer time to reposition / re-entitle/ re-lease asset

2b Partial Sale Leaseback – Partial Surplus • Sell asset and lease back only a portion of the Asset

3 Move from owned to leased property(s)• Relocate from oversized/inefficient owned asset(s) to smaller leased property• Sell vacated owned asset

4a Asset Swaps • Swap surplus owned site(s) in exchange for better terms on leased locations with same landlord

4b Asset Swaps• Sell oversized/inefficient owned asset (Relinquished Property) and trade into smaller/more ef-

ficient purchased asset (Replacement Property)

5 Portfolio Sale• Bundle/Sell owned Operating and Surplus assets – including those with vacancy (include OREO

if US Financial Institution)

6Trade lease rights for rent reductions or ability to relinquish space

• Trade lease rights for rent / size / term concessions • Surrender Lease Options – Purchase, Termination • Substitute Parent for Subsidiary for guarantees • Offer “must-take” and extension for relief on surplus space (defer / blend and extend)

7 Inactive Property Program• Create an inactive property programme to separate operating assets from surplus• Advantage is focus of Programme on rapidly disposing of surplus real estate – specialized

expertise / rapid action

8Restructure Old (or Get New) Economic Incentives for Staying

• Renegotiate ground leases, economic incentives

9 Subsidiary Sale • Bundle Real Estate Assets (owned and leased) with sale of Subsidiary

10 Subsidiary Bankruptcy• Reject or assign leases within Subsidiary• Assign (“sell”) Below Market leases

11 Sublease to Landlord

• Tenant subleases to Landlord vacant space• Advantage to Landlord • Controls leasing activity in building • May result in positive impact on Financial Statement impact vs. reserves • Avoids further capital expenditures on fit out

12 Place new leases in Unrestricted Subsidiary• Create unrestricted subsidiary that falls outside of debt covenants• Only works where Lessee can avoid a parent guarantee


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APPENDIX 1, BROKER OPINION OF VALUE

Property Description

Broker Information

Market Evaluation

Property Name

Property Address

Use

Owned or Leasehold / Sublease:

Total Building Size

Lease Expiration

Year Built (age of building)

Class Type (a, b, c)

General Condition (scale 1-10, 10=highest)

Building Features / Area Amenities (Restaurants, Neighbourhood etc.)

Operating Expenses / Cam

Parking ratio / spaces

Local currency

Comments

Broker Contact Info: Broker Contact Info:

Address Address

Phone / Email: Phone / Email:

Area Description

Submarket Vacancy (%)

Under Construction

Market Conditions & Trends (Pro/Con)


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Property Evaluation

Additional Comments

Lease Comparables

Competitive Buildings

Client Estimated Vacate Date

Reasonable Marketing Period

Recommended Asking Price

Projected Taking Price

Lease Incentives

Local Commission Rates

Comments

Address Size Tenant Term Ti/Rent abatement Net Rent Comments

Address Size Tenant Term Ti/Rent abatement Net Rent Comments

Best Case Worst Case


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APPENDIX 2

Following information or action needs to be completed before a building /floor is moved to Vacant Estate Program.

General guidance:

The Client CRE Team or project managers needs to remove anything installed (unless the buyer / landlord want it) and leave the space in a clean and tidy condition so the space presents well. All contracts need to be cancelled and forwarding addresses put in place. All furniture and rubbish need to be removed with the space cleaned & dusted before closing the door and handing over the keys / security codes. This train of thought should apply whether property is managed out by the local delivery (fag end leases) or is to be handed over to the Vacant Estate Program if managed separately.

Information Gathering and Processing Team involed Completed Comments

1Site Identification (approximately. 120 days prior to space vacating

Client CRE Manager and CBRE TM team

2 Confirm Sqft and strategy (Sale, Sublet, mothballing) Client CRE Manager and CBRE TM team

3A call need to be organised by the Portfolio Manager to discuss scope and handover process. Following topics need to be on the agenda:

Client CRE Manager,Project Manager, security Manager, Property Manager, CBRE team

3.1

Agree the scope of works prior to handing the space to vacant estate program (Broom Clean, Refurb.) Are there any assests that are to be kept or to be removed e.g furniture

Project Manager and client/CBRE TM team

3.2Confirm the possible amount for dilapidations / restoration

Project Manager and FM partner

3.3Ensure any contracts are terminated or re-scoped (incl.utility’s, service, lease, security contracts)


3.4

Inventory of statutory O&M manuals, site plans and instruction need to be provided, including specific information related to the infrastructure e.g air con, or raised floor with max loads. etc. - To be provided at handover


3.5Provide building related Health and Safety information and asbestos reports / certificates etc. at handover

Client CRE Manager and FM partner

3.6 Provide copy of insurance details to Vendor. Client CRE Manager

3.7 Identify all existing FM contracts and realated costs Client CRE Manager and FM partner

3.8Following documents need to be completed before handover, Contact list, Site Inspection and Security Check List.

Client CRE Manager and FM partner

4Identify FM and Security services that need to be part of the space management.

FM and client Security

5 Obtain Client approval on FM SLA Client Property Manager and CBRE team

6 Implementation and monitoring of services Client CRE Manager/CBRE property manager

Documents

Volume Disposal Guide 2012