Calibrate your real estate.

No private real estate developer would be as careless about managing his properties as are some corporations. Your bottom line will suffer unless you understand today's real estate market, inventory your holdings and then learn how to manage them.

Real estate typically represents a major corporate investment, accounting for 20 percent to 30 percent of total assets. Occupancy costs, real estate-related interest and capital costs all affect the corporate income statement.

In the past, corporations accumulated real estate with little thought for risk or loss. This cost them little, given the market conditions of those times. Property values usually went up, and expanding companies grew into properties they bought or leased. Landlords and sellers had the upper hand, making lease and purchase commitments long-term, seldom reexamining them in midterm. Property was cheap and plentiful, and the environment was forgiving - mistakes were cured by the passage of time and rising values.

But times - and conditions - have changed. Property values are as likely to go down as up, companies are downsizing and, increasingly, leases are reexamined and restructured in midterm. The current real estate environment is not forgiving of companies that have to account to their shareholders for a return on invested capital. Therefore, it's probably time for your organization to do an internal property assessment and act on the results.

Going Metric

Clearly, measuring return on fixed assets isn't the only way a company should gauge its financial performance. However, ROFA can tell management how efficiently the company is utilizing the capital it has tied up in land, plant and equipment. It's also helpful when comparing a company to its peers.

How does a company increase its ROFA? One method is to decrease investment in fixed assets by eliminating surplus assets, consolidating operating fixed assets or by using an off-balance sheet tool (i.e., synthetic leasing, etc.).

Fruit of the Loom is one company that actively manages its real estate portfolio. In the fall of 1996, the company was restructuring its operations and decided to move its sewing facilities offshore while continuing to produce and cut fabric in the United States. This left a surplus of U.S. fixed assets, including mills, warehouses, showrooms and garment manufacturing sites.

Many companies in this situation either hang onto unneeded facilities, letting them become a drag on the bottom line, or they dump them, selling them fast at fire sale prices.

Fruit of the Loom took a different tack - maximizing the value of its surplus assets by packaging properties for uses that would target potential buyers. The company decided to eliminate an integrated spinning mill it owned in North Carolina because it was consolidating its U.S. yarn mills. One prospective buyer, who planned to strip out the machinery, offered $5.5 million. But Vice President of Finance and Corporate Controller Calvin McKay wasn't happy with that. His ROFA advisors worked with the local development agency to create an attractive incentive package. The outcome: A small, specialized textile company, looking to relocate and expand, bought the mill for $8 million.

A second transaction involved the sale of a 270,000-square-foot manufacturing and distribution facility. The process started with a shopping trip of sorts, identifying companies whose needs closely matched the facility's profile. Patrick Yarn Mills ultimately bought what some considered a white elephant for $2.2 million. The facility is now being used to produce and distribute Patrick's products.

"We're taking a different approach to management of the company's fixed assets," says McKay. "We're treating it as a separate business, one that must offer the company a return on its capital."

The first step in the ROFA process is to audit fixed asset locations (to establish what the company owns or leases) using a database program designed to track and manage real estate decisions. This creates a central tool management can use to help integrate fixed asset decisions and business goals. In addition, the database can store critical lease dates, lease documents and building and site plans.

As the audit progresses, beginning with an overview of inventory and drilling down to access fine detail, disparate bits of information will come together, providing an instant holdings profile. Management can then monitor the company's options, obligations or commitments on a local, national or international basis.

Assembling data also can uncover hidden jewels or potential hazards. Stories abound of managers forgetting to exercise renewal rights and losing a competitive location, or failing to act on a cancellation option hidden in the lease for a dormant facility. Merely characterizing a property as "surplus" in a data field shows holdings that can be sold, consolidated or traded. Add the capability of viewing data by operating unit, location or corporate responsibility, and mundane entries bestow valuable information.

Release Trapped Capital

There may be situations where ownership is strategically desirable, but many assets aren't "special" and don't need to be owned. Thus, understanding what your company owns lets you better allocate and release trapped capital. The philosophy is: "Separate the assets from the business." Once you do this, management better understands whether these assets add value.

For example, when one company decided to sell a division, a consultant asked if management had evaluated the fixed assets that were to be included in the sale. It had not. When it did, it discovered a modern, highly automated warehouse/distribution facility being used by the buyer was to be included. The buyer, however, said it would not need the facility, estimated to be worth $10 million. As a result, the facility was pulled from the deal and the buyer's lease was changed to a shorter term (at a higher rate) to facilitate its exit from the building. This bought the seller time to package the building and prepare it for market as it generated income. A year later, the buyer decided it would need the facility after all and was ready to negotiate.

The lesson here is: Why leave money on the table? You'd never give your product away. Why not look at your fixed assets as another product you have to market?

Left Arm, Right Arm

A multinational pharmaceutical company was restructuring its European operations and planned to close a facility in Spain. Severance liability amounted to $20 million. But more important, the company would have to import the product back into Spain, and the plant closing created public relations problems that affected its ability to obtain the import licenses it needed to continue to service the Spanish market.

The firm looked at how the facility could be reused and by whom. As it did, it found it had a consumer products division operating in a leased facility in the same city. This division wanted to consolidate three European manufacturing plants into one and didn't have the same licensing concerns as the pharmaceutical division. The consumer plant moved out of a leased facility into the pharmaceutical plant. The other consumer plants were also consolidated into this building and the pharmaceutical workers were retained to assist in the expanded operations. In one fell swoop, what had been a surplus plant with a heavy shutdown cost became a solution for another division - one that eliminated the severance liability and reduced its unit cost by 10 cents.

The moral of this story is that all divisions should know what a company owns. A major oil field services firm, for example, via a fixed asset software package, plans to post its holdings on its corporate intranet, allowing its divisions to know what it owns, thus promoting its co-location initiatives.

The real estate market has gone from Main Street to Wall Street. Real estate investment trusts (REITs) have created a new market for corporate real estate. There's a lot of capital chasing deals. Knowing what you own, how you own it and why you own it will help you be creative.

Bricks and mortar only shelter your operations, so why not leave real estate ownership to investors? Understanding your realty needs may allow you to package properties and capture significant value for your company. Synthetic leases are already wide spread, and many companies are studying corporate-sponsored REITs.

Despite your best efforts to deny it, you are in the real estate investment business. Therefore, managing your holdings proactively can only benefit your company.

Panning for Gold

* Audit fixed asset locations to establish what your company owns or leases.

* Create and implement a company-wide fixed asset policy.

* Determine the extent to which lease liabilities could drain future earnings, or how these obligations can be converted to immediate cash.

* Decide how to package and market the company's fixed assets as products of value to others.

* Develop creative financial structures to release the capital trapped in fixed assets, and lower holding costs and other financial burdens of depreciation.

* Establish the true value of M&A deals and business divestitures by separating the value of fixed assets from the ongoing business.

Michael Katz and Edmund Prins are senior partners at Corporate Asset Advisors, Inc. They can be reached at [phone].