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What public managers could learn from the private sector.

This article is adapted from a manuscript entitled "Public Real Estate Management--Adapting Corporate Practice to the Public Sector: The Experience in Cleveland, Ohio," presented at the annual American Real Estate Society meeting in April 1992. It was the 1992 recipient of the ARES award sponsored by the Institute of Real Estate Management for the best article presented on a property management topic.

Recently, there has been an increasing trend for governments to enter directly into the real estate development using government-owned lands. The main reasons have been to stimulate economic development in the community or to further socially desirable uses for the property.

Because governments have stepped up their role in encouraging growth by implementing development of surplus properties, government managers need to know their own financial objectives. Do governments have the expertise to deal with these evolving trends?

In particular, what are government practices with respect to acquiring, managing, and disposing of real estate, and how do they compare with private-sector real estate management practices? Is the current knowledge of public real estate managers sufficient to assure efficient development of public lands?

This article draws upon recent articles on corporate real estate management that cover organization of the real estate management function, performance evaluation, information management, role and effectiveness of the real estate executive, real estate inventory and activities, and property acquisition and disposition decision rules. The consensus of these articles is that corporate real estate assets are generally under-managed.

Results from the corporate sector are compared with results of a survey of public property managers in 21 suburbs of Cleveland. The communities surveyed had 1990 populations TABULAR DATA OMITTED ranging from 10,000 to 88,000. The survey focused on the acquisition, management, and disposition of municipally owned property.

Preliminary research results suggest that suburban communities in greater Cleveland are engaging in many of the same real estate activities as larger, non-real estate corporations, but often without formal financial analysis tools. This implies that there may be a need to further educate public property decision makers regarding real estate practices.

Need for centralization

A striking difference between corporate and public real estate is the existence of a centralized real estate department. While over 80 percent of corporations had a real estate department, only 5 percent of the suburbs in Cuyahoga County, Ohio (where Cleveland is the major city) had a separate real estate department. The department heads responsible for real estate (frequently public works, city planning, or finance) usually spent less time on real estate (30 percent) than their private sector counterparts (100 percent).

While public property maintenance decisions are nearly always made by city staff (91 percent), the more important acquisition and disposition decisions were only made by professional staff one-third of the time. Elected officials were the primary decision makers on these matters in more than 70 percent of the suburban communities surveyed. This decentralized approach, with each department making its own real estate decisions, may be contributing to under-management of overall municipal real estate assets.

Need for analysis

Figure 1 compares public and private responses about the quality of information available on real estate, including the presence of a property inventory, the state of a computerized management information system (MIS), and selected accounting practices.

Although the vast majority of the public and private managers had a property inventory, the quality varied greatly.

Computerized property management information systems are relatively uncommon in the private sector (26 to 50 percent), and even less common in the Cleveland suburbs (26 percent). Therefore, most public property managers do not possess key information resources found to be important to efficient corporate real estate management.

The Cleveland experience is consistent with the experience of Athens and Atlanta, Georgia; and Mobile, Alabama, where the inventories were also partly computerized and without an MIS system.

While about half of the firms tracked property on an individual basis, only 35 percent of municipalities did. Approximately 60 percent of municipalities did track cash revenue on a property-by-property basis, usually for park and recreation facilities. Accounting by functional class (62 percent) was a more common accounting approach among municipalities.

Another main factor in tracking property performance, market value, was known by 44 to 76 percent of private firms. Approximately 30 percent of municipalities were able to place a current value on some (not all) of their holdings, usually recent acquisitions and developed properties.

The apparent lack of data can be partly explained by limited access to reasonably priced market information, namely property tax data. Because nearly all municipally owned property is tax-exempt, municipal real estate managers are deprived of a valuable piece of market information.

Need for written standards

While the objective of private firms in dealing with their real estate is driven primarily by the profit motive, either as a cash generator or a tool to aid production, the public sector's goals are more complex. The public sector is non-profit and recognizes both efficient operations and equitable distribution of resources as important objectives.

Another important consideration for a municipality is to generate a social return (affordable housing, jobs, and quality of life) to its constituency. These do not appear on the public budget. Despite the difficulty in measuring it, two-thirds of the public real estate managers attempt to include social return in property decisions.

Figure 2 shows the results of a survey with questions related to written policies and decision rules. A substantial portion of corporate real estate managers (87 percent) use formal decision rules for capital budgeting, acquisition, or disposition of property. Only 15 percent of Cleveland-area public managers do the same. The difference is almost as large with respect to use of a discount rate; well over half of corporate managers use one, but only 22 percent of Cleveland-area public real estate managers use a discount rate in making property decisions.

This discrepancy may be partially explained by lack of formal education; the most common education level attained by the primary public-sector real estate respondent was a bachelor's degree and only 19 percent had attained a graduate degree.

Approximately 54 percent of private sector managers had formal property management or development plans in place, compared with 19 percent in the public sector. Many municipal real estate decision makers appear to be left out of the process of making acquisition and disposition decisions; elected officials (city council--85 percent and mayors--71 percent) made key property decisions, often without consulting professional staff.

An important factor in evaluating ongoing return is explicit consideration of internal benefits derived from real estate as a factor of production in the form of internal rent. Accounting for internal rent was the practice among two-thirds of corporations, but very uncommon among the municipal property managers (15 percent), despite the fact that most publicly held properties are held for the use of the municipality and are not expected to be revenue generating. Formally dealing with internal rents is a necessary ingredient to ongoing property evaluation.

The notion that real estate can be addressed within a portfolio framework is not familiar to public managers; only 5 percent stated that they evaluate the performance of their properties over time. In contrast, over half of corporate real estate managers considered potential benefits to the portfolio in making real estate decisions.

Development activities

Figure 3 shows comparative results for selected development activities. Leasing of property or land was undertaken by a large portion of the corporate real estate departments (41 to 91 percent, depending on which group).

The activity reported among the public managers in Cleveland suburbs was similar: 48 to 52 percent are engaged in leasing activities. In addition, 38 to 57 percent of the suburbs were engaged in parcel assembly or land banking. Sale-leasebacks (39 to 49 percent) and property exchanges (39 percent) were fairly common among corporations, but were scarcely used among public sector managers; only 10 percent reported this activity.

The response on joint development was affirmative for 24 to 31 percent of private corporations and 29 percent of suburban municipalities. Despite the potential for substantial TABULAR DATA OMITTED public budgetary and economic benefits from joint development, there is little information available on either the process or results of joint development efforts by public-sector managers.

This mismatch could be a major concern for public managers because they do not appear to have a comparable level of information about either the performance of their own properties or financial analysis techniques as do the developers with whom they must negotiate.

This concern about a level playing field implies that the public property decisionmakers should acquire more real estate skills. Additional research also is needed to guide public real estate managers in joint-venture activities.

Examples of sophisticated public management

The results of the survey reveal that suburban communities in greater Cleveland need guidance in order to more efficiently use municipal real estate assets. If they were to begin organizing a professionally oriented real estate management function, what should the steps be?

Several communities in the United States, notably the City and County of Denver and Los Angeles County, have made substantial progress in establishing public real estate departments. Despite the fact that Denver and Los Angeles are large central cities and the subject communities are smaller suburbs, many aspects of the experiences of these two cities could serve as a model for other communities, as the approach professionalizes the municipal real estate function by incorporating many of the desirable aspects of corporate management practice.

The City and County of Denver created its Office of Asset Management in 1986, and hired a professional asset manager with a finance background to head the office. The initial activities included setting up an asset management policy, conducting an inventory of properties, planning and analysis, overseeing project management, executing transactions, and developing additional in-house real estate expertise.

A key element undertaken early in the process was to classify properties both by use and by potential use. Denver employs a four-category scheme: city use, financial investment, social investment, TABULAR DATA OMITTED and surplus. Each use has a different asset management goal. Classifying properties has the important advantage of reducing information requirements for property management and for evaluation of ongoing performance.

Los Angeles County's Citizen's Economy and Efficiency Commission has been developing a formal policy document intended to guide the county's real estate management and development activities. The document recommends setting up an economic-based real property management system with a formal policy statement, including objectives and a monitoring system. An initial inventory of county properties is to be improved and centralized.

A key component of the L.A. plan is to initiate a market-based rental system for internal rent and leasing of county space. Department heads are to be given incentives to improve performance of their real estate assets.

Organizing a real estate department

Based upon the experience in existing public property departments, as well as on findings from the corporate sector and results from this survey, some initial steps for improving use of municipally owned real estate include:

* Setting up a centralized real estate authority within the organization with overview or direct control over acquisition, management, and property disposition functions. Include special development activities for parcels with substantial market potential. The unit should be managed by a real estate professional with planning and finance experience.

* Devising policies and decision rules for the acquisition, management, and disposition of property, as well as the strategic role of real estate in attaining municipal goals.

* Conducting a detailed inventory of existing real estate assets, including property characteristics and market value.

* Initially classifying each property, as is being done in Denver.

* Creating a property-by-property accounting system that tracks the necessary variables for each category, including ongoing market value, costs, internal rent, revenues, and social benefits attained. It is key that real estate be considered an asset capable of producing a mix of measurable and difficult-to-measure returns (including social benefits).

If a meaningful rate of return cannot be established due to difficulty in measuring social benefits, a reasonable alternative would be to rank each property's performance ordinally. This is key for ongoing evaluation of under-utilized properties.

* Creating an MIS system to service the accounting function.

* Developing the in-house expertise to derive maximum financial return from the real estate assets that have development potential.

* Evaluating and managing municipal real estate holdings like a portfolio, analyzing returns over time. Consider both risk and return.

References

Cowart, Larry. "The Management of Real Estate Assets by City Governments: Three Case Studies" (dissertation). Athens, Ga.: University of Georgia, 1990.

Gale, Jeffrey and Case, Fred. "A Study of Corporate Real Estate Resource Management." The Journal of Real Estate Research (Fall 1989), pp. 23-34.

Los Angeles County Citizen's Economy and Efficiency Commission. "Real Property Management and Development in Los Angeles County." August 1991.

National Council for Urban Economic Development, The. "Moving Towards Joint Development: The Economic Development-Transit Partnership." Washington, D.C.: UMTA, 1989.

Pittman, Robert and Parker, Joel. "A Survey of Corporate Real Estate Executives on Factors Influencing Corporate Real Estate Performance." The Journal of Real Estate Research (Fall 1989), pp. 67-80.

Redman, Arnold L., and Tanner, John R. "The Acquisition and Disposition of Real Estate by Corporate Executives: A Survey." The Journal of Real Estate Research (Fall 1991), pp. 67-80.

Redman, Arnold L., and Tanner, John R. "The Financing of Corporate Real Estate: A Survey." The Journal of Real Estate Research (Summer 1989), pp. 217-240.

Roberts, Neal and Basile, Ralph. "Public Real Estate Asset Management." Washington, D.C.: National League of Cities, 1990.

Utter, Marilee A. "Public Asset Management." Economic Development Commentary (Fall 1989), pp. 4-11.

Veale, Peter R. "Managing Corporate Real Estate Assets: Current Executive Attitudes and Prospects for an Emergent Management Discipline." The Journal of Real Estate Research (Fall 1989), pp. 1-22.

Complete references are available in the extended version of this article, to be published in 1993 in the Journal of Real Estate Research.

The author welcomes an exchange of ideas on the types of corporate and public real estate activities described in this article. Please feel free to contact him (in care of the JPM editors at IREM National) if you are working in this area.

Robert A. Simons, Ph.D. is an assistant professor of urban studies, planning, and development at the Levin College of Urban Affairs at Cleveland State University in Cleveland. He teaches graduate courses in property market analysis and finance and in public economics.

Professor Simons earned his Ph.D. degree in planning and master's degrees in planning and economics from the University of North Carolina at Chapel Hill. He has over 10 years of real estate and planning consulting experience. His research interests include public real estate development, mortgage default, and inner-city commercial redevelopment.
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Title Annotation:Asset Management
Author:Simons, Robert A.
Publication:Journal of Property Management
Date:Jan 1, 1993
Words:2439
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