Calibrate your real estate.

• Author: Katz, Michael
• Position: Includes related article on capitalizing on fixed asset locations

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...