Property Portfolio Dilemmas Faced by CEO’s
Russell Martoo discusses the many challenges faced in non-profit sector property portfolio management. Read the first article in this specialist series.
Of the many challenges faced by a CEO, including resourcing, staff, clients, regulations, technology and finance, the property portfolio of an organisation in the non-profit sector is typically viewed as something that is static and therefore seldom proactively managed until a major issue develops.
CEOs from the non-profit sector find that most issues arise from having a disparate property base accumulated through circumstance or allocation rather than planned development. Hence many problems stem from legacy or historic reasons that have simply not been adequately addressed in the past.
Frequently, the non-profit organisation does not address these issues because the usual commercial triggers do not apply. For example a lease expiry or renewal that occurs in a rental building is not applicable for freehold properties. Or there is often a strong cultural attachment from the organisation to a particular location and premises for historical reasons that may no longer have purposeful meaning but remain a barrier for change.
A unique characteristic of the non-profit company is the accumulation of property assets over time either through bequests and donations, philanthropic acts, amalgamations or from earlier service models which utilised a large number of properties across a range of tenures that may include freehold and a Deed of Grant in Trust and other leases. The net result for the organisation and its CEO is operating in a fragmented capacity out of multiple smaller locations or consolidating into legacy premises that are now poorly adapted for their current use, for example utilising a school classroom as an administration office.
A financial downside of operating in a range of legacy buildings owned by the organisation is either regularly deferring maintenance or expending money on the cost of adaption and maintenance of what are fundamentally inappropriate buildings, often in poorly serviced locations. This means that the real cost of the property’s inefficiencies are lost in the ‘miscellaneous overheads’ column in the accounts, and there is no transparency of the real cost of property in running the business. However, if the costs are not being measured then they cannot be efficiently managed.
Because non-profits rely heavily on external funding to maintain operations, a change in business model due to a major change in funding or client requirements can have a major impact on how the service is undertaken or delivered. Now more than ever, real flexibility to adapt your property portfolio to meet the changes demanded by government, granting organisations, customers, clients and technology on business and service models, is paramount.
This quantum shift of service delivery will require a more comprehensive review of the property portfolio with the potential requirement of securing new or upgraded properties. The CEO is then placed in the position of having to provide their Board with various business cases relating to the organisation’s property portfolio. Recommendations in such reviews may include identifying investment opportunities and sites, preparing feasibility studies, site acquisition, negotiation with statutory bodies, managing the delivery of new premises and overseeing the marketing and disposal of the existing property assets.
Managing the rationalisation of an asset or getting the maximum value for the asset at sale requires the proper preparation of the asset before disposal. This may include a range of requirements from the need for physical change, for example asbestos removal, through to a regulatory change such as obtaining a more commercially attractive town planning use approval.
As the managerial representative to the Board, the CEO should be aware that their organisation can be faced with having to undertake numerous governance matters from public and stakeholder consultation and leasing and tenant negotiations in addition to disposal strategy formulation, site decontamination and remediation and acquisition transaction management.
Faced with decision making in operational areas completely unrelated to the organisations core business is daunting for many CEOs but potentially more difficult for those managers working under the parameters of limited resources such as is often the case for those in the non-profit sector. However, putting this area into the ‘too hard basket’ and not facing the property portfolio dilemma will only restrict the potential growth of the valuable service offering by tying up resources with inefficient and under-performing property assets. The best approach is to undertake a holistic review of the organisation, the business model and the service delivery strategy and to develop a property strategy that will support it, not the other way around.
Russell Martoo, Managing Director – RCP Qld