The Grey Area

I thought about running for Governor of California. I figured, who better to send to Sacramento than someone who understands best practices, working with transition timelines and building client relationships? I thought about it then I decided against it.By not running, I was able to reduce my ramp- up time for learning the intricacies of California politics to zero and I saved $3,500 bucks by not filing an application. If my year-end performance evaluation looks at cost savings and time reduction, can I legitimately cite these as successes? Preposterous, you say. Yet, many corporate real estate managers operate in a similar gray area when creating performance priorities for their employees. It goes by several names–sandbagging comes to mind–but the fact remains that true performance in anything from CRE to governing the state of California requires action-oriented goals, accountability, and strict evaluation methods.Since I’m not a politician, let’s focus on CRE–specifically the disposition of owned property. When I was on the corporate side, I worked with brokers to set up incentive-based pay that kept them working in my best interest. It was a fairly simple formula and popular enough with my management for me to use it on three separate multi-million dollar transactions. Here’s how it works: First, establish the market value of the property via an appraisal or Broker Opinion of Value. While this will give you a value based on highest and best use, you will have to set a target price based on any extenuating circumstances such as environmental contamination, deed restrictions and market velocity.Next, determine your threshold for selling the property that garners the minimum commission. (My minimum commission was 3%.)Finally, agree on a full commission for a “home run.” Typically, I would give the broker a full 5% commission on a home-run deal. Build the model to reward the broker for meeting time constraints and price goals. Here’s how: On one transaction, the appraised value of the property came back at $4.5 million. We deducted a half million based on many environmental factors, such as asbestos abatement, that we were not going to cure but had priced out. That gave us a fair-value price of $4 million. We assigned a threshold of $3.5 million. Thus, the broker commission was set at 3% for a sale at $3.5 million. That was the amount we were pre-approved by management to sell the property. The listing price was set equal to the appraised value. There was no incremental commission adjustment between $3.5 million and $4 million, but for every dollar over $4 million, the broker made 11%. In addition, this 11% adjustment was reduced by a certain factor if the property was not in escrow within three months after listing and further reduced every month after that. By doing this, a sale at $4 million earned a 4% commission and a sale at $4.5 million earned a 5% commission.Now, assign a weighting to these goals: First is the price target, and second the timing constraint. There’s no gray area in the above model–the broker either passes or fails the hurdles and, as the CRE manager, you’re in control. In my example, if the broker’s performance was not up to snuff, in the timeframe we mutually agreed, I had the right to recall the broker and replace him or her with someone else. It’s too late for me to run in this election, but perhaps some of the candidates in the California race would like to incorporate this model into their platform. Fail, and it’s “Hasta la vista, baby.” Succeed and you earn the right to say, “I’ll be back.”Vik Bangia ([email protected]) is a director in CB Richard Ellis’ global corporate services transaction management group.