Allan E. Wampler, President,
Synergy Real Estate Corp.
In the brave new world of deregulation, many electric utilities have not formulated corporate strategies to convert the “hidden” value in their underutilized real estate assets into a corporate growth platform. To get the most from their real estate assets, utilities must develop a sound plan and execute it.
Senior management and the board of directors should base their decisions exclusively on how real estate assets can best help the company meet its strategic objectives. Immediately after opting to pursue a real estate strategy, the company should implement it and stay the course for the long term. Inconsistent application of a real estate strategy-or no plan at all-dooms from Day One a utility’s efforts to use real estate as a revenue generator.
A house divided
If a utility does a market analysis of real estate opportunities within its portfolio of holdings and identifies opportunities to use its land assets as a growth platform, the utility must take a more entrepreneurial approach toward development and abandon the traditional approach of managing properties.
Real estate-related efforts should be coordinated between the traditional and new development arms of the business. Both functions should also be separated to give people in two distinct cultures an opportunity to reach their full potential. Traditional land management activities are usually risk-averse. In contrast, the real estate development field is typified by an entrepreneurial income platform in a cyclical business where practitioners have high tolerance for risk and thrive on “pay-for-performance” compensation plans.
To further maintain the necessary division between the utility’s traditional and new real estate arms, it is helpful if the latter employs its own support staff and consultants (e.g., law, finance, real estate, engineering). Likewise, the land management group must maintain control of the custodial work for real estate assets. The two real estate groups, however, should collaborate between their respective professional staffs in defined efforts to maximize shareholder value. To ensure a cooperative and efficient corporate culture, top and senior management must develop and implement policies that foster collaboration.
Creating a real estate strategy in-house is often expensive, time-consuming and lacking in the necessary “fresh perspectives” that help to coordinate activities between traditional and new real estate divisions. By outsourcing real estate strategy development, a utility can achieve the same-or superior-results at a lower cost in less time than it could by keeping such strategic planning internal.
Regardless of whether a power generation company decides to sell its real estate assets or allows them to be developed for cash flow and long-term appreciation, the first step in arriving at an informed decision is to inventory the real estate portfolio and identify development opportunities.
The real estate advantage
Through ownership of real estate, a utility can: 1) create a growth platform from which to attract more power customers; 2) improve industry observers’ and shareholders’ opinions of the company; 3) improve public opinion; 4) increase visibility; and 5) increase revenue.
By leveraging real estate assets and marketplace knowledge gleaned from being informed of development plans in their early stages, a utility can create a profitable revenue stream to expand its portfolio and contribute to the growth of other businesses within the corporation.
This proven, autonomous earnings platform makes utilities more attractive to industry analysts, which can increase shareholder value as long as risk is managed well. A proven strategy of increasing returns while managing risk is accomplished by joint development ventures with third-party real estate developers who use their credit, capital and expertise to create a successful project in which they share the rewards with the utility.
The model for success
Contrary to popular belief, there is a definitive real estate business model that has consistently proven to be successful for utility companies. The components of the model are:
- Articulating a vision from senior management that real estate income development is a top priority.
- Creating a real estate effort that has the freedom and the necessary incentives to execute the vision with clear support from senior management.
- Inventorying real estate assets, identifying development opportunities through market studies within the portfolio and analyzing their potential feasibility.
- Establishing tangible, measurable financial goals that are applicable to the real estate business
- Marketing sites to maximize return-on-investment.
- Cultivating joint development ventures.
- Lowering the utility’s risk in real estate deals.
- Structuring compensation packages that are performance-based at least partially, and that are comparable to accepted real estate industry payment formulas.
If utilities executives follow this model, they are likely to create revenue streams that boost shareholder value, public opinion and their own job security-an impressive trifecta in these increasingly uncertain times.
Wampler is president of Synergy Real Estate Corp., a real estate development and consulting firm that works extensively with utilities. He is the former Director of Economic Development for Allegheny County (Pittsburgh), Penn. He may be reached via phone at 412-338-4600 or e-mail: firstname.lastname@example.org. Visit www.synergyre.com for additional information.