Among the plain excesses are:

• $106,859 for a “Private Dining Room”, including
  • $36,904 for “6 chairs”
  • $3,072 for “Labor to Reupholster chairs”
  • $3,579 for “Dining room chairs”
• $35,114 for a “Commode on legs”
• $87,783 for a “Pair of guest chairs” in “John’s Office” (not including >$80k for various other chairs throughout the suite, and >$43k for the dining room chairs mentioned above)
• $68,178 for a “19th C Credenza”
• $16,020 for a “Custom Coffee Table”
• $3,917 for “Light Bulbs & Ext. Cords”
• $1,404 for “Parchment waste can” (a la Tyco’s Kozlowski)

To anyone with project audit experience, the multiple (apparently redundant) lines for dining room chairs would be one of many red flags.  Even if the work and costs were justified, the descriptions would have been clarified.  This is one of the clear indicators that even basic project oversight or controllership was absent.  Further, there is no line indicating designer Michael S. Smith‘s management fee, which indicates he may have profited through markups on the furniture/supplier items; a blatant violation of most modern purchasing programs.

But there was a curious omission in the documents leaked to Gasparino.  While they include complete detail for the $837,698 of costs related to Smith (including all of the above items), there is only a summary line for the other major bucket: $385,111 for “ML Project Services” (including construction, architectural & engineering fees, and non-capital).  Considering construction work was limited (a few new electrical fixtures?), this is an equally astounding figure for a refresh & decor project.

Presumably “ML Project Services” represents the PM group within Merrill Lynch Global Corporate Services.  (Whether this is just an internal moniker / cost center or a full legal entity remains a mystery – one that could have its own story.)  But since the documents surely leaked through someone inside (or near) ML GCS, it seems that Deep Throat didn’t want to expose their own group’s largesse along with Thain and designer Smith.

Clearly, controlling capital spending on a high-profile executive project is a difficult task, requiring incredible backbone.  But corporate real estate executives are nonetheless duty-bound by fiduciary obligations to the corporation.  In fact, it may be argued that a proactive CRE/CS team would protect busy executives like Thain, who are not specialists in office decor projects.  The evidence in this case suggests complete passivity, and perhaps additional culpability.

In its Autumn 2008 Survey of CRE managers, London-based GVA Grimley reports significant pessimism and plans for portfolio contraction across the board, particularly in leisure (hotels & restaurants), retail, and financial services sectors. 

Among the findings, personnel cuts have left 50% of the corporate real estate users with surplus property, and 40% sitting on completely vacant sites.  Rather than hold the space for better times (e.g. subleasing), a strong C-level emphasis on cost control and profitability has over half of all firms aiming to downsize their portfolios by up to 25% in the coming months, mainly through lease terminations (“lease breaks” to the Brits) and non-renewals.  The survey was conducted largely before the dramatic economic problems of the past month.

The complete executive summary points out:

• Business confidence has continued to fall since the Winter 2007 survey.

• Significant job losses are expected across many sectors as output expectations have weakened.

• Occupier demand for property has eased in the last six months and looks set to fall in the next six months.

• The majority of sectors are reporting significant effects from the credit squeeze and the economic slowdown.

• Over half of Corporate Occupiers would ideally shed up to a quarter of their leases.

• Corporate Occupiers are intending to exercise a significant number of breaks and not renew leases expiries.

• Half of all Corporate Occupiers are carrying surplus property, and over three quarters of those have vacant property.

• The changes to vacant rates are having the biggest impact on medium size firms and those in the engineering and transport sectors.

• Business is being driven by profitability and reducing costs.

• Property decision making is based on cost reduction and the contraction or expansion of the business.

Although the report contained nary a positive remark, there is always the implicit fact that “Negative Absorption Means Opportunity” for corporate real estate professionals, as discussed here a short time ago.  For those who are poised to grow (or just renew), now is the time to get out there, push great lease deals, and “go long”.

The Confederation of British Industry (CBI) co-publishes the survey with GVA Grimley.

Some may recall that late-2004 to mid-2005 was a bit of a watershed period in this area.  With credit plentiful, the period saw a rush on large ground-up single-tenant projects, sale-leaseback arrangements, and generous landlord TI financing.  Major corporations suddenly woke up and started asking about proper treatment for all of this off balance sheet capital being assumed on their behalf.  After a few requests for interpretations and earnings restatements by public companies, SEC Chief Accountant Donald Nicolaisen set the record straight on several issues, including the treatment of tenant improvement allowances, free or abated rent periods, and other landlord concessions or inducements.

I am always a fan of going straight to the source to understand issues, particularly government policies and guidelines.  In that spirit, I first reccomend a thorough reading of the Nicolaisen staff letter itself, as posted online by the SEC.  For comprehensive background and analysis, the best article I have found is one called “Increased Clarity in Accounting for Operating Leases“, authored by James M. Fornaro and Rita J. Buttermilch and published by the CPA Journal.

For the corporate real estate professional who wants to be fully educated on the issue, below is a tour de force of the materials you should know inside-out.  For any of the FASB documents, my advice is to go directly to the FASB library and download the most recent (“as amended”) PDF version.

SFAS 13 (Accounting for Leases)

SFAS 66 (Accounting for Sales of Real Estate)

SFAS 91 (Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases—an amendment of FASB Statements No. 13, 60, and 65 and a rescission of FASB Statement No. 17)

SFAS 98 (Sale-Leaseback Transactions Involving Real Estate, Sales-Type Leases of Real Estate, Definition of the Lease Term, and Initial Direct Costs of Direct Financing Leases—an amendment of FASB Statements No. 13, 66, and 91 and a rescission of FASB Statement No. 26 and Technical Bulletin No. 79-11)

TB 85-3 (Accounting for Operating Leases with Scheduled Rent Increases)

TB 88-1 (Issues Relating to Accounting for Leases)

FSP FAS 13-1 (Accounting for Rental Costs Incurred during a Construction Period)

EITF 05-3 (Accounting for Rental Costs Incurred during the Construction Period)

EITF 97-11 (Accounting for Internal Costs Relating to Real Estate Property Acquisitions)

In future articles, we’ll try to discuss some of these in greater detail, along with discussion and analysis concerning practical corporate compliance.