The High Cost of Real Estate Mistakes

Real Estate missteps can be very costly. Many never come to light. Here is one way:

A major department store had an option to renew a downtown store lease. The option was granted when the store first occupied the space in a difficult market. The landlord agreed to the option provision to entice the tenant to take space in their building rather than one down the street. The landlord landed a paying, credit worthy, tenant. It provided for a renewal rent in line with the rate prevailing at the time the tenant moved in. In the meantime rents in the CBD of that city climbed substantially. The head office did not exercise the option before the date required.

The tenant put itself in the position of having to negotiate a new lease. There were no alternate spaces available nearby. The retailer had to decide to pay up or close the store. They agreed to a rent that was $25 million more than exercising the option would have been. The option was not carried on the books of the firm as an obligation or an asset. It did not appear on any management dashboard. The Real Estate department never told management there was an option. It never appeared in the 10k as a footnote. Management did not allocate resources to fix the problem. Nobody lost their job. No Six Sigma team was deployed to reduce Real Estate errors. This costly lesson never resulted in any improvement to processes.

The only ones who knew what happened were the head of the Real Estate department and a few of the Landlord's friends..

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