Leasehold Property: Financial Constraints and Sustainability Factors - Coursework Example

Executive Summary Leasehold property is a type of financing followed by many firms in order to develop the financial positioning of the company. Leasehold properties help in developing the financial image of the company and helps in sufficing its financial needs to a greater extent. However, it has been largely noted that the leasehold financing needs to be planned in order to prevent the company from facing financial backlog and cost burden. Similarly, in the given case, the company has been carrying its cost burden owing to mismanagement of its leasehold property. It is thus suggestive that the company needs to reschedule its property portfolio in order to develop their financial image and enhance their productivity. Table of Contents Executive Summary 1 Overview 3 Assumptions 3 Analysis of Real Estate Issues 5 Financial Constraints 5 Location-Related Factors 6 Sustainability Factors 7 Condition Factors 7 Analysis of Business Issues 8 Functional Dependency 8 Capacity and Reliance 9 Labour Availability 9 Analysis of Facilities Management Issues 10 Existing Utilisation Ratios 10 Existing Working Practices 10 Existing Facilities Management Resources 11 Financial Performance 11 Consolidation 12 Conclusions 13 References 15 Overview From the case scenario provided, it is observable that the electronics manufacturer has been operating through its four leasehold properties. The manufacturing and the logistics centres are located in the leasehold location of the company, wherein the leasehold properties form a part of the business. The company has its manufacturing sector outsourced in four locations, including Warrington, Derby, Leicester and Reading. This manufacturing sector has been facilitating the company’s business in the line of its present operations. However, the review of the leasehold properties of the company suggested that it has been carrying an extra 25% property cost over its competitors. This extra cost of property is actually creating a financial stress on the company to bring out a line of new products, which has underlying investments into the new plants. Furthermore, with a gearing ratio of 1:1.4, the Managing Director is not very much apprehensive on further borrowings. With this concern, the discussion henceforth analyses the possible issues related with lease with due consideration to its impacts on the debt-equity ratio of the company and thereafter, recommend processes that would help the company to reduce its property cost. Assumptions The review of the case study suggests that the company needs to redevelop its property portfolio as the present leasehold properties have been increasing the cost burden of the company. As per the case scenario, the company is quite likely to have incurred extra costs over its competitors. Hence, it can be assumed that the company was not able to assess the leasehold properties, as majority of those could not be utilised in full swing. This led to additional cost burden for the company and increased its cost of production leading to lower bargaining power on price. Furthermore, taking the assumption that the company was operating in areas that were less labour intensive, it can also be argued as a major contributor to have led to the increase of its cost burden. Besides the stated issues, the company can also be assumed to have faced problems related to transportation and poor infrastructure of the regions wherein its properties were located. Leasehold Property Details Warrington: The site location is at one of the prime areas of Warrington where it has huge scope to prosper Hull: it is a freehold property hence does not requires to be considered for lease planning Derby: is located in an isolated area which needs to be reconsidered for leasing Leicester: Is located in one of the prime location and the company has only 2 years left for the lease Reading: has a long tenure left for the lease Analysis of Real Estate Issues Corporate real estate has been one of the major assets of the organisation. The management accordingly followed separate patterns for acquiring assets to improve its financial stability. In this respect, leasehold assets can be identified as one form of asset acquisition that prevented the company from investing severely into acquiring the land, but provides with the ownership of the land for certain tenure, in a risk-controlled manner. This is beneficial for the company, as it does not have to invest into the land or building but can carry out its operations in a full-fledged way. However, there have been several factors leading company to make a decision about taking a lease instead of buying or taking a rent. Notably, there are several issues associated with leasing by a company, which can be identified as financial constraints, location-related constraints as well as the sustainability factors, as have been discussed below. Financial Constraints Observably, the company is operating majorly through leasing its manufacturing or operational centres, which has led it to vulnerable risks of falling into financial constraints. A similar aspect have been noted with regard to many other companies operating through leasing, wherein, a long-term perspective revealed that it are more vulnerable to the financial risks of investing in the asymmetric information related to leasing. Contextually, the time value of money plays a pivotal role in leasing (Slotty, 2009). It is important for the company to analyse the different financial constraints as well as its opportunity cost available from other modes of acquisition and then invests into the lease. To be noted in this context, the company’s decision to buy or to lease is highly dependent on the time value of money the company is likely to gain from investing in buying a particular property or to lease the same (Slotty, 2009). The analysis of the case herewith suggests that different leasing of the property undertaken by the company is having a negative impact on its long-term financial position. Location-Related Factors Selection of a particular location is more than important for an organisation, which plays a pivotal role to enhance its productivity. Location selection is required to be conducted in such a way that it facilitates the company’s transportation as well as other manufacturing needs. Furthermore, the location-related factors even depict the company’s ability to maintain its competitive edge. It is in this context that when deciding about leasing or buying any property, the location-related factors act with major importance. However, there are certain lease contracts that prevent the lease taker from putting on rent, which prevents the lease taker from utilising the infrastructure effectively that would otherwise help them attain an opportunity cost (Ghyoot, 2003). In relation to the case, it has been observed that the electronic company has not been able to utilise most of its leasehold properties in an efficient manner. Moreover, the location of the different manufacturing areas, are quiet widespread and has been affecting the company’s operational costs majorly that has further been affecting the company’s financial development largely. Hence, the location of the company in such a haphazard manner has been majorly affecting the different operational development that could be incorporated to make it operate better. This has also been observed that the different production related operations were taking place in different sites this increased the cost of operation as well as the cost of production. Sustainability Factors From a general perspective, it is often argued that sustainability factors help in attaining higher degree of productivity of the company. The sustainable factors include a strategy that would help in developing a cost effective process to increase its overall productivity. Undoubtedly, this is one of the foremost concerns that the company should be considering, while taking on properties for lease. Consideration to sustainability factors may further help the company to develop its image in the society and help it perform better and more effectively. The company, while selecting a lease location, must therefore be considering the factors like the availability of proper power supply that would help it to run in a cost savvy way. Moreover, the legal bindings of the property should be judged in order to develop a proper operational level for the company so that it can perform better, contributing to the overall sustainability of the company and offering it with a competitive edge (Jones Lang Lasalle, 2011). The company’s level of sustainability was highly hampered owing to the lack of proper infrastructural as well as operational support in all its manufacturing units. Condition Factors The conditional factors or the operational factors involve different issues that are likely to affect the production of the company. This is also observed that the conditional factors should be considered parallel to the review of the different restructuring requirement as well as operational efficiency that would help in enhancing the efficiency and productivity of the company. To be precise, conditional factors commonly involve the maintenance as well as the additional operations that would help in developing a proper competitive position for the company to maintain its productivity at the given level of profitability. The company should also be comparing the opportunity cost that needs to be involved in order to develop the locations in such a manner that would increase its productivity (Pucciarelli, 2008). Contextually, the review of the case suggests that the operational factors remained noticed by the management, as the plants lacked proper functioning in full capacity. The case scenario herewith revealed that only one of these plants was operating in 100% capacity, whereas the others were operating either on 50% or 75% capacity, leaving the other areas unutilised. Hence, it can be argued that the conditional factors of the plants were not properly judged. Additionally, not all the leases were provided with a sub-let facility that prevented the company from utilising the operational areas in an effective way. Analysis of Business Issues Functional Dependency The functional dependency of a production department is often observed to have an adverse effect on developing the productivity of the business. It is noteworthy in the context that the manufacturing sectors are highly dependent on the functional level of the sites. In addition, the integrated system of the business that has distributed its marketing as well as the other sectors has increased its dependency on the different branches of operations performed by the company. This is observed that the different sectors dealing with the production of the different parts and procurement was located in two separate regions this made the production system prolonged. Furthermore, the increased dependency has also developed a larger amount of interdependency among the branches that has in turn developed greater complication into the system and has made it difficult for business continuity (Longenecker & et. al., 2009; Thomas, 2003). Capacity and Reliance Capacity and reliance of the site taken on lease acts with a pivotal role to develop the productivity of any given business, as the productive capacity of the business is majorly dependent on the capacity of the site to support such development. A company can only be successful with expansion if the site, where it has been operating, provides with adequate support to facilitate the expansion. The manufacturing sector also plays an important role towards developing the business and facilitating expansion of business (Longenecker & et. al., 2009; Thomas, 2003). Stating precisely, the capacity and reliance of the business is majorly dependent on the capacity and reliance of the site. The capacity of the present business has a negative is not as per the requirement for productivity of the business. In the case scenario provided, the capacity of the business was highly mismanaged and underdeveloped in the sites that prevented the company from carrying out its manufacturing and procurement under the same location with sufficient smoothness. Such discrepancies have further resulted in increasing the production cost of the company and thereby, affecting the productivity of the same. Moreover, the sites could not be utilised to its full capacity, which also created a backlog for the development of a complete function that could have helped it in increasing the level of productivity. Labour Availability Availability of labour is a major constraint that plays a crucial role in deciding the capability of the company to be productive and efficient. Labour availability at different locations is a major business issue. If there has been ample availability of labour near the site, production cost is likely to decline largely that may further lead to substantial increase in the profitability of the company. The availability of skilled and unskilled labours also helps in developing the company’s productivity and effectively initiates its growth (Longenecker & et. al., 2009; Thomas, 2003). Contextually, as revealed in the case scenario, the availability of labours in the locations of manufacturing help in facilitating the productivity of the company and enhance the system of production. Furthermore, production in labour intensive areas makes labour availability easier and cheaper. This increases the effectiveness of the business and thereby, enhances the productivity of the same to a sufficient extent. Analysis of Facilities Management Issues Existing Utilisation Ratios The utilisation ratio refers to the development of the site in a manner that it can operate at its 100% capacity. Proper management of space also helps in developing the sites in a cost efficient way that would help it in further accelerating the productivity of the company. To be mentioned in this context, utilisation ratio helps in determining the opportunity costs that could be developed in order to suffice the financial needs of the business. Notably, the operational activities could also be developed by utilising the proportion of availability with the occupancy rate measure (Evans & et. al., 2007). Contextually, the case suggests that the company was not able to manage the complete space of its leased properties and hence, the company can be criticised to have been underutilising its spaces, further increasing its cost burden. Existing Working Practices Work practices have significant contribution in developing the image of the organisation and in managing the organisational operations in an efficient manner (Evans & et. al., 2007). The existing work practices that the electronic manufacturer has been maintaining, helps in developing the operational activities and analysing the same to increase its productivity. However, review of the case scenario revealed that there were certain flaws into the system too. This envisaged that the existing working practices needed to be redeveloped to stimulate advancement in practices at the workplace and increasing sustainability thereafter (Evans & et. al., 2007). Existing Facilities Management Resources Facilities management resources help in creating an environment that facilitates a cohesive system to carry out the operations of the business. The facilities management resources are also argued to help in developing the core business to attain higher productivity levels for the business (Noor & Pitt, 2010). Based on these underpinnings, the company needs to review the current facilities and resources to develop a better image and enhance its productivity at large. Furthermore, the company should also be reviewing its current facilities that are available at its plants on the different leasehold properties. Financial Performance Financial performance of the electronic manufacturer is observed to possess a severe backlog. The lease areas of the company have been suffering from different managerial, operational as well as business issues. It has also been observed that the company has been facing major financial issues for the development of its plant to facilitate production in the new line of business. Increased expense of the leased hold properties is also a major challenge for the company. Contextually, the different leasehold properties are observed to incur an elated amount of costs involved, accelerating the financial burden of the company. The company is also having a gearing ratio of 1:1.4, which suggests that the company’s equity to debt ratio is at its margin. However, if the company goes for increasing its borrowings, the gearing ratio will cross its standard limit. Furthermore, the company has been carrying an extra production cost burden of 25% that needs to be reduced to maintain its competitive advantage. Thus, the company’s financial performance could be increased only if it could reduce the amount of cost it incurs for the leasehold expense. Consolidation The electronic manufacturer is observed to possess a huge amount of investment in the different leasehold properties. Furthermore, it can also be noted that the company has not been able to successfully utilise its plants and could not effectively draw its infrastructural facilities to enhance the productivity. Furthermore, the company was observed as operating at 100% capacity only at one of its leasehold centres, whereas the others were semi utilised. The company should also be planning to incorporate its procurement as well as the production units at one place so that its extra costs for transportation can be prevented. In order to design the portfolio for property the company should be analysing the different business challenges that it is likely to face at the time of its operations. The different facility requirements as well as the infrastructural availabilities should also be analysed to develop the productivity of the organisation. The company should also be taking effective measures to utilise the sites in full capacity so that it could develop its productivity. Accordingly, to redesign the property portfolio, the company should consider continuing with the Warrington and Reading Sites for 15 and 18 years respectively, as it is located in prime areas and have a chance of prosperity. Derby should be abandoned completely, as it is less productive and located at an isolated position, which blocks the availability of labour and transport further. The production research could be shifted at the Hull branch, which is a freehold property and likewise, materials procurement can be shifted to Warrington. However, as the reading site is located in a proper area and operating at 60% capacity, the company can invest a certain amount of working capital and merge the operational as well as production work at Leicester and Reading. Hence, the new property portfolio that would be suitable is as follows. Conclusions The review of the case suggests that the company needs to develop its property portfolio in such a way that it can continue with production development at a lower cost. By reducing the 25% cost involved, the electronic manufacturer would be able to reduce its cost of production and develop its financial performance at large. The location of the manufacturing and the procurement centre are quiet far away, which justifies the fact that the amount of costs involved in transportation is quite high. It is thus suggestive that the branches need to be located in such a way that the company is able to reduce its time for production as well as the costs associated with it. Furthermore, the company needs to be developing its new plant to suffice the needs of its new consumers efficiently. The company should also be developing its new branches in labour intensive areas so that it does not face any problem regarding its labour availability. Moreover, to prevent further borrowing and thereby increasing debts, the company needs to plan to terminate one of its lease contracts and develop the same with one other running unit. This would ensure that the company can optimally utilise its available place and infrastructure. Furthermore, the company should terminate the less flexible lease contracts and merge the same with some other business unit that would reduce the costs involved in transportation and in leasing operations. This would even help in developing the company’s financial performance and thereby, ensure its higher efficiency. References Evans, K. & et. al., 2007. Improving Workplace Learning. Business & Economics. Ghyoot, V. G., 2003. The Lease V Buy Decision in Real Estate: Theory and Practice. University of South Africa, pp. 1-18. Jones Lang Lasalle, 2011. Companies Go Green to Enhance Productivity. Perspectives on Sustainability, pp. 1-3. Longenecker, J. & et. al., 2009. Small Business Management: Launching and Growing Entrepreneurial Ventures. Business & Economics. Noor, M. N. M. & Pitt, M., 2010. Defining Facilities Management (FM) In the Malaysian Perspective, European Real Estate Society, pp. 1-23. Pucciarelli, J. C., 2008. IT Leasing and Financing: Financial and Operational Factors To Consider. White Paper. [Online] Available at: http://www.dell.com/downloads/global/corporate/iar/IDC_IT_Leasing_Financing_Considerations.pdf [Assessed 29 October 2014]. SMG, 2008. Space Utilisation: Practice, Performance and Guidelines. Utilisation. [Online] Available at: http://www.smg.ac.uk/documents/utilisation.pdf [Assessed 29 October 2014]. Slotty, C. F., 2009. Financial constraints and the decision to lease– Evidence from German SME. Goethe University Frankfurt, pp. 1-25. Thomas, A. B., 2003. Controversies in Management: Issues, Debates, Answers. Business & Economics Read More