Organizations of all stripes - utilities, manufacturers, state and federal agencies, etc. - regularly find themselves needing to reevaluate the nature of their real estate holdings. Perhaps there's been a takeover, and there are now redundant facilities to maintain and operate. Or maybe the current facilities have simply become outmoded, and it has been deemed more cost effective to sell them off rather than remodel them. Or possibly the economic climate has changed, and management wants to free the money currently tied up in property. However it happens, the decision is made to dispose of the holdings, and the sooner, the better.
According to the Bureau of Labor Statistics many of the 268,000 administrative services managers in the United States wrestle with this very decision as part of their job descriptions, and the number of properties they manage - and dollar value associated with them - is so large that it is critical these managers find efficient, effective means of bringing the issue to closure. For example, experts estimate the state of California alone owns more than $1 billion worth of surplus property and recent research has found that 55% of UK corporate occupiers have surplus properties in their portfolios.  Though no similar figure is available for other regions, it stands to reason that the case here in the United States and in New England is quite similar, and observers believe it to be.
Case in Point: Mass. Division of Capital Asset Management
One notable local example involved the Commonwealth of Massachusetts' Division of Capital Asset Management (DCAM), which recently found itself needing to shed significant amounts of real estate but opted not to follow a conventional RFP- or broker-centered route. Instead, it utilized the auction as its disposal technique and realized excellent results as a consequence.
DCAM provides professional and comprehensive services to state agencies in the fields of public-building design, construction, maintenance, and real estate. Among its responsibilities is the maintenance and disposal of surplus property, a task the agency itself notes as being "time consuming and complex."
In 2003, the organization benefited from legislation passed to accelerate the disposition of surplus state property. Known as Section 548, the new legislation eliminated two steps that had historically slowed its progress in this regard:
Significantly, the bill also authorized DCAM to use absolute auctions as a method of sale, an approach technique the agency knew would attract buyers, move property, and boost revenue. "Absolute auctions are based on the American free-market principle that things are worth what people will pay for them," said auctioneer Jerry Manning, CEO of JJManning Auctioneers (Yarmouthport, MA) and a primary facilitator of the DCAM initiative. "The certainty that the highest bidder takes the prize generally doubles or triples the number of qualified bidders that attend, and the resulting competition can add 10% to 20% to the purchase price." DCAM found this to be so, and during the two years the legislation was in effect, the agency provided dramatic proof of just how effective auctions can be when time, efficiency, and results are primary considerations.
The Appeal of the Auction: Speed, Simplicity, and Guaranteed Market Value
'The elements that led to DCAM's successes are present in every auction," said JJManning president Justin Manning. "These include speed, simplicity, and the ability to instantly command market value, and DCAM benefited greatly from all three."
Speed is important because of the ongoing need to pay carrying costs for as long as the surplus property remains on the books. Obviously, the longer it takes to dispose of a property, the longer money must be spent toward such ongoing expenses as maintenance, insurance, and, in non-government contexts, taxes, and perhaps mortgage payments as well. So it is critical that the time to sale be as short as possible.
This need for speed is one reason Section 548 eliminated the local community option, for every month the local funds were not forthcoming was another month the state was writing checks. But the real enabler was the ability DCAM received to sell property at auctions, which can be scheduled, promoted, and completed according to a tight and controllable timeline. This stands in stark contrast to sales via RFP or through conventional brokers, both of which may require months of paperwork and/or showings before a buyer even can be identified.
An auction's fundamental simplicity also contributes to its speed, for properties sold this way are sold as-is, and bidders typically are required to tender a non-refundable deposit equal to 10% of the purchase price. This helps weed out participants who may not be serious about buying and prevents contingencies relating to property improvement from slowing or killing a sale. According to Jerry Manning, some 98% of deals made at auction therefore close successfully; by contrast, "traditional brokers would be excited with a 50% or 60% closing rate," he said. In DCAM's case, the relative certainty of the outcome meant that deals generally were completed in 60 days from auction.
Another of the great benefits of going the auction route is that putting a property on the fast-track to disposal need not require a reduction in price. Real estate brokers often use the phrase "priced to move" when seeking a rapid sale because they know that a low price will make it easier for someone to buy. What they don't know, however, is just how low to set that price before they end up leaving significant money on the table - or conversely, just how high that price could be before it begins to chase prospective buyers away.
An auction eliminates this uncertainty because it results in a sale that by its very definition is at market value, i.e., the amount that someone is willing to pay at a given moment in time. In some cases, a reserve is set to ensure the winning bid is at least of a certain amount. But beyond that, the largest offer takes the prize, and no questions remain about whether more money could have been made.
DCAM's Happy Outcome
By working with an experienced auction house like JJManning, DCAM was able to attract and qualify more bidders than it would have had it followed a traditional RFP or broker-led process. In fact, two RFPs were withdrawn because the bids they contained were below the appraised value. The properties then went to auction, and the bids received there exceeded those attracted by the RFP.
Indicative of DCAM's success was the property at 61 Walnut Street in Lexington, Mass. Containing 6.92 acres of zoned R-O single family land, it sold at absolute auction for far more money than would have been realized through a broker-facilitated sale. The winning bidder was an investor who went head to head with a developer who needed the land for access to an adjacent property he was developing. The private investor eventually won the contest, and DCAM reaped the benefits of the competition by receiving $5.61 million for the property, a figure that was twice the pre-auction estimate and significantly higher than any listing price a real estate broker would have set if pursuing a conventional sale.
In the end, DCAM was able to leverage its absolute auctions to great effect, generating more than $41.5 million in real estate sales during the two years Section 548 was in force. By contrast, only $5 million worth of property was sold in the two years prior. Further, said Metropolitan Area Planning Council spokesperson Andrea Hurwitz, "the state has not disposed of a single new surplus property [and] not one dollar of revenue has been generated" since the measure was sunsetted, at which time DCAM lost the ability to sell at auction.
These facts make it clear that auctions were fundamental to DCAM's success, and a move is currently afoot in the Massachusetts Legislature to restore this capability. Of course, auctions are always available to commercial concerns, and many already take this route when disposing of unwanted holdings. With DCAM as a beacon and the local real estate market softening, it only makes sense that more will soon follow suit.
Bureau of Labor Statistics, U.S. Department of Labor, Occupational Outlook Handbook, 2006-07 Edition, Administrative Services Managers; on the Internet at http://www.bls.gov/oco/ocos002.htm