Commercial Real Estate
How commercial real estate can centralize treasury
Commercial real estate organizations have many options for consolidating their treasury, from creating shared service or regional treasury centers to establishing payment-on-behalf-of structures.
Commercial real estate organizations often start with decentralized financial operations, leaving control in the hands of specialized business segments and, for property managers, property-level staff. But as businesses grow, this decentralization can become problematic.
- With financial processes and banking decisions decentralized, it’s more difficult to maintain visibility into financial operations.
- Growth increases risk, as there are more employees who are bank signers, more employees transacting on behalf of the company and more payments being made.
Ultimately, the risk involved, the inefficiencies created and the cost of a decentralized organizational structure cause many growing organizations to rethink their status quo.
Poor controls prompt centralization
The treasurer of a large multifamily property management organization recently found a key operational account that still lists a signer who left the company seven years ago. The retail division employees responsible for the account failed to keep adequate controls, prompting the treasurer’s company to centralize its treasury team.
In addition to improving controls and visibility, commercial real estate organizations may also centralize their treasury to:
- Improve cash-flow visibility
- Maximize liquidity across the business
- Remove redundancies to improve efficiency
- Leverage scale to reduce cost and ratios
Creating a fully formed and centralized treasury function can significantly improve your company’s efficiency and controls as it grows. Options for centralization are wide ranging and include:
- Centralizing bank account management with a corporate treasury team
- Creating a shared service center
- Developing regional treasury centers
- Establishing pay-on-behalf-of structures
With complex organizational structures, including many entities with mixed ownership and operationally distinct business units, there isn’t a single path forward for commercial real estate organizations. For complex commercial real estate organizations, the best solution may be a hybrid scenario where decentralized and centralized functions collaborate and complement each other. Before you decide how much treasury centralization your company needs, examine your options, along with the scenarios that can help you the most.
Shared service centers
A shared service center (SSC) consolidates finance functions that were previously managed locally. For commercial real estate organizations, that’s often at the property or fund level. Accounts payables, accounts receivables, bank reconciliation and payroll may be part of the centralized account structure. Employees within the SSC are dedicated to finance tasks and execute them across the entire business, creating economies of scale and standardized processes.
A full SSC isn’t always the best solution for all commercial real estate organizations. For example, companies with large property management business lines may leave rent collection and cash application duties at a divisional or property level. Having local staff members who know their tenants’ circumstances can outweigh the benefits you might get from centralizing your receivables functions.
A single enterprise resource planning (ERP) system provides the ideal environment for creating an SSC, but it isn’t a requirement. Many commercial real estate organizations operate multiple ERPs, with business units such as investments and property management using niche industry software. These companies may benefit from cross-training employees on all ERPs or dividing the SSC into smaller sub teams that specialize in transacting on individual ERPs.
Location is also important when setting up an SSC. Traditionally, companies have focused on finding a location with the right balance of costs, available labor and geographic coverage. The COVID-19 pandemic prompted many companies to decentralize their teams to increase the SSC’s labor pool and coverage hours.
Regional treasury centers
Finding the right level of centralization and oversight can be difficult for companies with large international footprints. Commercial real estate organizations may find autonomous international treasury personnel best positions the company to deal with local regulatory and day-to-day business needs, market conditions and customer requirements. But this model provides limited operations control and visibility. The model can also make implementing a cohesive international treasury strategy difficult as companies add more locations.
U.S.-based control over international treasury may not provide the efficiency gains your company wants, either. International teams may still need significant in-region support, and the time differences between daily users and U.S.-based managers can complicate operations.
A regional treasury center (RTC) can help balance control and effectiveness of international treasury operations. RTCs act as in-region extensions of corporate treasury and work closely with local operating units. RTC employees often report directly into corporate treasury to ensure organizational efforts are coordinated. They also communicate between headquarters and local treasury teams.
While an RTC might not lower costs overall, it can:
- Improve cash utilization
- Decrease risks
- Improve corporate visibility into international operations
International organizations may not find a single perfect organizational structure, but RTCs can be the most effective strategy to finding a balance between costs, oversight and operational effectiveness.
One of the most sophisticated operating structures is a payments-on-behalf-of (POBO) structure. In these arrangements, a large, multi-entity organization collapses its account structure and transacts for its subsidiaries from a single legal entity. Effectively, it is an SSC transacting on behalf of a multi-entity organization, when possible through a single or limited number of bank accounts.
That reduction in the number of bank accounts is a key benefit. Moving to an all-encompassing comingled account structure can be difficult for commercial real estate organizations for several reasons:
- Large organizations often have many legal entities with differing ownership groups. This structure can complicate Know Your Customer guidelines and bank due diligence and may limit the financial products available for the organizations’ use.
- Some divisions may have agreements that don’t allow for comingling of funds with other entities. The jurisdictions of the legal entities involved also come with regulatory and tax considerations that impact their ability to participate in a complex POBO structure. For both domestic and international account rationalization, your internal legal and tax resources need to assess the viability of the pooled structure.
- It can be difficult for accounting to track and manage intercompany positions and entity-level transactions. This is exacerbated for organizations with multiple ERPs. Treasury management systems or bank solutions, such as virtual account structures, can help combat these challenges. It’s essential to plan and test processes within a proposed structure to ensure visibility and controls aren’t lost.
However, if an organization can overcome the legal barriers and technical challenges that come with transacting for multiple entities through consolidated accounts and payment files, the cost savings can be immense.
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The best path forward is often a measured approach. For example, JPMorgan Chase’s Corporate Treasury Consulting recently worked with a property manager whose first step in centralization is creating accounts payable pods, or more centralized regional accounts payable centers. The new model’s pilot is launching at a few properties. This way, the organization can stay agile and provide tangible benefits of centralization without adding significant risk.
When planning the optimal structure for your organization, you should also lean on your long-term relationships with banks and vendors. Whether they share insights or introduce you to clients who are willing to discuss their treasury centralization process, their experience can be invaluable as you evaluate options for your organization.