Avoiding Costly Surprises When Going Global
December 10, 2005
Case categories include: International Business Operations
By Robert Sher
Today, companies no longer just compete with firms across town, but successful firms must compete with new companies – both large and small – from around the world. Venture capitalists now demand that start-ups incorporate overseas labor to leverage their investments. For many companies, going overseas can be a daunting task with hidden traps.
San Jose-based AsiaPac International was founded by global real estate expert J. Patrick Moultrup in 2001 to help companies specifically compete globally. According to Mr. Moultrup, the legal, financial and real estate regulations and practices in Asia are different than in the U.S. or Europe; and these regulations and practices vary by country. As a result, many companies often discover what works in the U.S. does not necessarily apply in these markets. These differences can be expensive.
An expensive lesson
After signing 30 leases for facilities in Asia, the CFO of a major Silicon Valley firm thought he’d hire Mr. Moultrup of AsiaPac International to give six of them the once-over. The CFO was expecting an all-clear, since the leases were in English and he had read them thoroughly. Unfortunately, it was not that simple.
Despite the CFO’s thorough review process, including a legal review, AsiaPac’s review revealed that CFO had fallen victim to a number of “common” traps. In this case, Mr. Moultrup had to tell the CFO that his leases contained a “restoration” clause, which meant that 50 to 70% of the security deposit would never come back. The leases had given the landlord the unilateral right to offset the deposit for all costs (at inflated prices) of tearing out all the tenant improvements made by the CFO’s firm. In practice this generally means that most of the deposit never returns. This trap could also have embarrassing financial reporting and potential Sarbanes Oxley implications because a large part of the “deposits” in this case should have been classified on the company’s balance sheet as a “prepaid expense” and amortized.
In the U.S., many contracts don’t say it all either. But we’ve built up experience about what really happens, and when a contract is vague, we know American common law kicks in. We also know that legislation, over the years, reigned in the scams that plagued consumers and businesses. But all this isn’t necessarily true abroad. Foreign law is just that: Foreign. Foreign businesses – especially those that are not looking for long-term relationships (i.e., landlords) – omit some things from the contract that they know will benefit them in the future. They feel no compunction to put your downside in bold lettering.
Having seen it many times, Mr. Moultrup explains the landlord’s game. At the end of the lease term, the CFO would give notice. He computed the cost of moving versus the 15% rate increase the landlord wanted, and built that into his budget. The landlord accepts the notice, and sends the estimate for the “restoration.” For a million dollar deposit, it would be $500,000 to $700,000. Shocked, the CFO would learn that he is going to lose this fight, and can’t afford it. So he begs the landlord to allow him to stay, which the landlord does for a 25% rate increase since he had a lease from a new tenant on the table for that price (sure!). The nasty restoration clause stays there, guaranteeing a repeat of this scenario in 36 months. Ouch.
How it usually goes wrong
So how do large companies and start ups fail to recognize traps like the restoration clause? The reasons vary, but may include 1) inexperience operating within a country; 2) lack of knowledgeable in-house staff due to corporate downsizing and outsourcing; 3) using U.S.-based advisors (i.e., lawyers, brokers, consultants, etc.) without the proper local expertise; 4) using local advisors who accept (“business as usual” at the U.S. company’s expense) and do not explain to their U.S. clients the differences and, more importantly, the implications between U.S. and local business regulations and practices; 5) use of local brokers who receive most of their income from landlords, versus a true tenant-rep firm; and 6) the ongoing battle between headquarters-based and local field personnel who have different perspectives and agendas.
Mr. Moultrup suggests that you make sure you have the right representation – someone who is knowledgeable about local markets and has your interest in mind. For real estate issues, that means you should work with a true tenant-rep firm, one that does not receive income from landlords. Mr. Moultrup also recommends that companies negotiate and specifically address issues that often give rise to problems. Because leases are typically governed by the local language document, not the English version, have your foreign leases independently translated. Too many companies make business decisions on incomplete lease abstracts that fail to include all key lease terms and conditions.
• Don’t assume U.S. business practices and protections apply overseas.
• Demand representation from someone who is knowledgeable about local markets and has your interests in mind.
• On real estate issues, work with a true tenant-rep firm and beware of traps such as the restoration clause.
Robert Sher is principal of CEO to CEO, specializing in assisting CEOs and business leaders as they navigate critical passages. He is the author of The Feel of the Deal; How I Built a Business through Acquisitions. He may be reached at Robert@ceotoceo.biz.
Company and Case Facts:
Company: AsiaPac International
Person: J. Patrick Moultrup, President and CEO
Alliance Member since: 2005
Business Founded: 2001
Product: Global Real Estate Consulting
Typical Customer: Tenants seeking expert representation for real estate needs in Asia & Latin America
Written: December, 2005
Address: AsiaPac International, 2540 N. First Street, Suite 102, San Jose, CA 95131
Web Site: www.asiapacintl.com