Avoiding the Pitfalls of Expansion

Avoiding Five Common Pitfalls of International Expansion

Real Estate Traps Often Missed by Corporations Expanding into Asia

The rationale for doing business in Asia, particularly India and China, is compelling. As with any new endeavor, doing one's homework is a prerequisite for success. The legal, financial and real estate regulations and practices are different in this region than in the U.S. or Europe; and these regulations and practices vary by country. The business environment in this dynamic region continues to change as well.

The principals at API Global have worked with hundreds of companies, ranging in size from some of the largest Fortune 500 firms to small start-up companies, to establish, expand and redeploy operations in Asia. While it would be wonderful to report that all of our clients have had completely positive experiences in Asia, many of our clients engaged us only after they discovered that they have fallen victim to one of the many "traps" involved in operating, or even exiting, an offshore facility.

Five of the more common traps we have seen and enabled multinational corporations ("MNCs") to avoid or minimize include:

  • Lease deposit problems
  • Unexpected lease terminations
  • Large unanticipated lease exit costs
  • Lack of alignment of goals
  • Lost in translation

So how do large, sophisticated and established MNCs, as well as small start-ups, fail to recognize some or most of these challenges? 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 MNC’s expense) and do not explain to their US 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 firm that receives its commission income only from tenants, i.e., a true tenant rep firm; and
  6. the ongoing battle between headquarters-based and local field personnel who have different personal and business perspectives and agendas.

How can a company avoid these traps?

The first step is to recognize how each of these problems occurs.

Unexpected lease terminations:

Many leases contain a provision that allows the landlord to terminate a lease on totally subjective grounds, e.g., the landlord’s loss of faith in the tenant’s business or the tenant’s level of trustworthiness. A landlord can use this type of clause to terminate a lease for any number of reasons, from a personal one, to an economic one, e.g. if another tenant wants the space and is willing to pay a premium.

Lost in translation:

Many companies mistakenly believe that their lease files are complete and/or that they fully understand the nature of their overseas leases. Our audits for MNCs often indicate that corporate personnel do not receive the complete lease from their overseas brokers or own personnel. This problem is exacerbated because many leases are governed by the local language version, and the English language translations MNCs receive are too frequently incomplete, missing many of the key terms and conditions—such as stating the actual usable vs. rentable square footage leased—the address of the leased space and the address of the landlord for notification purposes, and the actual lease deposit, which is also known as Key Money in Japan. This problem is further complicated because many issues covered under a lease are not included in leases in Asia, rather they are dictated by local laws or business practices that are different than those in the U.S. and often not tenant-friendly.

Lack of alignment of goals:

This problem has two major sources of conflict. Many MNCs will quickly recognize that headquarters and field personnel do not always have the same agenda. Consequently, the objectives of the company (from a corporate real estate executive’s headquarters perspective) are not always achieved as field personnel often drive and oversee the local real estate search and negotiation process. The second, and often unrecognized, challenge comes from the nature of the tenant-landlord-broker relationship. Nearly all brokerage firms in Asia receive the majority of their revenue by representing the landlord. As a result, most brokers fail to be tenant advocates and address issues like the ones mentioned above.

How can MNCs address today’s challenges as they establish, expand or redeploy operations in Asia and Latin America?

The solution involves selecting the right business partner, planning ahead to gain flexibility (and negotiating power), and, of course, through lease structuring and negotiating the best possible terms. To learn more about how API Global can help companies act quickly and successfully with their international activities, please contact us today.