The following is a guest post from Todd Carpenter, managing principal of Baker Tilly’s development and community advisory practice. Opinions are the author’s own.
Traditionally, chief financial officers were primarily responsible for managing a company’s finances. However, recent years have seen a surprising shift in this role. Today, CFOs act as strategic partners, managing changing business and operating dynamics.
This shift is driven by several factors, including the pandemic, which forced many businesses to reevaluate their operations, including their office spaces and real estate. As a result, handling real estate and infrastructure decisions has become a new challenge for modern CFOs.
Todd Carpenter
Permission granted by Todd Carpenter
The changing role of CFOs has been a consistent transition over time that now encompasses many responsibilities outside of typical financial considerations. For middle-market companies, introducing real estate and infrastructure as a CFO responsibility makes sense due to the significant financial implications of these decisions. These companies often lack the resources to have dedicated personnel for real estate and infrastructure decisions, leaving CFOs to take on these tasks.
Middle market companies, particularly in the manufacturing and industrial sectors, require CFOs to make complex decisions in a post-pandemic world, factoring in supply chain and inflation challenges.
Tax and financial considerations
Real estate decisions come with numerous considerations, such as tax implications, housing and living needs and supply chain evaluations. One of the most complicated factors is tax implications. CFOs must pay close attention to local tax incentives, which can have a direct impact on a company’s operating costs, profitability, and long-term financial outlook. Governments often offer tax incentives to encourage business investment in certain areas and help economic and community development.
Competitive tax incentives can also make one location much more attractive than another. For example, we worked with a client who was looking to build a new office in a metropolitan area. Through a detailed site selection analysis, we learned that they could save about $5 million if they chose to build across the street from their original selection because of local tax incentives. Because we performed a thorough evaluation, the client was able to make a smart financial decision without having to compromise on the location of their new office.
Tax increment financing (TIF) also comes into play in these decisions. TIF is a public financing method that uses future property tax revenue to fund community improvement projects in a designated area with the overall goal to stimulate economic development. Properties in a TIF district are established as the base value and any growth over this base value generates tax increment that is collected in a special fund. The municipality can then use these funds to pay for public or private projects such as infrastructure, industrial development or affordable housing.
Other key real estate priorities
In addition to tax and financial considerations, housing availability for employees is crucial when selecting a new location. Locations should be near a variety of housing options and be commute-accessible across the company. In industries such as healthcare or industrial and manufacturing, where more employees come into the facility every day, there needs to be a variety of workforce housing available nearby. This could be in the form of apartments, condominiums, single-family homes or subsidized housing.
CFOs in these industries should also consider supply chain challenges when selecting facility locations. For example, in the industrial and manufacturing industry, easy access to freeways, railroads and shipping ports are crucial to ensure timely delivery and eliminate additional delays. The pandemic has shown that supply chain mishaps can result in increased costs, production delays, and strained supplier relationships.
The evolving role of CFOs has put these leaders in positions where they must become skilled in a variety of topics within their organizations. While CFOs were mindful of real estate decisions before 2020, the pandemic has necessitated a more detailed evaluation of office and facility locations and budgets.
For a successful real estate and infrastructure strategy, CFOs need to align their company priorities and financial bandwidth when selecting new office or facility locations or engaging in expansion discussions.