From the November 2010 issue of Treasury & Risk magazine

Silver AHA Winner in Financial Risk Management

Just as New York City is faring better than Las Vegas when it comes to real estate values, some countries in Microsoft's real estate portfolio are riskier than others.

During the recent downturn, the technology giant's treasury revisited its methodology for evaluating projects in its roughly $7 billion real estate portfolio. Microsoft's real estate and facilities team had been determining the corporate discount rates to use to buy or lease buildings, says Joel Combs, group manager in Microsoft's treasury.

The company typically buys most of its new facilities, and it became concerned that the discount rates did not fully reflect the riskiness of each project, given the perils confronting different areas, from political instability to the real estate ramifications of new laws or taxes. "We have specific cost of capital protocols for every business unit, but the real estate unit for some reason never did," Combs explains.

The initial analysis of a project often used a discount rate below Microsoft's cost of capital, so the net present value of the project looked encouraging until the discount rate was adjusted to account for higher country risk. "It would go up for approval and we'd say, 'You can't use that rate,'" says Combs. "Obviously, this creates disagreement and eats up time. We wanted more consistency in how these projects were evaluated from a discount-rate standpoint."

Treasury partnered with the real estate team to create a base discount rate for real estate transactions. The groups used benchmark data from a peer group of commercial and data center real estate companies that were geographically weighted. They utilized forward-looking betas that questioned real estate values over the last few years, and delevered the peer group data and then the results from the market risk premium to determine the base discount rate.

The teams scaled the market risk premium across different countries using IHS Global Insight Country Risk Ratings. The result? "We've now got a consistent and fair approach for evaluating real estate proposals on a global basis," says Combs. "It's an agreed-upon process that decreases indecision and disagreement."


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