Global Viewpoints

Yes, It’s Escalation Season Again!

Presented by: William H. Brownfield, CRE, CCIM, EscalationAdvisors.com

Welcome to our five-part series designed to help you have a happy and successful Escalation Season in 2010. Actually, you can probably use it for every year, since escalation processes seem to change more slowly than even Darwin could have imagined.

If you are an office building owner, manager or a property accountant, this series will help you navigate the process of (a) reconciling last year’s prepaid escalations for your property and (b) preparing this year’s pre-billed escalation estimates you will send to your tenants. Even though every lease is potentially different, follow this framework and you will improve the odds of being happy with the results.

Speaking of results, let’s start with the end in mind and ask a question:

• When all of the work is done, how will you know if you had a successful escalation season?

We believe a successful escalation season requires two outcomes:

• You correctly billed your tenants for their share of operating expenses and taxes (meaning in accordance with each tenant’s lease requirements), and …
  
• Your tenants trust your invoices enough to pay you what they owe.

So, these are the results we want you to walk away with when you’ve finished preparing, calculating and invoicing escalations for your office building. We also believe that these results can be stated as a forward-looking objective that you will likely want to achieve:

Goal: Both the tenant and the landlord know that the escalation charges and collections were done in accordance with the lease.

Ultimately, the goal of any agreement between two parties (such as a commercial lease document) is to have both parties do what they say they will do. Such a lease typically establishes many obligations for a landlord to fulfill. Tenants, on the other hand, have far fewer obligations and none more important than to pay rent that is due. Their ‘rent’ is often defined as base rent plus the tenant’s share of operating expenses and taxes (aka pro-rata share of escalations), and for the purposes of this series, we assume that you are fully aware of what your leases obligate you as the landlord to do, with respect to escalations. Our series can’t replace good reading skills and using good judgment, but it can give you a decent overview of the process you’ll want to follow.

The four parts of this series are presented in sequential order:

1. GETTING PREPARED
   This step revolves around collecting and organizing the right information. Boy Scouts, Girl Scouts and painting contractors are particularly good at this part.
   
2. DOING THE WORK
   Yes, this is the hard part, but it can be fun if you actually do it during regular working hours.
   
3. BILLING THE TENANTS
   If you’ve done it right, you’ll be able to sleep comfortably at night.
   
4. COLLECTING WHAT’S DUE
   If you’ve done it right, you’ll be able to explain things well enough so the tenants can sleep comfortably at night.

So much for prelude! Next week, we will jump into Part 1: GETTING PREPARED. We will include a detailed checklist that you can use to collect all of the information you will need to have a successful escalation season.

ARGUS Office Escalations uses BOMA International's approved methodology for calculating escalations. Using this product will result in fewer audit problems because of its standardized formatting and formulas. The software works for thousands of different leases and is designed to be user friendly.

Lodgian to be Acquired by Lone Star Funds for $270M

Edited: Jennifer Brenner
Source: Lodgian, Inc.

Lodgian, Inc., one of the nation's largest independent hotel owners and operators, today announced it has entered into a definitive agreement to be acquired by an affiliate of Lone Star Funds ("Lone Star"), in a transaction valued at approximately $270 million, including assumed debt.

Under the terms of the agreement, Lone Star will acquire all of the outstanding common stock of Lodgian for $2.50 per share in an all-cash transaction. The price represents a premium of approximately 67.2 percent over Lodgian's average closing share price during the trading period of one calendar month prior to January 15, 2010 and 64.3 percent over Lodgian's average closing share price during the trading period of six calendar months prior to January 15, 2010.

Lodgian's Board of Directors has unanimously approved the merger agreement and has recommended approval of the transaction by Lodgian shareholders.

"After careful consideration, and with the assistance of our advisors, Lodgian's Board of Directors determined that a transaction with Lone Star will provide meaningful value and liquidity to our shareholders," said Daniel E. Ellis, Lodgian president and chief executive officer. "We believe that Lone Star brings considerable real estate experience and financial strength to our assets, and we look forward to working with Lone Star to transition the business as smoothly as possible."

"We are pleased to welcome Lodgian to the Lone Star family and look forward to working with their talented team to integrate the business into our portfolio," said Lone Star Funds' Andre Collin, senior managing director, real estate Americas. "This is a diverse and well-managed hotel business that will complement our existing real estate assets."

This transaction is not subject to a financing condition, and the purchase price is fully committed. The transaction is expected to close during the second quarter of 2010, subject to approval of Lodgian shareholders at a special meeting and satisfaction of customary closing conditions.

Certain shareholders of Lodgian holding 26.8 percent of the total outstanding common shares have entered into voting agreements under which they have agreed to vote their shares in favor of the merger.

Genesis Capital LLC acted as a financial advisor to Lodgian, and Houlihan Lokey Howard & Zukin Financial Advisors, Inc. has provided a fairness opinion to the Board of Directors of Lodgian. King & Spalding LLP is acting as legal counsel to Lodgian, and Hunton & Williams LLP is acting as legal counsel to Lone Star. Dana Ciraldo, previously affiliated with Hodges Ward Elliott, is acting as financial advisor to Lone Star.

Lone Star is a global investment firm that acquires debt and equity assets including corporate, commercial real estate, single-family residential, and consumer debt products, as well as banks and asset-rich operating companies requiring rationalization. Since the establishment of its first fund in 1995, the principals of Lone Star have organized private equity funds totaling approximately $24 billion of capital that has been invested globally through Lone Star's worldwide network of affiliate offices.

Lodgian is one of the nation's largest independent hotel owners and operators. The company currently owns and manages a portfolio of 34 hotels with 6,401 rooms located in 20 states. Of the company's 34-hotel portfolio, 16 are InterContinental Hotels Group brands (Crowne Plaza, Holiday Inn, and Holiday Inn Express), 12 are Marriott brands (Marriott, Courtyard by Marriott, SpringHill Suites by Marriott, Residence Inn by Marriott and Fairfield Inn by Marriott), two are Hilton brands, and four are affiliated with other nationally recognized franchisors including Starwood, Wyndham and Carlson.

China's Economy Not a Bubble Says NIA

Edited: Jennifer Brenner
Source: National Inflation Association

The National Inflation Association recently announced that China's GDP grew 10.7% last quarter over a year ago, its fastest pace since 2007. There is now speculation that China's central bank will start raising their benchmark interest rate in order to tighten lending in the country. In fact, China's central bank last week raised reserve requirements and Chinese authorities have ordered some of China's largest banks to curb lending for the rest of January.

NIA believes China's moves to tighten bank lending will strengthen the long-term future of their economy. In the short-term, interest rates will inevitably rise and their GDP growth will decline, but we won't see a collapse in asset prices in China.

Certain pockets of the Chinese economy may have mini-bubbles, such as the real estate markets in Hong Kong and Shanghai. However, even if real estate prices in certain major Chinese cities were to decline substantially, it won't be enough to send China's economy into a tailspin like Dubai. Dubai's economy was built on real estate speculation, while China's economy has been built on a solid foundation of manufacturing and savings.

There are some claims being made by people like James S. Chanos that China is in danger of producing huge quantities of goods that it will be unable to sell. NIA believes China's population of 1.3 billion people will be perfectly capable of purchasing their own goods that they produce, if the Chinese government abandons their currency peg to the U.S. dollar and allows the yuan to appreciate. China's currency peg is responsible for most of the global economic imbalances that exist today. It is forcing the Chinese to acquire U.S. treasuries, fueling the 'dollar bubble' in the U.S. and artificially suppressing the standard of living of Chinese citizens.

When China first chose to peg their currency to the U.S. dollar in 1994, China had a much smaller, less-mature economy. Due to a lack of population centers and distribution networks, China was dependent on the strength of its exports. Today, China is investing heavily into its infrastructure by building high-speed rail lines, dozens of new airports, and high-tech power distribution systems and electricity grids. At the same time, our infrastructure in the U.S. is decaying and we don't have any savings to repair it.

China is not trapped into maintaining its currency peg to the U.S. dollar. China's exports to the U.S. and Europe now account for less than half of their total exports. China has been rapidly increasing exports to countries like Australia, that can purchase their goods by trading valuable commodities instead of printed money.

It is impossible for China's economy to be a bubble when the Chinese stock market is still about 50% lower than its all time high. There are many Chinese stocks that have 20%+ revenue growth and trade with price/earnings ratios below 10, with comparable companies in the U.S. that have zero or negative revenue growth yet trade with price/earnings ratios of 20. These valuations should be the other way around, but the perception today is that China is still a "risky" emerging market.

China's economy is still in its infancy. China's oil consumption per capita is less than 1/10 the U.S. and most Chinese households don't own a car, while the average American household has 2.3 cars. China has saved and lived below its deserved standard of living, allowing Americans to live beyond their means for an extended period of time. This imbalance must soon be dramatically corrected.

China has many of the same characteristics the U.S. had just before it took its world superpower status from the U.K. in the 1920-30s. The U.S. was propelled to its superpower status because it was the world's largest exporter of goods and the world's largest creditor nation. Today, China exports the most goods and is the world's largest creditor nation with $2.3 trillion in foreign currency reserves. China will have many ups and downs in the decades ahead, but over the long-term we believe China is positioned to capture the U.S.'s status as the world's superpower.

The National Inflation Association is an organization that is dedicated to preparing Americans for hyperinflation.

Merlin Entertainments Group to Open LEGOLAND(R) Florida

Edited: Jennifer Brenner
Source: Merlin Entertainments

Merlin Entertainments ("Merlin"), Europe's No 1 and the world's second largest visitor attraction operator, recently announced a multi-million dollar investment in the biggest family tourist centre in the world with the planned opening of LEGOLAND® Florida.

Merlin has purchased the historical Cypress Gardens in Winter Haven Florida from property investment company Land South Group and will open LEGOLAND Florida on the site at the end of 2011. The deal to buy the 145-acre site includes the freehold on the current theme park and waterpark as well as an operating lease in perpetuity on the historic botanical gardens. Merlin plans a significant multi-million dollar investment over a number of years, up to and beyond opening, in what will be the biggest LEGOLAND to date. In line with the group's "resort" strategy for its theme parks this is likely to include both accommodation and the addition of further branded attractions from the Merlin portfolio. This will build on the $100m invested over the last few years in improved infrastructure on the site.

The Florida development will be Merlin's second LEGOLAND Park in North America and will play an important role in the group's continued growth in the US. It will provide a full-day, year round, theme park experience geared towards families with children between the ages of two and 12. Its design will mirror the successful concept of the four existing LEGOLAND Parks in Denmark, Germany, UK and California. However, as with the other four, it will also have its own unique "twist" reflecting its stunning location and adding a Florida flavour.

The decision to open a LEGOLAND Park in Florida follows considerable research in the area by Merlin over a number of years. This indicated a high recognition of the LEGOLAND Park brand and a 90%+ intention to visit by families in this target market. The issue therefore has been to find the ideal site. Cypress Gardens has long been a popular location for millions of visitors. Merlin believes its central Florida location, approx 30 minutes from Orlando and also close to Tampa, is the perfect site for a leisure brand as powerful and compelling as LEGOLAND.

The development follows the success of LEGOLAND® California which opened in 1999. LEGOLAND California was recently voted the country's best children's theme park by Amusement Today for the sixth year running. It is also recognized as the fastest growing theme park in the US, enjoying an increase in visitor numbers year-on-year, including 6% in 2009.

LEGOLAND Florida will be the biggest LEGOLAND Park ever opened and will offer a unique mix of more than 50 rides, shows and attractions, including spectacular LEGO® models and other interactive elements.

The Park is expected to create more than 1,000 new jobs by opening; as well as boosting the Florida economy through the use of local contractors for development.

Nick Varney, CEO of Merlin Entertainments, said:
"LEGOLAND Florida will be one of the most exciting and important projects Merlin has ever developed. It is a unique opportunity for us; Florida is the biggest family tourist center in the world. We have been looking for the right site there for some time and in Winter Haven we plan to create one of the best and certainly most beautiful, theme parks in the world. LEGOLAND California has already proven how much U.S. families love the unique LEGOLAND concept. Now we are bringing that fun and experience to a much wider audience - the millions of U.S. and international visitors who come to Florida every year."

Charlie Crist, Florida Governor, said:
"We are delighted at this news. We are extremely happy that the future of Cypress Gardens is secure. LEGOLAND is one of the most exciting names in family attractions and a welcome new addition to Florida."

Merlin Entertainments is firmly establishing itself in the important U.S. market. When it opens, LEGOLAND Florida will be the company's thirteenth attraction here. It joins LEGOLAND California; SEA LIFE Carlsbad; Madame Tussauds – New York, Hollywood, Las Vegas and Washington, D.C.; LEGOLAND Discovery Centre Chicago; and the Underwater Adventures Aquarium in Minneapolis, all of which are already successfully operating. Four more attractions are also in development - SEA LIFE Phoenix; LEGOLAND Discovery Centers in Dallas Fort Worth and New Jersey and the Pepsi Globe observation wheel in New Jersey.

Eastbridge Al Mal Holdings Formed By a Kuwait Investment Company to Invest in U.S. Real Estate Opportunities

Edited: Jennifer Brenner
Source: Eastbridge Al Mal Holdings Ltd.

A Kuwait-based public company sponsored by one of the largest merchant families in the Middle East, with annual sales in excess of U.S. $5 billion, in partnership with several global investment professionals, has announced the formation of Eastbridge Al Mal Holdings Ltd.

With offices in New York City, Dubai and Kuwait, Eastbridge Al Mal's real estate activities will principally be focused on opportunistic investments in high quality, income producing commercial real estate assets in major U.S. cities with local operating partners who require additional equity capital for direct real estate investments, debt and securities.

Rick H. Singer, a 25-year veteran of the real estate industry and a founding partner of Eastbridge Al Mal, will serve as chief executive officer of all real estate-related entities. Throughout his distinguished career, Singer has served in senior leadership positions at several investment firms, including 10 years as the head of global real estate at Salomon Brothers Inc.

"We are excited to announce this venture at a time of tremendous opportunity in the real estate marketplace," said Singer. "While the current global capital dislocation and re-pricing of assets have forced many firms to restructure and curtail investments, this new venture will position our firm as one of the most active investors in the marketplace."

Edward E. Hamilton, also a principal of the firm, will head business development and capital efforts from Eastbridge Al Mal's New York City office. Eastbridge Al Mal will additionally be focused on investments in the energy sector. This effort will be led by Walter F. Brandhuber and Nabil Al-Sabih out of the Middle East.

Eastbridge Al Mal Holdings Ltd., capitalized by a Kuwait public company, is a venture between senior real estate and energy investment professionals and the Al Mal Investment Company – a listed corporation whose controlling shareholder is one of the largest conglomerates in the Middle East and North Africa (MENA) region.