Global Viewpoints

Yes, It’s Escalation Season Again! Part 2: Doing the Work

Written By: William H. Brownfield, CRE, CCIM, EscalationAdvisors.com

Yes, this is the hard part, but it can be fun if you actually do it during regular working hours.

There’s a saying that “Talk is Cheap”, and that theme certainly applies to escalations. It is a certainty that you won’t receive the correct amount of expense reimbursements unless you put some serious thought and effort into the task. If done properly, the "doing" part of preparing escalations can be stimulating and rewarding, and also a savvy way to build trust with your tenants. But when done improperly, escalations can be tedious, time-consuming and just flat out wrong. At their worst, escalation problems can turn into a tenant relations shootout or nightmare.

Speaking of shootouts and nightmares, I’m a big movie fan. Metaphors for the normal things in our lives are everywhere on screen, even for escalations. For instance, think of Clint Eastwood’s role in The Good, The Bad & The Ugly – that’s what escalation auditors aspire to be: the good guy who methodically knocks off the bad guys and gals who send out incorrect invoices. And how about that old classic Frankenstein? A well-meaning doctor of the same name attempts to create life but instead creates a monster, spurring the villagers to grab their pitchforks and wreak havoc. This gory story reminds me of the well-meaning property manager or property accountant who crafts his or her own Excel spreadsheet for escalations, and ultimately pays for it with a tenant revolt - or even worse - achieves the ultimate insult in tenant dissatisfaction: the dreaded "tenant union." And what about Paul Newman in Cool Hand Luke? As cool as he was, also the most successful hard-boiled egg eater a southern prison has ever known, he still suffered the consequences of a “failure to communicate” and paid dearly for the oversight. Getting back to reality and real estate begs the question: “Will your escalation billings survive the communication test?”

So, you have the checklist described in Part 1, and by now you have collected all of the information it lists (if not, time to get crackin’ – the escalation clock is running). If so, you are off to a good start. What comes next must be done methodically.

Checklist of Documents Required for Doing the Work

Expenses

• Load final 2009 expenses into your billing software
• Review the 2009 General Ledger (GL) for any mis-classed items, errors, omissions,or necessary corrections
• Analyze your January 2010 GL for expenses relating to 2009 that need to be added back to 2009 (Accruals)
• Gross up your variable expenses (using BOMA-approved methodology if possible)
• Determine which (if any) capital improvement scan be escalated in 2009
• Create one expense pool for your standard leases and as many others as necessary for your nonstandard leases

Rent Roll

• Abstract all new leases or any existing leases which were modified leases in 2009, and load the escalation info into your billing software
• Prepare a schedule of 2009 prepayments by tenant
• Prepare a schedule of occupancy by month (both leased and physical occupancy)
• Determine which tenants may have their 2009 expenses limited by Expense Caps

Review for Accuracy & Reasonableness

• Combine your Expenses and Rent Roll data in your billing software, shake well, and review the results with senior management/ownership
• Do your 2009 escalatable expenses look reasonable in comparison to 2008 actual and your 2009 budget? (if not, investigate any large discrepancies)
• Are any tenants getting an unusually large charge or credit? (if so, investigate to ensure that it is appropriate)
• Are your capital improvements being treated in accordance with the leases, and are they consistent with prior years? Can you add imputed interest to the cost?
• Are your gross ups reasonable? One good rule of thumb is that the percentage increase of each gross up should never exceed the percentage increase in occupancy. For example: If you are grossing up a 75% occupied building to 100% that is a 33% increase in occupancy (25% divided by 75%), so your gross up for any account should never exceed 33%. For example:if your actual cleaning contract expense was $100,000, your gross up should never exceed $133,000):

Well, that’s the end of this part of the Checklist. Rather tedious, isn’t it? But it’s a lot easier than eating 50 hard-boiled eggs. Next week, we will jump into Part 3: Billing the Tenants, which will include Cover Letters and presentation of invoices.

CRE Market Draws New Players

Written By: Jennifer Brenner

The current flux in the commercial real estate market is drawing in a new set of players trying to capitalize on the low prices and lack of available financing in the market, says Michael Verma, senior account executive with ARGUS Software.

Verma, who has trained, consulted and managed the accounts of the globe’s top real estate firm’s for the past seven years, says he sees more securities players and private equity types such as high net worth individuals entering the commercial real estate market for the first time due to the unprecedented opportunities created by the recent market collapse.

“ARGUS sales have always been a good indicator of transaction trends as we are the first to hear from new prospective investors,” comments Verma. Verma has been the top ARGUS account executive for the past three years.

“These alternative investors have access to equity, while the traditional CRE buyers are struggling to find funding. This trend creates a negotiable space for those who previously may have shied away from the competitive transaction market of the past five years,” he adds.

Verma also is seeing a marked acceleration of development and acquisition activity within the multifamily market.

“We are working with these developers on real deals that are being driven by the difficulty for consumers to obtain loans in the single-family market,” notes Verma. Overall Verma sees an uptick in general market activity and optimism regarding the economy.

HFF Named to Market for Sale Trophy Office Tower in Pittsburgh

Edited: Jennifer Brenner
Source: Holliday Fenoglio Fowler, L.P.

The Pittsburgh and Chicago offices of HFF (Holliday Fenoglio Fowler, L.P.) announced today that they have been named to market for sale EQT Plaza, a 32-story, trophy office tower in Pittsburgh, Pennsylvania.

HFF executive managing directors John Pelusi and Gerard Sansosti in Pittsburgh along with managing directors Jeff Bramson and Jaime Fink in Chicago are marketing the property on behalf of the seller.

EQT Plaza is a 615,942 rentable-square-foot, trophy-quality office tower located at 625 Liberty Avenue in Pittsburgh’s central business district. The property is the corporate headquarters for EQT Corporation and is 96.2% leased with minimal near-term lease rollover. Additional tenants include Cohen & Grigsby, McGuire Woods, and National Union Fire Insurance. The building features a full-service health club, a 5,170-square-foot conference center, underground parking garage and a Morton’s of Chicago restaurant. The current owner has invested nearly $3 million during the last five years on plaza and lobby renovations, a new life safety system, and fitness and business center upgrades.

”This is the premier address in Pittsburgh as evidenced by the property’s high occupancy rate,” said Sansosti. “The average lease term is an attractive 9.5 years making this an exceptionally stable office asset.”

Deloitte Appoints Robert O'Brien to Lead U.S. Real Estate Practice

Edited: Jennifer Brenner
Source: Deloitte

Deloitte recently announced that Robert T. O'Brien has been appointed to lead the U.S. real estate practice and has been elected a vice chairman, effective immediately. O'Brien succeeds practice leader, Dorothy Alpert, who has assumed the role of northeast deputy regional managing partner.

"Bob's broad background and global relationships position him well to execute for our clients. His more than 25 years of public accounting and transaction experience in the real estate and hospitality industries will prove to be an invaluable asset to Deloitte and to our clients in meeting the challenges of the current market dislocation," said Bill Freda, Deloitte's vice chairman and U.S. managing partner for clients and markets.

In his role as U.S. real estate leader, O'Brien is responsible for the real estate practice's overall strategy and execution across tax, audit, enterprise risk, consulting and financial advisory services in the real estate, homebuilding, engineering and construction industries. He will be based in Chicago.

"As the global economy recovers, two trends are becoming apparent: the next generation of real estate investors is emerging in the form of distressed asset funds and REIT activity is heating up via IPOs and M&A. Success through the downturn in real estate and into the next cycle will require overcoming challenges and excellent execution," said O'Brien. "Whether it's enhanced financial reporting to investors and the capital markets, efficient entity and investment structuring, valuation insights, strategy and operations, or technology, these new and evolving industry players will need the assistance of a professional advisor with broad and deep real estate expertise. I look forward to taking that journey with our clients and sharing with them Deloitte's tremendous capabilities across these and many other specialties."

"International capital flows will continue to characterize real estate investing. With a strong presence in every major financial center here in the U.S., as well as abroad, Deloitte's real estate practice offers clients an entry to a global network with the 'on-the-ground-expertise' so vital to real estate," said Alpert. "As the global real estate funds leader during my tenure as real estate practice leader, Bob exhibited an unmatched facility for the diverse needs clients face as real estate continues to evolve as a global industry. I am confident he will excel in his new role, benefiting both our clients and Deloitte."

O'Brien most recently served as the U.S. audit and enterprise risk management leader for the real estate practice, as well as Deloitte's global real estate funds initiative leader. From 2003 to 2008, he led one of Deloitte's Chicago audit practice groups. From 1999 to 2003, O'Brien served as a transaction services partner in Deloitte's M&A practice. He was promoted to partner in 1995.

O'Brien joined Deloitte in 1983 upon graduation from John Carroll University with Bachelor of Science in accounting. In 1989, he earned an MBA in finance with highest honors from Northwestern University's J.L. Kellogg Graduate School of Management, with a concentration in real estate and international business. He is a CPA and a member of the American Institute of Certified Public Accountants, National Association of Real Estate Investment Trusts, National Council of Real Estate Investment Fiduciaries, and Pension Real Estate Association. He serves on the board for City Year-Chicago.

Real Estate CEOs Predict Long Road to Recovery

Edited: Jennifer Brenner
Source: The Real Estate Roundtable

Amid signs of a stuttering recovery, senior real estate executives report that declining fundamentals and deterioration in Net Operating Income (NOI) pose formidable challenges to the commercial real estate sector — encompassing office buildings, shopping malls, warehouses, hotels, and apartment buildings — according to The Real Estate Roundtable's 1st quarter 2010 Sentiment Index.

"Our industry urgently needs public policies that will drive job growth in the economy. We need policies that will facilitate equity investment in real estate. And we need policies that will restart a secondary market – to help banks clear their balance sheets of toxic assets while encouraging greater lending to credit worthy borrowers, both large and small," Roundtable President and CEO Jeffrey DeBoer said.

"The sense of overall gloom that prevailed one year ago has eased. Credit markets have thawed somewhat and that is obviously good. However, there is a long road to recovery ahead and policy uncertainty only makes the road more difficult to travel," DeBoer added.

The Roundtable's latest Sentiment Index (now at 73, up from 63 in the previous quarter) shows an industry just beginning the process of pulling itself out from the depths of the deepest real estate downturn seen in a generation. The Overall Sentiment Index is calculated based on averages of Future and Current Indexes – all measured on a scale of 1 to 100. To reach an Overall Index of 100, for example, all survey respondents would have to answer that conditions are "much better" today (Current Conditions) compared to one year ago, and will also be "much better" 12 months from now (Future Conditions).

The Sentiment Index indicates that confidence in market conditions may be on the mend, yet industry leaders remain guarded in their improved outlook. The Current Conditions Index, which measures market conditions today versus one year ago, came in at 69, a 13 point increase from last quarter's sentiment reading. The Future Conditions Index, which measures market conditions today versus one year from now, came in at 77, an increase of seven points from the 4th quarter of 2009.

A common concern among the 110+ survey respondents is the impact of declining fundamentals and deterioration in NOI. As one CEO commented, "There are 20 million or more people who are underemployed or unemployed. Businesses are being very cautious. The federal government is considering raising taxes. All of this is causing uneasiness."

Another executive added, "Things will be slow to recover because economic growth and jobs take time. Jobs drive fundamentals."

Survey participants also noted that if interest rates are raised now to counter inflationary pressures, it would undermine the conditions needed for economic recovery. Many participants said they expect lenders to continue loan extensions to avoid forced sales, particularly for high quality assets wallowing in a distressed market. Yet with hundreds of billions of dollars of commercial real estate debt maturing annually over the next several years – and limited ability to refinance on the horizon – many respondents said the deleveraging process necessary for an economic rebound has been delayed.

DeBoer noted, "The volume of commercial real estate transactions is anemic. Transaction volume is down more than 90 percent compared with 2007. The scarcity of transactions feeds on itself as value determination is made more difficult and lenders are more reluctant to extend credit. Policy actions that facilitate equity infusions, particularly from global capital sources, would help spur transaction volume and assist in deleveraging maturing debt."

Perhaps the biggest reason for the positive change in sentiment this quarter is an improved outlook on capital markets. Approximately two-thirds of respondents said capital – for both debt and equity – is more accessible now compared to one year ago, during the height of the financial crisis. Of all survey respondents, 83% predicted an increased availability of debt capital in one year, while 75% said there would be an increase in available equity in one year. As the report notes, while this sentiment is a good sign for 2010, it also indicates that there is still a long way to go before market conditions can be qualified as "back to normal."

Some respondents also said asset values may be close to bottoming out. The report shows 45% expect real estate asset values to increase in the next year, while 35% expect them to remain flat, and 19% predict further declines. "The free-fall in pricing has stopped," said one interviewee, adding, "Values are going to stay along the bottom through 2010." Another participant reiterated this view, saying, "In terms of valuations, we're at the 'muddle through' point, with fundamentals continuing to provide downward pressure."

DeBoer and The Roundtable have been championing a multi-pronged plan to attack the liquidity crunch afflicting the markets. "Just as there is no single cause of the financial crisis, there is no single solution – no 'silver bullet' – to address the mammoth refinancing challenges in commercial real estate," said DeBoer.

"As President Obama emphasized the need for job creation during his State of the Union address last week, we agree that generating sustainable jobs is a top policy priority. At the same time, we remain vigilant in ascertaining market conditions, while urging policymakers to encourage stable asset valuations, enhanced transparency and sensible underwriting practices – all key factors for the return of a reliable credit system," DeBoer added.

The Real Estate Roundtable brings together leaders of the nation's publicly-held and privately owned real estate ownership, development, lending and management firms with the leaders of national real estate trade associations to jointly address key national policy issues relating to real estate and the overall economy. Collectively, Roundtable members' portfolios contain over 5 billion square feet of office, retail and industrial properties; over 1.5 million apartment units; and in excess of 1.3 million hotel rooms. Participating trade associations represent more than 1.5 million people involved in virtually every aspect of the real estate business.

GGP Gets Master Plan Approved for Massive 13M SF Maryland Project

Edited: Jennifer Brenner
Source: General Growth Properties

By unanimous vote and following one of the most extensive community processes ever carried out by a development firm, the County Council in Howard County, Md., Monday approved a 30-year master plan for downtown Columbia. The legislation creates one of the largest long-term development opportunities in the history of General Growth Properties (GGP), which controls most of the 390 acres affected.

Over the life of the development project, the approved plan involves as much as 13 million square feet of retail, commercial, residential, hotel and cultural development. The plan emphasizes smart growth, environmental sustainability and walkability.

“This plan combines the insights of the community with those of world-class planning and design experts,” said Tom Nolan, president and chief operating officer of GGP. “We believe this development will represent a global model for smart growth design, and a model as well for how such plans should be devised and improved in full collaboration with the community.”

“For the people of Howard County and the state of Maryland,” Nolan continued, “this means the 21st century renewal of one of the 20th century’s great places, with an enhanced competitive position for attraction of capital and creation of high-quality jobs. For GGP, this long-sought action gives us a chance to do great things in one of the most promising regions in the country, and grow our business in ways that can enrich thousands of lives. Many of our nationwide properties have untapped value, and Columbia’s is exceptionally significant.”

Greg Hamm, GGP vice president, master planned communities, said, “This accomplishment is the product of countless hours of close collaboration among every interested party in Columbia and Howard County. Residents, business leaders, community advocates and elected officials worked very closely with GGP to ensure a vision of quality, livability, environmental responsibility and economic vitality. It is a privilege to be able to work with such an engaged and thoughtful collection of people.”

Approval of the plan for downtown Columbia is seen by many as the final realization of the original master plan created under the leadership of visionary developer James W. Rouse, whose company founded Columbia in the 1960s on largely undeveloped property and created 10 villages surrounding what was to be a “downtown.” The villages now are home to almost 100,000 people, but downtown development has been limited to The Mall in Columbia and several other commercial and residential projects. The urban core Rouse envisioned has not up to now materialized.

“Rare is the community that is so committed to careful planning and long-term thinking, but here in Columbia we had long, thoughtful deliberations about how Jim Rouse’s vision could be fulfilled here and now. Today may have been the biggest day in Columbia’s continuing story since the first residents arrived in 1967,” Hamm said.

To be accomplished in three phases, the plan calls for up to 5,500 new residential units, 4.3 million square feet of commercial office space, 1.25 million square feet of retail space and 640 hotel rooms at full build-out. It includes renovation of the outdoor performance venue, Merriweather Post Pavilion, and development of a multi-modal transportation system.

The master plan also has sustainability features, including measurable goals for saving energy and water, improving public transportation, ecology and livability. It will be walkable, feature extensive bike trails and have improved watersheds and storm water management systems. Green technologies and building standards will be utilized.

Columbia, Md., is situated on 14,100 acres between Baltimore and Washington, D.C., just off Interstate 95. The master planned community contains almost 40,000 residential units, more than 5,500 businesses in 26 million square feet of space and provides 63,200 jobs. There is 4.8 million square feet of retail space, including The Mall in Columbia and Gateway Overlook, both GGP retail centers.

Columbia is 15 miles from the downtown Baltimore, and 30 miles from Washington, D.C. Located only 11 miles from Fort George G. Meade, downtown Columbia will benefit from the positive economic impact of the Base Realignment and Closure (BRAC) program underway by the Department of Defense. It is expected that approximately 22,000 new jobs will come to Fort Meade in the next five-to-seven years.

GGP currently has ownership interest in, or management responsibility for, over 200 regional shopping malls in 43 states, as well as ownership in planned community developments and commercial office buildings.