Browse Category: Development

Get Your Competitive Edge on Pre-Due Diligence 

Today’s guest post is by Leigh Budlong, founder of Zonability. You can connect with her on LinkedIn or email her at [email protected]

The purpose of formal due diligence is well known to all real estate professionals. We’ve all experienced either the first-hand hiring of experts to help mitigate risks or advising clients to do so. It takes time and money with results often bringing up more questions than answers.

In this age of technology, a new approach for gaining insight into important issues that can impact real estate deals quickly and efficiently is now a reality. It means leveraging technology assets to quickly and inexpensively ascertain initial answers to questions that would typically require extensive time and money during a formal due diligence process.

This stage is called pre-due diligence and can help to quickly evaluate a listing you might find on CommercialSearch.  Pre-due diligence sacrifices accuracy in return for speed, but that tradeoff is perfectly acceptable as long as everyone involved is clear about the objectives and capabilities of pre-due diligence vs formal due diligence which involve experts.

 

Consider what it would mean to have your own process around this stage of information gathering and property assessment. How can it be mined to improve your work and business relationships? Can it become your competitive edge?

 

Before going into more detail, my inspiration for this blog post came from a summer read, Phil Knight’s book, “Shoe Dog”. The memoire came recommended by a real estate data executive, and it has all the thrills – and letdowns – that come with building a business and the people you meet along the way.

 

Phil Knight talks about Steve Prefontaine, an American runner from Oregon known from the 1972 Olympics. Known as “Pre”, he was an early endorser of Nike shoes and a real athlete. According to Knight, Pre’s “competitive fire, gutsy race tactics and inherent charisma charmed crowds and inspired up-and-coming runners to stick with the sport and give it their all.” 

 

Who doesn’t like to be inspired, or to inspire others? In reading these words I instantly recognized the traits that make a great athlete also make a successful real estate professional. It takes training, dedication and a positive “can-do” attitude. The training is what pays dividends during a race or match. The same is true for the real estate professional.

 

By being willing to train hard on honing your skills around pre due diligence, you can be better prepared to serve clients and help them succeed. As part of any training, it means approaching the learning curve. In this case, you’ll need to find those technology tools designed for efficiency and use them regularly to get in more reps, to get better in your role.

 

In my role as an inventor of real estate technology called Zonability, I focused on showcasing a method successfully employed when I practiced in real estate as a commercial real estate appraiser and broker (earning both the MAI and CCIM designations).  Rather than spend hours piecing together, our customers instantly assess a property from a pre-due diligence perspective. It employs what I call “the PLE technique”.

 

P stands for physical, L for legal and E for economic. Together, the review of PLE on any property, at the pre due diligence level, provides a solid initial assessment.

  • Physical – property strengths and weaknesses.
  • Legal – find the hidden opportunities and risks.
  • Economic – run numbers to test “what if” scenarios.

At Zonability, our role in pre-due diligence focuses on assessing untapped development potential and uncovering risks associated with zoning regulations which tie to some of the property’s physical attributes, legal and eventually, economic. How do they tie to economics? It is the combination of the land – its size and zoning relative to the existing improvements and what economic benefits they continue to offer in their market.

 

My years of experience as a commercial real estate appraiser and broker helped hone my skills to assess PLE opportunity and risk. I wanted to translate that when I had Zonability developed. Some call it a “highest and best use” starter, others see as a way to hone in on their to-do list – especially those who handle real estate development.

 

Here are highlights:

 

  1. Identify ALL kinds of regulations impacting the parcel. Yes, these fall under the L category (for legal). Our aim is to give these letter/numbers some meaning and include “future land use” plans which really start to touch on E for economics.

  1. Make it obvious what is the zoning landscape around the subject and showcase the parcels’ shapes – this gets into the P for physical as well as L for legal.
    Quickly gather intelligence within a 1/4 mile of the property for existing conditions: zoning category distribution, building size and lot size. Use this information to size up the subject and the ideas about how it might be used which leads to point #3.

  1. Does the property have zotential? Zotential is our way of saying data-driven potential. The reason we opt to use this language is to make it abundantly clear, this is an interpretation, it is not documented in some city file or stamped and ready for approvals. No, it is very much in the early stage – or “pre” – realm where ideas are still being kicked around.


  1. Get the numbers running! Zonability also has a one click “pro forma” that generates an Excel using our zotential estimates. You can set the basics like monthly rent and cap rate range then iterate in Excel.

Real estate professionals have always had a unique opportunity to differentiate themselves from competitors by discussing untapped property potential with their clients. However, before Zonability, the process of calculating untapped potential was slow, frustrating, and expensive given the complexity of regulations involved.

 

The reality is that most people won’t make the effort to do this work manually. However, we’ve repeatedly found that there’s a direct correlation between the difficulty to obtain important data and the opportunity to deliver value to clients.

 

By having your process in place, quickly and inexpensively:

  • Gauge demand, including current a highest and best use analysis.
  • Develop initial marketing, including ballpark pricing and valuation considerations.
  • Work with the owner/stakeholders to set expectations.

At the root of this process, is being able to decide if the deal is worth pursuing or will terms need to be changed as well as a focus on further evaluation?

In order to remember this concept, think of the long-distance runner, Pre, who had to often “dig deep” to find the energy reserve required for deals that take weeks and months to come together. Building relationships focused on problem-solving and not solely on closing the deal are worth the time. These are the types of deals that people walk away from satisfied and wanting to do again. Who doesn’t appreciate the chance to repeat a win?

In summary, offering fundamental real estate information that can’t easily be “googled” is a great way to establish expertise and build trust with clients. Tech driven pre-due diligence is a way to reduce the time and money required to deliver value to clients. Ultimately this leads to better relationships, which is still the basis for success in real estate.

Do you have success stories about having employed such a technique that saved you and your client time and money? If so, I’d like to hear about it.

 

Stadium Finance: Wins On The Field Can Mean Wins For Investors

Panorama of Dodger Stadium in Los Angeles (tak...
Panorama of Dodger Stadium in Los Angeles  (Photo credit: Wikipedia)

As Spring Training for the 2017 Major League Baseball season gets underway, our attention turns to stadium finance, a strange intersection of finance, athletics and real estate that leverages competition on-field and off.

Stadium development in the US is often subsidized by the public, meaning development risks are often shared by taxpayers in various ways, from tangible environmental impacts (parking availability, foot traffic) to the borrowing of already-strapped municipalities aiming to improve the business fitness of the areas surrounding the stadium.

That borrowing – typically performed by issuing municipal bonds – is rated by bond ratings agencies, allowing comparisons to be made in a bond market matching lenders and borrowers.  But which sport throws off the most data to use for investment comparisons?  It’s baseball.

Baseball Is The Handiest Test Case

Of the major sports, only Major League Baseball puts the “business fitness” argument behind stadium development to its greatest utilization test. Unlike football, basketball or hockey, (major league) baseball hosts a whopping 81 home games a season. From April to September, baseball stadium utilization when the team is in town is a nearly-every-day-of-the-week affair, whereas other sports make their home appearances only a handful of days of a season-week – or only one day, as in football.

It’s in part because of this high utilization that the finances of stadium development can be deeply affected by the performance of the team on the field.  In an amazing post at Commercial Observer by Terrence Cullen, exactly how on-field performance can affect financial performance underwriting a development is shown by a long look at the New York Mets and Citi Field. From “How Batting Averages Can Affect A Stadium’s Bond Rating”:

“There are two ways to argue for a new stadium,” he said. “One is, ‘Our team sucks, we need a new stadium so we can be good again.’ Which usually doesn’t work very well, because if your team sucks, nobody cares. Or, ‘Our team is great. If you don’t give us a new stadium, you’ll never see this again.’”

The latter option, he added, is often the better route. “This is very, very common,” he said. “If you’re trying to get a new stadium you compete that one year.”

[…]

Gerstner pointed to the instance in which the San Diego Padres leveraged its All-Star roster to secure financing in the late-1990s to build what is today Petco Park. The Padres boosted their roster for the 1998 season, making it all the way to the World Series that October (the Yankees swept the team). The following month, voters went to the polls to determine whether the team could build the stadium. The city invested $300 million into the project, while the Padres invested $115 million, according to news organization Voice of San Diego.  

Following the approval, however, the Padres traded away key players and lost others to free agency, Gerstner noted. The team finished fourth in its division with a 74-88 record.

Read the entire post at Commercial Observer here. And don’t forget to Play Ball!

 

President Trump’s 60-Year Lease With Uncle Sam

The inauguration of President Donald Trump, titan of commercial real estate, marked the start of a great number of legal fights concerning his numerous undivested CRE holdings.  One set of concerns raised by the political opposition centers on what it means legally for the sitting President to be doing business with foreign governments, something that appears to be happening routinely within the context of his ownership of Trump International Hotel in Washington, DC, just blocks from the White House.  The broad argument from political opponents goes: with each hotel bill paid by a foreign government staying at the luxury hotel comes a potential conflict of interest as long as the President continues to own that hotel.

Any guest-related potential conflicts aside, the development details of the hotel itself may hold unprecedented potential conflicts. The hotel property was redeveloped inside a former Post Office owned by the US Government — more specifically, the General Services Administration, an independent federal agency established in 1949 that contributes to the management of around half a trillion dollars of US federal property including over 8,300 owned and leased buildings.

GSA is the owner of the Trump International building. The lease has a reported 60-year term with two 20-year options.  The lease has clauses that are drawing attention from industry and governmental players in a way that promises much fighting in the future.

Breach? No Way To Know Yet

The legal confusion is not made clearer by the political forces interested in it.  Efforts by Congressional Democrats to undermine the administration have called certain lease clauses into question: As USA Today reports:

The [hotel] lease reads: “No member or delegate to Congress, or elected official of the Government of the United States or the Government of the District of Columbia, shall be admitted to any share or part of this Lease, or to any benefit that may arise therefrom; provided, however, that this provision shall not be construed as extending to any Person who may be a shareholder or other beneficial owner of any publicly held corporation or other entity, if this Lease is for the general benefit of such corporation or other entity.”

Thus far, the landlord does not see a breach —  GSA has not been moved to act on the strength of these inquiries, stating:

“GSA does not have a position that the lease provision requires the President-elect to divest of his financial interests. We can make no definitive statement at this time about what would constitute a breach of the agreement, and to do so now would be premature. In fact, no determination regarding the Old Post Office can be completed until the full circumstances surrounding the President-elect’s business arrangements have been finalized and he has assumed office,” the statement reads. “GSA is committed to responsibly administering all of the leases to which it is a party.”

For a in-depth look at the lease, read Steven Schooner and Daniel Gordon’s legal analysis piece at Atlantic “Has Trump’s Election Breached His D.C. Hotel Lease?”

The potentials for conflict are certainly there – without them, GSA might not respond – and the wrangling over the outcome will no doubt continue for much, much longer.

Add this to the giant pile of unprecedented commercial real estate issues raised by the inauguration of Donald Trump.

Construction: The Employment Crisis (Almost) Nobody Talks About

Commercial development without skilled construction workers is a recipe for no development whatsoever. Yet the country’s educational system appears to be failing the construction industry – along with commercial real estate.

The system seems content to allow millions of students at for-profit colleges to be simply fleeced and abandoned, no more employable than they were before going into debt for their education. This is the for-profit education industry’s choice: a grab for the short-term, subsidized buck over the long-term benefit to the student and to the country.  Rather than orient itself toward trade education that actually meets the demands of the wider economy, the secondary educational system’s choice to turn away from the trades appears to have placed it on a direct collision course with the needs of the commercial development industry. Those needs are near all-time highs: the latest employment forecasts from the US Department of Labor say that the national need for these workers ranks higher than the needs for workers in all other categories save one (heath care).

Annotated table showing construction job growth

Programs To Patch The Gap

Correcting the course isn’t going to be automatic, or even easy. Construction mogul Bill Gilbane’s piece in Commercial Observer highlights the gap between industry needs and trade education by talking up investing in programs that address high school students in the funnel for careers in construction and design. Gilbane sings the praises of the Ace Mentor Program, an afterschool program that brings high schoolers into careers in architecture, construction management, engineering and other disciplines.

Beyond programs like Ace, development and real estate firms have opportunities to address the issue on their own.  As Gilbane writes about his company’s internal efforts:

But we must still do more to bring young people onboard and keep them long term. In order to meet future demand, we need to develop the pool of workers in our industry now. Developing the skills of younger professionals helps create our leaders of the future.

That is why we launched a two-year Management Candidate Acceleration Program (MCAP). The MCAP program allows younger employees to gain first-hand experience in each department at Gilbane Building Company and once they’ve completed the program, participants are prepared to step up into those roles full time—and their paths often lead to project or executive management.

This is essential to ensuring current young professionals become our next generation of leaders. It also supports our long-term employees on a path to continuous improvement. By providing technical and educational programs, we help our staff learn new skills to support their current roles and develop their leadership abilities.

These educational and mentoring models — both external and internal — are worth looking at, throughout the commercial real estate and construction industries as the economy surges forward.  Let’s not let “business as usual” today serve to shut down huge business and employment opportunities in the future.

Where Is Commercial Real Estate Oversupply?

English: Welsh Assembly Office Construction De...

The national market for commercial real estate is a massive thing, a meta-market encompassing tens of thousands of localities, each with their own economies and histories, subject to their own internal logic — and illogic. When trying to take all of these in as a whole, it’s important to remember that the local stories always loom larger than might be apparent, and that effects are overwhelmingly driven by local needs, wants and preferences.

That said, some indicators are more easily acquired nationally than others. Construction delivery is one. More inventory arriving may influence performance for existing, surrounding inventory, but delivered construction always opens the door (when taken as an aggregate) to the possibility of overbuilding.

With that indicator’s strength in mind, Susan Persin’s piece in REITCafe (registration required) looks at national construction deliveries in the major sectors of CRE and finds where the numbers suggest demand and supply are growing out of balance, tipping toward supply.

In apartments, the high end of the market in NYC and SF get a jaundiced eye from Persin:

[…]REITs with significant investments in markets like Manhattan and San Francisco, such as Avalon Bay (AVB) and Equity Residential (EQR) have cut their revenue forecasts several times this year, citing weakness in these markets.[…]

Persin also noticed some developments in office markets in Dallas, Houston and New York that have the “o” word — overbuilding — rearing its ugly head. Quoting Sam Zell’s recent Bloomberg interview — a chipper affair otherwise — shows Zell concurring about a situation in NYC office that sees new construction as outpacing demand there.

Get the full article — with commentary on all the major CRE sectors of retail, hospitality, industrial  — at Trepp REITCafe for a free registration.

Photo credit: Wikipedia

Short Film: The Absent Column

Like a lot of Chicagoans, I’m something of an architecture nerd. Being proud of this town’s skyline and the engineering that went into it is second nature to Windy City natives, but we don’t often slow down to take a close look at the stories behind the world-famous postwar modern styles.  It’s an international story: the likes of Ludwig Mies van der Rohe, Bertrand Goldberg and Walter Netsch will not likely appear again, but their work as a whole forms the visual and functional vocabulary associated with modernism the world over.

Filmmaker Nathan Eddy’s documentary The Absent Column explores the story behind Chicago’s Prentice Women’s Hospital Building a 1975 Goldberg building in the brutalist style.  Colleagues of the architect as well as preservationists have faced off over the fate of this half-bunker-half-flower structure, and Eddy captures the story.  Definitely worth a look.

 

The Absent Column from Nathan Eddy on Vimeo.

 

Los Angeles Buildings Targeted For Earthquake Refit

English: Los Angeles skyline and San Gabriel m...

Brokers, property managers and landlords of Los Angeles: be aware that an updated list from the Los Angeles Department of Building and Safety (DBS) has arrived. The list identifies thousands of buildings that may potentially require earthquake retrofitting, including those sporting “tuck-under parking” designs and other popular constructions that are especially susceptible to collapse in earthquake conditions. The list contains over 23,000 addresses.

Buildings that are most vulnerable have been identified with the following criteria:

  • Consist of 2 or more stories wood frame construction
  • Built under building code standards enacted before January 1, 1978
  • Contains ground floor parking or other similar open floor space

How Do I Get The List?

You can get to the list in two ways. The Los Angeles Times has published a searchable website that you can use after the link.  You can also obtain the entire list by request to the DBS by contacting the LADBS Custodian of Records at (213) 482-6770, or email [email protected].

Soft Story Construction Targeted

In October 2015, Los Angeles passed an ordinance requiring retrofitting for “non-ductile concrete and soft-story wood frame” buildings. According to law blog JD Supra, inclusion on the list does not mandate retrofitting; it requires only that building owners within one year of receipt of formal notice from DBS prepare a structural analysis showing whether their buildings meet the earthquake standards promulgated in the ordinance. Further, appearance on the list does not constitute notice, says the JDSupra piece penned by Tetlo Emmen and Alfred Fraijo.

Photo credit: Wikipedia

BuildingRating.Org: Learn Your Local Gov’t Jurisdiction’s Building Energy Policies

Quick, no Googling –  on what does the US spend more on energy? Transportation or buildings?

It’s buildings.

Every year, $400 billion goes to energy to buildings, a sum that adds up to roughly 40% of the total US annual energy expenditure.  That makes energy to buildings is the largest single sector in US energy consumption, including transportation.

With a figure that large, and with so much commercial property inventory having been built decades before serious energy efficiency features occurred to architects, owners and developers, you can bet that opportunities to save energy dollars in commercial property are huge.

Along with huge opportunities to control costs and rewrite operation and development plans, local government sustainability policies figure greatly in the bottom line of new and existing commercial property development. Getting to the actual policie, so as to know what flies in one state and doesn’t fly in another presents a challenge.

Building Energy Policy Briefs Aplenty

BuildingRating.Org is operated by the Institute for Market Transformation, a DC-based nonprofit dedicated to promoting energy efficiency in buildings, has done a service by collecting and making available an ever-growing archive of sustainable energy building policies for local jurisdictions across the US. Check out the most recent collection at these links today — and get a handle on how energy efficiency savings and local government relate with programs, policies and case studies.

 

Big, Bigger, Biggest: The Story Of The Skyscraper

https://www.youtube.com/watch?v=P7lWOkXuO8Q

The engineering and commercial histories of tall buildings tell an inspiring story of meeting and overcoming huge challenges in management, in materials science, in finance, in construction technology, and in environmental sciences.  Big, Bigger, Biggest is a beautifully made 45 minute film that covers it all, beginning in 1870 with the Equitable Life building in New York and culminating with Dubai’s Burj Khalifa, at 2,722 feet the world’s tallest artificial structure.

The film builds an amazing story with advance after advance in elevators, materials, architecture, heat management, craning, form construction and much much more. 100% worth watching or showing to anybody tasked with solving problems with space, this film is one of my favorite documentaries and I hope it will become yours as well.

BOMA Updates Best Practices For Sustainability Through BEPC Contract Model

The Building Owners and Managers Assocation (BOMA) International has just announced the updated version of their groundbreaking BOMA Energy Performance Contracting (BEPC) Model to incorporate new best practices into building maintenance. BEPC was originally created in 2008 by BOMA International in a partnership with the Clinton Climate Initiative (CCI), several major real estate companies and energy service companies (ESCOs).

BEPC Is Updated For Today’s Best Practices

Unfortunately, since the initiative started in 2008 there was not much market emphasis on retro-fitting buildings with new energy-saving technology during the crisis of ’07-’09.  Now that the market has vastly improved and recovery is well underway,  BOMA is updating and sharing their program more broadly with the commercial real estate world.

A standout for best practice from BPEC: investors are well-advised to be proactive in managing their assets so they can make strategic investments to drive rents and occupancy.  Exhaustive management of utility expenses has become a best practice, but many of the older buildings have infrastructure that is approaching or at the end of its useful life, limiting potential to get a handle on all the utility usage information that true best practice calls for.

Gear To The Ground

You can’t manage what you can’t measure, and when it comes to sustainable ant truly controllable energy usage, that means extra equipment. Technology upgrades will be necessary in order for the buildings to remain competitive in today’s market.  Such refits can be large capital projects tending toward the complex, carrying a variety of risks. However, the risk of doing nothing is very real, causing rising maintenance costs, utility costs, increasing complaints from tenants and potential tenants.  Left unaddressed – especially in a competitive environment, these costs will negatively impact the owner’s bottom line sooner than later.

BOMA International Chair-Elect, Kent C. Gibson, BOMA Fellow, president of Capstone Property Management, LC. was quoted in BOMA’s press release, “BOMA International is pleased to provide building owners with a valuable resource that can help them increase asset value, improve operational efficiency and demonstrate to tenants a commitment to sustainability.”  Among these are investigations into technology applications that will help understand what’s really called for to improve building performance and reap the true benefits.

BEPC Designed To Enhance Performance and Efficiency

The BOMA BEPC was designed to manage risk performance, facilitate projects that enhance building’s performance and efficiency and aid in delivering predictable returns on capital projects. BEPC provides a conceptual framework and supporting template documents to help private building operators develop and execute investment-grade retrofits to enhance the value of their properties. BEPC also provides transparency on performance expectations, pricing and a clear guidelines for managing their retrofit project so that the owners meet their goals and finish their projects within their desired timeline.

Since its beginning, BEPC has facilitated projects in more than twenty cities across five continents. The BEPC Model works with a variety of funding models including ESCO or third party, Property Assessed Clean Energy (PACE) programs and self-financing.

Read all about the BEPC Model from BOMA here.