ir.
CORPORATE REAL ESTATE STRATEGIES
FOR
STRUCTURING DEVELOPMENT JOINT VENTURES
by
Kip G. Thompson
B.S., University of Utah
(1983)
SUBMITTED IN PARTIAL FULFILLMENT
OF THE REQUIREMENTS OF THE
DEGREE OF
MASTER OF SCIENCE
IN REAL ESTATE DEVELOPMENT
at the
MASSACHUSETTS INSTITUTE OF TECHNOLOGY
SEPTEMBER 1986
(
Kip G. Thompson
The author hereby grants to M.I.T. permission to reproduce
and to distribute copies of this thesis document in whole or
in part.
Signature of Author
/
Certified by
rpartment of Architecture
Auaust 15, 1986
I
nne B. g yn
PgLfe sor
Assstant
Planning
and
Studies
Urban
of
Department
Accepted by
Interdepartmental Degree Progran
tNSTE
HnotChSEP 051966rr
James McKellar
Chairman
in Real Estate Development
CORPORATE REAL ESTATE STRATEGIES
FOR
STRUCTURING DEVELOPMENT JOINT VENTURES
by
KIP G. THOMPSON
Submitted to the Department of Architecture
on August 15, 1986, in partial fulfillment of the
requirements for the Degree of Master of Science in
Real Estate Development at the
Massachusetts Institute of Technology
ABSTRACT
This essay is an analysis and evaluation of decision
criteria for corporate real estate executives to use in
structuring joint ventures for developing corporate real
The joint venture arrangement being evaluated is
estate.
one between a corporation (not in the real estate business)
No previous experience with
and a real estate developer.
joint ventures is assumed.
Several corporate real estate managers and developers
were interviewed to determine how corporate real estate
decisions are made and to assess their experiences with
A review of business and real estate
joint ventures.
The corporate experiences
literature was also conducted.
and literature were drawn from to construct the decision
models and recommendations found herein.
The corporate characteristics most conducive to joint
venture viability are described and used to construct
The risk and
profiles of the ideal corporate candidate.
benefit tradeoffs of the joint venture approach, relative to
other options, are used to establish ideas for maximizing
Finally, the analysis focuses on guidelines for
benefits.
Some key
structuring and managing the joint venture.
provisions for the joint venture agreement are described.
Corporations are typically not equipped to handle the
Joint ventures are
real estate development process alone.
recognized as appropriate vehicles for developing corporate
The corporation can benefit by, reducing
real estate.
occupancy costs as well as maximizing value of corporate
real estate assets while reducing the risks of development
and ownership.
Thesis Supervisor: Lynne B. Sagalyn
Title: Associate Professor of Urban
in Real Estate Development.
Studies and
Planning
CORPORATE REAL ESTATE STRATEGIES
FOR
STRUCTURING DEVELOPMENT JOINT VENTURES
ABSTRACT............................ .................
2
ACKNOWLEDGEMENTS....................
LIST OF EXHIBITS.................... ................
1.
2.
3.
0 0 0
INTRODUCTION.........................................7
A.
Thesis Research Methodology..................9
B.
Thesis Structure...........................11
C.
Corporate Real Estate:Paydirt or Foolsgold.12
D.
Considering the Range of Alternatives......22
DETERMINING A CORPORATE REAL ESTATE STRATEGY........28
A.
Finding the "Hidden Value".................29
B.
Determine a Corporate Real Estate Strategy.33
C.
Criteria for Corporation Joint Venture
Viability..................................46
D.
Corporate Scenarios for Joint Venture
Development................................55
E.
Corporate Joint Venture Profiles............64
UPSIDE & DOWNSIDE OF CORPORATE JOINT VENTURE'S..
A.
Drawbacks to Corporate/Developer Joint
Ventures...............................
B.
Why Joint Ventures Fail................
C.
Benefits of the Joint Venture Approach.
D.
Plan for Success.......................
72
....
....
74
...
79
.81
4.
5.
6.
GUIDELINES FOR PROPERLY STRUCTURING THE VENTURE.....83
A.
A Corporate Decision Model..................83
B.
Proposal Evaluation Process.................93
C.
Understanding the Developer Connection.....97
D.
Selecting a Development Team...............98
E.
Managing the Corporate Internal Factors ... 107
THE JOINT VENTURE AGREEMENT AND MANAGEMENT PLAN...
.113
A.
Necessary Provisions......................114
B.
The Business Entity.......................123
C.
Keeping the Marriage Intact................127
D.
Prepared for Dissolution...................128
E.
Privately Held Corporations................129
Conclusion and Summary of Findings..................131
FOOTNOTES......
..................--------.....-
142
LIST OF PEOPLE INTERVIEWED.........................147
BIBLIOGRAPHY.........................------.--.-..
149
ACKNOWLEDGEMENTS
Like most supposedly original works,
this paper owes a
ideas
deal of its content to the experiences and
great
than the author.
other
persons
In the
text,
the
of
author
speaks
with the voice of authority and experience,
when in
fact,
the ideas were drawn from the experiences of
others.
To them the credit is due.
executives who were willing to share their experiences
busy
In particular, I appreciate the efforts
and ideas with me.
of
First, I want to thank the many
Steele,
Tom
his
to advise and help structure the direction of
schedule
study.
who unselfishly took time from
He
helped formulate my initial directions and
busy
the
gave
constructive comments after reading bulky rough-drafts.
My
analysis
helpful
thanks
and
to Lynne Sagalyn,
clear
focus.
who demanded
Classmates
were
thoughtful
particularly
in maintaining humor and support that smoothed
rough times.
And finally,
the
I dedicate this final project to
my beautiful wife, Leesa for her love, patience, and endless
support, during my research and writing.
LIST OF EXHIBITS
TABLE 1-A
WHY CORPORATIONS FAILED....................19
TABLE 1-B
OPTIONS CONTINUUM.............................23
TABLE 2-A
DETERMINING A CORPORATE REAL ESTATE
STRATEGY......................................34
TABLE 2-B
DYNAMICS OF INTERNAL CORPORATE CONFLICT....45
TABLE 2-C
FINANCIAL CHARACTERISTICS OF A VIABLE JOINT
VENTURE CANDIDATE.......... ............... 52
TABLE 2-D
OPERATIONAL CHARACTERISTICS OF A VIABLE
JOINT VENTURE CANDIDATE....................53
TABLE 3-A
DRAWBACKS OF CORPORATE/DEVELOPER JOINT
VENTURES............................. ..
73
TABLE 3-B
WHY CORPORATE/DEVELOPER JOINT VENTURES
FAIL.......................................75
TABLE 3-C
BENEFITS OF CORPORATE/DEVELOPER JOINT
.............
...........
VENTURES....
.... 80
TABLE 3-D
STRATEGIC OPTIONS FOR ENHANCING JOINT
VENTURE SUCCESS............................81
TABLE 4-A
FINANCIAL PROPOSAL EVALUATION MATRIX.......85
TABLE 4-B
FINANCIAL PROPOSAL EVALUATION MATRIX
DEBT/EQUITY MIX.......................
..... 86
TABLE 4-C
FINANCING ASSUMPTIONS.......................89
TABLE 4-D
FIRST YEAR
TABLE 4-E
FORECASTED PRO FORMA INCOME ANALYSIS.......91
TABLE 4-F
CORPORATE PARTNER CASH FLOW ANALYSIS.......92
TABLE 4-G
CORPORATE COST OF OCCUPANCY EVALUATION.....92
TABLE 4-H
DEVELOPER QUALIFICATION PROPOSAL EVALUATION
..................................... 94
MATRIX
TABLE 5-A
JOINT VENTURE AGREEMENT CAVEATS AND
QUESTIONS..................................123
PRO FORMA INCOME ANALYSIS......90
CHAPTER ONE
INTRODUCTION
"Life is a constant process of
deciding what we are going to do."
- Anonymous
criteria
for
structuring
estate.
is an analysis and evaluation of
paper
This
corporate real estate executives
joint
The
ventures for developing
decision
to
use
corporate
in
real
joint venture arrangement being evaluated
is
one
between a corporation (not in the real estate business)
and
a real estate developer.
joint
for
The discussion shows that
venture can be a viable and worthwhile
maximizing
the
value
of
corporate
a
consideration
assets
and/or
joint
venture
minimizing occupancy costs.
intent
The
is
not
approach
as a panacea
strategy.
Instead
to
champion
the
real
estate
paper provides a survey of
issues
to every corporation's
the
encountered by corporate real estate managers in
real
estate options and suggests an approach for maximizing
the potential of a joint venture alternative.
focuses
ventures
estate
evaluating
on
issues to consider in assessing
are
from
joint
whether
an appropriate vehicle
for
developing
corporate context.
The
paper
the
characteristics
The analysis
of
a
suitable
corporate
joint
real
discusses
venture
candidates
and
those of attractive
development
partners.
It offers an analytical framework and guide to the
and
discusses key issues for the
also
The
of a joint venture relationship.
pitfalls
agreement,
benefits
paper
negotiation,
and management stages.
Joint ventures are not new to the business world.
are
regaining
attention
as
a
means
for
sharpening
competitive strategies in new product development and
Real estate development joint ventures,
arenas.
and
journals
texts
undertake
activities
undertake
alone.
are
vehicles
that
enable
that they could not (or
corporations use the
Large
other
like the
cooperative ventures being discussed in
corporate
They
business
firms
should
to
not)
to
approach
attract capabilities and entrepreneurial energies that their
own firms lack.
corporations such as Xerox,
Large
begun
to
use
frequency,
study
perhaps
joint
joint
venture
IBM and AT&T have
alternatives,
to develop corporate real estate.
ventures was sparked by the
with
some
to
The idea
realization
that
each entity (the developer and the corporation) had
something unique that could lead to synergistic outcomes.
developer possesses experience,
knowledge, ideas, marketing
skills and managerial capabilities,
resources,
land,
or
a
tenant.
A
but may lack
financial
The corporation in
this
scenario has some combination of land, cash, credit or space
needs,
large
but wants lower occupancy costs.
corporations
have
blazed
the
Since some of the
trail,
others
are
beginning to follow suit or at least consider joint ventures
as a viable option to their real estate strategy.
A.
THESIS RESEARCH METHODOLOGY
The information gathered for this analysis came from
survey
of both trade
and general business literature.
a
In
addition, I interviewed developers and corporate real estate
managers
from
several
of
the
largest
and
Insight
firms in the country.
development
corporations
and
direction
also came from advisors and consultants close to the field. 2
The
interview process brought an insider's perspective
focus on the primary issues and concerns of
and
parties to such
mutual ventures.
The
scope
towards large,
(if
was
oriented
well-known, corporations most with
national
of
the
corporate-research
not international) presence.
As it turned
out,
were in a growth or stable stage of their industry.
those
have
interviewed
no interest
in,
nor
with developers.
capabilities,
projects
Some of
would
they
projects
joint-venturing real estate development
consider
many
Those with no interest either had in-house
which
enable
of their own;
them to
monitor
development
or no interest in building at
all.
Some could see little justification for joint venturing at a
time
when
developer's
concessions
current
on
leased
saturated
advantageous
are
offering
property are
markets.
Others
so
so
find
many
short-term
abundant
joint
and are in the midst of several joint
in
the
ventures
venture
projects at present.
Virtually,
all firms interviewed had
at least considered joint ventures.
since
The curiosity is strong
many have recently received proposals from developers
for joint venture.
For
various
reasons,
many
of
those
interviewed
requested anonimity which I intend to respect for all.
information gathered was,
therefore, used to generate ideas
and a perspective from which others can benefit.
of
excluded
funds,
Any direct
are
in this text came either from literature or
references
matters
The
general
financial
knowledge.
institutions
The
study
such
as
intentionally
banks,
pension
insurance companies or syndications - those who
are
already in real estate oriented businesses.
A
mix
search
of the literature on the subject revealed
books and articles on asset
of
a
(typically
management
written by corporate real estate managers) which of late are
calling for a profit oriented strategy towards
Others
assets.
who
estate
spoke of the "war stories" of corporations
the
valiantly plunged into the real estate business in
1960's
The
real
and 1970's and came out badly scarred
and
beaten. 3
evidence is clear that much of the real estate held
corporate-America
certainly
is under-utilized or
misunderstood.
represents a potentially phenomenal dollar
by
It
value
estimated at $1.4 trillion dollars. 4
Corporate-America
of
real
estate
owns or controls billions of dollars
assets.
This paper is
not
about
asset
management;
yet,
alternatives
is
One
real
discuss
corporate
real
is
asset management approach
a
joint
experienced developer.
venture
estate
management.
to discuss the need for asset
estate
corporations
to
used
arrangement
by
some
with
an
This paper is intended to highlight
and analyze the nuances of this approach based on interviews
with developers and corporations.
B. THESIS STRUCTURE
real
The intended audience for this paper is corporate
Recognizing that such a title could apply
estate managers.
to
a
I have narrowed
wide array of job descriptions,
the
target audience to those managers within large organizations
with an active real estate entity.
Little familiarity
with
development
or corporate real estate objectives is assumed.
The
chapter
first
experience
in,
and
industry in general;
provides
attitudes
an
the focus shifts towards management of
real estate used by the corporation.
by
the
discussing
estate
real
the
towards,
corporate
of
overview
of
range
The chapter
alternatives
concludes
available
to
corporations and how each might affect corporate objectives.
Chapter two focuses on strategic methods for
Corporate objectives are suggested
options in real estate.
as
the
venture
starting
point
alternative
that
characteristics
venture.
qualitative
An
is
for
The
decision-making.
considered in light
might impact the
analytical
and
exploring
framework
of
decision
for
11
corporate
to
evaluating
quantitative issues is presented
joint
and
joint
the
the
chapter
ends with a discussion of the ingredients necessary
for a joint venture strategy to work.
The
remainder
ventures.
Profiles
of the paper focuses
of
three
solely
different
on
joint
venture
candidates
provide the basis of discussion.
Chapter
lists
describes the pros and cons of a
joint
and
joint
three
venture
strategy in light of the proposed profiles.
Chapter
four
outlines
the
internal
and
external
contraints for joint venture organization. The joint venture
is examined from the eyes of the developer-partner and
are
given
for selecting the "ideal" mate for the
The
discussion
also looks at some negotiation
tips
venture.
suggestions
for optimizing the value of the venture for the corporation.
The final chapter offers some suggested concerns to
covered
give
an
It is intended to
in the joint venture agreement.
overview of the critical issues that
as
raised
the
relationships.
parties
prepare
to
be
bind
need
their
to
be
working
The conclusion offers some final commentary
and lists some general conclusions from the research.
C.
CORPORATE REAL ESTATE:
In
have
recent years real estate journals
and
periodicals
devoted increasing attention to the need for
management
frequently
the
PAYDIRT OR FOOLSGOLD ?
of
corporate
real
estate.
These
improved
articles
admonish corporate real estate managers to
hidden veins" of value in corporate real estate
"tap
assets
and usage.
the
for
frontier
The literature would
internationally competitive strength.5
the
that
suggest
value lies not
only
in
under-utilized
but
also
in
the
facilities,
corporate-owned
corporate
resources
far as to suggest that corporations use their
separate
a
skills to enter real estate as
managerial
and
went
Earlier articles
signature on a corporate lease-hold.
so
for
quest
its
American corporation in
great
"last
is seen by some as the
management
Asset
6
line of business and means of diversification.
message
The
Business
One article in
was
Investment"
widely
the
in
circulated
Corporations were
executive
offices of many corporations.7
concerned
about the future of earnings per share
of
Harvard
the
Review (July/August 1967) entitled "Real Estate as
Corporate
idea
even
with
not new - it was parlayed
vigor in the 1960's.
greater
a
is
tapping into the profit potential of
this
and
estate
real
offered hope.
The
result
jumped
corporations
separate
was
that many of
into
real
the
estate
country's
as
development
line of business during the 1960's and 1970's.
great
fever seemed to sweep corporate America into
found
profit source.
For a brief period,
were anticipating great profits from
discovered
real estate industry.
Street
brokerage
a
the
Business literature
house market
a
A
new-
corporate chief
executives
Wall
largest
letters
during
newly
and
that
period
gave the impression that corporations were about
"make
it big" in real estate.
strong
to
Security analysts even gave
recommendations to those companies with real
estate
equities. 8
The
results in most cases were disastrous.
The
that real estate offered was dashed quickly as the
brought about a rapid exodus.
real
estate
hope
failures
The question remains, whether
is a source of value and profit to
corporate-
America or a fixed asset to be maintained and put up with as
a
necessary nuisance to the main-line
objectives?
Should
(other than experienced developers) be in
corporations
real estate business?
If not,
the
can they "profit" from
the
real estate that they own or use?
The answer lies first in understanding the past and the
Will future corporate attempts
implications on the future.
at
developing real estate be met with the same perils
impacted so many in the past.
is
sought by reflecting upon,
entering
real estate,
that
An understanding of the past
1) corporate motivations for
2) the type and extent of
corporate
3) the results, 4) an analysis of the results.
involvement,
1. Motivations
The motivations for corporate entry into real estate
the
1960's
were
diverse.
They
included
such
aspirations as:
o
o
o
o
Diversification,
Compensating for downturns in business cycles,
Improving profits in the long run,
Hedging inflation risks,
14
in
stated
o
o
o
o
o
o
Harboring large cash reservoirs,
Sheltering accumulated earnings from taxation,
Supporting social objectives for redevelopment,
A means of using surplus corporate land,
A means of marketing company products,
Testing new technological systems.
pursued
Many
of
recommendation
real
competent consultants such as Arthur
D.
But few corporations did anything substantial
Little Inc..
and
In spite of the claims
to study project feasibility.
stated
the
under
development
estate
objectives for corporate selection of real estate as
a line of business or a means of capturing value, one former
stated,
president
"up until about 1972 it was
fashionable
for corporations to get into real estate; and since 1972, it
has been fashionable to get out".
2.
9
Extent of Corporate Involvement
It
is
difficult
corporation got into which aspects of the
and
experiences
which
to generalize about
depth
of
business.
Their
varied.
Many
involvement
of
type
corporations pursued land development, wherein large parcels
of raw land, or land with minimal site improvements would be
purchased and up-graded for subdivisions,
office
development
parks
industrial
parks,
was
themselves
or
corporate
land
recreation.
or
either
conducted
by
by third-party builders.
developers
included
shopping centers,
Actual
the
corporations
Some
of
Boise
the
Cascade,
big
Dart
Industries, ITT, McCulloch Oil and Kaiser Aluminum.
Several corporations chose to develop residential
estate.
real
They cited the shortage of housing, pent-up demand,
15
population,
growing
as corporate
well
as
Corporations
production skills as incentives for that move.
Weyerhauser,
Morris,
largest players in the
the
among
were
business.
The
housing
residential
into
builders
through acquisition of one or several
development
or
and Johns Manville
them pursued was to get
of
most
course
ITT,
Avco,
developers
in
already
By
business.
the
development business was seen as an
residential
of great promise that would grow,
Phillip
Standard,
American
Olin,
Loews,
CBS,
as
such
and
managment
the
some,
investment
perhaps faster than their
primary business.
business came from a review of their own real estate
estate
had
addition,
market
such holdings were
Many
holdings.
that
real
impetus for other corporate entries into the
The
potential
better
of much higher and
values
inventories
land
their
International,
Lockheed,
Steel,
U.S.
assets
on
their
Sun
of
list
who
Among those
were
Oil,
some
like
Hercules,
Transamerica and Scott Paper.
Stauffer Chemical,
the
others chose to develop
While some sold land outright,
surplus
The
were several times greater.
reviewing
Rockwell
In
uses.
much of the land was reported at book value while
corporations in this category is endless.
were
assets
non-productive
own
through
company
owned
subsidiaries or with a partner.
A
few corporations became involved in
development
ventures
only
with
the intent
development
of
making
or
a
statement or furthering their own
corporate
as General
Electric,
Westinghouse
Walt
and
others
such
Disney
viewed land development as an opportunity to
an
still
image.
create
urban laboratory for testing their own new products
and
systems. 1 0
3.
The results:
If
real
the score had been kept on corporate ventures
estate
against
the
in
the 1960's it would be
corporations.
In the
seriously
earlier
1970's
into
slanted
heavy
losses were incurred and reflected in corporate earnings.
A
few of the most noted examples are described herein:
o Boise Cascade was certainly one of the big-time
losers; with write-offs of $78 million in 1971 and
another $150 million for real estate losses in 1972.
how
The Penn Central experience demonstrates
o
leveraging can backfire on a real estate investment
Central)
(Penn
Railroad
Pennsylvania
strategy.
acquired Great Southwest Corporation who became very
Net
active in acquiring and selling real estate.
income on the parent company books rose rapidly.
were consistenly low since
receivables
However,
As interest
expansion was achieved by leveraging.
Debt
rates rose the subsidiary badly overextended.
service could not be covered out of cash flows.
Management was forced to restructure.
o Westinghouse was clobbered particularly hard in
They were plagued by
government subsidized housing.
environmentalist legislation and protests from city
Their
groups in planned residential communities.
luck was better in the hands of management team it
Westinghouse's failures have been largely
acquired.
attributed to inexperience and internal management
problems.
o American Standard terminated its activities in land
Its experiences had
and housing development in 1974.
plagued with large losses i 1 mobile home,
been
recreational and housing developments.
4. Analysis of results: Why corporations failed?
of
analysis
An
real
of
development
past
estate
interesting
some
reveals
corporate
of
failures
annual reports and responses to inquisitive
The
patterns.
the
shareholders prompted executives to point to such
the economic recession,
forces as:
tape.
rapidly rising interest
environmentalist movement and governmental red-
the
rates,
exogenous
While it is impossible to discern the relative weight
of such factors there were other internal forces fueling the
failures as well.
the largest contributing factor to the
Perhaps
of
corporate
familiarity
factors
corporate
strategy.
real
estate
activity
the
was
Table
1-A)
contributing
lack
of
A review of the
with the real estate industry.
(see
demise
to
real estate may help formulate a
failures
more
in
proactive
TABLE 1-C
WHY CORPORATIONS FAILED
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
Inexperience in the development business,
successes bolstered confidences and led
Early
executives to take greater risks,
financial
and
market
of
Misunderstanding
characteristics of real estate,
Lack of knowledge of real estate markets and
operating techniques,
unsustainable
(with
Excessive use of leverage
relationships to cash flow),
Conflict between real estate profits and need for
booked earnings,
(which affected
Changes in accounting guidelines
reported earnings),
Overpayment for acquisitions of development firms,
Lack (or laxity) of management controls,
Conflict with development partners or subsidiaries,
Internal communication problems,
Inflexible corporate management styles,
Acquisition mania (acquiring unrelated entities
without careful planning,
Lack of goal definition,
Poor management controls,
Failure to "reach" the appropriate market,
Inopportune timing,
Inadequate planning,
Acquisition of unproven or unseasoned development
firms,
Failure to investigate the special economic and
operating characteristics of real estate business,
Inexperienced corporate personnel acting as liaisons
between parent and subsidiary,
Belief that industrial and management skills are
transferrable to development business,
Slow moving decision processes.
The
corporations
failures
place
took
predominantly
who were attempting to enter the
industry as a separate business.
estate
They lacked the experience
as well as the characteristics to make it work.
19
real
within
It has been
"those who can't remember the past are condemned
that
said
to repeat it".12 Therefore,
is
the remainder of the discussion
estate.
guiding the future of corporate involvement in real
The
lack
the
manage
the
Many would agree that they also
lack
clear
is
evidence
that
development process.
corporations
capabilities
management
entrepreneurial
in
lesson
to take the historic failures as a
intended
to
Real estate is not their business.
the interest.
message is eminently clear that solo ventures into
The
real estate development by corporations in totally different
and
of
lines
distinct
business
are
unwise.
are
not
anxious
corporations
indicates
that
history.
Yet, in some sense corporations are in
Evidence
repeat
to
real
the
estate business.
is the source of corporate involvement in the real
business
executive
estate
real
One
business.
estate
primary
real estate used by corporations in their
The
proclaimed
"anytime you have over 3 million square feet, you are in the
real
The key to capturing the value
potential.
untapped
make
Most corporate executives see
estate business".
real
estate
a
more
vital
of
part
the
the
is
to
corporate
strategy. 13
A
conducted by Harvard
study
subsidiary
management
significant,
of
Harvard
Real
Estate,
shows
University,
that
Inc.,
"proper
of real estate assets by any company can make
positive
short-term
20
as
well
as
a
a
long-term
impact.
The study estimated that American companies'
estate
typically
assets
and is worth an aggregate between $700
$1.4
nations's
that
accounts for at least 25% of their
- a
trillion
sum
pension funds."
given
real
equal to,
or
total
billion
greater
and
than
The conclusion of the
the
study
is
the aggregate value of real estate within their
domain, corporate executives have an obligation to put their
real
estate
authors
adjust
assets
to their highest and
best
use.
The
conclude that "every corporation should review
its
objectives
real
estate policies
with
contemporary
to
real
reconcile
estate
and
operating
and
values
opportunities." 14
The
leased,
value lies within corporate real
owned
or
developed;
only
of
40%
whether
American
clearly and consistently evaluate the performance
companies
of their real estate."15
Most treat it as a facility or
item like stationery and paper clips.
overhead
corporations,
and
yet
estate,
AT&T
such as Rockwell International,
have
discovered
the
Some
IBM,
The
strategically managing corporate real estate.
of
great value is there.
to
tap
large
Xerox,
potential
profit
an
in
source
It is up to corporate executives
that source in a responsible and
advantageous
way
that does not detract from its principal business. Corporate
managers can begin to tap the value by evaluating
real
estate
usage and selecting strategies
value.
21
that
corporate
maximize
of the most crucial factors that led to the demise
One
of
of
lack
was
development
at corporate
attempts
past
in
their
experience in real estate development when they own a
house
experience.
internal
people
Many
feel secure
The truth is
or have participated in real estate decisions.
that
of
the development process is complex and requires a
lot
of
the
that are not existent in many corporations.
market
has
capabilities and understanding
entrepreneurial
for
that
shown
but
imprudent,
irresponsible,
only
not
is
it
corporations
most
History
on
development
to attempt
their own without sufficient experience.
D.
CONSIDERING THE RANGE OF ALTERNATIVES:
their real estate assets are endless;
examples can be found
the
exhaustive
An
alternatives that are available.
of
managing
This section outlines
to support almost any approach.
range
for
to corporations
available
options
The
this
exploration of the many options is beyond the scope of
The
review.
speculative
continuum
development,
being
on
from
ranges
considered
the one extreme,
to being
1-B).
a
It
is
assumed that all corporate real estate activity will can
be
gross
lease
placed
tenant on the other (see Table
somewhere
along that continuum.
In
reality,
the
options are infinite and the simplification used here is not
intended
to
indicate that options are
listed.
22
confined
to
those
TABLE 1-B
OPTIONS CONTINUUM
How
past
SPECULATIVE
DEVELOPMENT
JOINT
VENTURE
GROSS
LEASE
does a corporate user make the
the decision seemed fairly clear.
buy/lease
evaluation
financial
constraints
decision
following
was made.
was usually
decision?
the
economic
A simple
Within
the
criteria
the
conducted.
and some qualitiative
In
It is no longer quite so simple.
discussion explores some of the major
The
advantages
and disadvantages of the bipolar ends of the spectrum.
1. Reasons for developing or owning corporate real estate:
Perhaps the most compelling motivation for corporations
to consider owning the space they utilize is the control
affords over design,
Ownership
construction and management.
allows more control over occupancy costs and
be a source of profit.
enhancement
quality,
of
Often,
corporate
image
corporate citizen in a community.
own
it
can
the motive for ownership is
a
good
Sometimes becoming
your
or simply to
be
landlord is motivation enough for corporate executives.
Some may be motivated by tax benefits.
23
Large corporations with name-recognition and
credit
bring
tremendous
development.
Their
value
presence
in
to
a
a
blue-chip
real
estate
development
brings
additional
value to surrounding building in many cases
phenomenon
which
economists refer to
as
- a
"externalities",
benefits accrue to the building owner in the form
These
increased
A great deal of value is also
demand and rents.
approvals,
added through the land development,
construction
processes.
of
design
and
Ownership allows a corporation to
reap the benefit of such added value.
2. Some key disadvantages of developing or owning corporate
real estate:
While
technically
control
significant
a
large
corporation
via covenants in the
these rights are not always enforceable.
lease
can
contract,
From a practical
require
standpoint the enforcement of such rights may often
legal
recourse
which can be costly,
exert
disruptive
and
time
consuming.
The
risk
substantial.
inherent
real
estate
development
is
To the extent that such risks can detract from
the main line of business,
ownership.
to
Inexperience
corporations will tend to
in
the industry
multiplies
avoid
the
market, financial and operations risks.
Real
large
estate development is an unkown business to
corporations.
most
The managerial characteristics needed
to orchestrate a successful development project tend to
24
not
exist
within
a large corporate
framework.
Unfamiliarity
with the business is one of the factors that led to most
the
of
problems by those who ventured into development in
1960's
and 1970's.
the
Some corporations are not interested in
the managerial difficulties attendant to ownership.
Compared
to
a lease transaction,
ownership
of
real
estate typically involves a higher up-front cost of time and
The development of a building requires investment
capital.
in feasibility studies, financial analysis, market analysis,
construction and design management and property and
leasing
management.
and
Dedicated
skilled
real
management
estate
capabilities must be in place to ensure success in any
estate investment venture.
must
team
have
accountability
To be effective,
sufficient
to
minimize
the management
and
autonomy
authority,
delays
real
and
bureaucratic
complexities and to avoid conflicts with operating
business
entities.
3. Reasons to consider leasing:
Corporations
flexibility
For
future
a
mode of high growth
and sorely in need of cash,
energy
business.
will
capacity.
high-growth corporation unsure
flexibility, the choice is simple.
and
maximum
need
in changing and reconfiguring office
startup,
the
in
be
funneled into
a lease
offers
it's
of
needed
Any available cash, time
the
primary
line
of
Short term leaseholds do not tie up large sums of
25
Marketing
capital.
be
offices of growing corporations may
leased for the same reasons.
administrative efforts required for initiating and
The
closing on lease contracts are relatively simple. operations
lease
managers are likely to have more autonomy on making a
The time
decision than say a long-term purchase commitment.
for securing and the effort to gain approvals from
required
within the corporate structure tend to be easier.
correlate
more
readily to the corporate short- term planning horizon.
They
be
used
of
Terms
do
productively
in the product development or
Furthermore,
process.
equity
may
tie up large blocks of capital that could
not
more
leasehold interests
of
ratio
the
Standard
Accounting
marketing
a lease does not raise the debt
company.
Boards
Financial
the
However,
13)
(FASB
requirement
"capital" leases be shown as additional debt on the
sheet
makes the difference between leasehold and
to
that
balance
ownership
less significant in some cases.16
policies employed by many of the corporations
Approval
interviewed
would
indicate a propensity or
managers to utilize short term leases.
stated or not,
incentive
for
The policy, whether
comes from approved expenditure limits given
to managers at certain levels.
4. Some key disadvantages to leasing:
Rapid
escalation
of
office rental
26
rates
can
cause
One study found that
occupancy costs to grow geometrically.
occupancy costs,
2000.
They are projected to reach 7% by the year
2% to 4%.
price
Such
doubled from
as a percentage of revenues,
escalation
can have a
effect
significant
on
corporate earnings. 17
only are costs rising over
Not
offer
typically
little
time,
opportunity to
appreciation values of real estate.
leaseholds
but
long-term
capture
Large corporations
may
be able to gain signficant contractual rights in their lease
realistic.
The
tenant
such
of
enforcement
agreements,
rights
little control
has
not
is
always
over
design,
and
leasing
management procedures, or neighboring uses.
Somewhere
in-between
the
development
options lies the joint venture alternative.
be structured to approximate or to
can
either extreme.
However,
the introduction of a partner.
gaining
the
disadvantages.
with the developer a joint venture brings new risks
dissipate,
asset
from
It can, in fact, be structured as a genuine
seeks in both extremes and to share
from
differentiate
which allows a corporation to capture the advantages
hybrid
it
A joint venture
but
Not all disadvantages
properly structured it can be a
means
for
some of the benefits of real estate development and
management in concert with an
who also shares the risks.
27
experienced
developer
CHAPTER TWO
DETERMINING A CORPORATE REAL ESTATE STRATEGY
"...Much
of
the
wretchedly
poor
performance
of
large
numbers
of
corporate real estate developers has
been
a
function
of
poor
management
and poor definition
of
objectives."
Where
options
do
in
opportunity
corporations "fit" along the
real
estate?
Is
the
fate
continuum
of
of
corporate
in real estate development sealed by the dismal
performance of the past?
national
It is possible that the
economic recession brought about a historic anomaly,
in the
failures that plagued corporate developers, that will not be
But
repeated.
the
evidence
seems
to
indicate
just could not handle real estate
corporations
that
operations.
The history of corporate diversification into real estate is
sufficient
to
warrant skepticism about the wisdom of
solo
corporate attempts at developing real estate.
Corporate
executives
requisite
when
going
They were uncomfortable while in it, and
into real estate.
the
were inexperienced
characteristics for success in the
were never quite attained.2
industry
Real estate development and the
various production and service industries are just different
enough
that
simultaneously,
the
is
chances
for
unlikely.
success
in
both
It is safe to say
arenas
that
few
large
of
corporations will venture into development as a
business.
firms
there now. 3
are
Mobil,
Fewer than two dozen of the largest
line
American
Those who are there such as
Gulf,
and Weyerhauser, have weathered the storm and appear
likely to stay, but the new entrants will be few.
While
the picture looks less than enticing for
full-
scale entrance into development, opportunities still abound.
are in the real estate business by
Corporations
the
corporate
a
corporate
apply
units.
of
real
exploited.
off
better
- their
best
Within that guise the establishment
estate
strategy
begins
with
an
and
how
of the overall corporate objectives
understanding
they
are
efforts on what they do
line of business.
main
of
indicate that corporations
their
concentrating
value
estate assets can and should be
real
would
History
of
The
own and occupy.
of space they
amount
virtue
to the operating
strategically
and
marketing
The value for corporations lies within the needs and
strategies
of
entity
must
understand
the strategic direction of the corporation
well
enough
these units.
The real estate
to translate the operating concerns into
facilities plans.
long-range
The intent of this chapter is to explore
how a corporate real estate manager can effectively
and
profit
from
the real estate assets and needs
utilize
the
of
corporation.
A. FINDING THE "HIDDEN VALUE" IN CORPORATE REAL ESTATE
The
consensus among academics and practitioners
alike
is that corporate real estate is under-utilized and that
29
it
0
is, in fact, a great source of value for corporations.
discovered
study
that barely 20% of American
manage their real estate for profit.
4
One
corporations
and
Only 40% clearly
5
consistently evaluate the performance of their real estate.
even
cannot
Value
be
recognized,
extracted,
less
much
without some performance-driven system of evaluation.
In the capital budgeting process, corporate real estate
facilities)
(or
priorities.
Demands on the capital budget are always higher
should they be expected to be) to cut demands "needed"
so
capital items,
"operations-oriented"
for
anxious
Management is not
than a corporation can afford.
(nor
of
lowest
gets relegated to the
oftimes
estate
real
expenditures or investments often get cut until the need for
is urgent (as one manager put it,
space
hanging out the windows").6
to
cut
is
The only "big ticket" item left
real estate - so
ignores
described,
the
are
"until people
it
fact
gets
cut.
estate
that real
process
The
may
have
inherent qualities that can add to, rather than detract from
the operations objectives.
Finding
a re-evaluation of
requires
facilities
haul")
the "hidden value" in corporation real
to
response-oriented
traditional
call,
we
management.
A
operation (also characterized as "you
a
strategic,
estate
goals-oriented
strategic planning orientation will allow the corporate real
estate manager to capture the value unique to real estate by
proactive
rather
than
reactive
management.
What
that
Real
may possess "hidden value"?
it
such
assets
real estate from other capital
differentiates
assets
estate
typically:
1. come in large denominations,
2. appreciate in value over time (while
accounting treatment depreciates,
3. can be leveraged,
4. provide tax benefits,
5. provide a long-term source of high returns, and
6. are undervalued on corporate books.
books.
reflected
on
the
Financial
Accounting
in
is so,
This
much
accurately
to appreciation that has not been
due
is
In many cases the market value
cost.
historical
greater,
at
real property assets are carried on the books
Most
of
spite
33)
Board's Standard 33 (FASB
the
which
calls for adjustments to book values so that net assets
are
terms of constant dollars and current costs
- a
in
stated
practice which is followed in footnotes, but not in the main
financial statements. 7
with properties that
corporation
a
Therefore,
are
worth more than book value may have a great amount of unused
secured borrowing capacity lying dormant.
real
estate
assets that are not actively
resources.
an
As
example,
potential
Lockheed
be
drain
on
Corporation
has
Burbank
that are severely under-utilized given the
current
real
estate holdings adjacent to
value of the property.
could
a
may
managed
the
significant
Airport
therefore,
and,
under-utilized
In addition, the
include
an
A proactive strategy for the company
evaluation of the
31
current
use
to
the
and
parcelled off or developed
the
corporation.
at
sale
quick
The land could be rezoned
highest and best use.
potential
a
A reactive approach might necessitate
distressed prices at some
corporation is in desperate need of cash.
management
proactive
to
profit
at a tremendous
point
the
when
It is clear that
stands a greater chance of
enhancing
to
It also requires a corporate commitment
profitability.
active management of real estate assets.
Corporate
tapped
from real estate's
estate
that
unique
have
provided
a
have
developers
Major
characteristics.
being the most significant users of America's
corporations,
office
real
the profit
of
portion
substantial
of
users
and industrial space,
already direct the commercial
real estate market in terms of what is built and where it is
The assets of today's corporations can be better
located.8
they will but recognize
if
utilized
potential
within
the
Robert K.
utilization.
real
estate
the
untapped
portfolio
profit
and
space
Brown, Director of Real Estate for
Rockwell International Corporation stated:
better
is
mission of the corporate entity
"no
or more critically judged than profit
understood
Hence, the real estate unit should also
performance.
be judged on the basis of its contribution to profit
performance, and it should be directly accountable to
top manggement on the same basis as other operating
units."
The key to hidden value from a corporate perspective is
profit
(which
includes reduction of occupancy
find acceptance within boardrooms,
should
be
oriented
towards
32
cost).
To
any real estate strategy
enhancing
that
measure
of
To find the "hidden value" in
well-being.
corporate
real
a corporation must first be interested enough to set
estate
a
up strategically oriented evaluation system,
measure
and
a line
real
Otherwise,
accountability.
continue to be under-utilized and a
will
estate
of
performance
potential
drain on corporate earnings.
has generally shown that
Experience
corporations
who
"stick to the business they know best" stand a better chance
of
While
success.
on
focus
the
that is an argument for maintaining
primary
line
of
business,
does
it
a
not
substantiate any right to neglect, or refusal to enhance and
capture the value in corporate assets.
B.
DETERMINING A CORPORATE REAL ESTATE STRATEGY
realization
A
that
value lies within
corporate
the
real estate asset coffers requires a plan for extracting it.
The following strategy is a tool for assessing and capturing
that
suggested
literature
represents a
It
value.
by
on
corporate
facilities
compilation
real
estate
management
of
strategies
managers
and
real
and
by
estate
investment strategy. 10
Determining a corporate real estate strategy involves a
series
of steps to be applied corporate-wide on a
by-project
basis
as outlined in Table 2A.
discussion describes the process.
project-
The following
TABLE 2-A
DETERMINING A CORPORATE REAL ESTATE STRATEGY
I. NEEDS ANALYSIS PROGRAM
1. Assess Corporate Objectives and Strategies
o Financial objectives
o Operational objectives
o Basic screening criteria
III. JOINT VENTURE STRATEGY AND AGREEMENT PROCESS
1. Select Option
o Operating plan
o Define expectations
o Gather information
Conduct Detailed Financial & Qualitative Analyses
o Market/marketability analysis
'o Structure financial requirements
o Set corporate parameters
2.
Evaluate Current Status of Real Estate Portfolio
o Identify properties
o Assess efficiencies
o Isolate surplus properties
2.
3.
Forecast Capacity and Facility Needs Requirements
o Identify operations needs
o Budget/financial constraints
o Time horizons and lead times
3. Partner Search and Selection
o Requests for proposal
o Screening
o Negotiation and agreement process
jSs
II. EVALUATION OF ALTERNATIVES
1. Generate Alternatives and Standards
o Collect location data
o Build/joint venture/lease options
o Use requirements
IV. MANAGING THE JOINT VENTURE BUSINESS
1. Manage the Development Process
o Degree of control
o Risk containment
o Accountability
2.
Establish Decision Making Criteria
o Financing decision
o Critical analysis (NPV, IRR, Occupancy Cost)
o Qualitative factors
2. Conducting the Business
o Dealing with conflicts
o Information exchange
o Adapting to changing needs
3.
Analyze Alternatives
o Weight risk/reward tradeoffs
o Cost/benefit analysis
o Efficient frontier - portfolio analysis
3. Meeting Corporate Goals
o Expectations of user group
o Assertive support function
o Performance measures
I. NEEDS ANALYSIS PROGRAM
The
needs analysis program represents the ongoing
day-
within
the
and
standards
estate
group
technical.
is
entity within the corporation has
operating
Each
real
is as much political as it
It
corporation.
the
of
function
to-day
own
its
interests - many of which may conflict
with
the real estate group and its mandate.
1.
Assess Corporate Objectives and Strategies
The
first task is to probe and define the short
long-term
strategies
corporate objectives and the intended
achieving
for
them.
Before
a decision can
- and
be
made
to
attempt a joint venture development, the corporate executive
needs
to
the
assess and clearly understand
corporation's
primary goals.
From
objectives
a
list of corporate
and
constraints
financial
the
operational
and
corporate
manager
can
establish initial screening criteria for analyzing proposals
or
alternatives
estate.
for leasing,
buying,
or developing
These criteria are applied at different stages
the evaluation process
real
of
to distinguish options that are best
for the corporation's goals and policies.
2.
Evaluate Current Status of Real Estate Portfolio
This step is best performed on a continuous basis.
involves
setting up an inventory system to track properties
in terms of costs,
inventory
It
market value, income, and expenses.
should be an up-to-date record of all
The
properties
by location and
leased;
and
owned
type
of
Other
use.
pertinent information includes the description, age, capital
improvements,
historical
and
needs,
performance of
each
property.
3.
Forecast Capacity and Facility Needs Requirements
groups
operations
The
will
be
their
implementing
respective strategies for achieving corporate objectives and
or
expanding
have
will
contracting
The
needs.
space
corporate real estate function is to accurately assess those
needs and be prepared to fill them when
facilities
scrutiny
requires
This
of
the
budget
needed.
financial
and
constraints on each operations group, relative to its plans.
II. EVALUATION OF ALTERNATIVES
process
The
of
evaluating
alternatives
available
increases the probability of making decisions that
space
utilization
Generating
and
alternatives
profit
is
objectives.
maximization
creative,
a
optimize
yet,
intuitive
process that becomes more efficient as experience is gained.
Creativity
reasoned,
is
to be encouraged in this stage
creative
since
well-
alternatives often provide new ways
of
maximizing gain.
1.
Generate Alternatives and Standards
Once an assessment of the corporate objectives, policies
and
requirements has been made,
be brought into perspective.
the real estate issues can
The assessment procedures may
seem second-nature, but their importance is accentuated by a
perusal of the many failures experienced by corporations who
embarked into the development without adequate planning.
The next step is to bring the developable asset into the
Will
process.
analytical
its
Will it reduce the
contribute to the main line of business?
A question that is not so easy to answer
cost of occupancy?
at
which must
one
but
first,
way
some
in
development
be
revisited
continually
throughout the process.
the
venture
options
/
corporation
has
alternatives
that
tenants
in
preference
and
The next
step
as
financing
soft
lease continuum
been
recently
or
large
master-lease
quest
desperate
as
real estate markets such
build/
One
beyond.
evaluating
capitalize on the
The
alternatives.
considered can fall anywhere along the
alternatives
joint
location
data from the operating group.
requirements
considers
start with
may
process
The
Houston
for
or
Denver.
must
In
the initial "brainstorming" process some standards
be
set to disqualify alternative proposals
clearly
IBM
will only consider markets where they have
critical mass of employees and space needs that they
to
maintain for the foreseeable future.
stage
of
development,
developer characteristics.
size
a
expect
Examples of other
standards might include design requirements,
criteria,
are
For
interests.
beyond the scope of the corporate
example,
that
of
rate of return
facility
and
a
on
proposals
which
defines
corporate
screening process.
may
It
to
blindsighted
the corporate decision-making
leave
the
The disadvantage is that it may skew the
results and stifle creativity from the developers.
also
The
assumptions.
the
the form proposal is that it facilitates
of
advantage
asked
states
submit
to
might be
form
standard
explicitly
and
criteria
partners
potential
Next,
important issues that were overlooked.
The discussions in this text imply that the corporation
is the initiator of the project.
uninvited
by
spawned
In fact, many projects are
proposals.
have
It may help to
a
system of initial tests to determine whether the unsolicited
warrant
proposals
bases initial review criteria on
corporation
one
least,
At
scrutiny.
further
predetermined
location and timing factors.
2.
Establish Decision Making Criteria
The
of
alternatives generating process is essentially
the financing
making
used
criteria
The
decision.
be one of the
can
include
analysis
standards
on the basis of NPV,
Alternatives
used.
IRR,
making
investment
assessing
by the corporation in
options
decision
one
or
Occupancy
Cost.
experienced real estate manager stated
One
financial
often
the
that
analysis may serve as the screening device,
alternative
qualitative issues such as;
selected
is
location,
38
on
the
basis
while
most
of
timing, term or need
and other macro political or socioeconomic issues.
3.
Analyze Alternatives
The
critical
Cost)
Occupancy
alternative
require
to the
relative
of
tradeoffs.
This
others.
first cut pro
or
IRR
of
each
process
will
should be applied in an analysis
generations
risk/reward
NPV,
(ie.
criteria
analysis
figures
forma
and
Many subjective factors impact the
analytical process.
It may help at this point to apply traditional portfolio
techniques to weigh
management
risk/reward influences
and
establish whether each alternative falls along the efficient
Cost/benefit analysis will help
frontier of expectations.
apply the more important qualitative issues.
The
one
financial feasibility exercise should begin with
cash
year
corporation's
flow
projection
return/risk
that
requirements
lender's loan underwriting requirements.
do
not
a
considers
the
as
the
as
well
Alternatives that
meet the corporate return criteria or that fail
to
at
this
corporation had qualitative standards
that
exclude any alternatives less than 50,000 square feet.
They
qualitative
meet
standards should be
eliminated
point.
One
large
also insist on getting in at the predevelopment stage of any
project
(lease/buy/or joint venture) so they
design
criteria and so they could capture the
could
impact
value- added
qualitative
the
Often,
involved.
was
ownership
where
may consist of preferences of the officers of the
standards
corporation.
III. JOINT VENTURE STRATEGY AND AGREEMENT PROCESS
To
point
this
to
given
been
and
gathering and sorting in order to generate
information
range of
the
evaluate
a lot of attention has
this
At
alternatives.
available
juncture the decision to pursue a buy/joint venture or lease
alternative
is
made.
assumes
The remainder of the model
that the previous financial and qualitative analyses led
selection
and
analysis
The
of the joint venture alternative.
and
Much more detailed
decision are hardly complete.
to
focused analysis is conducted through this next stage.
1.
Select Option
tentative decision has been made to pursue a joint
The
next step involves a thorough definition
venture.
The
corporate
expectations
information gathered must be more
the
equity
investments will be made?",
corporate
an
operating
"What
precise:
"What are the
locational and space requirements?",
the design and space standards?"
the
devise
Key assumptions are brought into the analysis process
plan.
so
in order to
of
precise
"What
These are all examples
questions that will come up at this
point.
are
of
Operating
plans should be drawn up and circulated to key people within
the
organization to ensure that the inputs are according to
expectations.
2.
Conduct Detailed Financial & Qualitative Analysis
data
analysis
flow
of
requirements
Financial
speculative
anticipated
potential
desired.
property
marketability
here
While separated
space.
and
specified
clearly
are
into
made
is
investigation
of
type
the
and
discounted
conduct
from previous steps to
generated
cash
gathered
corporation combines all information
The
Key
concert with the partner search and selection process.
The
assumption
that
can
simultaneously.
more
the
In
where the initiative comes from the
scenario
simplified
the
on
are
several proposals have been solicited
evaluated
be
discussed
issues
partners.
potential
the
come from proposals submitted by
must
in
this step is actually being conducted in
terms of function,
data
of
and
likely
developer,
a
shortened pre-screening process will be helpful.
3. Partner Search and Selection
The basic parameters of the expected project are
The first milestone
to developers and proposals requested.
is
to
partner.
the
a meeting of the minds
gain
The
parameters.
agreement
process
criteria.
the
prospective
negotiations process is underway
and
fit
the
selection
and
eliminates those proposals that do not
corporate
Chapter
with
Many qualitative factors are applied in selecting
developer.
screening
issued
four
The
entire partner
gets underway with the accepted
discusses
more
detailed
partner
suitor.
selection
IV. MANAGING THE JOINT VENTURE BUSINESS
and development plan are
agreement
the
marriage
consummation are not
its
and
steps
significant
the
However,
model.
this
not covered within
are
that
entity,
business
establishment of a joint venture
The
considered
be
to
lightly or insignificant, so they are discussed elsewhere in
(Chapters
text.
the
issues).
four and five covers these
it takes on a life of its
Once the venture is formed,
own,
but still requires ongoing management.
1. Manage the Development Process
The development process is
out
in
development
The
effect and influence that the
corporation
partnership
bring to bear on the process must be spelled out
will
Control
advance.
status
corporation's
will
within
general or limited partner.
- whether
partnership
However, a limited partner can
venture agreement and the lease contract to make
the
almost
how
on
to
be
developer
parameters.
the
enough control
for
measures
indistinguishable.
risk
for what.
accountable
debt
the
the
of
function
the
difference
agree
be partly a
well
through
define
effectively
joint
be
and
in the
detail
in
agreement.
and
risks
with
The means of managing the process should
complexities.
laid
ladened
The
partners
must
is
contained
and
who
Few corporations want
the
project
is to be
recourse and may require guarantees
debt as well as construction-cost
from
the
and
time
2. Conducting the Business
In most cases the developer will insist on
should be the operating partner.
into
Systems must be put
It must
place for dealing with conflict and changing needs.
be
and
being
remembered that the two partners are typically coming to
expectations.
this transaction with many mutually exclusive
For instance, the developer typically wants higher cash flow
for
and
terms,
financing
better
the
corporate
if
finance
out of the project to funnel cash reserves
when
the developer has other
out
cash
partner wants to
happens
parent
What
costs.
user group wants reduced occupancy
corporate
The
value.
residual
or
the
to
These
expectations?
issues must be resolved in advance.
3. Meeting Corporate Goals
The corporate real estate
or
department
never forget that it is nothing more than a
should
but not at
the
This last step returns
the
to the beginning assessment of corporate goals
and
of corporate assets.
It can be profitable
expense of the parent.
direct
process
support
seeking to maximize the value
group to the primary business
argues
subsidiary
for the implementation of performance measures
that
enable the real estate function to assess its contribution.
What performance measures should be used by a corporate
real
estate
The
entity?
two most
important
reduction of occupancy cost and profitability.
milestones
employee,
employed.
such
as
delivery
time,
goals
are
Performance
occupancy
cost
per
or cost of real estate to corporate assets can be
The
impact
of
real estate activities
43
on
the
be
can
is important and key reporting standards
balance-sheet
to measure
implemented
it.
Some
measures
suggested
include:
o percent of real estate assets/total assets
o percent of real estate assets/shareholders equity
(and
o property sales contribution to annual earnings
earnings per share)
o Percent of corporate debt in real estate assets
o disposition values of surplus properties 12
o performance relative to annual objectives
The
performance
measurement
evaluation
status
Table 2-A.
and
measures will differ by
particular
could be initially
company,
but
on
the
based
of corporate real estate recommended
space
Reductions in occupancy costs of current
additions to profit or net-worth in the utilization
surplus
space
don't
that
are both key measures.
should
profitability
be
abandoned.
Since
of
efforts
Management
contribute to reduction in occupancy
in
costs
real
or
estate
management is a support function within the corporation, the
performance
measures should also reflect the
which
manner
support is provided. Performance measures are complicated by
the
conflicting
objectives between the real estate
and the operating groups within the corporation.
2-B).
groups
(See Table
Effective operations require a constant balancing and
reassessment.
AT&T's real estate philosophy is to provide space
each
the
where
user-group
at a competitive cost of occupancy
within
market while simultaneously generating long-term
possible.
The effect of that approach is that
44
to
value
they
take
deep concessions offered by
the
like
markets
Denver
developers
soft
participate
but
Houston,
and
in
in
ownership where profit potential still exists for developing
space.
Xerox
Corporation has instituted a complete
strategic
these
conflicts
designed
is
with
to deal
program
that
through
the use of joint ventures and
Every
evaluation.13
to
appear
be
the most
performance
objective.
successful
some
expressed
interviewed
in balancing the conflicting
difficulty
who
company
ongoing
have
Those
implemented
internal measures that they try to adhere to.
TABLE 2-B
DYNAMICS OF INTERNAL CORPORATE CONFLICT
OPERATING GROUPS
REAL ESTATE GROUPS
TIME HORIZON
Short-term
Long-term
EARNINGS PERSPECTIVE
Pre-tax
profits
After Tax
cash flow
Short term
Gains
Cash flow &
appreciation
DESIRED DEBT RATIO
Low or debt
desired for
operations
High
FACILITY LOCATION
LAYOUT & DESIGN
Image unique t:0
enterprise; or
low cost of
Configure to
VALUE
PREFERENCE
FACILITY
STANDARDS
Maximize
45
utilLity
"fit" market;
speculative
Maximize
market value
Can these differences be mitigated in a way that allows
the
corporation to maximize the value of their real
without
The
detracting from the primary
essence
minimized
of
by
operational
this paper is that the
a
real
assess
strategically
corporate
and
objectives.
respond
is
to
maximizing
value
be
organized
to
the
corporate
a joint venture with
the
experienced real estate developer provides
for
can
For the firm with the appropriate
operational characteristics and needs,
an
objectives?
conflicts
estate group that
estate
of
corporate
real
vehicle
estate
while
supporting primary corporate operations.
C.
CRITERIA FOR CORPORATION JOINT VENTURE VIABILITY
ventures to develop real estate may represent
Joint
change in the way a corporation does
significant
a
business.
There are numerous conflicts and complexities that require a
different
approach than conventional corporate real
estate
The suggestions in this section are based on my
procedures.
observations
of
literature
corporate ventures and the
on
joint ventures in general.
This section outlines and defines some of the standards
for
judging or deciding whether a joint venture is a viable
given
alternative
corporation.
with
the
worthwhile
ideas
were
the
Viability
and
needs
is
characteristics
corporate framework and likelihood
of
making
contribution towards corporate objectives.
comments
of
currently involved in corporate joint ventures.
46
a
compatability
defined by its
mostly derived from
of
a
The
interviewees
o Interest and Motivation:
The
venture
most
essential ingredient for success of a
approach to developing real estate is the
and motivation of corporate management.
joint
interest
Many companies have
a prescribed approach to the management of their real estate
assets
which
example,
space
In
they
have no
intention
of
changing.
many manufacturing based corporations have
For
unique
requirements to serve their manufacturing operations.
most
cases,
they have developed a
cadre
of
in-house
capabilities to design, build and maintain these facilities.
Their facilities are built,
requirements of the firm.
a
as needed,
to fit the specific
About the only motive to involve
developer would be to gain access to a site controlled by
the developer.
Otherwise, the zoning and approvals would be
handled by attorney's construction,
and
design done
internally
marketing or management would be required;
no
so
the
developer has little to offer that they don't already have.
the
Without
the
managment,
joint
venture
and
interest
motivation
of
corporate
impetus to orchestrate and manage a complex
structure
would
be
insufficient.
driving force must be instituted or strongly supported
The
from
the top.
o
Autonomy:
One
characteristic
of
most
corporations
successfully put together and operated a joint
some
who
venture,
have
is
degree of autonomy for the real estate function or top
47
The manager of
management active in executing the program.
the corporate entity of the partnership must be able to make
operational
and
financial
The
quickly.
decisions
process is characterized by the need for
development
quick
reactions since markets fluctuate, political climates change
and each project is substantially unique.
entrants
corporate
require
management
style
quick
was
their
Not only does the development
inability to respond quickly.
process
failed
development
into
One reason early
response,
developer's
the
but
To
and culture is so oriented.
compatible partnership arrangement,
have
a
must
management styles
be symbiotic.
o Capable Internal Management:
Joint
ventures are complex and require a great deal of
The
manage.
managerial
attention to form and effectively
management
team on the corporate-side must be competent
dealing
with
operations
with
internal complexities
groups) as well as negotiating
partners
developer
product
(such
than
they are.
who are more
as,
The real estate
satisfying
favorable
familiar
in
terms
the
with
management
team
should be familiar with real estate and the facilities needs
of
the corporation.
Familiarity with corporate
financial
principles is also a must.
o Proactive Management Strategy:
From an internal perspective, the management style most
likely
to
work
for joint
venturing
proactive rather than reactive.
and
development
is
Managers need to be able to
to
respond
forward and capture opportunities rather than
look
crises.
response time is already slow due to
The
nature of the development process.
corporate
the
real
estate
occupancy
can
department
The typical
costs.
By preparing in advance,
make
likely
are also more
that
decisions
oriented
profit-
to
reduce
approach
response-oriented
to find space only when the need is imminent.
looks
As
scramble to find a space for which
they
consequence,
the
a
they
have to pay premium prices.
o Appropriate Corporate Characteristics:
alternative.
and
financial
These
considered
in
venture.
Tables
characteristics
makes
and
difficult
are
characteristics
to
operational
2-D
and
2-C
prime
such
absolutes.
in
express
some
outline
be
should
attributes
the appropriateness of
evaluating
a
Most
characteristic.
such
one
of
example
is
corporate land
surplus
of
availability
for
requisite
ventures to be an attractive and viable
joint
The
characteristics are
corporate
Certain
a
joint
of
the
as if they were bipolar ends of a continuum
broad
characteristics
The
generalizations.
demonstrated on Tables 2-C and 2-D are exemplary.
They are
of
corporate
to
be
considered
characteristics,
a
the
within
whole
not as stand alone determinants of whether
joint venture is "right" or not.
corporate
range
attributes,
the
success.
49
more
The better the fit
of
chances
of
likely
the
The
following
cycles
in
the
should
be
given
general
discussion
will give an
business where
rather
a
joint
consideration.
than
definitive
idea
venture
The
and
of
development
conclusions
can,
the
therefore,
are
be
applied by analogy only to the specific situation of a given
business.
o Contracting Market:
A
steel
firm
industries
consolidate
such as the
in a contracting market,
in
recent
years,
will
be
oil
or
looking
to
and perhaps liquidate their real estate assets.
A primary interest may be to determine ways to convert
real
estate into cash. This may be an opportunity for development
ventures,
Either way, knowledge of the business cycle will aid
sell.
the
may also indicate a pure need to package and
but
real estate manager
corporate
structure
ventures
interest
of
mature market may provide the prime opportunity
for
reflect
which
to
the
corporate
strategic
consolidating assets and generating cash.
o Mature Market:
A
real estate joint venturing.
for
The corporation may be looking
opportunities for pooling corporate earnings and at the
same time reducing occupancy costs.
methods
of
structuring
development
accomplishment of both objectives.
requirements
into
The "off-balance-sheet"
ventures
allow
Consolidations of space
joint ventured facilities can allow
corporation to take advantage of premium locations and
money.
The
cash
generated
50
for
by the stable market
in
the
save
the
primary
business
line
can
be
efficiently
utilized
in
buildings
in
development of real estate assets.
In
addition,
by
investing in land and
strategic areas during mature,
can
of
profitable, cycles companies
preserve the strategic tactic and financial flexibility
effecting
a sale/leaseback at a time when
the
capital
market might be expensive.
o Expanding Market:
In this stage corporations are least likely to be in
position
for
joint
greatest
and
the
venturing.
The
flexibility.
will
company
company
will
Cash needs
be
will
in
need
to
want
of
have
not
necessarily
Recognition
most conducive
of
those
maximum
flexible
objectives.
that the market will not expand forever must be
made so that the real estate assets do
demise
to
the
Ownership
occupany terms that can respond to quick changes.
is
be
a
the
company as the
not bring about
expansion
cycle
the
reverses.
Heavy expenditures for fixed assets in a cash-poor cycle can
be
detrimental to the company's growth as well as
stabilization. 1 4
51
eventual
TABLE 2-C
FINANCIAL
CHARACTERISTICS OF A VIABLE JOINT VENTURE CANDIDATE
GOOD CANDIDATE
WEAK CANDIDATE
1. PROFITABILITY
Highly profitable
& stable earnings
growth.
Declining quarterly
margins; Need to
show current
quarterly earnings.
2. CASH FLOW
Surplus cash;
needs reservoir
for cash.
Needs short-run
consistent cashflow
yet cash flow is
down.
3.
Long term.
Short term.
Accepts calculated
risks yet seeks to
share risks.
Highly risk averse
5. DEBT TO EQUITY
Low debt.
High debt.
6. BUSINESS CYCLE
Mature, or at
crest of growth
cycle.
Declining.
INVESTMENT
HORIZON
4. RISK
POSTURE
7. INCOME STABILITY Stable or growing.
8. TAX NEEDS
Tax benefits can
be utilized.
Declining.
No use for tax
benefits.
TABLE 2-D
OPERATIONAL
CHARACTERISTICS OF A VIABLE JOINT VENTURE CANDIDATE
GOOD CANDIDATE
WEAK CANDIDATE
1. ORGANIZATION
OF REAL ESTATE
DEPARTMENT
Reports directly
to President or
board of directors.
Autonomous authorization to pursue
development.
Facilities department an appendage
to operations
entities. No independent decisionmaking
capabilities.
2. LAND OWNERSHIP
Own surplus
developable land
or desire to own
unique sites.
Own sites intended
for 100% use of
corporation.
Transportation,
High-tech.
Manufacturing.
3.
BUSINESS TYPE
4.
INDUSTRY CYCLE
Counter-cyclical
with building &
development
industries.
Same business
cycle as building
& development.
5.
LOCATIONAL
PREFERENCE
Strong interest
or need to locate
in specific sites
or those with
specific
demographics.
Indifferent to
most
location options
(ie. unsophisticated
manufacturing
operations).
Generic or
flexible; office,
speculative.
Highly specialized;
marketing centers,
unique.
Growing need to
occupy space.
Oversupply of
space or need to
consolidate for
strategic
economies.
Minimal
In-house
construction,
design and
marketing.
6. SPACE REQMENTS
7.
SPACE
NEEDS
8. DEVELOPMENT
CAPABILITIES
o Compatible Partner:
A
who
partner with development skills and professionalism,
for
One
partners.
the
communication,
The
style.
possessed
with
only two have had problems
this research,
venture
interviewed
Of those
to joint venture success.
essential
was
other
to
attributed
is
objectives
and
to corporate needs
responsive
is
lack
the
in
incompatibility
joint
of
management
developer partner should contribute skills not
the corporation,
by
yet they both
should
have
fundamentally similar management philosophies.
o Economically Sound Project:
All of the right partnership ingredients and
will
characteristics
do
unsound project succeed.
projected
little to
an
help
corporate
economically
Careful scrutiny of the market and
cash flows should be conducted before
committing
to the venture throughout the analytical process recommended
in Table 2-A.
The corporate partner has a fiduciary duty to
economics
scrutinize
the
developer's
projections.
and
not
rely
just
on
the
in
speculative
phases should consider net expected absorption,
in light of
Market
studies
competing projects built and anticipated.
should
be
reduction
weighed
and all appropriate
put into place.
assure that the
In short,
risks
Financial
measures
of
risk
the corporation must
project will be viable on it's own
not simply because of the corporate presence.
merits,
D. CORPORATE SCENARIOS FOR JOINT VENTURE DEVELOPMENT
The
if
best conceived plan has little chance for
it does not "fit" corporate
context
characteristics.
In
this
corporate characteristics are those operational and
financial
the
success
attributes that make up the current direction
company.
This section begins with some case
that are drawn in large part from actual
examples
of
examples
experiences.
The
represent corporate attempts at resolving the real
estate use issues from primarily an operational
standpoint.
The purpose of the examples is to demonstrate how
corporate
characteristics
impact the decision to joint venture.
The
characteristics
from
the
examples.
Tables 2-C and 2-D are
used
in
Elements from the decision model in Table 2-A are
The illustrations and discussions are meant
also employed.
to be illustrative, not exhaustive. Factors which influenced
the
alternative
attributes
are
selected are listed after each
condensed
into
some
case.
The
conclusions
and
high-tech
firm
discussions further on in the text.
EXAMPLE 1:
Corporation
wanted
to
adjacent
Al,
a
rapidly
growing,
develop their corporate headquarters on
to
their
current
home
office.
The
a
site
purchased several years previous in anticipation of such
opportunity.
The
site
was
an
corporation intends to occupy the entire
building as the need arises,
but may lease out portions
at
first, depending on the rate of growth in the interim. There
is no in-house development capability.
In fact,
corporate
real
estate
people,
yet
is
handled
the
firm
by a small
has
very
staff
of
facilities
well-defined
corporate
policies relating to building type and internal floor layout
and
design.
large
Corporate
cash reserves.
earnings are strong and
they
As the decision was made to
have
develop
the site, the company hired a consultant and contacted local
bankers
and brokers to gain direction and
screening
potential
joint
initially
venture
was
needed
development
(RFP's)
were
means
of
joint
gaining
Requests-for-proposals
and evaluated.
corporate
objectives,
alternatives.
considered as a
The
for
sent to potential joint venture partners
received
was
partners.
expertise.
responses
profiles
venture
information
made
financial
in light
of
A thorough
strategies,
the
various
review
and
and
of
growth
development
The decision was made to develop and own the
site themselves and to hire a developer on a fixed-fee basis
for
development and management services.
for
proposal
was
sent on that
basis
A second request
and
the
developer
selection was made.
Factors:
o
o
o
o
o
o
o
o
o
o
Unique site
Value in land to be captured
Sole occupancy intended by owner
No intention to leverage corporate tenancy
Speculative space only short-term if at all
Needed to gain development expertise
Corporation earnings were high
Credit and cash position strong
Project easily managed adjacent to home office
Corporate headquarters design not standard
speculative
o Financial capacity to own outright
The company was not anxious
joint venture.
a
support
to
purchasing
the appreciated value of its foresight in
share
would
characteristics
many of the
although
inappropriate
deemed
was
venture
joint
a
instance
this
In
the land with a developer who shared little risk. They found
a
of achieving their
means
and
objectives,
While
control and flexibility without sharing in the value.
development
lacked
they
adjacent
immediately
It was felt
management and control could be easily exerted.
the
that
where
headquarters
corporate
to
was
project
the
expertise
for
desires
developer had sufficient incentive to manage
the
project well without a "piece of the upside".
EXAMPLE 2:
manufacturing
marketing
is
B2
Corporation
firm
a
with
Fortune
high-tech
500,
international
manufacturing
and
and
Over time
space needs that are growing rapidly.
the corporation has developed a strong cadre of engineering,
needs
space
their
architectural capability.
and
construction
The
engineering.
are
unique
and
Most
all
of
special
require
design must allow for easy adaptation to
changing
manufacturing
typically
housed
in
one-two
facilities
Their
needs.
story,
industrial
or
are
R&D
environs but have very unique build-out requirements such as
loading-docks
and
HVAC
and
above-standard
requirements.
characteristics
Typical
floor loads,
electrical
speculative
location
not
necessary.
for their developments are
Prestige or proximity to major centers is not important, but
cost
and availability of labor force are.
also of little importance.
strong
cash position,
viable
option.
their
manufacturing
Design style is
For this company,
in a
highly
a joint venture is not considered
a
Instead they build and own the majority of
marketing
spaces
borrowing
capacity
facilities
under
and
flexible
lease
terms.
the
The
smaller
corporate
and credit allows them access
to
debt
financing at rates much more favorable than typical mortgage
rates.
Factors:
o Manufacturing firm
o In
house,
design construction and engineering
capabilities
o Above standard engineering requirements
o Needs oriented corporate philosophy
o Special purpose type buildings
o Little risk in type of single use projects
o Obtain financing from corporate paper market
o Strong credit and debt capacity
o Favorable debt terms through corporate bonds
Company B2 has the capability to handle most of
They employ several engineers, construction
needs in-house.
managers
and
building
space
designers.
that
They
is highly
responsive to their own needs.
office
space
Engineering
The
their
is generic.
are
not
marketable,
but
want
So what can a developer
available
it
their
With few exceptions,
and construction skills are
with
concerned
offer?
within.
corporation can hire the same attorney that a developer
would use to gain approvals.
The financial and marketing risks are virtually
existent
since
they
don't intend to share
facilities
nonor
space or build in a research park.
So, they build what they
have unique needs for and lease the rest.
is
benefit
to
likely
B2
is
not
example of the type of company that
prime
the
Corporation
from
joint
a
speculative
requirements are much different than those of a
is
so the only motive for building additional space
market
their
for
space
Their
venture.
own
future
the
Furthermore,
expansion.
corporation is not seeking to share risks or gain expertise.
best
is
Value
captured
by
providing
efficient
cost
manufacturing facilities that meet their standards.
EXAMPLE 3:
Corporation
Many of these
developable properties across the country.
have
properties
ten
over
been on the corporate books for
have market values that are several
and
years
surplus
C3 owns several thousand acres of
times
book
The corporate financial posture has been weak as its
value.
primary business lines are in down-cycles. There is a strong
need
to
risks.
same
generate earnings and at the
C3
has
time
minimize
sold several properties only to watch
the
investor/developer make considerable profits in a relatively
short
time
by
packaging or
resaling.
The
company
has
commissioned studies to determine which of the properties in
their portfolio have the greatest potential and to determine
At least
one
attempt to develop land brought about losses when
the
the highest and best uses for each property.
solo
market
was
inaccurately
assessed.
capture the value in their assets,
C3 desires a
way
to
yet, they don't have the
development
expertise.
They are also concerned about
conflict between real estate value realization and the
to book short-term earnings.
the
need
The corporate parent does not
want to incur more debt.
Factors:
o
o
o
o
o
o
Surplus property
Need of development skills
Desire to capture value, yet minimize risk
Interest in learning the development business
Previous difficulty in assessing the market
Need to keep debt off balance sheet of parent
The corporation opted for joint venture development of
several
properties
order
in
to
gain
the
development
capabilities and capture a portion of the value added by the
development.
The surplus properties were underutilized, but
characteristics
about
in
The
latent values which could be captured.
had
this firm give reasons
of
financial
skepticism
for
the viability of a joint venture approach.
of other
light
develop alone),
approach
(lease,
alternatives
capturing value
sell,
through the joint
However,
hold,
or
venture
may prove to be most advantageous in the long run.
C3 may want to limit its investment to the packaged value of
the
require
would
at the highest and best use)
(i.e.
land
developer guarantees.
minimize
risk,
as
A limited partner
well
as
position
but may preclude the opportunity
of
gaining development skills for use in the future.
EXAMPLE 4:
Corporation
D4
international presence.
is
a large
blue-chip
company
with
The corporate earnings are stable.
every
virtually
Some
country.
the
metropolitan area in
they
strength,
have
ownership
an
that
found
allows them to lower occupancy costs by leveraging
position
They have
the value of their presence and blue-chip credit.
also
found that their presence adds value,
and
users
ownership.
The corporation has a well-staffed internal real
and
requirements
facilities
through
captured
that can be
owners of space,
surrounding
to
facilities
estate division that manages all real estate and
needs
it's
of
can gain tremendous concessions by virtue
and
the
While
of the space has been used inefficiently.
company
size
large
in
offices
have
They
are constant.
projections
Growth
at
reports
corporate
large
cities.
The
space
The
level.
staff
potential for concentrating
allow
in
the
corporate
image
and
is
important so corporate design is important in conveying that
Nonetheless,
image.
space needs are equivalent to
first-
class speculative office.
Factors:
o
o
o
o
o
o
o
o
joint venture provides the best alternative in
A
case
since
tenancy
credit
Space needs roughly equivalent to speculative office
Large corporation
Strong credit
Tenancy adds value
Prime locations important
Long term growth expectations
Control of design important
Need to consolidate occupied space
to
corporate user can
the
share
tenant
and
in its value.
the corporation
leverage
The developer
can
reduce
occupancy costs and improve upside potential.
61
its
this
desired
gets
the
effective
The dichotomy
smoothed
is
estate
real
earnings horizons of the primary business and
between
The
financing".
real
use
the
by
sheet
balance
"off
of
estate subsidiary is set-up
as
an
unconsolidated subsidiary so that only the equity investment
shows up on the parent's balance sheet.
EXAMPLE 5:
Corporation
5E is in a high growth mode and
occurring so rapidly,
space needs.
for
suburban
it is difficult to accurately predict
Their space needs at this point are primarily
office or R &
D
type
buildings.
minimal.
Corporate
energies
and
Long-term
Cash resources
commitments could impede needed flexibility.
are
to
Since growth is
earnings to fuel continued growth.
funnel
needs
are
resources
predominantly oriented towards growth and market access.
Factors:
o
o
o
o
o
o
High growth
Need for flexibility
Cash poor
Management intent on fueling growth
High risk profile
Highly leveraged
For this company in the short-term the best alternative
is
to lease their space.
the
The need for
use of
more
flexibility
expensive,
probably
require
leases.
They have little leverage as a high
oriented company.
partner
would
short-term
risk,
growth
Long-term commitments as owner or venture
may prove destructive in the event of cash squeezes
or plateaus in the business cycle - a risk that the board is
not anxious to take.
EXAMPLE 6:
Corporation
F6 is a large,
Each site must fit
estate needs are very site-specific.
set
criterion.
of
order to gain
access
Otherwise, they
developer/landowners.
substantial
number of the sites they use.
virtually every site decision is location.
prestige
to
with
location are all important.
in
own
try to
The
motive
a
in
Demographics and
When a
site
they will consider a variety of alternatives.
desired
a
certain
sites the company often does joint ventures
desirable
the
In
real
regional firm whose
is
All
sites are leveraged so that cash can be funneled to the main
business line.
means
They are only interested in real estate as a
to accomplish their corporate
In
objectives.
most
cases, the developer must carry 100% of the development risk
since
the joint venture is not signed until the development
is virtually complete.
Factors:
o
o
o
o
o
Risk averse
ownership a good choice
Site specific needs
Flexible management approved
Secure cash position
A joint venture for
perceived,
primarily,
corporation
has
as
a
financing
zoning
F6
but
The
building
understands
and approvals process and knows the market
its own needs.
to the site.
option.
the capability to manage its own
program and has built for its own account.
the
idea,
this company is a good
for
The key to the joint venture here is access
The
the
preceding examples are intended to illustrate
under
circumstances
a
which
joint
venture
approach
to
providing corporate real estate needs is appropriate.
It is
clear that the developer liaison is not beneficial in
every
Virtually,
circumstance.
way or the other,
is often based on some
needs characteristics.
of
that decision
from
The decision to go
of leased and owned space.
combination
one
all major corporations have some
In
them.
criteria
or
Joint ventures should become a part
process for corporations who may
essence,
benefit
three
the analysis has produced
broad categories of potential beneficiaries of joint venture
speculative
and
credit
leveraging
1) the corporation
alternatives:
development
its
tenancy,
developable
property,
locational
preferences
needs
- who
in
interested
is
2) the corporation
and,
strong
with
with
surplus
3) the corporation with unique
desiring
to
gain
access
to
a
particular site.
E.
CORPORATE JOINT VENTURE PROFILES
are three dominant profiles which seem
There
the
scenarios
ventures:
and criteria necessary for
corporate
fit
to
joint
1) credit leveraging development, 2) surplus land
development, and 3) location seeking development.
1.
Credit leveraging development:
This alternative offers a means for a large corporation
to
leverage
the value of its tenancy by
participating
as
development partner in a project in which the corporation is
64
essentially the anchor tenant.
It is a situation similar to
that used by anchor tenants in major malls.
is
that
rents
The difference
instead of reducing occupancy costs through
the
corporation
thereby, participates
takes
in
an
the
ownership
cash
flows,
lower
position
tax
and
benefits,
appreciation and eventual sale of the entire development.
The strategy used by Xerox is to set up a joint venture
a reputable developer.
with
phased
project
roughly
The
the
parent
half of the space as anchor tenant to the
project.
partner
unconsolidated
to the joint venture is
subsidiary
separation
the
wholly-
parent.
with
of operating costs from investment costs on
participation
unconsolidated
as
The
the
The subsidiary, thereby, allows
consolidated balance sheet.
on
of
a
maintains an arms-length relationship
parent corporation tenant.
carried
a
occupies
subsidiary
its
develop
corporation
corporate
owned,
wherein
The venture might
the
The parent corporation reports
an
equity
investment
The asset value and
subsidiary.
the subsidiary's books.
in
the
debt
are
The corporation
gets
benefits of premium office space with expansion capabilities
for
the operating groups as well as incremental profit
and
positive cash flow on a major real estate investment without
affecting the overall balance sheet structure. 1 5
2.
Surplus land development:
The
corporation
land
developable
expertise
is
a
yet
who
owns
lacks
the
significant
in-house
parcels
development
likely candidate to benefit from
65
of
a
joint
venture.
Corporations
category
include:
typically
fall
ventures
developer
with
partners,
this
into
paper,
timber,
transportation,
By entering
and natural resource companies.
manufacturing
joint
that
gain
can
they
development expertise for specific projects and perhaps that
enable them to
also
may
knowledge
development themselves.
eventually
embark
on
In addition, they gain value beyond
what they might normally expect from a sale by capturing the
added through development.
value
Their actual
return
on
may be greater to the extent that the land value
investment
is improved by the development effort and/or the
developers
capital contribution.
The development of surplus corporate land is certainly
not
free.
trouble
process
development
reluctant
"the
potential
profit
effect
adverse
profits".
still
needs
pursue the resource
to
and
the
Many
are
Markets must still be tapped
management.
because as they
doesn't exist
or
the development process has
because
on
see
of
it
the
short-term
steel company reports leaving the real estate
A
fast
development business because of its "inability to move
enough" to capture the market. 1 6
However,
the
estate
are those with large amounts of
surplus
The study concludes that these corporations
reflect
development
land.
the companies still involved in real
survival
today
of the fittest and are not representative
typical corporate behavior.1 7
of
Available
include:
land
surplus
a company with
to
holding, selling, packaging and selling, packaging and joint
venturing,
and
recommended
here
developing
jointly
and
to package the property
is
option
The
properties.
the
develop it with an experienced developer.
Packaging
corporation to,
"entails
of
part
some effort on the
the
possible
a) determine the highest and best
use of the property in the current marketplace, b) study the
alternatives
zoning
to attain the best use,
and approvals,
c)
obtain
necessary
and d) market to a developer partner
18
with increased potential value.
firm
One
design
and
arrangement
will
obtain
and
contracts
construction
reduce
resources.
The
prepare
developer
that the
marketing studies before
relinquish rights to the land.
thereby,
risk
requires
and
the
the
financing
corporation
The corporation
can,
commits
the
developer brings expertise and shares
the
its risk immensely before it
with the corporation who contributes the land
- which
is valued higher because of the prepackaging efforts.
3. Location seeking development
The
third
profile
of
a
likely
corporate
joint
venture candidate is one who enters a joint venture in order
to secure a desirable property.
one
The most likely scenario is
where the corporation desires a parcel adjacent to
one
they currently own or they want one in a highly desirable or
prestigious location.
67
One company structured such a joint venture in order to
parcel
a
contributed
$3
at
valued
have
less
than $500,000 cash in the
site
work
and
recouped
developer
process.
funding
was
liable
of
the
initial
would
which
of
construction
development
Upon completion, the liability would be shared.
valued
A big issue in this scenario is how the land is
when
and
and
for
value
the
developer/landowner
possible
be
The
loan.
the
and at risk during
an
would
corporation
project (for
planning studies) all
upon
towards
million
The
$10 million development.
eventual
landowner
the
and
lease
the
contributed
corporation
The
headquarters.
a research campus around their
develop
may
it
A
recouped.
is
soon
want to recover value as
will likely want the highest possible
as
price.
It is in the corporation's interest to not be obligated
for
development
is
of
purchase
the
the
substantially completed.
land
until
the
However, the corporation may want
the land valued at the landowners cost basis, or at least at
it's predevelopment value.
The
same
can
profile
benefits
be
found
structured
in
into
the
this
credit
takes
takes
or
profile
corporation can be a sole occupant of the space.
occupant
leveraging
away the speculative risk,
the
Being sole
but
it
always
away a large portion of the benefits of developing in
the first place.
For example, the corporation would not be
able to capitalize on the external benefits of its
68
location
decision unless there were additional space.
How
for the effective joint venture
makes
What
can
the
of
drawbacks
such
ventures
strategy?
overcome?
be
Certainly the first step is to ensure that the joint venture
is
well
and
conceived
corporation.
ventures
Earlier
revealed
mirrors
studies
that
the
of
"often
objectives
corporate
the
key
of
real
the
estate
executives
and
technical staff had not really identified in thier own minds
what their own objectives were". 1 9
For
example,
corporate
the
in
strategic plan will be significantly affected
macrotrends
corporation.
managers
the role that real estate plays
within the primary business cycle
Discussions
with
corporate
real
of
the
by
the
estate
have revealed that business cycles are predominant
influences in their decision criteria.
Throughout the evaluation and decision-making process a
manager's
corporate
focus must be
continually
toward the two most important criteris:
redirected
1) Does the project
"fit" or enhance corporate objectives and strategies and; 2)
does
it
make economic sense?
have
Far too
led
their
many
well-meaning
companies
into
corporate
executives
disastrous
real estate ventures because it was the
popular
to
develop
thing
to
do or because of a hidden aspiration
real estate.
Corporate joint venture partners may be able to realize
increase
substantial
against
With
corporate
careful
enhanced
in equity without
earnings or balance
planning
a
joint
incurring
liabilities.
sheet
venture
charges
can
result
in
long-term cash flow without significant diminution
By bringing in an experienced
of current quarter earnings.
and
capable developer,
the
risk
of building
Achieving those ends.
these ends can be achieved
in-house
development
without
capabilities.
however, often taxes the ingenuity of
20
the best managers, accountants and lawyers.
70
CHAPTER THREE
UPSIDE AND DOWNSIDE OF CORPORATE JOINT VENTURES
"Babies are in fashion again, and many
U.S.firms are rushing to find partners with
whom to form joint ventures.. .Joint ventures
need as much attention and support from
their parents as do babies."
If
it
emphasized
has
not
that
already
corporate
become
clear
real estate
are
isolated
some specific characteristics of
likely
to
pros
final
In fact this
from and succeed
to corporate real estate.
approach
the
benefit
in
describes
three
candidates
a
joint
"ideal"
be
joint
paper
This chapter
and cons for those "preferred"
section
must
development
ventures
not for everybody.
it
has
most
venture
explores
candidates.
corporate
The
joint
venture profiles.
those for whom a joint venture approach is likely
Even
to be advantageous will have risks and concerns to consider.
The
risk
Potential
of
failure is not inescapable
drawbacks and the
ventures in general are
can
be
any
venture.
causes of failure among
considered
made to circumvent or
in
joint
herein, so that efforts
insure
against
them.
The
potential rewards are discussed briefly followed by a primer
on
planning to overcome the negative attributes in favor of
the positive.
This is a chapter of lists.
Some discussion
is used to elaborate on the issues listed but the
is
intention
to explore the breadth of drawbacks and benefits
rather
than detail their implications in general sense.
all
one
caveat is in order.
the
ingredients for success
careful
in
place,
must
perform
analysis and consideration of the unique aspects of
For therein lies the greatest risk - failure
each project.
to
Even those corporations with
plan and analyze the individual project in light of
and
constraints
failures
in
real
precipitated
resulted
opportunities.
by
from
estate
development
unforeseeable
quick
many
While
may
circumstances
decisions and
aims
to
its
corporate
have
been
many
more
"follow
the
crowd."2
A.
DRAWBACKS TO CORPORATE/DEVELOPER JOINT VENTURES:
"Same bed, different dreams"
- Old Chinese proverb
The
venture
primary
candidate
others.
concern of this section is to
to some of the problems
alert
the
encountered
by
The theory is that awareness of potential problems
will
incite caution and preparation where possible.
3-A
lists a compilation concerns raised in interviews
and
are
not
in
business
Many
absolutes.
The listed
literature.3
can
drawbacks
be
drawbacks
avoided
by
Table
careful
planning that is accurately reflected in the agreements
documents
implemented
of
the
that
Management
venture.
minimize
risk
72
and
controls
optimize
can
and
be
benefits.
TABLE 3-A
DRAWBACKS OF CORPORATE/DEVELOPER JOINT VENTURES
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
Detracts from primary line of business
Loss of control over corporate assets
Risk of financial loss beyond investment
Opportunity cost of time and financial investment
Developers are frequently undercapitalized
Loss of strategic flexibility
Drain on corporate resources and personnel
Potential adverse affect on corporate name or
identity
Conflict with requirement for current earnings
Possible negative impact on balance sheet ratios
Exposure to additional financial risk
Loss of strategic or internal flexibility
Difficulty to "get out" when needed
Conflict with developer's interest in deferred earnings
Increased complexity
Interest rate fluctuations
Political disincentives to propose internally
Developers design criteria may not be in best interest
of the user
Slow and time consuming to set-up venture
addition to the market and financial risk
In
with
real
any
development,
corporate
a
venture
is exposed to internal and exogenous risks from the
partner
introduction
marriage,
variables.
could
estate
inherent
a
of
second
party
picture.
introduces a
As
with
any
of
new
spectrum
The energies required to manage the new venture
detract
corporate
a partner to the
from the primary line
structures
accept a new partner.
of
business.
are not organizationally prepared
Previous studies have indicated
Some
to
that
partners means that the decision-making process will
having
be more cumbersome. 4
the
is
corporation
booked
short-term,
the
conflict between
earnings
the
and
of
requirement
cash
typical
requirements and flows of real estate development.
accounting measures can be implemented,
public
the
the most significant drawback for
Perhaps
However,
even that
wherein,
constraint can be minimized.
unknown variables and potential loss of control to
The
partner
developer
the
is
another
Actual
drawback.
or
for
managers.
One manager stated that "when you give up control,
you give
up
of control can be difficult
loss
perceived
own
your
and
destiny,
that
conflicts
one's
with
obligations to shareholders." 5
B. WHY JOINT VENTURES FAIL:
most
Corporate
joint
stellar
record.
One
problems.
is
due
They frequently go awry
drawback
Obviously
experience.
Another
ventures effectively.
help
problems.
have
and
the
cause
which eventually leads to failure
using
such
the firm can get better at this
with
to the relative inexperience of
ventures. 6
to
ventures in general do not
firms
is the owner's inabilities to
manage
The issues raised in this section are
managers avoid common and
previously
experienced
TABLE 3-B
WHY CORPORATE/DEVELOPER JOINT VENTURES FAIL
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
Inexperience in dealing with outside partners
Incompatibility with partner
Lack of communication
Lack of management support and continued attention
Sharply different management styles, motivations or
commitments.
Failure to agree in advance on how to run the
business
Different perceptions among partners of what is
important
Poorly conceived motivations and business strategies
Leveraging beyond the capacity of the project
Inaccurate assessments of the market potential
Business failure of one of the venturers
Poor planning resulting in unrealistic or erroneous
action
The Time schedules are overrun
(in the immortal words of one
The "costs go crazy"
builder)
A partner loses interest or sells its interest
Conflicting objectives
Lack of follow-through
General eceonomic conditions
difficulty
The most often cited reasons for failure or
ventures
joint
within
were incompatibility
and
lack
of
communication or trust amont partners.
Independent
Lybrand
general)
reveal
fall
studies
by McKinsey & Co.
that "some 7 out of 10 joint
short of expectations
or
are
and Coopers
&
(in
7
disbanded"
ventures
There have been no specific studies to indicate whether that
same
ratio
would apply to development joint
75
ventures
but
many
of the factors contributing to joint venture viability
are the same.
Failures
arenas:
can
1)
assessment
largely be categorized
Partnership
of
market,
in
incompatibility,
three
2)
Inaccurate
financial or development
Inabilities to manage ventures effectively.
broad
risk,
3)
The first
can
be managed largely by careful selection of the partner.
The
other
are
two
and
experience
incompatibility
functions
largely
luck.
To
requires
deal
an
of
with
managerial
the
drawback
up-front recognition
corporation and a developer each has its own
interests are often conflicting.
different
interests
can
open
skill,
of
that
agendum.
a
The
A clear recognotion of the
the
door
synergies and management of differences.
of a compatible partner is essential.
to
creation
of
Careful selection
Some managers suggest
a step-by-step relationship or long engagement periods.
and
Conflict
perceptions
of
disruption
can
come
from
relative importance or value
the
of
some
An illustrative example is the perceived value of a
issue.
corporate anchor's name on the development.
known
differing
corporation
like Xerox is confident
A large, wellprominent
that
display of their logo adds value to the development.
development
perception
tenants
differing
may
partner
because
disagree
displayed logo may
the
from the project.
perceptions
strongly
that
with
deter
As simple as it may
Their
certain
seem, such
can lead to disrupting conflicts
if
not properly managed.
One
joint
management
partner
venture discovered
styles
wanted
between
the
the
sharply
different
The
developer
parties.
to lock-in on a permanent
loan
rate;
the
corporation preferred to wait but finally agreed to sign-off
on the commitment. When rates reversed, an internal conflict
heated up.
In another instance the partners disputed as to
the
of equity investment and
timing
distributions.
There
were big arguments that eventually ended up in a buyout.
Real estate development is a high risk endeavor.
of
A lot
efforts and resources must pour in before any return
- particularly
realized
venture
land.
in developing raw
A
is
joint
with a developer partner can alleviate some of
the
since
risks which have impacted previous corporate entrants
the corporation has the benefit of the developer's expertise
and
to
commitment.
The financial and marketing risk inherent
the industry will nonetheless
if
risk
the
persist.
project fails midstream or if
partner walks away could be devastating.
partner
of
The
financial
the
developer
Even as a limited
amount
the risk of loss could go beyond merely the
invested capital.
mushrooms losses.
instances
"recapture"
requires
in
Foreclosure or liquidation
of
The Internal Revenue
some
tax
some
Service
previously
write-offs
taken.
This ciscussion of the risk inherent to real estate
argues
primarily
that
assessment of the market,
and
that
the
corporation
financial,
it scrutinize the
77
make
its
own
and development risks
developer's
and
consultant's
perceptions.
demand,
market
expected
be paid to
should
Attention
realistic
the
(not
and net expected absorption
gross absorption net absorption also considers lateral moves
and
supply relative to
expected
mitigates
partnership
Cautions should be taken
of the risk.
much
Corporate
market).
corporation's
in the project and the
presence
the
to
scrutinize and avoid that which remains.
Once
partner
the
has been
selected
and
joint
the
the viability of the project
venture
has been consummated,
depends
largely
Failure
can be avoided by management of the process and
taking
risk
includes
upon
the
strenght
avoidance measures.
aboiding,
which are involved.
of
its
management.
The management
transferring or minimizing the
of
by
risk
factors
A few pragmatic suggestions follow:
o Carefully assess the location decision relative to
market conditions
o Avoid recourse debt and let the project stand on its
own financial merits
o Take a partnership position (limited or general)
which coincides with risk posture and amount of
control needed
prices of land and
o Carefully monitor purchase
market
to
services for relevance
o Institute and constantly monitor the project with
good accounting and cost controls system
o Conduct ongoing feasibility research
o Make sure the economics of the project stay within
corporate risk/return parameters
of failure may depend
upon
to
some
may simply mean that the project did not
meet
the
definition
expectations
coming
into the
corporations
Finally,
return criteria.
venture.
Failure
While studies have shown that returns from
real
estate development are consistently higher than
investments,
experiences
the
other
otherwise.9
of some prove
Atlantic Richfield was at least one corporation that got out
of
corporate joint ventures because of inadequate
returns.
They wanted to concentrate on the energy business. 10
C.
BENEFITS OF THE JOINT VENTURE APPROACH
described
corporation that fits the characteristics
A
in chapter two stands to reap tremendous long-term
benefits
a properly structured and well-managed joint
venture.
from
In
the
first
circumventing
place
many
of
a
venture
most
the
It
development.
corporate
joint
also
serious
a
is
means
risks
provides
a
of
of
solo
means
of
capturing latent values in corporate real property assets as
well
as
reducing
"sharing"
synergistic
the
occupancy costs.
ownership.
In
Risk
is
essence the joint venture
means of mingling talent and needs
corporation's
needs.
reduced
to
is
79
a
fulfill
Other benefits are outlined
Table 3-C.
by
in
TABLE 3-C
BENEFITS OF CORPORATE/DEVELOPER JOINT VENTURES
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
Control (vs. lease)
Gain developer experience w/o cost of acquisition
Access to real estate beneficial to the corporation
Capture value in real estate usage
Reservoir of corporate earnings
Optimize value of surplus corporate real estate
Learn the development business
Cost and risk sharing
Optimize space utilization
Leverage credit tenancy
Reduce occupancy costs
Vehicle for attaining corporate real estate objectives
main-line
Opportunity to test technologies from
business
Long-term profit center
Tax benefits
Off-balance sheet financing
Flexibility in structuring to meet corporate needs
Opportunity to condolidate operations in large markets
The most obvious benefit in teaming up with a developer
is
that
the
corporation
expertise and knowledge.
gains
access
to
development
Most corporations do not have the
in-house capability to manage the development process - much
less understand the market. In one firm, the executives felt
that
in
they lacked the "sixth sense" needed to make a
real
private
estate development.
It was felt that
profit
successful
real estate entrepreneurs bring this ingredient
to
their projects; but, corporate managers often cannot perform
in
the same way or with the same
corporations
are
not
success.
able to attract the type
needed to manage the process for them.
Furthermore,
of
They can't
talent
provide
the autonomy nor the financial incentives that are needed to
attract qualified people.
D. PLAN FOR SUCCESS:
This
section
the
overcoming
failure.
key
are
It
to
outlines
briefly
aforementioned
some
drawbacks
and
joint
successful
venture
of
causes
provides a checklist of the major areas
a
for
strategies
that
program.
The
discussion is brief and general since the following chapters
describe a practical model for structuring the joint venture
and necessary documentation.
TABLE 3-D
STRATEGIC OPTIONS FOR ENHANCING JOINT VENTURE SUCCESS
(MINIMIZING RISKS)
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
Careful selection of a partner
Gain commitment of top management
Plan and document scope and intent carefully
Know your own constraints and objectives
Minimize the impact on earnings - subsidiary accounting
Non-recourse debt
Structured to be able to make changes quickly-response
Preserve the ability to get out when needed
Test and affirm realities of pro forma assumptions
Joint venture agreement that details parameters
Monitor the development process
Obtain personal and financial guarantees on financing
and construction
Ensure that developer has organizational strength to
deliver on time
Seek creative alternatives to conflicting objectives
Leverage within capacity to cover debt
Ongoing financial, market and operational feasibility
studies
Risk reduction, transfer or minimizing
81
Despite
the
drawbacks
potential
and
the
corporate joint venturing to develop real estate,
of
risks
there are
of
many advantages to be gained by the synergistic juncture
developers
and corporations.
specific.
Joint
ventures
The benefits are situation
bring
the
viewpoints
players (partners) and the result can be a stronger,
champion
if managers can channel the
the venture and the corporate parent.
82
interactions
of
-
new
hybrid
between
CHAPTER FOUR
GUIDELINES FOR PROPERLY STRUCTURING THE VENTURE
"A company's competitive situation no longer
depends on itself alone but on the quality
of the alliances it is able to form."
-
Bruno
Lamborghini,
Economics Director
-
Olivetti.
A.
A CORPORATE DECISION MODEL
The most important criteria for corporate joint venture
viability is economic feasibility.
requirements
feasibility
have been
the
met,
qualitative
assume even greater importance in the
may
issues
once financial
However,
decision
in
The proposed joint venture should be evaluated
process.
light of the corporate objectives, goals and constraints.
chapter gives a broad review of the joint venture
This
structuring
process
realization.
operational
process.
The
from
initial
inception
to
project
The first section discusses some financial and
issues
that will be pertinent
throughout
the
analysis recommended should take place within
the framework of the corporate decision model in Chapter Two
(Table
2-A).
operational
that
Each corporation has
feasibility
its own
approaches and
reflect the objectives of the firm.
financial
valuation
methods
The intent is to
present a simple set of tools for starting the inquiry
the
joint venture.
and
into
They should not be relied upon without
83
thought and adaptation to fit the
careful
needs
corporate
and typical decision criteria.
made
on the same basis used
to test other corporate investments.
The approach discussed
Financial
in
comparisons
this section recommends evaluation on the basis
NPV (net present value),
cost
occupancy.
of
The
of
the
IRR (internal rate of return), and
model should be
adapted
to
in
preferences regarding measures or rules- of-thumb
corporate
- including ROI (return on invested capital), ROA (return on
capitalization rate,
assets),
(measuring the relationship
of net operating income to value) or hurdle rate.
The first financial evaluation
primarily informational.
The
several
information comes from the developer's
should
(Table 4A)
developers.
proposals,
but
of
the
be augmented (or tested) on the basis
also
is
It is arranged in a matrix for the
evaluating proposals from
of
purpose
model,
corporation's own estimates, as attained by research or from
advisors.
The model gives a single time-frame breakdown of
costs.
development
Land is listed at the agreed price for
which it is contributed to the partnership.
costs are the hard costs,
at
first,
soft costs can often be
by rules-of-thumb.
sum of land,
The development
derived,
Total project costs are the
development costs and soft costs;
added a contingency margin of error.
to which is
TABLE 4-A
FINANCIAL
PROPOSAL EVALUATION MATRIX
DEVELOPER
1.
Land
2. Development Costs
Building
Tenant Improvements
Site Improvements
Off-Site Improvements
Parking Structure
Surface Parking
Total
Development Costs
3. Soft Costs
Development Fees
Overhead
Mkt Anal. & Consult Fees
Title Insurance
Legal & Acctg. Fees
Loan Fees
Int. During Constr.
Taxes During Constr.
Broker Comm. & Mktg
Oper. Exp. Before Occup.
Lease-Up Deficit
Linkage
Total
4.
Soft
Project
Cost
Costs
Contingency
(subtotal)
Fee
5. TOTAL DEVELOPMENT COSTS
85
The
total
development
conveyed
the
template (Table 4-B) for
mix
debt/equity
cost is
onto
purpose
the
of
establishing debt requirement on the basis of desired equity
input.
TABLE 4-B
FINANCIAL
PROPOSAL EVALUATION MATRIX
DEBT/EQUITY MIX
DEVELOPER
Total Development Cost
Corporate Equity In
Developer Equity In
Total Equity In
Required Debt
Loan Commitment Fee
Points
TOTAL
DEBT
REQUIRED
The
most
important
in-depth financial
analysis
development project's expected return
determine
a
project's
cash
flow analysis.
In the
initial
is
to
the
screening
stages the projected cash flows should be considered on
the
of the stabilized year (usually at some predetermined
basis
occupancy level) income and expense stream (Table 4-D).
model pro forma (Table 4-D) does not consider tax
This
equity build-up,
shelter,
These
appreciation.
cash-flow
of
the required equity investment for the project
is
the
divide
corporate
return
debt/equity
One way
and
parameters
to
basic
testing
value,
project
one-year
The
for
provides a basis
deriving
and
feasibility
deriving
forma
pro
"most
a
It is
of the project's potential.
sketch
more
in
will be considered
factors
and detailed financial studies.
elaborate
likely"
time value of money nor property
determining return on equity.
result
(cash flow
desired rate of return.
can
be
before
taxes)
The estimated
the
by
rate
of
derived by the inverse of that function, if
the equity amount is know.
More comprehensive financial analysis can be
using
Table 4-F.
considered
lease-up time,
It should incorporate
assumptions about construction
time,
rent estimates, escalation, and expenses. In
addition,
the
sales price at some future point
estimated
and
accounted for (in before-tax
scenarios).
flows
In this model the before-tax cash
and after tax benefits are evaluated.
carefully
performed
The
disposition
can be
price
and
should
after-tax
estimated
applying a capitalization rate (CAP rate) to the NOI in
year following sale.
time
horizon
be
by
the
(NOI/CAP rate = value). The projected
depends on corporate
preference.
looks at nothing over a five-year span,
87
One
firm
while another makes
that
assumptions
is
typically
parallel
fifteen
the term of
years.
However,
which
lease,
the
the
longer
the
horizon, the greater the uncertainty of the projections.
simplified
A
Table
on
flow
the end of the holding period is also
at
(sale)
version of the cash
reversion
given
in
The before-tax equity reversion equals the net
4-E.
sales price (sales price - expenses incurred for sale) minus
The tax treatment on sale will
the unpaid mortgage balance.
be
contingent upon each partner's allocation and the
allocable
ammounts
to
each,
which
is in
sale
affected
in the partner's capital accounts and
upon distribution of benefits.
on
part,
equals
basis
by
the
the
agreed
In general, the taxable gain
net sales price minus the
adjusted
basis
(which is taxed at capital gains rate) plus the depreciation
recapture.
However, in a partnership they are derived after
allocation since the partnership is not taxed.
TABLE 4-C
FINANCING ASSUMPTIONS
Permanent Interest Rate
Term
Amortization
Loan to Value Ratio
Debt Coverage Ratio
Supportable Loan Level
TABLE 4-D
FIRST YEAR PRO FORMA INCOME ANALYSIS
INCOME
Gross Possible Income
Partner tenant (X SF @ $__)
Speculative (Y SF @ $ __)
Less vacancy
Effective Gross
(on spec. space)
Income
EXPENSES
Operating Expenses
Real Estate Taxes
Management
Fees
Other Expenses
Replacement Reserve
Total Expenses
NET OPERATING
=
INCOME
Annual Debt Service
Cash Flow Before Taxes
TABLE 4-E
FORECASTED PRO FORMA INCOME ANALYSIS
1
YEARS
2
INCOME
Gross Possible Income
Partner tenant
Speculative
Escalation
Less vacancy
Effective Gross Income
EXPENSES
Mortgage Interest Exp
Operating Expenses
Real Estate Taxes
Management Fees
Other Expenses
Total Expenses
BEFORE TAX CASH FLOW
Less Depreciation
TAXABLE INCOME (LOSS)
Net Proceeds From Sale
SELLING PRICE
Less:
Less:
Selling Expense
Unpaid Mortgage Balance
BEFORE TAX EQUITY REVERSION
3
4
5
TABLE 4-F
CORPORATE PARTNER CASH FLOW ANALYSIS
PARTNER INCOME ALLOCATION
Priority return
% share after priority
Sales proceeds
Tax benefit allocation
Total partner's share
EQUITY INVESTED
AFTER TAX NET CASH FLOW
NPV
IRR
TABLE 4-G
CORPORATE COST OF OCCUPANCY EVALUATION
+ Rent paid
-
After tax
Cost
of
cash
flow from partnership
occupancy
OTHER OPTION
Cost of
occupancy
(i.e. lease)
cash
The
analysis in
Table
the occupancy costs.
the
presents
4-F
consideration
corporate share of benefits without
expected
of
flow
The net cash flow will be used to
calculate the cost of occupancy in Table 4-G.
cost of occupancy model is designed
corporate
The
evaluate
the occupancy costs realized by making
venture
investment
decision.
Although
to
joint
the
template
the
demonstrates a single year, this model should be spread over
the
expected investment (or lease) period and
include
the
upfront costs as well as expected proceeds from disposition.
The
occupancy costs of other alternatives (such as straight
lease)
can be compared either as an investment
alternative
or as a benchmark.
B. PROPOSAL EVALUATION PROCESS
The
next
section discusses some
of
the
qualitative
factors which will impact the evaluation process.
of
qualification
issues is provided as a basis for
A matrix
rating
each developer's proposal. Each item is briefly discussed in
the following text.
of
corporate
experience.
These issues were compiled from surveys
executives
who
have
had
joint
venture
The intent of the matrix is to formalize
qualitative criteria used in the selection process.
the
TABLE 4-H
DEVELOPER QUALIFICATION
PROPOSAL EVALUATION MATRIX
DEVELOPER
1.
2.
3.
4.
5.
6.
Land
A. Size
B. Valuation Method
C. Time of Valuation
D. Payment Schedule
Development Costs
A. Building
1. Building Size
2. FAR
3. Phasing
B. Site Improvements
1. Existing Bldgs
2. Site studies
Developer Experience
A. Type of Developments
B. Size Developments
C. In-house Capabilities
1. Construction
2. Construction Mgt
3. Marketing
4. Brokerage
5. Project Mgt
Financial Strength
A. Net worth
B. Debt/Equity Ratio
C. Cash Avail/Liquidity
D. Line of Credit
E. Current Commitments
F. Financial Partners
Current Projects
A. Local
B. National
Developer
A. Desired Pship Status
B. Capital Contribution
C. Loan Amount
D. Share of Income/losses
E.
F.
G.
Financial guarantees
Split of overruns
Guaranteed Price
7. Proposed Rents
94
1. Land Valuation:
decided
value
The
for the
upon
important
is
land
whether it belongs to the developer or the corporation.
of
Further inquiry should also spell out
equity.
contributed
portion
significant
a
will represent
it
cases
most
In
when it is paid for,
the method and time of valuation,
and
who holds title during the development process.
2. Development costs:
Development
this
at
estimates
costs
and
stage
soft
unless
costs
will
likely
be
price
is
guaranteed
a
but not
They do provide a basis for comparison,
demanded.
one that should be determinative in selecting the developer.
At
this
stage,
used
the financial estimates are best
for investment analysis of the joint venture and
tools
as
for
further inquiry into the developer's assumption.
3.
Development Experience:
The
developer
experience
issue
basis
a
gives
for
weighing not only the quality of experience, but the type of
experience
one
firm
relative to a particular need.
requires
responsiveness
price
any
developer
example,
have
in-house
capabilities which they feel are necessary for
construction
situations.
that
As an
on
construction matters in
special
They also insist on a firm-fixed
construction
so that costs are clear from the inception.
corporation
may want assurances of
marketing
for speculative space in a soft office market.
design
Another
capabilities
4.
Financial Strength:
commitment
and
Financial
strength
corporate
joint venture.
are
The corporation will likely want
financial
strength
necessary
to
analysis
provide
is
developer's
the
of
The
as
should be as thorough
full assurance
the
and
risk.
the
bear a proportionate share of
to
a
for
paramount
that the developer has "staying power"
assurances
ability
leveraged.
highly
are notoriously
firms
Development
strength and commitment to the development.
financial
One
include careful scrutiny
should
This
commitments
of
during the duration of the
firm required covenants not to compete that
and
time
process.
specified,
a) the dollar value, b) percentage of time allocable, and c)
distance
in miles of any competing projects from the
joint
The restraint was also extended to related
venture project.
parties.
5. Current projects:
6.
(see above)
Developer:
This
section
is used to value the benefits
developer brings, or will bring, to the venture.
are
key in valuing the partnership share or in
risks.
example:
personal
the
These issues
allocating
One firm uses formulas for giving increments of the
partnership
For
that
depending on relative value
a
guaranteed
of
construction
contributions.
contract
guarantee on a loan might equal another 10%
of the proceeds or ownership.
or
a
share
UNDERSTANDING THE DEVELOPER CONNECTION
C.
a
In
and
project
the
access to a valuable site,
gaining
benefits
most
While
cash
of
in
the
flow
and
are
creative
A joint venture can be used as a
efforts.
continue
developer
to
developer
gets
more
potential
for
other
a
attract
to
technique
leasing
debt
after
They prefer to reap the long-term benefits of
appreciation.
their
profit
owned by the corporation.
long-term
the
for
business
a
are merchant builders,
developers
some
provide
developer may also be interested in
The
service.
primary
developer's
is to secure a credit lease that enables him to
motivations
finance
the
venture one of
joint
By
building.
joint
- he
than just a lease
is
It
leases.
venturing
for
attract
to
a
potential user to land
he
a
terms
developer to secure land for development on favorable
or
a
the
creates
vehicle
one
the
allow
and
tenant
already
has
secured.
Developers became accustomed to joint ventures over the
past
decade
lenders
mortgage
to
as high,
seek
terms.
volatile
equity
interest
rates
participation as
Borrowers
were
part
to
willing
propelled
of
their
share
potential profits and appreciation in order to obtain
term
loans
interest
rates
declined,
lenders became
long-
sufficiently
at fixed interest rates that were
low to allow some initial cash-flow from the
the
property.
less
As
demanding.
Instead of demanding equity participation to offset the risk
of volatility,
lenders have now gone to shorter-term bullet
97
call for little or no amortization
that
loans
during
the
term.2
soft
need
markets
long-term
to secure
credit
"blue-chip"
long-term financing in
seeking
Developers
provide a means to that end.
tenants
commitments
from
with
such
ventures
Joint
tenants.
overbuilt,
in
demonstrated
As
developers are willing to
their relationships with lenders,
in the benefits when the participant can help make
share
project
possible
partner
(in
exchange
with
stream
income
property.
The
property's
value
financing
terms.
and
In
a
period
of
of
determinant
the
therefore
the
of
determinant
the
is
when
demand
a
cash
potential
appreciation
future
and
shelter
tax
inflows,
to
for its credit and commitment
offset occupancy costs
can
project)
venture
corporate
The
and profitable.
a
a
the
weak,
is
preservation of that income stream is essential for adequate
financing as well as maintenance of long-term value.
D. SELECTING A DEVELOPMENT TEAM
corporations
Large
will certainly be
inundated
proposals to form joint ventures - particularly,
desirable
surplus
land.
In
the
right
with
those with
situation,
the
chemistry, the project, and the needs will seemingly fall in
place.
The
exercise
due
possible
mate
corporate
manager
has a
fiduciary
diligence and caution in selecting
for each transaction.
offer complementary
Attractive
duty
the
to
best
partners
skills and value to the venture.
This
Corporations should be careful
selecting a partner.
for
measures
important
the
of
some
at
looks
section
not to
overestimate their partner's strengths.
o Experience
consider
for a corporation to
It is important that
from the developer's experience.
a
benefit
to
transaction with a developer is
venture
joint
reason
primary
The
the
developer partner have experience in the type of development
development
Experience in one facet of
considered.
being
(such as commercial office) does not necessarily transfer to
residential
The
retail).
or
level sought should compensate for the level
experience
inexperience
within
the
in
gained
as
(such
type
another
the corporation.
by
board-room
best
Confidence is
that
the
useful
to
demonstration
a
of
partner's skills offset the in-house weaknesses.
gauge
To
the
it
experience
be
might
investigate the history of the developer's projects.
If the
developer is to provide project management or marketing
the development,
his track record in either of those should
It may be useful
be carefully investigated.
time in some of the developer's projects.
managed?
to spend some
How well are they
Has the marketing effort been successful?
important
might
for
be
inquiry
an
into
Just as
developer's
the
relationship with local contractors, architects and brokers.
Have
they
Does
the
been paid on time and
developer
manage
effectively and efficiently?
99
the
according
to
agreement?
construction
process
o Experience in Joint Ventures
development
A
venture
they
partner
who
had
previous
dealings will often be easier to deal with
joint
because
will be able to anticipate questions and issues key to
the joint venturing process.
joint
In addition,
an
experienced
venture partner will likely be more willing to
pertinent
and
has
information.
tax
alternative
partners
will
share
Knowledge of partnership accounting
treatments
relevant
substantially improve
the
for
individual
performance
and
information exchange within the venture. 3
o Financial Stability
Another
initial
screening mechanism for
is financial strength
selecting
and
stability.
development
partner
Traditional
tools of testing financial viability should
used with scrutiny and caution.
search
be
This may include financial
through industry reports such as Dun and Bradstreet.
The extent of the developer's holdings is not necessarily
good gauge.
heavily
a
a
Too often those holdings are quickly built and
leveraged.
empire built on heavily
An
leveraged
resources can quickly dissipate.4 Even the strongest looking
portfolio could be sold or mortgaged in a financial bind, so
it
is important to evaluate more than the financial
status
at a single point in time.
Financial
credit
ratings
beginning.
The
ratios,
audited financial
statements,
and
from
the
depth of resources is more important
than
should
be
100
carefully
checked
cash shortfalls as a participative
to
contribute
to
capability
some
should at least be
There
size.
mere
partner.
The same criteria used by banks in evaluating developers can
capability, capacity and
credibility,
namely:
apply here,
credit-worthiness.
o Established Track Record
of the development firm in
Longevity
business
is
Given the cyclical nature of
judgement.5
scrutiny
careful
industry,
sound
indicia of prudence and
good
development
the
business
development
the
in
of the developer's history
weathering the down-cycles is revealing and informative.
o Scope
The
partner would be wise to
corporate
level and scope of development anticipated before
selection of a partner.
upon
fit
the
anticipated
development
being
development,
the
aware
the
consider
embarking
The developer selected should
scope.
considered
For
example
a
is
if
local
developer selected should be one
of and sensitive to the political,
only
the
home-town
who
is
environmental and
construction practices of the locality.
On the other hand, a corporation might consider a large
national developer if they are considering several
across the country.
However,
themselves
On multiple projects the experience and
developed
relationship
some
to
projects
could
be
easily
transferable.
national corporations purposely avoid
one
developer
101
in order to
stay
tying
clear
of
favoritism and/or antitrust implications.
o Prior Dealings
Prior
contact.
and
posturing
dealings
therefore
direct
through
is
work
make the gears of progress
positioning
Less time will be spent in
freely.
more
practices of an entity
and
principles
operating
the
understand
to know and
way
best
The
more
time
and
towards
directed
accomplishing the task after a working relationship has been
established.
o Offset the Firm's Weaknesses
fundamental
A
joint
reason for considering a
venture
approach to development is to gain the synergistic effect of
joining
skills
boundary
diverge
to
greater
the
respective
The more the
dissimilar capabilities.
symmetry
this argument arises where
will
evolve.
dissimilar
The
skills
give rise to conflict.
o Select Equally Experienced Partners
Resource
differences give
partnerships
for greater combined strength and synergy.
opportunities
But, differences
in experience level, management styles, control systems, and
outlook
where
are disruptive.
compatible
Joint ventures are
relationships
needed.
Fundamental
partners
are
differences in perspective or hidden agendas are some of the
most prominent factors in joint venture failure.
102
6
o Market Access
Market access is the second most important skill that a
can
developer
oriented.
financially
oriented,
market
Good developers are not only
able to capture a substantial portion of the
but
they
target.
residential,
retail
market
typically
are
perspectives
Corporate
scheme.
venture
joint
most important in the surplus property
is
attribute
This
expertise).
development
(after
involved
space
speculative
with
to the development
bring
market
is
commercial
or
is
Each
interchangeable.
characteristics.
However,
either
access
in
most
often
distinct
with
a unique market
not
Many successful commercial developers have
failed miserably in the residential market and visa versa.
o Technology
Technological
when
the
capabilities become especially
corporate venture partner intends to use specialized or
One example is the capabilities
developed by the Perini Corporation in marine
construction,
Their
technologically innovative up-down construction.
development
the
when
or
considering development of unique properties
state of the art equipment.
or
important
unique
provide
subsidiary would be well positioned to
skills
technical
in
a
project
such
where
technological skills are needed.
o Integrity
Perhaps
the
corporate
partner
corporate
image
most
interested
is
the
in
maintaining
integrity
103
for
consideration
important
of
the
a
the
valued
developer.
Throughout the development process the name and image of the
venture
the
by
may
developer
reverberations
often
goes
a
reflect
long
way
or
have
partner.
The
upon
corporate
the
towards
image
partnership
or
promoting
in
detracting from the success of a development.
a
Activities
partners will be intrinsically linked.
The impact of
blemished reputation could affect more than
partner's
a
singular development project.
Integrity can go far beyond mere image when executing a
large and complex real estate transaction.
Many times it is
necessary to have complete trust in the partner since issues
sufficiently
arise that no partnership agreement could ever
detail.
o Communications and Trust
For
a
ingredient
essential
communication
strongly
venture to
development
and
of
trust.
the
effectively,
work
partnership
is
These elements were
an
complete
stated
as
important in every interview with joint-venturers.
The development process, by nature, is fraught with unknowns
and
rapidly
doesn't
variables.
The
partnership
begin and continue on the basis of trust is
for problems.
not
changing
The relationship must start with trust
that
doomed
among
only the principals but also the managers and those who
will be executing the business plan.
Trust will continue to
thrive (where it is deserved) best in an environment of open
and informative communication.
104
A partnership venture cannot afford to have one partner
withholding information.
have
Successful ventures seem to
continuous flows of information that work as "grease" to the
of
wheels
operation.
status
continually apprised of the situation and the
other
the
An operating partner must keep
of the project whether the information be good or bad.
o Sensitivity to corporate objectives
Early encounters with the developer can provide clues as
important
Are responses dogmatic,
developer to corporate objectives.
or
imaginative,
does the corporate culture prefer in a partner?
cultures
of
can
who
The company
most development firms will be different
the typical corporate bureaucracy.
manager's
What
responsively?
concerns or seek to address them
echo
merely
Does the developer
boiler plate?
the
by
is the sensitivity demonstrated
measure
One
relationship.
to eventual dynamics of the partnership
from
Nonetheless, a corporate
job will be greatly facilitated by the
developer
foreign
corporate
work
well with the
sometimes
culture.
o Political or local connections
factor not to be ignored in many communities
A
quality
of
the
political
ties
of
the
is
the
development
organization.
o Connections within financial community
Friction
even
with community groups can cause the demise
of
will
be
the best conceived project.
105
A project that
Contacts with
leveraged must have strong financial backing.
bankers, insurance companies and pension funds will not only
but will be needed for
be beneficial in the startup phases,
The corporation should verify
refinancing or eventual sale.
the developer's financial contacts.
o Rapport with corporate management
joint
a
of
operation
to
ingredient
essential
an
Since
venture
support
the
is
successful
the
top
of
management, a developer must have the capabilities that will
instill
and
confidence
gender
from
support
the
within
corporate framework.
o Risk Sharing
Real
estate
development,
and
construction
development
The
enterprise.
corporate
in
particularly
is
phases
user
highly
a
minimizes the
land
the
risky
risks
by
The
agreeing to lease some portion of the developed space.
risk of the remaining speculative space remains to be borne.
Corporations
may
want
to shift as much of
that
risk
as
possible to the developer partner.
Expertise
o Development
The
requires
present
and
complex
a
level
nature
of
most
of experience beyond
capabilities.
most
harnessed within the corporate framework,
acquired
(can
mastered
should
they
Experienced developers
offer) skills and
106
projects
corporations
Until those skills can be
come from outside the organization.
have
development
abilities
in
such
diverse areas as:
o
o
o
o
o
zoning and approvals,
negotiation of architectural and construction contracts,
management of design and construction,
marketing sensitivity and marketing capabilities,
financial acumen and contacts
o Leverage
experienced
An
time.
Contractors,
more
likely
to give concessions in order to
The
business.
a
than
greater
force
for
around
be
architects and suppliers may
some
repeat
a
as
is recognized
development community that will be
the
within
developer
developer's leverage
is
infrequent
and
one-time
maintain
the
certainly
corporate
participant.
E.
MANAGING THE CORPORATE INTERNAL FACTORS
The importance of selecting a qualified and
development partner cannot be overemphasized.
an
in
conflicts
the
managing
is
importance
internal
effective
manner.
A
potential
problems
of
compatible
Of subsequent
constraints
and
of
the
number
negotiating
and
managing the joint venture have already been discussed.
In
constraints
Chapter
estate
and
Two,
Table 2-B outlines the conflicts between real
and the operations groups.
The real estate
entity
serves a support function, but that does not preclude active
management of its corporate mandate.
some
joint
This section describes
negotiations and managment techniques
venture
function
on
equation.
107
the
corporate
for
making
side
of
a
the
o Plan well, but follow through with management
Thoughtful attention to the planning and creation stage
of
effort
venture are crucial to
joint
the
its
must be made to rally support of all
success.
Every
levels
within
the
corporation and to demonstrate the potential rewards of
the
joint venture effort.
cause
the
champion
must
resources
the project.
At least one key
throughout
its
manager
must
Sufficient
process.
be secured to allow continued viability
of
Strategic alliances and top management support
must be carefully nurtured.7
venture
But the joint
viability doesn't stop there.
study
A
Lybrand
spends
Coopers
by
on the average joint venture goes into creating
to
subsequent
is
stages
&
management
that nearly half the time top
revealed
"Attention
...
of joint ventures conducted
often
it.
scanty.
Involvement trails off severely as time wears on - to 23%
of executive time for developing the plan,
19% to
drafting
8
legal documents and 8% to setting up management systems.
The percent of time devoted is perhaps not as important
as
a
recognition
managerial
that
attention
the venture
throughout
continue
the
to
receive
development
and
management process.
o Foster trust within the corporate parent
and commitment are essential ingredients to
the
"Trust comes hard at the top.
But
it comes even harder down the ranks - and that is where
the
Trust
vitality of any venture.
108
fate
most alliances is sealed." 9
of
to
predict the nature of difficulties a development
accurately
project
impossible
It is
incur.
may
nurtured on all levels,
and
developed
But if trust has been
when things go wrong,
energies can
be focused to the problem rather than the finding fault.
o Winning isn't everything
Successfully
a new dimension in management skills.
requires
progam
running a corporate joint venture
are
There
many sides that must be answered to and it takes an enormous
amount of balancing. Successful joint ventures often require
a
mindset contrary to most business precepts:
winning isn't everything.
gain
upper
the
me."10
reprimand
because
the
One manager stated "If I tried to
hand in a joint
Once again,
extreme
that
Namely
venture,
my
there needs to be a
of the mutuality mindset
would
boss
balance
could
mean
giving away the store.
o Allow autonomy with accountability
The "right" balance of autonomy and accountability needs
to be established between the corporate parent and the
estate entity.
following
Every situation will be different,
guidelines
suggest ways
will
relationship with the parent.
unit's
of
real
but the
managing
the
In most cases the real estate
responsibility is to support the operations
process
of the main business line.
o Clearly define what the parent should expect
There
will be a greater chance for smooth operations if
109
performance measures are clearly defined and
the
an early stage.
from
be clearly spelled out.
place
in
The risk and reward tradeoffs should
All expectations should be clearly
Few things could be more threatening than for
communicated.
the
chief financial offer to discover one morning that
the
venture's debt obligations have violated the covenants in
a
corporate bond.
o Maintain constant communication, both good and bad
of sight out of mind" is not the best credo for
"Out
a
joint venture to follow in its relationship with the parent.
If
correctly,
managed
fully
kept
aware
of the progress
at all times.
project
the corporate management should
of
the
be
venture
joint
They should also be reminded of the
benefits that are being provided now and in the future.
as involved and complex as
In order for a transaction,
a joint venture in a real estate development, to succeed, it
directors.
of
board
implications
to
that
There
are
The
fact.
a
political
of
lot
real
corporate
the
and
the support and blessings of top management
needs
estate
manager has to be confident enough in the venture and secure
enough
in
foray
into
The
his position to carry it through.
a
joint venture will
likely
take
initial
phenomenal
amounts of time and energy in order to gain support and
put
the project together.
One
convincing
corporate
corporate
real
estate
manager
management that the idea
110
spent
years
was
sound.
have since participated in several joint ventures that
They
are proving successful.
o Negotiations
philosophy
The
this
discussion
on
do
all
impact
the
raise and resolve issues that may
can to
development process in the early
venture
joint
by
is that joint venture partners should
negotiations
they
espoused
negotiations.
of
stages
Changing circumstances and aspirations of the
partners may casue the terms agreed upon to evolve,
but the
operations will be smoother if all significant contingencies
have been considered and addressed.
The
entire decision process discussed herein has
been
of
the
oriented
towards
and
corporation
understanding
the
corporate objectives.
interests
the
most favorable
means
for
achieving
A firm understanding of the corporate
interests and objectives is precisely what is needed for
an
effective negotiation strategy.
The initial bargaining position will likely be formed
by a manager's assessment of the firms need to joint venture
and the expected benefits of doing so.
understand
the developer's interests and the value of
the
partner brings to the negotiation.
the
table
contribution
power
The next step is to
and
what
is
wanted
by
Who brings what to
each
is the best way to sum it up.
will favor the firm that controls the
desired. 11
ill
what
side
for
its
The balance of
resource
most
Once
manager understands both
the
side's
expanded beyond what either can do alone.
may
corporation
a
need
specific parcel
earnings
land,
tax
For example, the
of
land
The developer
with tax losses.
and
but does not want
reservoir for corporate surplus cash,
impact
the pie can be
contributions and desired returns,
intended
interests,
has
a
to
the
needs cash and a tenant to secure financing and needs
losses to offset a large expected cash flow.
An over-
simplified example, but it demonstrates how the benefits can
The corporation gives
be expanded before they are divided.
the
cash
and it's credit tenancy for
an
equity
interest
which harbors the cash and reduces effective occupancy cost.
They gain the developer's expertise and land.
gets the tax losses,
The developer
the credit tenant and a partnership in
safe investment.
Discussion of shared benefits is helpful in arguing for
creative
"winning
Pushing
solution
isn't
too
the battle,
to
and
problems
everything" in
a
a
recognition
long-term
relationship.
hard for the last buck may result in
"winning
but losing the war" when the partner turns
tables next time or walks away from the deal.
112
that
the
CHAPTER FIVE
THE JOINT VENTURE AGREEMENT AND MANAGEMENT PLAN
"The plan means nothing, but planning
means everything."
- Annonymous
This
principles
describes
section
that
some
of
be addressed in
must
the
the
and
issues
joint
venture
agreements and subsequent management of the development.
is
a "boiler plate" legal
not
description
all
joint
joint
a
There
skeletal
points
of
is no single blueprint applicable
to
venture agreements or
venture
but
to help clarify the major
intended
consideration.
document,
It
management
plans.
partners interviewed agree that the
Most
venture
documents mean little without the total commitment and trust
One operational venture had reduced their
between partners.
entire agreement to twelve written pages.
There
agreement
and
the
"Alliances fail because
do not make them work,
managers
can
extent to which a contract
venture success.
joint
into
are limitations to what can be written
an
ensure
operating
not because contracts
are
poorly written". 1
joint
The
evolve
through
contract.
venture
the
and
development
agreements
initial proposal stages
to
a
will
formal
Prior to and during this process, the purpose and
113
expected
contributions
against
touchstones
which partners
ongoing
compare
will
the
are
party
gains of each
and
operations
to
meets
their
respective
objectives.2 The process and methods will
vary,
whether the venture
ascertain
and
the key is to ensure that every issue
but
may
that
the
affect
relationship
contingency
by
covered
is
the
negotiating parties.
A letter of intent might be drafted in the early stages
of
the process in order to "capture" the intentions of
the
anticipate
any
care
parties.
Great
possible
changes
at
be taken to
may take
place
partners'
the
in
Although many such changes are difficult
relationship.
conceive
that
should
the
formed
time a relationship is being
nurtured - failure to do so my precipitate future
As
has
soon
long as the development is going well,
as
and
disaster.
partner
much reason to call upon the contract documents but
things start to go awry the documents provide
"battle tools".
to
neither
to
as
the
The corporation who has taken adequate time
anticipate such issues will be better prepared
for
any
difficult times.
A.
NECESSARY PROVISIONS
As
mission
partners attain an understanding of the
and
venture's
the respective objectives of each party it
time to negotiate a contract.
"meeting
of
future.
This
The document should reflect a
the minds" on key issues of
section
the
is intended to help
114
is
present
the
and
corporate
upon the
decide
and
isolate
manager
discussions
Most
of
raised
in
list - not necessarily exhaustive.
with
section
this
in
discussed
issues
the
real
corporate
estate
were
a
It is
agreement on key issues and reduce it to writing.
representative
of
zone
corporate
They
managers.
reflect their key areas of concern.
By carefully considering
o Define scope and purpose:
and
precisely
defining
can
corporation
the
avoid
scope
future
of
the
conflicts
for the development or the end result.
especially
important
partnership position.
limited
the
their
about
intentions
if the corporation has
the
project,
This is
opted
for
a
Since limited partners lack
right to participate in management,
the definition
of
the venture's scope in the agreement provides a restraint on
the operating partner.
o Term:
Assignment of a term for the duration of the
sets a planning horizon and binds both parties
venture
for
that term.
o Management:
The management authorization describes
the degree of discretion that the management partner or team
may have.
sell,
The rights could include; the right to contract,
incur indebtedness,
to the joint venture.
or mortgage property
belonging
clear
The management section gives a
description of who has the day-to-day decision rights and to
what
extent.
dealing
There
should
also be
recommendations
for
in
the
with decision impasses at different points
115
development process.
If the corporation provides
o Capital contributions:
the
of
land or a strong credit lease for a substantial portion
else.
everything
for
the developer may take responsibility
the project,
to
addition
in
would,
developer
The
If the
managing the development process, procure financing.
developer were the general partner he would also be at risk.
but
structured,
of
understanding
corporation
the
should
parameters
their
be
could
decision
or
alternative
conceivable
Every
strong
a
have
beginning
before
of
The agreement should describe the effects
negotiations.
overruns and how they are met, and whether the contributions
to
results
describe
also
should
for
It
equity.
the overruns are treated as loans or
meet
failure
make
to
contributions.
o
carefully
Budgets:
set
The
budgets
venture
to be used as
control the development process.
be
partners
will
want
to
and
to
bench-marks
The budgeting process will
in
most helpful to the non-managing (corporate) partner
assessing the performance of the development manager.
Some
budgets used by joint ventures include:
o Development budget: estimating total project costs.
and
estimate of receipts
budget:
o operations
expenditures for management, maintenance, supervision
and operation of the project for each fiscal year.
o Capital budget: estimate of any capital replacements,
substitutions or distributions during each fiscal year.
Where
possible,
the
corporate venture partner
116
will
to seek authorization in advance from the
want
for
parent
prescribed budgetary discretion so that the process will not
get bogged down at some point, in want of approvals that are
tied-up in corporate bureaucratic red-tape.
o
Major Decisions:
Control can also be maintained by
decision
the non-managing partner through the use of "major
points"
described
venture
agreement.
joint
or
in the development agreement,
of
approval
These agreements require
both the venturers and include such milestones as:
o
o
o
o
o
o
o
o
o
o
o
o
o
o
approval of development plan,
major change orders,
amendment to development agreement,
acquiring land or interest therein,
financing beyond a preapproved line of credit,
selling, transferring or mortgaging property,
determining distributions,
changes in annual capital budget,
agreements with related third parties,
naming the project,
dilution of percentage interest,
architect selection,
contractual limitations,
removal of operating partner.
Division of interests:
o
issue
handled
is
corporations.
partner's
reduction,
joint
The
every
in
logical
most
guarantees,
ventures
follow
time,
and divide
a convention
to
is
way
by
manner
conceivable
contributions of expertise,
or
interests
The division of
value
each
equity,
risk
accordingly.
Most
allocating
equal
of
ownership interests to each party and weighing the value
contributions
Accounting
rules
in
of
terms
priority
for unconsolidated
ownership of less than 50%.
117
of
distributions.
subsidiaries
require
o
Capital
contributions
capital
Additional
Distributions:
the
repaid in
are
initial
and
each
of
ratio
venture's contributions, before a distribution of profits is
made.
formula
The
the
according
to
ownership
share.
is
for distribution beyond that point
value
determined
Priority
of
venturer's
each
for
distributions may be made
extraordinary contributions such as contribution of land.
Right
o
of
transfer
such issues as
outlines
sale to
of
before
a transfer or sale.
their
respective
without
and
third-party,
first
interests
partners
refusal to purchase another
rights
section
This
interests:
of
that
The co-venturers specify
or
interests cannot be sold
specific written permission of the
transferred
other.
After
careful selection of the partner by the corporation it would
be
unwise to let the partner exchange that interest in
its
sole discretion.
o
Before
of tax benefits:
negotiations
the corporation should know the extent to which
begin,
benefits
be
Allocation
are attractive to the company.
Tax advice should
sought before structuring the agreement to
assumed
tax
in fact,
benefits can,
tax
ensure
be of benefit to
that
the
corporation.
o Financial partner contributions:
It is not unusual
to find a third-party financial contributor participating as
a
partner in such a venture.
118
The extent of the
financial
be
should
There
defined.
definite
a
well
be
should
involvement
and
contribution
partner's
schedule
of
contributions backed by guarantee or letter of credit.
Lender
o
the
in
Participation
where a sophisticated lender is providing all,
instance
operating
all of the development and
almost
In
Venture:
will
lender
distributions.
(Particularly
a
want
undoubtedly
capital,
in
priority
the
or
the
the
The lender may also want an equity position.
if the lender provided the financing for
the
land acquisition and wants to capture the appreication value
its up-front risk.)
for
at
outset
the
allowable
include,
participation,
The issues that must be negotiated
partners'
of
2) the percentage of
the
lender's
partnership
3) the method of reducing the
interest that may be granted,
original
extent
1) the
4)
interests,
the
lender's participation in available cash,
priority
of
the
and 5) the amount
3
of control that will be surrendered to the lender.
o
Ownership:
All property in the venture should
be
venturer,
individually
shall
have any ownership except as tenants in
partnership.
Each
party
deemed
No
owned by the venturer.
should
all
waive
rights
to
actions
for
dissolution.
o Operating partner's covenant:
The corporation
may
require that the developer partner do the following:
o prepare all necessary architectural plans, designs,
cost analyses,
specifications,
working drawings,
plans;
marketing
construction schedules, and
119
o manage all construction efforts;
specified,
o make
no material changes from the
approved development plan without approval of the
other partner and conduct activities only with review
and written approval of the partner;
o take full sales and marketing responsibility;
accordance
in
the
property
o improve
preapproved plans;
the
with
o incur no ingebtedness beyond amounts preapproved
the partners.
One
stipulation
predevelopment
exposure.
contribute
developer
analysis,
The
corporate
had
all
done
not
land)
until
the
marketing
site,
architectural
and
financial
position
take a limited partnership (limited liability)
influence
right
management
control.
set in the beginning and
bolstered
to
needing
without
to
was
approve
and
drawings
The corporation was therefore able
obtained all approvals.
to
would
complete
prepared
up-front
the
joint venture partner
(corporate surplus
land
the
minimized
that
a
had
covenant
operating
corporation's
by
exert
major changes in
the
Their
the
by
prescribed
plan.
Additional control measures can be implemented via the lease
contract.
o Developer fees and overhead:
developer
sets
In the event that the
a fee for development or
reimbursement
of
overhead, periodic disbursement periods should be indicated.
A
clear
overhead
definition of
should
what constitutes direct
be established.
Payments are
predetermined construction and marketing stages.
120
costs
pegged
for
to
Business
o
and
entity should agree to keep complete books
partner
or
records
reflecting
all
costs
and
the
of
transactions
Concurrence on the method of accounting should be
venture.
to determine whether it be on the cash
beforehand
made
managing
The
records:
financial
and
accrual basis.
or
Partners should also agree on the methods of
accounting for tax benefits and distributions.
and
The developer is required to submit detailed books
of accounts - showing budgeted and actual costs and
records
other pertinent information on a regular basis.
require
ventures
All
quarterly.
monthly
others
accounting,
Some joint
only
are
records are available for audit and review
at any time.
liquidation
Dissolution,
o
specific
The
termination:
terms and criteria for termination of the
venture
may
trigger
be
should
or
described.
Some
events
which
dissolution include:
o
o
o
o
o
completion of the ventures prescribed purposes;
passage of the allotted time or life of the venture;
a material breach of the joint venture agreement;
mutual agreement of the parties;
bankruptcy proceedings against one of the partners.
still
have
continuing contracts and obligations to be performed.
Until
On
the
dissolution
the
joint
venture
may
venture is liquidated or the obligations terminated the
agreement
should specify the rights and obligations of
parties involved.
right
in
the
The nature of the breach may trigger the
the remaining partner to take possession
121
of
all
assets
of the venture and it can be agreed that
the
other
party forfeits all further rights to any profit. 5
o
Capital
Individual
accounts:
should be maintained for each partner.
each
partner's
capital
1) original
contributions,
partnerships
profit
The accounts include
contributions,
3)
allocations
2)
proportionate
and
accounts
capital
be
additional
share
reduced
by,
of
4)
distributions and 5) proportionate share of partnership loss
allocations. 6
122
TABLE 5-A
JOINT VENTURE AGREEMENT CAVEATS & QUESTIONS
o Who gets tax benefits?
the corporation pay tax on distributions not
o Does
received?
o Who is responsible for capital requirements in excess of
budget?
o Are capital contributions treated as loans or as equity?
o Do capital contributions entitle the contributor to
preferential distribution of earnings?
o What are the penalties for default?
o What are the "buy out" or forfeiture provisions?
o Who is responsible for cost overruns?
o How are management disagreements resolved?
o What are the priorities for cash distributions?
o To what extent can a partner deal with related entities?
o What happens in the event of death, bankruptcy or
insanity of participants?
o Who makes sale, financing or leasing decisions?
o What actions can be taken for managing partner's apparent
disregard for fiduciary duty?
o What restraints on competition can or should be imposed
on the developer?
o How much of the developers time or efforts should be
devoted exclusively to this project?
o What are the rights of the corporation to substitute new
management?
o How are disputes resolved between co-venturers?
o How and at what point in time is the value of contributed
land determined?
o How have the corporations property rights been protected?
The
understand
"bottom
line"
to
contract
documents
the intended mission of the venture and
is
to
reflect
it in the agreement. 7
B.
THE BUSINESS ENTITY
The
take
is
form that the joint venture business
a decision that must be made on two
123
entity
will
levels.
The
through
are
department
or
consolidated
either
be
unconsolidated
an
to
can
unit
business
accomplishng
The two most apparent means of
subsidiary.
this
a
from
everything
The
unit.
business
partner's
corporate
the
level of decision is how to structure
first
unconsolidated
subsidiaries.
should
Corporations
separate
consider establishing a
venture
subsidiary realty corporation to serve as the joint
A separate entity can protect
with the developer.
partner
As an autonomous unit with
the parent's ultimate liability.
defined, discretionary, authority this unit can be much more
responsive
If
partner.
to an entrepreneurial-type development
structured,
properly
can also
a subsidiary
keep
the
venture's debts off the parents balance sheet. 8
A
subsidiary is a corporation which is more than fifty
The parent, or
percent owned by another company.
can
owner
majority
effect either policy or day-to-day influence and
control over the subsidiary.
accepted accounting
Generally
principles (GAAP) permit the parent organization to
for
subsidiary in one of two ways.
the
financial
statements
with
the
"consolidate"
or
own,
its
2)
parent
can
subsidiary's
report
the
method.
In
the
firm's
creation of legally separate subsidiaries
reduces
event,
consolidatio
The
or
in the subsidiary using the equity
investment
either
combine
1)
either,
The
account
the
tn
treatment
depends
sWet
ea f
124
upon
rules.
sunting
the financial risk to the parent organization.
fall
Losses would
on the owners and creditors of the subsidiary
only
the parent doesn't have to legally bear the risk of
loss.
Accounting
unconsolidated
rules
from those of the parent,
greater
suggest that a subsidiary can
if its operations,
1) differ
-
be
significantly
2) if the parent corporation owns
less than 50% of the subsidiary, and 3) the primary business
of
the real estate subsidiary is not leasing facilities
to
the parent.
the equity method of
For an unconsolidated subsidiary,
In other words, the net of
accounting is required and used.
the
plus any profits
corporation's original contributions,
or losses occuring over the life of the venture, is all that
Any financing need
need be identified on the balance-sheet.
only
"off-balance-sheet
off
pressures
the
unconsolidated subsidiary,
produce
A corporation,
through
can enter a partnership with
minimal investment and by leveraging,
without
the
takes
to
subsidiary
unconsolidated
quarterly earnings and avoid debt.
an
approach
financing"
Thus,
corporation.
if it is significant to the
statement
the
financial
displayed as a footnote on the parent's
be
asset
create a major
distorting the financial ratios or capacity of
the
parent.
The next level is to decide whether to be a general
limited
primarily
partner
upon
of
the
the
venture.
amount
of
liability
control that the partner wants to have.
125
decision
The
and
or
depends
management
If a partner wants
minimum exposure and is uninterested in the daily management
decisions of the development, then the option will likely be
must
to maintain its limited liability status,
order
the
within
provisions
by
the
stay
Limited
the
within
partners
Limited
of the sites of the partnership).
state
Uniform
(or its equivalent as adopted
Act
Partnership
allowed
in
A limited partner,
for a limited partnership position.
who participate in the "control" of the partnership will
that a limited partner can do
most
The
Act.
the
of
general partners under the provisions
as
regarded
under
be
these
provisions is:
o require the maintenance and inspection of partnership
books;
o demand a formal accounting of partnership affairs;
o loan money to the partnership; and,
o request a dissolution and winding up by court decree.
participation
The
of
most
development in joint ventures,
has
agreement
been
process
development
appears about equally
in
most
cases
property management services as well.
partner
general
the
manage
the
provide
the
to allow the developer to
and
and the
corporation,
to
split
cases
In all
and general partners.
limited
between
in
corporations
major
The developer is the
either
limited
or
general.
The primary advantage to a general partnership position
is
the
Those
cases,
amount of control that if affords the
who
corporation.
have participated as limited partners,
were
confident that sufficient
126
control
in
most
mechanisms
in
and
agreements
the
and
development
in the
instituted
be
could
The
lease.
partnership
of
regret
one
a
participant in development of surplus corporate property was
be
not involved enough in daily operations
they were
that
learning the business - which they wanted
do.
to
to
The
business unit and the partnership status decisions depend on
the
has
be
considered
section draws from the experiences of
successful
control
and
risks
on
impacts
Each
corporation.
and discretion of the
policy
must
that
carefully.
C.
KEEPING THE MARRIAGE INTACT
This
venture
joint
arrangements to suggest a few paradigms
preserving the venture relationship.
that
the
The discussion assumes
selected
was carefully
partner
and criteria.
objectives
essential
ingredient to venture success.
sure that some,
at least
between partners weekly.
program
evolved
communication.
the
status
budget
reviewed
development
overwhelming,
is
an
made
series
the entire venture
regular
and
plans
of
Monthly progress meetings were held in which
the development
relative
year.
to
informal, contact was
In that case,
a
conform
partnership
One
was
reviewed.
reports were generated and the actual
established
coming
of
around
to
Communication
corporate
made
for
to plan and budgets.
Quarterly
progress
was
were
The budgets
annually along with the business plans for
the
All this operated under the umbrella of
the
It
program and partnership agreement.
but
operationally it provides
127
for
sounds
constant
review
and
communication of each
partner's
expectations.
Surprises are unlikely to disrupt the venture's progress and
changes
can be made to reflect the changing expectations of
partners.
D.
PREPARED FOR DISSOLUTION
To
prepare
partnership
at
for
the time of its
a job "left to the lawyers".
or
disbanding
creation
of
sometimes
a
seems
If considered at all it
to businessmen.
counter-intuitive
is
dissolution
However,
it is
wise
to
consider the factors of future conditions which may call for
separation
and
prepare
partnership
can,
in fact,
accordingly.
Breaking
be vastly more
up
difficult
a
than
forming one.
Some
of
the
factors
which
might
consideration are what to do in case of:
in
the
taken
into
1) dramatic shifts
nature of the corporation's main business line,
mismanagement,
developer
be
fraud
partner
or dishonesty by a
wants
out
or
partner,
undergoes
3)
2)
the
substantial
reorganization.
In response to these considerations,
suggested
and others, these
approaches to reorganization or dissolution might
apply:
with
the
in accordance
dissolution
o Judicial
requirements and provisions of the Uniform Limited
Partnership Act.
o A put option which obligates the other partner to
a
at
share
corporate partner's
the
purchase
predetermined price or value formulation.
128
o A call option permitting dissolution or buy-out
the partner rather than withdrawal.
of
o A "russian roulette" approach,
whereby, either
partner has the right to purchase the other partner's
interest.
An effort to purchase by one partner
triggers a right in the offeree to purchase from the
offeror at the same price.
This approach forces the
offeror to make a reasonable first offer.
o A finite term for the joint venture agreement.
Since a joint venture is, by its nature, formed to
conduct one transaction, rather than an
ongoing
business the term should always be well-defined.
An
might
agreement
seem
governing
distasteful
positive relationship.
and
the
to
the
potnuptial
those
attempting
Better
caught
in
to
to
form
a
But situations are forever changing
likelihood of changed interests in the
high.
relationship
future
prepare for future break up than
the unhappy circumstance without an
is
to
be
avenue
for
amicable resolution. 9
PRIVATELY HELD CORPORATION:
E.
The orientation of most of the discussion in this
text
has been towards publicy held and traded corporations.
Some
of
the
issues
and constraints
regarding
corporate
real
estate change when a privately-held corporation is involved.
of the conflicts and internal management concerns that
Many
impact
real estate decisions in publicly-held
dissipate.10
The
market
pressures
of
Wall
corporations
Street,
to
demonstrate growth in quarterly earnings, are not present in
the
private
firms and so,
a longer
term
perspective
Concerns about the cyclical nature of
easier
taken.
estate
can be tempered when the corporate earnings
is more patient.
129
is
real
profile
"Cash-generation
corporations
as
are
is
ability
for
highly
valued
private
by
of
the associated tax benefits
real
If tax shelter is not of importance
estate development."
to the company,
more
there is at least a greater willingness and
the
private corporation
to
pass
along
tax
Also, real estate tends often
benefits to related entities.
to be a means of estate-building for the shareholders of the
private
firms.
Land banking and land development are
not
unusual pursuits towards that end.
"Real
corporation
estate
acts
as an insurance
policy
will survive for years into the
that
future."12
the
A
example of a private corporation who has successfully
prime
pursued joint ventures in real estate development is Johnson
Wax
Johnson
Corporation.
development
throughout
of
the
Wax
oversees
venture
joint
commercial
and
residential
country.
In
short,
properties
joint
venture
developments for private corporations can be an advantageous
means
of
smoothing
out the
day-to-day
business
corporation and providing for long-term value.
130
of
the
CHAPTER SIX
CONCLUSION AND SUMMARY OF FINDINGS
The
role
development
of
is
corporate-America
being
being
revisited.
in
This
real
time
increasing
attention
is
corporate
real estate assets and capturing the value
within them.
Previously,
corporations
of
managing
several of the largest
lying
American
got into real estate development as a means of
diversification
most cases,
placed on the importance
estate
from their primary lines of
business.
their attempts were met with dismal failure and
the exodus was swift.
Few remain in the business and those
who
do are typically developing their own
The
evidence makes it clear that large corporations do
have
the
In
knowledge
or capabilities to
surplus
assets.
from
profit
not
solo
efforts in real estate development.
Therefore,
not
Fortune 500 type firms are not now, and are
likely to become,
heavily involved in real estate
reasons other than their own direct corporate use.
a
now
push
for
There is
the
real
and practitioners agree that corporate
real
for corporations to actively manage
estate assets that are for their own direct use.
Academics
Antate assets are
those
assets
corporate
that
coffers
under-utilized.
lie
to
dormant
The worst examples
are
sapping
the
for
years,
keep them maintained and
131
the
taxes
More frequent are examples of inefficient uses, poor
paid.
and dispositions that yield much less than true
management,
Add to the mismanagement, the fact that the cost of
value.
housing corporate-America has been rising rapidly - in
terms
(the cost of occupancy,
as a percentage of revenues,
during the past decade);
doubled
real
becomes
and the evidence
more clear that corporate real estate is under-utilized.
Corporations have historically faced the corporate real
- many
issue as either a lease or buy type decision
estate
still do.
Each extreme option has its place and respective
benefits.
There
are
joint
A
well-capitalized developer
venture with an experienced,
one
in-between.
many options
option available to corporations that can
provide
is
the
best of both worlds.
development
Xerox,
AT&T,
and
giving
is
attention
more
As
coming
to
announcements
joint ventures with corporations such
and others,
consideration
IBM,
as
more companies are taking notice
idea.
to the
Corporations
their
leverage
position
or
simply
are
ways
getting smarter at looking at their assets and seeking
to
of
more
manage
effectively.
It
is
not insignificant that these
corporations
assessing and attempting to capture the value of their
estate
assets.
value:
$1.4
Those assets represent a staggering
are
real
dollar
trillion - at least 25% of the total assets of
American corporations.
Substantial value and profit can be
132
realized by active management of those assets.
The
approach taken by many corporations is to
joint
financially
sound
venture their projects with experienced,
The joint
developers and to take a share in the ownership.
Developers are pursuing joint
potential for long-term gain.
opportunities
venture
less
as well as a
and a net reduction in occupancy costs,
risk,
with
affords them the benefits of ownership,
venture
of
sources
as a means of unlocking
land and capital; and a tool for securing credit tenants.
venture can be a viable alternative that allows
joint
both
respective
and corporations to accomplish their
developers
A
objectives.
who
Corporations
estate
the
of
importance
assets under their control face the issue of how
value
that
extract
or
utilize
it
to
improve
to
company
process of inquiry begin with a thorough assessment
corporate
real
The analysis presented, herein, suggests that
performance.
the
recognize
objectives
and the current status
of
corporate
of
properties relative to those objectives.
The
investigation
financial
ownership.
knonwledae
joint
recognized during the course
advantages
are
that joint ventures
offer
and operational flexibility similar
But
they
get
and experience.
the benefit of
Through a
venture a corporation can,
and at the same time,
this
corporations
to
the
properly
outright
developer's
structured
1) reduce occupancy costs
build an asset reservoir,
133
of
2) capture
premium value of surplus real
the
using
corporation
as
the
disturb
off-balance-sheet
a
and
the
does
not
financing
it
limited partner,
so that
corporation's
recording
parent
secure
3)
The venture can be
desirable properties for their own use.
structured
or,
estate,
of
debt
or
overall risk posture.
However,
for
corporations to effectively capture
plan
of their real estate they must have a strategic
value
that proactively anticipates and plans for needs,
the
regularly
evaluates alternatives, and manages the process efficiently.
A
decision
model was offered in Chapter Two to
this
help
process function smoothly (see Chapter Two Table 2-A).
joint
The
synergistically
venture
mixes
alternative
the
is
developer's
a
that
hybrid
and
knowledge
expertise with the corporation's credit, space need, and the
profit motive of both.
First,
It is not without problem.
the introduction of a profit motive to the asset
management
process creates conflict with the operations groups in which
the corporate real estate operation
is intended to support.
Some of the conflicts are outlined in Chapter Two Table 2-B.
it
But,
solution to the conflict is not easy to resolve.
The
estate
function
corporate
is a support
operation.
Therefore,
real estate entity's first motive is
to
and rewards sought through the joint ventures
134
the
provide
space and facilities for primary corporate operations.
risks
real
the
begins with the overt recognition that indeed
The
should
be tailored accordingly.
Beyond
criteria
the
for
alternative
likely
operating
internal
lie
dilemna
joint venture viability.
The joint
is not advantageous in all cases.
other
venture
Those
to gain the benefits of a joint venture fall
most
within
three distinct categories:
1)
Corporations with blue-chip credit
who
can
consolidate their occupancy needs in premium markets and
thereby, capture value of their own tenancy as well as
lease extra space to speculative tenants.
2) Corporations with surplus land or facilities that
have latent realizable
value that can be realized by
packaging and developing.
3) Corporations seeking unique or advantageous
that are owned or controlled by a developer.
Beyond the general corporate profiles,
as
well
as operational characteristics
determining
viability.
These
tests of financial strength,
capability
partner.
to
and
other financial
are
important
characteristics
operational
willingness,
handle the added dimension of a
success.
research
will
ameliorate
the
were used throughout the
text
are
and
corporate
for
chances
The conclusions drawn from
in
development
A constructive review and assessment of
characteristics
venture
other
sites
joint
interviewers
to
highlight
issues and establish corporate characteristics and profiles.
The
following are highlights of the major findings of
research.
135
this
MAJOR FINDINGS
o
estate
not
real
attempt
solo
of real estate unless it is strictly for
their
development
development
is
whose primary business
Corporations,
should
related,
not
use and they have the in-house technical capability
own
to
manage it.
o Corporate real estate assets are,
under-utilized
and
corporate
estate
real
as a general rule,
of
a
that
is
Implementation
mismanaged.
asset management
program
performance measured will reduce occupancy costs and provide
real
corporate
for improved profit from the
opportunities
estate of most large firms.
o
One means of reducing occupancy costs and sharing in
the upside potential of corporate real estate is to develop,
capable,
in concert with an experienced,
the real estate used by the corporation.
developer some of
effort
The joint
has the overall effect of reducing risks and enhancing gains
to
participants.
both
tenant
credit
corporation
developers
risk
than
The developer gets a lease from
and a partner who
gets,
a)
reduced
shares
occupancy
knowledge and experience,
owning
outright,
The
risks.
the
costs,
b)
c) more control
and e) potential
for
a
the
less
future
profit.
o
are,
The primary
1)
risks or drawbacks to a
joint
venture
conflicts between corporate operational objectives
and the development process,
136
2) difficulties in setting up,
and managing a partnership relationship with
negotiating
developer
inherent
who
has conflicting
objectives,
with
any development
process,
3)
and
a
risks
market
including
financial risk and potential damage to corporate name
risk,
and image.
Corporate
o
with
experiences
overwhelmingly
favorable
in
experiences
within
autonomy
of them.
favor
the
had
been
corporate
directly to the corporate level.
the
real
estate
most
the
with
Those
of
accorded
some
form
structure
and
reported
In virtually every
case,
their
cause
entities must still promote
within the corporate hierarchy.
are
developments
venture
joint
had
have
who
managers
estate
real
The primary function of the
real estate entity is support to operations groups
- profit
performance is secondary.
Corporations who have not experienced joint ventures
o
clearly into two categories.
fall
interest
in
The first group has
no
envision
no
pursuing joint ventures and
can
Without exception,
benefit that a developer could provide.
this response came from manufacturing-oriented organizations
who
had
technical experience for design,
construction
typically
lease
within the firm.
These
engineering
a
result of developer initiated proposals,
they have heard that "others are doing it".
137
and
The second group of companies
have been recently considering joint venture options
as
firms
manufacturing
build and own their manufacturing facilities
marketing facilities.
and
or
either
because
The entrance of
at the present.
ventures
joint
in
few corporations are involved
Relatively
o
blue-chip,
the
With the push on
well-known firms will likely pave the way.
to manage corporate real estate assets more efficiently, and
to
management
of
in
the
also
The push is
towards real estate entities.
attitudes
procedures
Changes are being manifest
companies.
America's
asset
the
reviewing
towards
trend
a
there appears to be
costs,
occupancy
reduce
made for business schools and real estate programs to
being
assist in training corporate asset managers.
o
estate
real
corporations do not have a clear
Most
strategy although many do have organized and operating
real
of
most
estate
If
organizations.
any,
strategy
the
companies is simply to be responsive to the operations needs
of the organization.
o
Corporate
attention
increased
is
real estate asset management
in
and
trade journals
the
gaining
business
feel that the emphasis will grow stronger
in
attitudes
of
indication
of
corporate concern, then that will certainly be the case.
As
attention,
so
Some
press.
the
coming
corporate
real
decade.
real
If
estate
the
and
concerns
executives are
any
estate asset management gets increased
will alternative approaches to procuring,
corporate
real
estate.
Joint
owning, and using
ventures
are
alternative, that is quickly gaining popularity.
138
but
one
and
used
being
become
corporations
competitive
to
accustomed
more
their acceptance will likely
managing cooperative ventures,
use
was observed that those corporations who
It
improve.
improve
to
frequently
more
As
advantages.
are gaining popularity
in general,
Joint ventures,
o
use them in the
development joint ventures most frequently,
with
Familiarity
operations side of the business as well.
the joint venture style of management is bound to facilitate
further use.
o
Perhaps
the
for
most key consideration
corporate
managers in setting up a joint venture is partner selection.
qualifications
for
environment
two
rapport
and
often
most
the
with
cited
Financial
partner.
development
a
communication
strength,
the
were
integrity
and
Trust
corporate
The selection process
were just as essential.
is typically handled on a case-by-case basis so the criteria
change, depending on the circumstance.
o
Most
have some control in the development process.
partner
measures
position were taken in the
venture,
Most,
also,
then
control
and
wanted the developer to
carry the risk during the development process.
and
If a limited-
were instituted via the partnership agreement
the corproate lease.
general
to
corporate executives felt it was important
IBM takes a
partner position because of its desire for
control
awareness that they are likely at risk whether they are
not.
legally
or
limited
partnership
Other corporations are
position
139
content
since the developer
with
is
a
the
up-front
Some managers required
operating partner anyway.
Most
were
to
gain
o Joint ventures to develop corporate real estate
will
capital
by
limited
cost and capital
on
assurances
requirements.
expenditure limits which had
approval by the board of directors.
be used with greater frequency in the coming years.
select compatible,
corporations
as
development
committed
effectively scrutinize the project economics; and
partners;
manage
As long
the internal conflicts,
prove
should
the ventures
beneficial.
development
of
form
noted
most
The
those
of
now
joint
doing
venture
have exerted powerful influence in shaping
the
large
and
The
ventures.
the
companies
are
want.
influential and capable of getting a lot of what they
A
concern
final
mentality
ventures.
evaluate
take
risks
the
a
on
place
should
Corporations
corporation's
the same
that
"follow
leader"
the
real
was exhibited in corporate entry into
that
may
estate
is
proceed with
rewards
and
scale
smaller
light
in
objectives and constraints,
with
joint
caution
and
of
each
then proceed
if
the opportunity looks right.
Caution is the by-word for the corporation embarking on
its
must
first joint venture.
be
Feasibility studies and analyses
carefully conducted at
every
stage.
There
are
drawbacks and risks to joint ventures - primarily due to the
introduction
of
a partner with conflicting objectives
140
and
risks inherent to any
the
planning carefully,
partner have to be managed.
those
risks
is
by
But,
project.
many of the risks of development can be
transferred.
or
avoided
development
The drawbacks of dealing with
a
About the only way to transfer
to be prepared to
deal
with
and
manage
effectively.
In order to have a viable joint venture development, it
must
be one that was selected for its relative advantage to
other available options.
be
And the development project
economically sound on its own merits.
important
partner
must
Perhaps the most
step in the entire process is the selection of
in whom the corporate management can have
trust and confidence.
141
a
complete
FOOTNOTES
CHAPTER ONE
1 See bibliography for representative list
reviewed.
of
literature
2 See persons interviewed list.
3 Most of the documentation on corporate experiences in
real estate development in this text came from, Robert A.
Sigafoos, Corporate Real Estate Development, (Lexington,
Massachusetts: Lexington Books, 1976).
4 Sally Zeckhauser and Robert Silverman, "Rediscover Your
Review,
Business
Estate," Harvard
Real
Company's
111-117.
p.
1,
No.
61,
Vol.
1983,
January/February
5 Telephone interview with Christopher B. Leinberger,
President, Robert Charles Lesser & Company, July 16, 1986.
6 Lewis M. Goodkin, When Real Estate and Home Building
Become Big Business, (Boston: Cahners Books, 1974).
7 Samuel L. Hayes III and Leonard M. Harlan, "Real Estate as
Review,
Business
Harvard
Investment,"
Corporate
a
July/August 1967.
8
Op.Cit., Sigafoos, p. 183.
9
Ibid.,
10 Ibid., p. 12
11 Ibid., p. 139-182
12 Ibid., p. 183.
13 Christopher B. Leinberger, "Real Estate Role Can Be Vital
in Corporate Strategy," National Real Estate Investor,
December 1985, p. 36.
14 Op.Cit., Zeckhauser, p. 111-117.
15 Ibid., p.
16 Michael A. Bell, "Strategic Approach to Corporate Real
Estate Management," Industrial Development, May/June 1984,
Vol. 153, No. 3, p. 13-16; and Robert Kevin Brown, Corporate
Executive Strategies for Profit Making,
Estate:
Real
(Homewood Illinois: Dow Jones - Irwin, 1979), p. 117.
142
17 Cesar J. Chekijian, "Corporate Challenge is to Control
Occupancy Costs," National Real Estate Investor, p. 50.
CHAPTER TWO
1 Robert A.
Sigafoos, Corporate Real Estate Development,
(Lexington, Massachusetts: Lexington Books, 1976) p. 44.
2 Ibid., p. 183-201.
3 Leonard Bogorad, "U.S. Corporations in Real Estate,"
Industrial Development, September/October 1984, Vol. 153, p.
11-13.
Executive
4 Robert Kevin Brown, Corporate Real Estate:
Strategies for Profit Making, (Homewood, Illinois: Dow Jones
- Irwin, 1979).
5 Sally Zeckhauser and Robert Silverman, "Rediscover Your
Review,
Business
Harvard
Estate,"
Real
Company's
111-117.
p.
1,
No.
61,
January/February 1983, Vol.
6
See interview list.
Where Do We
7 Robert Kevin Brown, "Fixed Asset Management:
p. 44.
1986,
April
Go?", National Real Estate Investor,
8 Op.Cit, Bogorad, p. 12.
9 Op.Cit, Brown, Corporate Real Estate, p. 4.
10 See; Stephen A. Pyrrh and James R. Cooper, Real Estate
Strategy, Analysis, Decisions, (New York: John
Investment:
1982), p. 192; and, Robert H. Hayes and
Sons,
&
Wiley
Stephen C. Wheelright, Restoring Our Competitive Edge:
Competing Through Manufacturing, (New York: John Wiley &
Sons, 1984); and, Interview List.
11 Op.Cit., Pyrrh & Cooper, p. 672.
12 Op.Cit., Brown, Corporate Real Estate, p. 37-48.
13 Michael A. Bell, "Strategic Approach to Corporate Real
Estate Management", Industrial Development, May/June 1984,
Vol. 153, No. 3, p. 13-16.
14 Menachem Rosenberg, "Equity Leases: Structuring Tenant Developer Joint Ventures", Real Estate Review, Winter 1986,
Vol. 15, No. 4, p. 54-60.
15 Op.Cit., Brown, Corporate Real Estate.
16 Op.Cit., Bogorad, p. 13.
143
17 Ibid.,
p. 13.
18 See Security Pacific Real Advisory Services - Lincoln C.
Jewett; and, Lincoln C. Jewett, "How to Market Surplus Real
Estate", Harvard Business Review, January/February 1977, p.
7.
19 Op.Cit., Sigafoos, p. 40.
CHAPTER THREE
Managing for Joint Venture
1 Kathryn Rudie Harrigan,
(Lexington, Massachusetts: Lexington Books, 1976),
Success,
preface.
2 Robert A. Sigafoos, Corporate Real Estate Development,
(Lexington, Massachusetts: Lexington Books, 1976).
3 The items listed throughout the tables in this chapter
have
been taken from all of the sources references,
including interviews.
4 Sanford Bog, Jerome Duncan and Philip Friedman, "Joint
(Cambridge,
Venture Strategies and Corporate Innovation",
1982).
Massachusetts: Oelgaschler, Gunn and Hain,
5 Jonathon B. Levine and John A. Byrne, "Corporate
Couples", Business Week, July 21, 1986, p. 102.
Odd
6 Op.Cit., Harrigan, p. 23.
7 Op.Cit., Levine and Byrne, p. 103.
8 Op. Cit., Harrigan, p. 173.
9 Joseph W. O'Connor, "Real Estate Development: Investment
Risks and Rewards", Real Estate Issues, Spring/Summer 1986,
Vol. 11, No. 1, p. 6-11.
10 Op.Cit., Sigafoos, p. 23.
11 Op.Cit., Sigafoos, p. 72.
CHAPTER FOUR
1 See interview list.
2 Menacham Rosenberg, "Equity Leases: Structuring Tenant Developer Joint Ventures", Real Estate Review, Winter 1986,
Vol. 15, No. 4, p.4, 55.
144
3 Peter Haverkampf and Gary Salton, "Real Estate as a
Corporate Reservoir", Industrial Development, May/June 1985,
p. 21.
4 Ibid., p. 21.
5 Ibid., p. 21.
Managing for Joint Venture
6 Kathryn Rudie Harrigan,
(Lexington, Massachusetts: Lexington Books, 1976),
Success,
p. 166.
7 Information gained from Urban Land Institute (ULI) Seminar
1986,
April
"Industrial Real Estate Strategies",
on
Washington, D.C.
8 Jonathan B. Levine and John A. Byrne, "Corporate
Couples", Business Week, July 21, 1986, p. 103.
Odd
9 Ibid., p. 104.
10 Ibid., p. 103.
11 Kathryn Rudie Harrigan, "Joint Ventures and
Strategies", Columbia Journal of World Business,
1984, p. 8.
Global
Summer
CHAPTER FIVE
Managing For Joint Venture
1 Kathryn Rudie Harrigan,
Lexington Books, 1976),
Massachusetts:
(Lexington,
Success,
p. 177.
2 Ibid., p. 55.
3 Ibid., p. 179.
4 Jim Moore, "Corporate Real Estate Activity:
Fleetness Will Be Key to Success", National
Investor, March 1985, p. 45.
Flexibility,
Real Estate
5 Lewis M. Goodkin, When Real Estate and Home Building
Become Big Business, (Boston: Cahners Books, 1974), p. 525562.
6 Ibid., p. 525-562.
7. Ibid., p. 525-562.
8 The discussion on corporate subsidiaries was taken in
Bruce N. Wardrep, Ph.D., "A Pilot Study:
large part from:
Subsidiaries for Real Estate Holdings",
Unconsolidated
145
Industrial Development, November/December 1985, p. 17-23.
9 Menachem Rosenberg, "Equity Leases: Structuring TenantDeveloper Joint Ventures", Real Estate Review, Winter 1986,
Vol. 15, No. 4, p. 58.
10 The discussion of privately held corporate interests was
Christopher B. Leinberger, "Private Firms and
drawn from:
National Real Estate
Estate Can Be Symbiotic",
Real
40.
Investor, April 1985, p.
11 Ibid., p. 41.
12 Ibid., p. 42.
146
PERSONS INTERVIEWED
W.C. Bartow, Director, Real Estate, Raytheon, June 24, 1986
Bell, President,
Michael A.
Corporation, July 18, 1986
Eric V. Benson, Senior
Polaroid, July 16, 1986
The
Manager,
Harbinger
Group/Xerox
Corporate Real
John Biddle, Manager Facilities Planning,
July 15, 1986
Norton
Estate,
Company,
Paul Donnelley, Corporate Real Estate, Data General, July 7,
1986
John Dyer, Vice President, Finance & Administration, Upland
Industries/Union Pacific, July 30, 1986
David D. Fitch, Vice President,
Development Inc., June 25, 1986
Larry
1986
Goldberg,
Cadillac Fairview
Urban
Corporate Real Estate, Polaroid, July
Lincoln Jewett, Executive Vice President,
C.
Pacific Realty Advisory Services, June 24, 1986
16,
Security
Christopher B. Leinberger, President, Robert Charles Lesser
& Company, July 16, 1986
Ralph Maffei, Director of Corporate
Laboratories Inc., July 23, 1986
Kevin M. Mahoney,
June 13, 1986
Principal,
Real
Estate,
Wang
Copley Real Estate Advisors,
Linda Maier, Director Corporate Services, Lotus Development
Corporation, July 10, 1986
Caroline McBride,
August 1, 1986
Director of Real Estate Development, IBM,
John J. McWeeney, Vice President-Real Estate, Stop & Shop,
July 11, 1986
Manager of Real
Ed Reiss,
Corporation, July 11, 1986
Estate,
Digital
Equipment
Gary J. Salton, Vice President, Homart Development Company,
July 18, 1986
Bruce Schick, Real Estate Manager, Wang Laboratories Inc.,
July 23, 1986
147
Robert
Shortsleeve,
Director
Corporate
Services,
Prime
Computer, July 18, 1986
President
Steele,
Thomas A.
Development, June 12, 1986
&
CEO,
Perini
Land
and
Barry Thomas, Treasurer, Union Pacific Corporation, July 29,
1986
Tom Trolley, Retired Vice President, Xerox Corporation, July
29, 1986
Ron Voth, Director of Real Estate, Apple Computers, July 12,
1986
148
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The list of sources presented here is not intended to
be a complete survey of all significant works on joint
Rather, it is a
ventures or corporate real estate.
study.
this
in
compilation of sources referenced
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American Society of Real Estate Counselors.
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Real Estate:
A
Bell, Robert. "Negotiating the Real Estate Joint Venture."
Real Estate Review, 34-40.
Bell, Michael A. "Strategic Approach to Corporate
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Real
1984,
Bog, Sanford, Jerome Duncan and Philip Friedman. "Joint
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Venture Strategies and Corporate Innovation."
MA: Oelgaschler, Gunn and Hain) 1982.
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Strategies for Profit
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Illinois:
(Homewood,
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Site
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Estate
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Real
Crandell, Larry. Corporate Real Estate Development and
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