Tuesday, May 27, 2008

Demand is making a difference in march toward green buildings

It may seem that green buildings are everywhere in Houston, almost becoming the standard of construction. But certain major real estate sectors are only just beginning the move toward healthy and green buildings, says Morris Architects Project Manager Tim Murray, chairman of Houston U.S. Green Building Council.
He cites USGBC statistics that the greater Houston area currently has 114 building projects totaling 23.7 million square feet that are registered under the national Leadership in Energy and Environmental Design certification program, meaning architects, construction contractors and facility managers are following USGBC's guidelines to get enough points to qualify for bronze, silver, gold or platinum LEED status after completion.
"Of that green building total, over 48 percent is commercial construction," he says. "Another 25 percent of the registered projects are classified as multi-use."
Commercial buildings From: http://houston.bizjournals.com
LEED has become the common standard for private commercial buildings.
"Developers understand that green buildings make economic sense," Murray says.
He cites the statistic provided by Andy Bergman, co-chair of the Greater Houston Partnership's Green Building Subcommittee, that 73 percent of Class A commercial projects planned or under construction are LEED-registered.
"No major developer wants to build the last 'standard' commercial building," Murray says. "Even speculative builders realize that a green building will bring more value and demand higher lease rates."
Existing buildings in the commercial market are also going green.
According to Murray, the Miller-Spivey report from the University of California, San Diego ranks Houston No. 2 in the nation in terms of the square footage of LEED- and EnergyStar-rated commercial buildings. The Institute of Real Estate Management-Houston Chapter recognized over 70 existing commercial buildings as achieving an EnergyStar rating in 2007.
"This shift results from owners looking for energy savings and tenants demanding green buildings for recruitment and retention purposes," he says.
Public buildings
The government is also taking advantage of the benefits of green buildings.
Locally, the City of Houston passed a Green Building resolution in 2004 and has since designed every feasible municipal project to the LEED standard -- over 20 to date.
"One of the earliest adopters of LEED was the federal government," Murray notes. "Most of the federal projects in the region are registered, the majority at NASA's Johnson Space Center. JSC has a LEED-certified building on campus and currently has 5 LEED-registered projects."
The higher-education sector has far fewer projects than other sectors, but still has 4 percent of the LEED projects, he says, adding that Rice University leads with five projects Lagging behind
Some markets -- health care, industrial, retail and multifamily -- lag behind, according to Murray.
§ Health care. "Houston has a huge medical real estate market. You would think that medical projects would quickly embrace the concept of healthy buildings," he says.
The Pearland Pediatric Building in Pearland is listed as one of the nation's 20 certified health care projects. But of Houston's 114 LEED-registered projects, only two are health care facilities.
One is Baylor's new Clinic and Hospital. Because of the facility's size, Houston's LEED health care facilities comprise 5 percent of the area's total LEED projects, much better than the national 1.9 percent.
"The health care industry is slow to warm to new methods for reasons ranging from cost to infection control," Murray says. "In addition, these buildings tend to be owner-occupied so there is no tenant market demand. And while green health care guidelines have existed for years, the LEED for health care rating system has not yet been formally released."
§ Industrial. Murray cites Colliers International statistics that the Houston area has 6.2 million square feet of industrial space under construction in the first quarter of 2008. Liberty Property Trust is developing two registered projects that equal 2.5 percent of the LEED list.
"Green projects are lacking," he says. "Industrial properties have been slow to accept green construction because even slight increases in construction costs can hurt competitiveness, and there is little precedent for how to 'green' this building type."
He notes that the drive to green industrial projects is led by large corporate tenants that demand green facilities as part of their sustainable corporate philosophies.
§ Retail. Retail is another dominating portion of the region's construction, yet is only 3 percent of the area's LEED projects, Murray says. He adds, however, that retail is often integrated into larger mixed-use commercial projects.
§ Multifamily. "Data on multifamily projects is hard to capture, since they are now so often included in mixed-use projects, but there are currently no stand-alone multifamily LEED projects in the Houston area," he says.
"The Houston market had just over $3 billion in building contracts in the first quarter of 2008, according to the Greater Houston Partnership," Murray says. "Green buildings are only just starting make to make a contribution to the built environment, and it is a movement that has tremendous room for growth."
Customer demand
Most large companies see sustainability as a major issue and are willing to pay a premium for space that meets sustainability standards, according to a recent international survey conducted by Jones Lang LaSalle Inc. and CoreNet Global.
Ninety percent of commercial real estate directors responding to the survey say sustainability such as the LEED certification maintained by the U.S. Green Building Council is a critical concern today, or will be within the next three years.
The survey queried 2,300 commercial real estate directors on four continents. Seventy-seven percent of those responding say they are willing to pay a premium in their occupancy cost to be in sustainable buildings, while only 22 percent expect to pay the same.
Thirty-eight percent of the survey respondents estimate sustainable buildings will cost 1 percent to 5 percent more than traditional buildings; 52 percent estimate the incremental cost at 5 percent to 10 percent; 22 percent estimated the premium at more than 10 percent. Those who focus on retrofitting existing buildings will see higher incremental costs than those engaged in new construction projects.
Respondents say a limited supply of green buildings is a widespread problem:
§ Only 17 percent say there are good, or widely available, sustainable real estate solutions in markets where their companies need to locate offices.
§ 42 percent say the supply chain is good in some markets but not others.
§ 41 percent views overall availability as limited or minimal.
"A company that wants to lease space in a LEED-certified building may have very few choices, if any, in the area where it wishes to locate," says Bruce Rutherford of Jones Lang LaSalle, Houston who is responsible for tenant representation and leasing operations throughout the region.
A building need not be LEED certified to be energy-efficient and environmentally friendly; however, LEED certification provides credibility that more and more owners value as a way to get credit for their efforts at sustainability, he adds.
Additionally, owners of existing buildings are considering renovations that can earn an existing building (LEED EB) or commercial interior (LEED CI) certification.
"It often turns out that a LEED silver or even gold is not out of reach," says Michael Novosad, a vice president for project and development services in the west region of Jones Lang LaSalle. "The equation is easy to calculate: Minimal cost of LEED certification, offset by higher rent and occupancy levels, equals more sustainable buildings in the near future."
Topping the list of factors driving corporate interest in sustainability are rising energy costs and the possibility of government regulation of greenhouse gas emissions, also known as carbon emissions, he says, citing USGBC statistics that buildings are responsible for 65 percent of all electrical usage and 30 percent of all greenhouse gas emissions.
Whether the cost of energy and sustainability is minimal or runs into the double digits, it's money well spent, Novosad adds.
"Benefits such as increased employee productivity and enhanced corporate image are not easily measured, but the energy savings are quantifiable and substantial, as much as 30 percent compared to traditional buildings," he says.
"We have passed the tipping point for sustainability, and the question is no longer about whether sustainable design should be considered," says Eric Bowles, vice president and director of research for CoreNet Global. "The question will be: How do you explain why you chose not to have a sustainable design?"
For more information on LEED Design call Ed Ayres or seek info : www.houstonrealtyadvisors.com or www.houstonrealtyadvisors.net or www.edayres.com

Wednesday, May 21, 2008

Revised Texas franchise tax raises lease issues for tenants

Due to constitutional issues regarding public education funding in Texas, this year's special session produced a legislative package providing property tax relief, funded, in part, by a revised Texas franchise tax.

from Houston Business Journal

"At the same time, the package reduced school taxes by an estimated
$15.7 billion over the next three years with a 33.3% rate reduction over two years.

Now, in addition to corporations and LLCs (currently subject to the existing franchise tax), general partnerships and joint ventures which have at least one partner that is not a natural person, limited partnerships and other entities are subject to the Texas franchise tax.

Commercial leases 101

Most commercial leases require the tenant to pay, in addition to rent, some portion of the taxes assessed against the project.

Mechanisms include the tenant's paying a pro rata share of all the taxes (a net lease) or the landlord including certain base year taxes in the rent the tenant pays with the tenant obligated to pay its pro rata share of increases.

Taxes, from the landlord's perspective, are generally described broadly.
Sophisticated tenants exclude from the definition of taxes income taxes, estate taxes or inheritance taxes and sometimes franchise taxes.

Sophisticated landlords, on the other hand, recognize that in some jurisdictions income producing properties are taxed by a tax against the income generated by the property -- what better evidence of the value of a property than the income generated thereby?

Those landlords pass on to tenants any tax imposed on the rents paid by the landlord (either by way of substitution for, or in addition to, ad valorem taxation upon the real estate).

Combining these positions with the revised franchise tax raises the following issues for landlords and tenants with respect to existing Texas leases:

§ What taxes can the landlord legitimately pass through to its

Is the tax definition broad enough that the entire franchise tax payable by a landlord can now be passed on to the tenants?

§ If there is a carve-out for income taxes (but not
franchise taxes), does the revised franchise tax count as a income tax which should be excluded? Note that an income tax is prohibited by the Texas Constitution.

§ If the revised franchise tax can be passed on to tenants,
how is it to be allocated among various tenants?

Some tenants require the determination to be based upon the income generated by the rents paid at that particular location without regard to other locations owned by the landlord or its affiliates.

§ Many landlords (e.g. limited partnerships) are now paying a
tax that they had never had to pay before.

Although their property taxes may be reduced by a third, they are able to pass those reduced property taxes on through to the tenants. Should they be able to pass a third of the revised franchise tax on to the tenants -- to keep things even?


Existing leases where one or more of these types of issues (or variations thereof) are present, will have to be analyzed on a case-by-case basis by both landlords and tenants to determine -- from the landlord's perspective -- what the landlord can pass on to the tenant in the form of taxes and -- from the tenants perspective -- that the landlord is not passing on more than is permitted under the terms of the lease.

As for future leases, landlords may recognize that the revised franchise tax is a cost of doing business that needs to be factored into the determination of the base or minimum rent that the landlord charges a particular tenant.

Alternatively, a landlord could provide for the franchise tax to be passed on to the tenant (and in doing so, the landlord should make specific reference to the revised franchise tax and any future amendments thereof).

The landlord will still have to include a method for allocating the franchise tax to the particular tenants in a particular location.
Tenants, on the other hand, will resist inclusion of the franchise tax as a pass-through item believing that it really is an income type of tax that should be properly borne by the landlord.

As is usual in these types of cases, larger, more sophisticated tenants with significant bargaining power will be able to exclude any franchise tax pass-through while those with less bargaining power will be paying the landlord's franchise taxes.

With a new legislative session about to begin, there is no doubt that there will be even further revisions to the revised franchise tax law.
In addition, we can be sure of judicial challenges to the existing law based on the Texas constitutional prohibition against an income tax.

While resolution of these issues has considerable economic impact on both landlords and tenants, there is no telling where it may end up -- stay tuned!" for more information see: www.houstonrealtyadvisors.com or www.houstonrealtyadvisors.net or www.houstonofficefinders.com

Sunday, May 18, 2008

Sugar Land Lands Coca-Cola North America

Economic development authorities in the cities of The Colony, Friendswood, Sugar Land and Cedar Park are helping to recruit new companies and retain current business.Lindsey Walker
When a major corporation decides to relocate its headquarters or a local company expands into more space in the same city, it most likely didn’t happen by chance. The hardworking members of the local economic development organizations are behind the scenes, constantly working to figure out how to generate more business in their communities while also focusing on the existing business in their area. This month in Texas Real Estate Business, we feature four economic development corporations that have made a difference in their cities.
City of The Colony
With Lake Lewisville as its backyard, the city of The Colony, Texas, has an advantage for recruiting businesses that some other cities don’t. In addition to this draw, The Colony also benefits from a location only 20 miles north of downtown Dallas, a pro-business government and a high quality of life. In order to capitalize on these features, the city created The Colony Economic Development Corporation in 1997. The following year, city voters approved the 4A and 4B sales taxes to generate revenue to offer incentives to businesses, to market the city and to fund quality of life programs.
“We have programs in place to help [meet our goals], such as a strategic plan, a marketing plan, a list of incentives that can be offered to specific types of businesses and a great relationship with The Colony city council to get incentives approved from the economic development corporation as well as the city itself,” says Tom Terrall, director of economic development for The Colony Economic Development Corporation. “These programs were put into place beginning in 1998 when the 4A sales tax was passed by The Colony voters and has grown since that time.”
With zoning for retail, office and light industrial uses, the city is focused on attracting those three types of businesses.
“If we had an area zoned for heavy industrial, we would also be interested in those companies,” Terrall adds. “But, our city is only about 15 square miles and we have no place for the heavy industrial businesses, though we do have a couple of parcels that can accommodate the distribution/warehouse/light assembly type of business.”
The majority of current and planned development is taking place in three main areas of the city — along the State Highway 121 corridor running through The Colony, on Wynnwood Peninsula west of FM 423, and in the southern most portion of the City in Austin Ranch, according to Terrall. In the past year, the corporation has been able to attract some retail businesses to open along S.H. 121, including Ross Dress For Less, Staples and Texas Roadhouse restaurant, and several larger developments are underway in the same area. Austin Ranch, for example, is a multifamily-focused, mixed-use project located just south of S.H. 121. Thus far, the development features about 2,000 apartment units, some townhomes, some retail and restaurants.
“Phase V has just begun. It will consist of around 535 more multifamily units; 9,000 square feet of restaurant uses; 13,631 square feet of retail; a four-story parking garage; and a park,” Terrall says. “The company recently signed an agreement with the city to put additional infrastructure in place in Austin Ranch in order to develop commercial parcels with corporate campus-style offices, and plans also call for more retail development at the intersection of Plano and Windhaven parkways.”
Peter Calthorpe master-planned Austin Ranch’s residential community, and Lucy Billingsley of the Billingsley Company are developing and managing the project.
Another development is a 50-acre retail project on S.H. 121 east of Blair Oaks that should be under construction by the second quarter. Also, Cascades at The Colony — a mixed-use development located on S.H. 121 and Morning Star with its 200,000-square-foot Phase I nearly complete — is scheduled to begin construction on its second phase in May. The first phase comprises flex/office buildings built for small and mid-size distribution, light assembly or storage tenants; Phase II will feature a Residence Inn by Marriott and a Fairfield Inn & Suites with approximately 100 rooms each. The project was master-planned by BOKA Powell and is being developed by Jackson Shaw.
“Future phases encompass approximately 200,000 square feet of office space and approximately 100,000 square feet of retail,” Terrall adds. Jackson-Shaw is currently looking for some pad site users, such as restaurants, to compliment and service the hotels.
“Employment at this location will help boost The Colony’s daytime population, which will attract more restaurants and other retail businesses,” Terrall says.
With a total population of around 39,300, the city of The Colony has a residential base that consists of a highly trained workforce (approximately 30.72 percent of the workforce has a minimum of an undergraduate degree) and an unemployment rate of 3.8 percent.
“Due to the influx of new companies and the expansion of existing companies in the North Texas area, I believe the job market is excellent,” Terrall says. “Our future economic outlook is bright; we are located at the center of business and population growth. Having more business locate in The Colony will help to diversify the tax base. This will also bring more local sales tax to our city so we can continue to offer a high level of service to our residents. That is the goal of The Colony Economic Development Corporation.”
City of Friendswood
The city of Friendswood, Texas, has been able to attract commercial users such as the city’s first green office building. Jacob White Construction Company is building the nearly $2 million, single-story project, which will feature a grass roof and water catchment system. The company will relocate its headquarters to occupy 5,000 of the building’s 10,000 square feet.
The economic development office for the city of Friendswood, Texas — located halfway between Houston and Galveston — was created in July 1999 to pursue a diversified tax base in the city, which is mostly residential. Now having been established for almost a decade, the goal of the office still lies in the idea of diversification, working to achieve a tax base consisting of 80 percent residential and 20 percent commercial. In fact, the city’s Comprehensive Plan is being updated to facilitate this goal.
In order to attract more commercial users, the city, which currently boasts an unemployment rate of 3.4 percent, offers several incentive programs for businesses, including tax abatement, tax increment financing and a municipal grant program.
“The municipal grant program allows businesses to expand or relocate in the city and utilize the municipal grant funds to help offset their costs for infrastructure, road improvements, drainage, land or building acquisition, building improvements or renovation, or city-related permit or impact fees,” says Karen Capps, economic development coordinator for the city of Friendswood.
The city is targeting certain businesses with its efforts. On the wish list are professional office development, medical facilities (minor care/outpatient), aerospace, hotels and more retail that caters to an affluent residential base.
Crystal Creek Developers, the developers of a new Friendswood project, the Design Center, received an economic incentive grant that will reimburse up to $30,000 for fees paid to the city relating to the construction and development of the 21,600-square-foot office/retail project.
The city, which has a population of 36,000, also would like to attract more mixed-use developments that are primarily commercial as well as business parks that include wholesale, service-related business and manufacturing. Over 3,000 engineers currently call Friendswood home.
One development in Friendswood that should help stimulate these types of commercial businesses is West Ranch, a 766-acre master-planned development by Friendswood Development Company. The community, which is bordered by Centennial Park, Chigger Creek and Clear Creek, will feature 1,500 homes, more than 60 acres of park space, 100 acres of nature trails tying into Centennial Park, two recreation complexes, a resort-style swimming pool, a competition-size pool, a fish landing and a community clubhouse. In addition, 68 acres of commercial space will include a 23-acre Village Center that is projected for 2010.
As one of Money Magazine’s 2007 Best Places to Live, the city of Friendswood has plenty to offer new businesses and their employees.
“Friendswood has a highly educated workforce with more than 52 percent of residents having achieved a Bachelor’s or Master’s degree,” Capps says. “Due to its highly educated resident base, the city’s household income is more than $114,000 with the lowest crime rate in the region.”
City of Sugar Land
Coca-Cola North America recently selected to relocate its Minute Maid Business Unit headquarters to Sugar Land Town Square (above) in Sugar Land, Texas.
Also a few miles outside of Houston lies Sugar Land, Texas. The city of 77,982 was one of the fastest growing cities in the country during the 1990s, which led to the development of the economic development department in June 1999 by the Sugar Land City Council.
“The city determined that a dedicated economic development would enhance their business recruitment and retention efforts and provide a positive influence on attaining their goals and objectives for a strong local economy” says Regina Morales, director of economic development for the city of Sugar Land.
Focusing on projects within the Sugar Land city limits, the department strives to diversify the city’s economy in order to ensure sustainability during economic changes, to attract development as a regional employment center, to create a balanced tax base, and to raise adequate funding for economic development activities. The economic development department has many programs in place to support these goals, such as marketing; recruitment; business retention and expansion; the Shop Sugar Land Program, which markets the city’s 900 retail, restaurant and entertainment venues; and the Heritage Program, with which the city has actively acquired and preserved the artifacts from the Imperial Sugar refinery that has been at its site since 1846.
Based on a Target Industry analysis, the city currently focuses on attracting corporate headquarters; software development; biotechnology research and application; pharmaceutical development and manufacturing; medical technology research and application; and energy and engineering. With Sugar Land’s highly educated workforce, low taxes, master-planned communities and aggressive economic development incentives, the city has been able to generate a substantial amount of new business in the past year.
“In 2007, Sugar Land’s economic development efforts encouraged more than $141 million in new investment, 1,240 jobs and 1.4 million square feet of new facilities,” Morales says.
According to Morales, during the past year, Minute Maid, Bechtel Equipment Operations and Finger Furniture have completed or announced headquarter relocations to Sugar Land. Additional success stories include the completion of the 157,000-square-foot, Class A Three Sugar Creek office building, the expansion of Fluor Corporation, Tramontina USA and National Oilwell as well as the opening of Whole Foods.
Currently under development right now in Sugar Land are Lake Pointe Town Center and Telfair. Lake Pointe is a 190-acre, mixed-use project featuring upscale residential; urban retail and restaurants; both medical and traditional office space; and medical facilities. The pedestrian-friendly project, which sits at the crossroads of Highway 6 and U.S. 59 directly across from Sugar Land Town Center, is being developed by locally based Planned Community Developers.
Newland Communities’ Telfair — a 2,000-acre, master-planned community located just off U.S. 59 and University Boulevard — offers both residential and commercial opportunities.
“One of the most visible amenities at Telfair is its central 70-acre lake and park system, which meanders through the community,” Morales says. “Marked by a dramatic pair of arched suspension bridges, this linear park offers places to jog, walk and bike.”
In planning stages is the Imperial Sugar redevelopment by Cherokee Investments and Southern Land Company. The venture is redeveloping the historical site and adjacent land into a master-planned, mixed-use development with extensive park space, a Sugar Land Heritage Museum and unique residential, retail and office offerings. (See “Sugar Land Set for Sweet Success” on page 30.)
“These new developments continue to provide well-planned mixed-use environments expanding the residential, commercial and office opportunities which strengthens the city’s goal as a location to live, work, play and shop,” Morales says.
As evidenced by these projects, large-scale developments are planned and in progress throughout the city — the highest concentration existing between Highway 90A and U.S. 59, according to Morales. More projects should be on the horizon as the job market in Sugar Land continues to strengthen.
“There has been a 95 percent increase in jobs since 1999, totaling more than 40,000, and a 3.38 percent unemployment rate for 2007,” Morales says.
Sugar Land’s strengths have always been found in the insightful and forward thinking vision of leadership and the implementation of those visions and goals since the early 1900s, according to Morales. “This quality of life, exceptional amenities and business opportunities has earned the city many accolades such as One of America’s Best Places to Live and Best Place to Raise a Family in 2006,” she says. “Sugar Land continues to strategically position itself as the preferred destination for both raising a family, business relocation and employment as well as shopping and entertainment.”
City of Cedar Park
Austin’s far northwest suburb of Cedar Park, Texas, hasn’t had an economic development department for as long as Friendswood and Sugar Land, but the city is making up for lost time.
Established by a vote of the city council in April 2005, the city of Cedar Park’s economic development department covers the city limits as well as the city’s extra-territorial jurisdiction (ETJ). The city offers a number of flexible, performance-based incentive programs that are designed to assist qualified companies that are relocating to the city as well as to assist local companies in their expansions, according Phil Brewer, director of economic development for the city of Cedar Park.
“The city’s goals are to diversify and expand the tax base as well as create and retain employment opportunities in Cedar Park,” he adds. “Because of the city’s location next to Austin, we have focused our efforts on targeting electronics, software, biotechnology and other technology-based companies.”
With these efforts, the city, which has a population of more than 53,000 within the city limits and another 25,000 in the ETJ, has been able to attract several new businesses. BMC West, for example, currently is building a new 120,000-square-foot materials distribution facility on BMC Drive, and 3PS, Inc., moved into a new 20,000-square-foot manufacturing facility in LaJaita Business Park last November. In terms of expansion, ETS-Lindgren is completing a 50,000-square-foot expansion to their existing facility in LaJaita Business Park. It should be ready for occupancy this spring.
A couple of major developments in the city of Cedar Park should contribute to future economic growth in the area. An approximately 900,000-square-foot power center being developed by Endeavor Real Estate Group called 1890 Ranch will be Cedar Park’s largest shopping center to date. Currently under construction on the project’s second phase, major national tenants Target, Cinemark, OfficeMax, Circuit City, PetsMart, Starbucks Coffee, FedEx/Kinko’s and Wachovia Bank opened this fall, and many others (Academy Sports and Gold’s Gym) are on track to open this summer. The project is located at the northeast quadrant of Highway 183A and FM 1431. Other significant developments include the 150-bed Cedar Park Regional Medical Center, which opened on Medical Parkway in December; Cedar Park Event Center, a 6,800-seat multi-purpose facility to be home to the Dallas Stars AHL affiliate (Texas Stars) once it opens at the northwest corner of Highway 183A and New Hope Road in August 2009; and a major 300-room resort hotel that is in the works and should be under construction on FM 1431 east of Parmer Lane this summer.
“While the development is spread around the city, the majority of current and planned development is focused in the area along the new 183A toll road or in the FM 1431 corridor east of the toll road to Interstate Highway 35,” says Brewer.
Cedar Park’s proximity to Austin is one of its selling points to potential new businesses, but it’s not the only one. Cedar Park has a supportive city government, outstanding quality of life and excellent schools, combining to make the city an ideal location for companies considering expanding or relocating their operations to the greater Austin area, according to Brewer. Backing up his statements, Family Circle recently rated Cedar Park as one of the top 10 cities in the United States to raise a family, and Forbes Magazine rated the city as the 11th fastest growing suburban city in America from 2000 to 2006.
The majority of jobs being created that aided in these accolades are concentrated in the medical/health care and service industries. With an unemployment rate of 3.5 percent, the city of Cedar Park should see continued strength in the future.
Says Brewer, “The job market in the greater Austin area is strong as companies continue to expand and add employees to their operations.” For more information see ; www.houstonrealtyadvisirs.com or www.houstonrealtyadvisors.net

Friday, May 16, 2008

Broadway Partners Fund Manager LLC has a contract to sell the downtown office building for $127 million

Fifteen months after acquiring One City Centre for $115 million, Broadway Partners Fund Manager LLC has a contract to sell the downtown office building for $127 million.
Dallas-based Behringer Harvard is buying the 47-year-old property originally built as the headquarters for First City National Bank.
The February 2007 acquisition was the first Houston investment for Broadway, a New York-based private real estate investment and management firm.
In flipping the 31-story office building at 1021 Main St., Broadway is exiting the market after a brief but lucrative stay. For ,ore information see: www.houstonrealtyadvisors.com or www.houstonrealtyadvisors.net

Thursday, May 15, 2008


The Shaw Group Inc. is increasing the amount of office space it uses by more than 50 percent.
Shaw signed a 10-year lease for 106,500 square feet of space in the 1430 Enclave Parkway building where it already leases 206,000 square feet. That gives the engineering and construction firm a total of 312,500 square feet.
Following the transaction, Shaw is the sole tenant in the six-story, Class A office building in West Houston's Energy Corridor.
The building was originally designed for Stone & Webster, an engineering firm that was acquired by Baton Rouge, La.-based Shaw. The property is in Enclave Office Park, which is south of the intersection of Eldridge Parkway and Interstate 10.
Building owner Piedmont Office Realty Trust was represented in the lease transaction by David Baker and Eric Anderson of Transwestern. Bill Bosack and Wendi Little of GFM Real Estate represented Shaw in the deal.
Shaw is a Fortune 500 company with $5.7 billion in annual revenue. For more information see: http://www.houstonrealtyadvisors.com/ or http://www.houstonrealtyadvisors.net/

Wednesday, May 14, 2008

Mall parking lots are too valuable for landlords to waste on cars

Mall owners have started seeing their parking lots as islands of underused flatland begging to go vertical.

from Shopping Centers Today, September 2006

"Mall REITs are waking up to the tantalizing value of the asphalt-covered acreage within their own portfolios. Many are drawing up plans to rip up their parking lots and replace them with office towers, apartment buildings, hotels, service retail and other moneymakers. There is a lot of pent-up opportunity.

Surface parking and its attendant ring roads and landscaping consume about 75% of the overall site of a typical regional mall. When you start to look at the full utilization of a parcel of 100 acres, what you're saying is that you've got 75 acres there that you can really start to work with.

Mall owners must figure out what to do with all those cars in the lot.
The only realistic solution, at least for large projects, is to spend tens of millions on parking decks. The incremental increase in GLA [gross leasable area] that you're able to produce by eliminating surface parking must offset that cost.

Traditionally, mall parking lots contain 4.5 spaces per 1,000 square feet of mall GLA, so a 1 million-square-foot mall would pack a whopping 4,500 parking spaces. In higher-density urban areas such as the Northeast, the cost of a stand-alone parking deck serving a mixed-use property is about $17,000 per space. A flat lot, by contrast, may cost about $4,000 per space. Not only has the price of concrete shot up in the past couple of years, but the more sophisticated look of today's town center concept translates into greater expense. It can't just be an ugly garage anymore.

And costs can become stratospheric if the site plan calls for underground parking, particularly when construction crews must dynamite bedrock or keep out subterranean water. There are urban sites that have huge demand for residential product, where [the residential] might command an exit sale price of $600 to $1,000 per square foot. But those sites might not be able to withstand a parking cost of $35,000 per space.

Given such constraints, how many of the approximately 1,100 enclosed malls in the U.S. today are candidates, either now or in coming years, for densification? In the near term, architects and developers say, two kinds of properties seem best suited for going vertical:

(1) Top-notch urban malls with high recognition among
consumers, and

(2) Certain lagging malls in markets that, though robust
in themselves, lack a true town center.

Such underperforming properties exist in nearly every healthy market, and developers are focusing harder than ever on creative ways to make them more competitive. These aren't as valuable from a retail standpoint as they once were. But rather than try to unload them on some other developer, these assets can be transformed into something that has value for a different reason. Done well, these can be the downtowns some of these suburban communities never had.

In the long term, mall owners are betting that densification will become more commonplace as growth drives up land values in markets that support only lower-density uses today. That's triggering us to design our brand-new malls with more of a block approach to the parking lots. That way we'll have nice rectangular lots with a grid system of driveways, interior roads and utilities, so that in 15 years we'll have these parcels in a shape that would support converting them right over to above- or below-grade parking structures, possibly as podiums with residential or office on top.

For too long developers have built malls and then years later struggled to figure out how to add new uses and rework the parking. What we are now saying is, after having done that for 50 years, what if we anticipate that? What would that be like?'

Other factors could work in favor of higher-density malls. Despite the daunting cost of parking decks, for example, tearing up asphalt could be less painful than one might think. Twenty or 30 years ago, cheap land enabled developers to err on the side of caution and build parking lots that were unnecessarily large. Most malls are overparked. There are 18 days a year when every space is occupied, but people still always find a place to park.

Some landlords have been able to replace redundant spaces at many of its malls with lifestyle components while avoiding the high cost of building parking decks. Furthermore, the growing phenomenon of public-private partnerships means developers do not always have to pay the entire cost of a parking deck themselves. The national backlash against the abuse of eminent domain, meanwhile, is making it harder for cities to aggregate the multiple parcels of land they need for mixed-use redevelopments.
Rather than give up on so-called smart growth, some municipalities might be more willing to form partnerships with mall REITs that happen to own huge islands of asphalt in the middle of town." For more information see; www.houstonrealtyadvisors.com or www.houstonrealtyadvisors.net

Monday, May 12, 2008

Intermodal project taking fast track

A $300 million intermodal facility and industrial park under development in Fort Bend County could create 2,000 jobs over the next 15 years.
The Kansas City Southern Railway Co. and Chicago-based CenterPoint Properties Inc. formed a joint venture agreement last month on the 800-acre project. The intermodal hub will serve as a transfer point to move goods between rail cars and trucks for distribution.
The project is comparatively modest in size, according to Curtis Spencer, president of Webster-based IMS Worldwide Inc., a logistics consulting firm.
"As intermodal terminals go, that is relatively small," says Spencer.
He notes two existing intermodal terminals in Houston are more than 300 percent larger than the planned Fort Bend County project.
Spencer acknowledges, however, that the newcomer has a lot of economic potential.
Between 1,000 and 2,000 employees are expected to work in the proposed industrial facilities. An undetermined number of construction jobs are connected to the project in addition to an unknown number of jobs at the intermodal facility.
Barkley Peschel, vice president of development and operations for the Greater Fort Bend Economic Development Council, sees direct and indirect benefits.
He expects the project to have a major impact on Kendleton, a small town near the intermodal site about 24 miles southwest of Sugar Land.
Peschel says Kendleton -- with an estimated population of 562 in 2007 -- has absolutely no commercial businesses. Even the gas station shut down. On a larger scale, the project could stimulate other development in the area and accelerate the county's westward growth along U.S. Highway 59.
In the big picture, the intermodal facility and industrial park stand to boost the Fort Bend County tax base.
The intermodal center won't be eligible for a tax abatement, but companies that set up operations in the warehouses will be.
Says Peschel: "We're going to use that tool to attract businesses there if we need to use it."
Kansas City Southern, or KCS, went with experience in picking CenterPoint Properties to develop the massive industrial park that will support the intermodal yard.
CenterPoint affiliates own and manage more than 44 million square feet of properties, and specialize in intermodal and transportation-related development. The company was acquired two years ago by the California Public Employees Retirement System (CalPERS), a $260 billion pension fund.
CenterPoint and KCS entered into a joint venture on the Fort Bend project in April. CenterPoint owns a stake in the development, but terms of the deal are not being disclosed.
Construction began in March on the first phase of the intermodal center consisting of 3,500 feet of intermodal track, with parking lots and related facilities.
Depending on demand, the intermodal site could eventually have up to four 8,500-foot tracks with associated facilities.
A total of 636 acres has been set aside for an industrial park large enough to hold 7.5 million square feet of industrial buildings.
Infrastructure work will begin soon on the industrial park, and building construction is expected to begin in 2010. Initially CenterPoint plans to develop buildings that the company will own.
Brian McKiernan, a CenterPoint development manager in infrastructure and transportation, says preliminary engineering and site work have begun. The company will soon be hiring Houston-area engineers, architects, contractors, real estate brokers and attorneys to handle the project.
"We like to do everything at the local level," McKiernan says.
Projected tenants include logistics companies importing goods from Mexico; exporters of containers to Mexico; possibly some companies doing light manufacturing; and retailers distributing everything from cars to commodities.
Expanding trade with Mexico is a key factor in development of the intermodal hub.
"A lot of these companies are currently moving their goods by trucks," says McKiernan. "As the Kansas City Southern line through Mexico develops, we see this as a more efficient way for these companies to move their products into and through the U.S."
Working on the railroad
The intermodal development comes in conjunction with ongoing restoration of a dormant rail line between Victoria and Rosenberg.
KCS purchased the 800-acre intermodal facility site two years ago intending to service the rehabilitated rail corridor.
Doniele Kane, a KCS spokeswoman, says Southern Pacific Railroad formerly owned the Victoria to Rosenberg line. When Union Pacific Railroad Co. purchased Southern Pacific, a decision was made to use other routes from Houston to South Texas. That cleared the way for eventual purchase of the line by KCS.
Track construction is already under way in Fort Bend County. The entire rail line from Victoria to Rosenberg is expected to be in operation in late 2008 or early 2009.

The revived line will shorten the KCS route from the United States to Mexico some 70 miles by eliminating the need to operate over nearly 160 miles of Union Pacific-controlled tracks between Rosenberg and Victoria.
KCS has an international intermodal corridor stretching from the Port of Lazaro Cardenas on the Pacific Coast of Mexico up to the railroad company's headquarters in Kansas City, Mo.
The Fort Bend section of the rail is at the center of that corridor, says Kane, so traffic would be coming into the area from all points along the KCS network.
While KCS does not serve the Port of Houston, Kane says the expanding Port of Lazaro Cardenas is considered an alternative to the congested West Coast ports for goods coming from the Far East.
Logistics consultant Spencer of IMS Worldwide puts the trading strategy in perspective.
He notes the Port of Lazaro Cardenas will be a competing route for traffic moving from Los Angeles/Long Beach to Houston. It should be a cheaper route, he says, but still faces some challenges.
"The shippers are still a little nervous about going through Mexico with their freight," says Spencer. "But Kansas City Southern has done a really good job about dealing with those issues head on. I think once the shippers start to see that, they'll start to come around." For more information see: www.houstonrealtyadvisors.com or www.houstonrealtyadvisors.net

HBJ May 12,2008

Friday, May 2, 2008

Rising Escalation Clauses

As the commercial office market begins to show signs of improving, commercial owners and brokers are taking a closer look at escalation clauses when they negotiate new leases.

from Realtors' Commercial Alliance Report

"Escalation clauses, sometimes referred to as pass-through clauses, enable an office building owner to raise rent to cover increases in operating expenses and sometimes property taxes. The value of escalation clauses in protecting landlords from unexpected cost increases is particularly important in today's volatile economic climate.

Rising interest rates and a falling dollar raise the specter of inflation. Higher operating costs, especially for heating oil and gas, are also putting pressure on owners' bottom lines. And the longer the lease, the more exposure and the greater the uncertainty the landlord faces. At the same, landlords must not let their inflation fears become so strong that it costs them tenants. Yet, failing to craft escalation clauses that address current and projected market realities can prove costly.

Fixed increases

Because fixed increases don't reflect actual costs or market conditions either the landlord or the tenant may stand to lose over the course of the lease. Landlords will be particularly hard hit if inflation rises rapidly. However, knowing exactly what the rental amount will be may be comforting to certain, more conservative tenants.

Consumer price index increases

The CPI is usually a closer measure of inflation than fixed increases.
Because CPI increases are applied to the entire base rent, including profit and fixed costs, which are not necessarily influenced by inflation, they usually work to the landlord's benefit. CPI increases are not common except during periods of high inflation, but property owners and managers may wish to begin inserting them in new leases – especially those with longer terms.

Straight cost pass-throughs

This alternative comes closest to achieving the goal of passing through only net increases. This makes it more equitable to both the owner and the tenant. Increases are calculated against costs for a designated base year. It's critical to ensure that the base year is being properly computed when calculating pass-throughs. Owners could be adversely affected if the base year is artificially high because of an unusual repair expense or temporarily high vacancy caused by the move-out of a major tenant. Take care to exclude uncommon expense items from the base year and spell out in the lease how unusual expenses are allocated if they occur in the future. Also be certain to detail how expenses will be allocated to a tenant if there are vacancies exceeding an agreed-upon percentage in either the base year or subsequent years.

Tailored operating cost pass-throughs

One way to make pass-throughs easier to deal with is to escalate only those expenses that tend to more volatile and pass through on an individual basis. The most common of these items are property taxes, utility costs, insurance, repairs and maintenance, and fuel oil.

There is no single answer as to the most appropriate structure for an escalation clause. Building and zoning conditions as well as the future economic environment will certainly influence which method is most advantageous for calculating escalations. But whatever escalation is used, the lease should specify annual reporting requirements so that both owners and tenants can be assured that costs are allocated and billed correctly." For more information see: www.houstonrealtyadvisors.com or www.houstonrealtyadvisors.net