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 REAL
ESTATE:
How To Keep The Roof From Falling In
Mixed-use towers.
Recycled building materials. On-site power plants.
Public-private partnerships. A confluence of factors
has created a wealth of new opportunities—and new
risks—for businesses involved in any aspect of
commercial real estate.
By Markus
Fuchs
Illustration by Carlos Coelho & Aman Khanna
When a
tornado ripped through downtown Fort Worth, Texas,
one night in 2000, hitting a highrise office
building head on and gutting it instantly, the tried
and true way of conducting the business of real
estate in this and most other cities across America
was torn at the seams.
The office
tower’s official address was 500 Throckmorton, but
it had sported a host of more official names since
its construction in 1974—from Block 82 Tower to the
Bank One Tower. As was the case with many of its
counterparts in other cities, the name reflected key
tenants or corporate ownership. Though its claim to
architectural fame was a grandiose five-story atrium
designed by well-known urban architect John Portman,
most of the building was filled with an
undistinguished collection of modern offices. But as
the twister pulled away, taking floors full of
cubicles and conference rooms with it, only the
steel structure was left intact. Ironically, this
disaster gave the developers who eventually bought
the structure an opportunity to reinvent it, making
it, in its new incarnation, a model for a brand new
approach to real estate.
Five years
later, the building shed the plywood cocoon that had
encased it since the tornado (and caused residents
to dub it “the Plywood Skyscraper”) to reopen as The
Tower. Now one of the most distinguished elements on
the city’s skyline, this glass-clad, octagonal,
37-story structure is what’s known technically as a
vertical mixed-use building. Jargon free, that means
it is part office building, part residential complex
and part retail destination. The top floors house
284 residential condominiums, including four “super
penthouses” from which, on a clear day, you can see
downtown Dallas. The third floor houses the offices
of banks, real estate brokers and brokerage firms.
And circling the building along the four downtown
streets that border it are such retail stalwalts as
Texas Capital Bank, Potbelly Sandwich Works and
Cantina Laredo. While mixed-use buildings such as
The Tower have been found at transportation hubs in
so called “edge cities” or in fringe neighborhoods
of existing urban areas for decades, a downtown
mixed-use building such as The Tower is far less
common.
|
“From any perspective,” says Kushnir,
“real estate is now more of a blended
approach. The legal role has expanded to
include a lot more than real estate
covenants, and all other roles have
expanded along those same lines.” |
The movement
toward a combination of residential, retail, office
and institutional uses in one building, as
exemplified by The Tower, comes harnessed to several
equally significant shifts in the real estate
landscape, says
Deborah C. Ryan, a allas-based partner at Patton
Boggs and chairman of its
Real Estate Practice. Among these:
THE “GREEN REVOLUTION”:
increased concern with environmental
issues, combined with the increased availability
of “green” building materials and efficient
energy, has made it easier—if not imperative—for
builders to reduce a building’s impact on the
environment and human health.
SELF-GENERATED POWER:
recent widespread power outages and
an overloaded grid have driven more and more
public and private institutions or large-scale
users to consider moving beyond mere backup
generators to create their own on-site power
plants; this has been especially popular with
hospitals, where power outages can have a
life-or-death impact.
PUBLIC-PRIVATE
PARTNERSHIPS: financing and operating
deals between public entities and private
developers are an increasingly popular—and
successful— means through which buildings,
energy plants, water-treatment plants, highways,
parking structures, schools, soccer fields and
other key aspects of the urban and suburban
infrastructure are being financed, built,
rebuilt and maintained.
The result of
this evolution, Ryan notes, is that commercial real
estate transactions are now far more layered and
nuanced than ever before. As a result, anyone
involved in real estate today—whether they’re
building or buying, renting or investing, selling or
managing—needs to have a lot of varied arrows in
their quiver, not only to take advantage of all the
new opportunities this confluence of trends has
brought about but also to avoid getting tripped up
by new types of problems that, in the old world of
real estate, would not have existed, let alone been
foreseen. “Whether you’re a builder, a lawyer, a
banker, an investor or a tenant, you can’t approach
this as a generalist anymore,” says Ryan. (For a
sample of such problems,
click
here.)
HOW WE GOT
HERE
Behind this
changed environment in commercial real estate are a
number of factors, including general market forces
and wider security and environmental concerns, all
facilitated by new financing options.
For the most
part, mixed-use construction was neither a viable
nor a desired option through much of the 20th
century. Many zoning regulations had—in reaction to
the heavy manufacturing of the Industrial
Age—mandated separate uses for every building for
safety reasons. That began to change in the late
1900s, as America’s industry grew lighter and the
economy became more centered on service jobs.
Planners, developers and lawmakers realized that not
only was it not necessary to separate residents from
modern offices but that there were, in fact, ways to
group residents, office workers and retail stores in
one building that could serve everyone well. “
The separate
uses feed off each other and have lots of economic
synergy,” notes Ryan. Residents, for example,
support the retail at night and on weekends. Office
workers support the retail during the day, when many
residents are away at jobs in, perhaps, other
mixed-use buildings. Retail converts lower floors,
which are less sought after residentially, into an
evergreen source of steady income.
Pushing the
demand for green buildings and power generation have
been environmental concerns and a need for energy
independence— both from geopolitical forces and from
the local energy grid, which has proven, of late, to
be beset with problems.
“Ten years
ago, green building features—from natural roofs to
solar panels—were just for the architectural or
environmental zealots,” says Carl Elefante, a
principal at Quinn Evans Architects in Washington,
DC, and a founding board member of the National
Capital Region Chapter of the United States Green
Building Council, a national non-profit organization
that promotes green building and developed LEEDS
certification, a widely used benchmark for green
building. “Today, bankers, insurance companies and
lawyers all look at green features as a way to save
money, manage risk and please governments.”
In terms of
more traditional power, the move toward
independence, from both a practical and security
perspective, has prodded businesses and institutions
from hospitals to government agencies to have access
to their own power sources. There are also myriad
economic advantages, with excess power even sold
back to the grid.
Public-private partnerships are now a central
feature in many deals, helping to moderate the high
cost of building as they allow federal, state and
municipal governments to obtain the necessary energy
facilities or to achieve infrastructure repairs and
improvements otherwise not possible—while, at the
same time, controlling land use and avoiding
overbuilding.
OPPORTUNITIES—BUT RISKS AS WELL
 For
businesses, this confluence of real estate trends
is, on the one hand, a real boon. Consider:
-
Public-private partnerships have provided
developers, institutions and public entities
with the opportunity to develop unused as well
as underutilized or dilapidated buildings.
-
As a
result of new opportunities not only for new
construction but also for the renovation of
historic properties, real estate investment
trusts (REITs) in 2006 had one of their most
active years in three decades.
-
While
green buildings may cost more up front, lower
operating costs over the life of the building
are expected to more than make up for the
initial outlays. And there are other less
quantifiable benefits: improving occupant
health, comfort and worker productivity as well
as reducing pollution and landfill waste.
-
By
building mixed-use projects, developers can
hedge risk by having a varied tenant base—and
tenants that can complement each other. But it’s
not all clear sailing. These new trends are
fraught with potential problems—many of them
legal. For example:
-
Green
developments can be extremely complex and
difficult to manage. Materials are difficult to
acquire and many contractors are not yet capable
of working in the green-building idiom, so cost
overruns and project delays are common.
Moreover, for some green projects, insurance has
been difficult to obtain because the building
methods are still considered unusual. Notes
Robert S. Brams, a Washington-based Patton
Boggs partner, “It is important for all project
participants to have a clear understanding of
what performance will be achieved by a building,
or an element of the building. Owners,
developers and design professionals must be
cognizant of what they spec and represent about
the building’s features.”
-
Mixed-use projects suffer from density
issues—more users, more crowds and more waste.
Ownership issues are often interwoven, requiring
master regimes to regulate uses and costs.
-
Collaborating with the government in a
public-private partnership can be an
advantage—and a challenge. As Ryan notes,
“Government organizations are, by nature and
design, slow and deliberate, with their built-in
system of checks and balances. Compare that to
the speed and nimbleness business needs. These
are two different worlds, and when working on
PPPs, the worlds collide.” Bringing the two
worlds together requires not only a deft command
of the law but also lobbying skills.
-
Developing on-site energy facilities
through public- private partnerships poses
special challenges, requiring an approach that
demands creativity from the energy provider and
the legal team, as both must meet the user’s
bottom line, be financeable, and comply with a
host of environmental, land use, regulatory and
fiscal requirements, especially when the user is
a public entity, such as the federal government
(see below, “Four New
Models: Born to Run—its Own Power”).
From a
broader perspective, adds Brams, the key is that
anyone involved in real estate must appreciate the
various risks faced in the world’s rapidly changing
development market. “There are a host of issues that
come in an era of prolific change,” adds
Michael Simmons, a Patton Boggs partner with
extensive experience in public- private real estate
partnerships, “with so many balances that need to be
struck.” Patton Boggs partner
Tony
Kushnir agrees. “From any perspective, real
estate now requires more of a blended approach,” he
says. “You’re dealing with federal laws and local
municipalities, with different types of occupants,
with both buyers and renters, and then you
complicate it further by throwing in something like
energy generation. The legal role has had to expand
to include a lot more than real estate covenants,
and all of the other roles have expanded along those
same lines.”
The bottom
line is that by taking advantage of the change and
being prepared for the dangers, those involved at
all levels of the real estate business can emerge
better off. This was certainly the case with Fort
Worth’s The Tower. For a time after the tornado, it
was assumed that the building would be razed. In
anticipation, businesses even planned implosion
parties. But with the right vision, the right
advisors and the right planning, the building was
saved. Better still, it was transformed into a key
fixture on the Fort Worth skyline, with a stable and
balanced tenant base—a model for buildings across
the country.
CT
PORTFOLIO: FOUR NEW
MODELS
|
 Reborn as
Mixed-Use: Once a local warehouse and retail outlet for
the catalog giant, Fort Worth’s old
Montgomery Ward building was gutted in 2006
and reemerged as One Montgomery Plaza, a
six-story collection of residential
condominiums with ground floor retail,
midlevel parking and sweeping views of
downtown skyscrapers from a landscaped roof
deck.
Born Green:
When the first
tenants moved into 1101 New York Avenue NW
in Washington, DC, this spring, they found
not only state-of-the-art office space in a
393,000-squarefoot LEED-certified building
designed by renowned architect Kevin Roche,
but also a “green” roof, triple-glazed
windows, a cistern to capture rain water,
waterless urinals and outlets to power up
electric cars in the parking garage.
Born to Run—its Own
Power:
Under a Department of Defense enhanced-use
lease, the Army Corps of Engineers
successfully redeveloped underutilized land
and built a central utility plant at the
U.S. Army’s Fort Detrick in Frederick,
Maryland. The single plant, privately
financed but on government land, is
contracted under a structure of leasing and
distribution formulas to supply a varied
customer base of high-level bio-safety
containment laboratories, from the National
Institute of Health’s National Institute of
Allergy and Infectious Diseases to the
Department of Homeland Security’s National
Biodefense Analysis and Countermeasures
Center.
Born, with
Government Assistance:
Multifamily home
builder Fairfield Residential LLC is turning
a parking lot adjacent to the Grossmont
trolley stop in La Mesa, California, near
San Diego, into 527 apartments, separate
parking for tenants and commuters, and
limited retail. Local government and transit
officials, as well as financing sources,
were heavily involved in the project. When
completed in late 2009, the apartment
community will, by agreement, have 15
percent of its units designated as
affordable.
CT
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