The IDCNY turnaround: a classic case history - International Design Center of New York - Mid-Year Review and Forecast

Financial institutions and lenders wishing to retrieve value from a distressed commercial property often look to asset management firms with strong local expertise and an ownership background and orientation. Institutions have come to rely upon these integrated firms offering developmental expertise, market knowledge and full service capability. To successfully revive a distressed property, an asset manager is often required to develop a strategy to reposition a property in the market, as well as address adverse conditions within the leasing and management programs. This process involves the following procedures:

* Analyzing the existing project conditions to determine strengths and weaknesses, including market position, physical plant and existing tenancy.

* Designing a customized operations and management program to cure physical defects, reduce inflated expenses and establish the required tenant services.

* Identifying the appropriate target market and develop a focused marketing and leasing program for the available spaces.

Appointing an asset manager with developmental experience is essential to turn around a troubled property under difficult market conditions. When S.L. Green Real Estate was appointed leasing and managing agent of International Design Center of New York (IDCNY) by the lender, IDC Queens Corp., the one million square foot property, consisting of two buildings, had just emerged from a lengthy and unsuccessful restructuring. Located in Long Island City, New York, the property was originally built as a manufacturing and distribution facility and then completely renovated for first-class office use in 1985. The previous ownership's intent was to create a design center for the contract furniture industry that represented a low-cost alternative to the high Manhattan rental rates of the 1980s. The collapse of the New York real estate market and corresponding significant weakening in the contract furniture industry led to a decline in the property's occupancy, eventual default of the borrower and an attempt at restructuring by the lender. In that time, the numerous New York real estate companies that were given the assignment to revive IDCNY, had met with no success.

Property Status

S.L. Green was awarded the assignment in 1993 and immediately assembled a team of specialists from its management and operations, leasing, construction management, legal and accounting divisions. These in-house specialists performed an in-depth review of the existing project conditions and then formulated a strategy to stabilize the annual revenue stream, cure any physical defects, reposition the property in the marketplace and ultimately retrieve lost value. It immediately became apparent that the dim prospects for the contract furniture industry and resulting high level of arrears and 55 percent vacancy rate, mandated altering the direction of the IDCNY and developing a new tenant base to assure its future. In addition to the high vacancy, S.L. Green determined that the property was over staffed (with 66 building management employees) and had a high level of excess operating expenses because of inflated service and maintenance contracts and a number of unnecessary expenses. These unnecessary programs included an inefficient in-house shuttle bus and subsidized cafeteria service.

Focused Management

S.L. Green established an on-site management and leasing office at IDCNY to oversee the revitalization of the property. A review of the physical plant revealed neglect by the previous owner and the necessary capital improvements included a complete reconstruction of the life/fire safety systems in both buildings, replacement of the entire roof on Center 1, and repair of structural defects in the parapets and facades of both buildings. The total cost of this three-year capital program was in excess of $55 million and was implemented to prevent a further deterioration of the property. The IDCNY staff s next priority was to design and implement an expense reduction program, which would alleviate some of the financial burden created by the low occupancy and ultimately increase current cash flow.

The first phase was a review of the existing staff to determine any overlap of duplication of job responsibilities. This resulted in a reduction in annual payroll expense of over $860,000. Each of the property's line items were analyzed, with a review of the corresponding contract or in-house program. The result of these analyses were annual expense reductions of 120,000 through rebidding the elevator, rubbish removal and security contracts; $82,000 via automation of the freight elevators; and $230,000 from a reorganization of the in-house shuffle bus service. No expense category escaped scrutiny, including a pay telephone audit, which yielded an annual savings of $12,000 and a Con Edison energy conservation and rebate program, which resulted in savings of $33,000 per annum. Finally, an analysis of the real estate taxes resulted in a negotiated reduction of 33 percent in the 1994/1995 assessed valuation and over $400,000 in savings. The total cost savings implemented by S.L. Green was initially $1.74 million and has reached in excess of $2 million.

Aggressive marketing

Before S.L. Green could reestablish IDCNY's position in the marketplace, it was necessary to stabilize the existing tenancy. The first order of business was to deal aggressively with the faltering financial status of the arrears among the existing contract furniture tenants. The S.L. Green leasing team reviewed each tenant's status and developed a strategy, which resulted in the termination of 18 leases to date and buy out income in excess of $5.4 million, net of arrears payments. The combined effect of the expense reductions and the correction of the tenant arrears, was a continual build-up of cash reserves required to fund landlord work and commissions required in the leasing program. This strategy also made it possible to develop a 500,000-square-foot block of space in the property.

Developing a New Target Market with the existing tenancy stabilized, a marketing program for the newly created large block of available space was developed. It had become obvious early on that the IDCNY's future depended on moving away from the design industry. Therefore, S.L. Green's next task was to develop a new target market for the property and the reintroduce IDCNY to both the tenant and brokerage communities. The leasing team decided that large floor plates, 120,000 square feet in Center I and 53,000 square feet in Center 11, high level of amenities, ample and inexpensive power supply, lower overall cost structure and availability of substantial tax savings, combined with its institutional ownership should be aggressively marketed to attract large corporate and government tenants. The target market focused on large users that did not require a Manhattan presence, but valued IDCNY's close proximity to both Manhattan and Long Island and first class space and amenities. The property was therefore positioned as The Business Center at IDCNY.

Focused pricing

The S.L. Green leasing team developed a pricing and concessions package for IDCNY that would directly compete with comparable alternative properties. A rental price of $16 to $18 per square foot was adopted and included cleaning and a $35 per square foot work letter to compete with alternative properties in downtown Manhattan and Brooklyn. An essential part of the marketing program was creating a corporate identity for IDCNY, which focused on the high quality of space, amenities, convenient location and strong ownership. The available space was marketed via a creative advertising and promotional program aimed at both the tenant and brokerage communities. This program combined an aggressive canvassing program, which included the use of a governmental lobbyist with several marketing tools including:

* The creation of a high-quality building identity brochure.

* A creative and concentrated advertising campaign that ran in numerous industry publications.

* On-site video presentations, featuring the available space, amenities and available cost savings.

* Specialized promotional lunch events at the property for members of the brokerage community.

Results

S.L. Green's two-year marketing campaign attracted a number of corporate and government users, leading to leases with Dillon Read and Allen & Company and finally resulting in a 201,364 square foot lease transaction in January 1996 with the Department of Design and Construction (DDC), a newly formed superagency of the City of New York in IDCNY Center 1. The 17.5-year, $40 million lease features an option for an additional 112,000 square feet and none of the rights of termination found in most leases with the City of New York. In addition to the DDC lease, the Department of Transportation also leased 49,669 square feet in Center I for its training and enforcement divisions. The transactions offered an excellent synergistic opportunity for the City of New York, which already occupied 169,036 square feet of space for the School Construction Agency, to centralize its construction operations in a modem and conveniently located facility. Negotiations for these complicated deals spanned more than nine months and involved numerous options and detailed work letters.

Conclusion

These leases also represented the rebirth of IDCNY and brought Center I to full occupancy with extremely high-credit tenancy on long-term leases. The same process is now evolving in Center 11, which has undergone a major round of tenant buyouts and is being marketed to similar tenants. The overall result of the three-year process is an increase in net operating income from approximately $2 million in 1993 to $4.75 million at stabilization. IDCNY is now being marketed for sale at a price that is a multiple of its perceived value at the commencement of S.L. Green's assignment.

COPYRIGHT 1996 Hagedorn Publication
COPYRIGHT 2004 Gale Group