AAA Financing In Real Estate

The conference IT Telecommunications in Real Estate Development and Management was organized by IM Events and took place in St. Petersburg in mid-October. Its main theme was interaction between building owners, management companies, and telecom market operators. The participants came to the conclusion that, no matter which way of dealing with an operator the owner may choose, flexibility and promptness in solving the tenants’ everyday problems are the key competitive advantages for any facility.

One’s as Good as None

In our age of telecommunications, the quality of a property’s communications infrastructure directly impacts its value. The owner faces the challenge of minimizing primary costs while maintaining a high level of service in telecom infrastructure. The management company, meanwhile, strives to cut expenses, maximize profit in the form of proceeds or commission fees, and provide quality service.

The most common solution is the contracting of a single communications operator. Under this approach, the owner only monitors the process and gets his share of profit in the form of a commission fee, saving both on primary investments and on operating expenses. “This solution allows the owner to provide for a single tariff and technological policies on the BC territory, save on laying the lines and even get a certain amount from an operator ‘for entering the property’,” says Andrei Vyshegorodsky, in charge of dealing with corporate clients at Prostor Telecom.

The management company’s remuneration for hooking up a new subscriber is 20-25% (at the hookup price of $150-200). In addition, in case of an exclusive contract both manager and developer may count on the remuneration of about 20-25% of tenant traffic. However, an exclusive operator means high costs for services for tenants and a lack of choice. Even if the “monopolist” grants other operators access to its channels, the cost of such an “alternative” is much higher than the cost of the basic opertor’s services.

“Monopolistic activities of one operator benefit the developer and cause headaches for tenants,” says Dmitry Borovkov, an executive aid at A+Estate (affiliated with LSR Group) dealing with IT. “The scheme has been prevalent since the formation of the real estate market and is still common. Yet solid tenants give up on such business centers as they need their hot phone numbers even after moving to a new business center in addition to a package of extra services. Furthermore large national and multinational companies prefer to deal with a specific operator and its absence from a business center can be the reason for their refusal to sign a contract.”

Adds Marina Puzanova, senior consultant for the office realty department at Colliers International: “Our advisers remember several examples when Western companies were denied their old phone numbers and ran into $1 million expenses needed to launch a new advertising campaign.”

Redundancy does Matter

Several competitive providers or an open access policy are much more promising policies from the standpoint of raising the property attractiveness. However, in this case the owner will have to invest in telecommunications infrastructure together with contracted providers. A partnership agreement is signed between each telecom provider and landlord. The latter can normally claim 15-20% of total proceeds from what the tenants pay.

“In the case of unrestricted access of providers to a property, tenants certainly win, but the building owner gets nothing but headache given that every tenant tends to bring his own provider,” says Mr. Borovkov. “As a result the telephone and computer networks keep sprawling and overlapping, and very soon a tangle of wires causes ultimate confusion.”

“To my mind an optimal approach is to have two or three telecom providers in a business center,” says Mr. Vyshegorodsky. “Each provider undertakes to pay a certain percentage of the subscription charges to a landlord on a monthly basis. ”

From Development to Communications

The third approach to the communication problem is creating an in-house structure or a local provider. Under this arrangement, the owner assumes the responsibility of providing communication services for tenants: building and maintenance of the in-house cable network, installation and maintenance of the cable input to the building and all other requisite equipment.

Denis Kuskov, director of the analytic agency Nedelya Sotovykh Tekhnologii (The Week of Cellular Technologies) estimates the cost of equipment installation in the average class B office facility at around $50,000. In exchange the owner may count on a full-fledged profit from rendering telecom services rather than just a comission fee. The shortcoming of this scheme is high current expenses and dependence on the professionalism of hired employees. Nevertheless, this interaction pattern is widely used by developers who then lease dedicated lines and channels from communication providers.

Yet providers do not hail the creation of in-house telecom structures by developers. Comments Andrei Vyshegorodsky: “Today it is not sufficient to just provide the client with a point of connection to our services. Clients are interested both in the lease of telephone stations and in their round-the-clock maintenance. A universal communication provider is needed to render such services.”

A Matter of Taste

“Creating an in-house communication provider to cater to a single property does not pay as the outlay is too high. But when a management company or a landlord runs a chain of business centers then an in-house provider would be justified,” says Marina Puzanova.

“It makes sense to let several competing providers to a large facility but the latter should be divided into zones of influence with each provider responsible for its particular ‘section’,” recommends Igor Gorsky, managing partner of Arin.

But when a developer holds a chain of business centers, Mr. Gorsky also recommends an in-house structure. “The latter will be 100% accountable and you’ll be able to decide what services to sell and for how much. If some provider no longer suits you for some reason, its replacement takes time. The more profitable your business is and the higher the status of your clients, the greater the problems that may arise,” he says.