Blue Hill Plaza: 90's success story.

The recent spate of financial problems that has drawn so much attention to giant Olympia & York underscores the fact that we've entered a completely different era in real estate. While the boom of the 1980's encouraged bigger projects, bigger real estate companies, more risk, more specialization, and more creative ways to involve more investors, the bust cycle we are now witnessing - and will probably continue to see for years - demands a leaner and more flexible approach from those who can last it out. Innovation, always the hallmark of successful real estate, is now being called on simply to achieve that act of financial survival.

For real estate companies, it means taking an entirely new approach to the way we do business. It means taking a pro-active stance in helping owners, tenants, investors and financial institutions to identify, analyze and solve a myriad of problems. It means taking steps now to restore confidence in real estate, whatever the economic scenario, with a steady eye toward the long view.

In order to facilitate the large-scale restructuring we now face industry-wide, real estate advisors and managers find themselves forced to create a multi-faceted team of experts in order to deal with the complexities of each situation. This involves considerably more than the now-familiar "workout"; it means bringing together attorneys, accountants, investment bankers, information systems experts and leasing brokers as well as asset and property managers. Finance, negotiation and management must now work in close concert. Even contractors have become part of the new, integrated team, providing a way to achieve the most cost-effective construction for projects unfinished or in need of tenant improvements to support a new economic strategy.

Financial dislocation continues to be a major obstacle to restabilizing the real estate picture. Practicality requires a clear recognition of the various, interlocking problems in each case, plus an innovative plan to solve them step-by-step. Where partnerships are involved, delicate diplomacy is essential to mitigate potentially explosive issues, and to create a cooperative atmosphere more conducive to recognizing needs, keeping a focus on the bottom line, and reaching productive resolution. Where litigation has become unavoidable, real estate advisors and managers can - and should - serve their clients by coordinating with attorneys throughout the process to make certain that legal decisions are made in consideration of the viability of the properties involved.

Debt restructuring itself has become increasingly tangled in a web of declining values, bankruptcy laws, the financial position of lenders or their inability to take control of troubled properties. Without active participation of real estate professionals, we could witness the wholesale abandonment of billions of dollars of property by financial institutions that already have enough problems with their balance sheets. The financial workout is no longer enough; debt restructuring is rapidly being tied to the entire process of asset management, and the marriage is changing the nature of both.

Blue Hill Plaza in Pearl River, New York, offers an example of how thoughtful coordination between financial restructuring, asset management, and leasing negotiations can create success, even under the most adverse conditions. Blue Hill even offers a capsule history of recent real estate development. The project was built in the early 1970's to an ambitious plan (1.2 million square feet of office space, with a retail base, in an untried suburban market) and a stunning Skidmore, Owings & Merrill design.

The project was so visionary that the market literally didn't know how to react: Blue Hill languished nearly vacant for most of a decade. In the early 1980's, however, a new owner/developer stepped in with the idea of courting large corporations looking for sites for regional service centers. Occupancy soared to 90%. Predictably, the newly successful area landmark attracted anxious new buyers. Blue Hill was sold in 1985, under terms that were, in retrospect, over-leveraged. An ambitious new leasing plan was supposed to provide sufficient cash flow to make the deal sustainable; the sudden collapse of the market in late 1987 evaporated this dream.

The owner's response, unfortunately, was to axe expenses dramatically: first by reducing management services, then by stopping payment of property taxes. The corporate tenants were not pleased, especially when management remained unresponsive to complaints, and they began to evacuate to other abundant and more amenable sites. Occupancy threatened to fall 40 percent in a moribund market.

In 1990, a British investor with an equity position, who was providing significant mortgage enhancements, decided to take a firm hand to prevent further deterioration. The Clifford Companies were retained to act on their behalf, and a practical, imaginative plan was set in motion to snatch victory from the jaws of defeat.

Immediately, full control of the property had to be ceded to the investor, without increasing financial exposure.

With this accomplished, debt was renegotiated to avoid bankruptcy. To assure the soundness of the new financial plan, attention then focused on asset management.

Disgruntled tenants, which included Metropolitan Life and Allstate Insurance, needed confidence restored. Our approach was to bring them into the planning process, let them participate in how priorities were set to catch up on services, deferred maintenance and new capital improvements. They were shown not only how much they were appreciated, but also how Blue Hill could regain its reputation as a vital, respected local landmark. We won a reprieve.