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Japanese owners - American managers.

Japanese Owners--American Managers In only a few years, the Japanese have become a major investment, finance, and development force in the United States real estate industry, ranking fourth in total ownership among foreign investors. Their equity investments, debt financing, and sole and joint-venture development activities now include all types of property, notably hotel and hospitality projects in Hawaii and on the West Coast, residential and mixed-use properties from coast to coast, as well as industrial and corporate facilities constructed by Japanese manufacturers for their own use.

From the first tentative moves by a handful of Japanese investors in U.S. real estate in the mid-to-late 1970s, to the headline-making buying sprees of today, the focus has been on high-profile commercial properties--especially so-called "trophy" office buildings in the major markets of New York, Los Angeles, Atlanta, Washington, D.C., and Chicago.

James Montanari, senior vice president of the national brokerage and management firm, Cushman & Wakefield, Inc., says that Japanese investment activity in U.S. real estate currently totals about $20 billion: $1.9 billion in pre-1985 activity, $0.5 billion in 1985, $4.8 billion in 1986, $6.8 billion in 1987, between $5 billion and $6 billion in 1988, and a projected $5 billion to $8 billion in 1989.

According to the property management executives interviewed for this article, several factors have made it not only prudent, but essential, that Japanese owners, investors, and developers rely on local American property managers to handle the day-to-day supervision of their newly acquired or developed properties. These include:

* the size and scope of their activities, in terms of huge financial commitments, diversity of property type, and wide geographic range;

* the enormous differences in social and business cultures, language, ownership and management standards, and the two real estate markets; and

* their relatively small, and often overwhelmed, U.S. staffs.

Differing concepts

of management

Much has been written about the overall Japanese approach to real estate investment and acquisition--their long-range outlook and desire to form lasting relationships with property firms, their general unwillingness to sell a property once it has been acquired, and their eagerness to learn as much as they can about our markets and our business methods.

But, these experts say, learning the American way of property ownership and management will not be quick or easy for America's newest owners because their reference framework of real estate management practices is so radically different than it is in the U.S.

Montanari notes that in America, there is a long, evolutionary history of property management services in which an agent serves as a representative of the owner, but that this is not the case in Japan.

"The concept and practice of property management itself is a whole new phenomenon to the Japanese," he says. "What do property managers do? How do they get paid? What expenses do they bear? What liabilities do they bear for the performance of the building, for accidents, and for things that we take as intuitively obvious because we have grown up in the business?"

Montanari says that Japanese owners must wrestle with issues that domestic and other foreign investors who are familiar with American management methods often take for granted.

"If I'm accustomed to running my building myself, and I have done it successfully in my home market of Japan, then I must not only understand what the U.S. property manager does, but understand why I, as the owner, can't do it myself here.

"Or, how much responsibility do I bear, and how much does the property manager? Do I have to tell him to unlock the door every morning or is he going to do that? Do I have to pay the property taxes or does he?"

Another sticking point is the issue of leasing. Montanari says that leases in Japan may run only three or four pages, while in certain U.S. markets they can range from 50 to 150 pages. As a result, questions often arise not only as to the mechanics of leasing in the U.S., but who the various players in the leasing process are and how they relate.

"If I have a property manager, how does that fit with a leasing agent? Is it the same, are they different? If they're different, why can't one person do the same thing?," he asks. "You overlay that with the fact that the issues of property management and leasing are different in New York than in Boston and Washington, and Los Angeles, and you can understand the confusion.

"For example, here in New York, we would use porter's wage [to configure escalation clauses], and in Los Angeles, they'll usee CPI escalations and passthroughs. Also, how the taxes are dealt with are different from region to region. It's enormously complicated and difficult to learn on an intellectual level," Montanari says.

Differing markets

Alan D. Levy, CPM [R], president of Tishman West Companies, Inc., notes that the heritage and current system of Japanese property management is radically different than it is in the U.S.

In Tokyo, the office vacancy rate in the city's prime financial district is less than 1 percent, with rents equivalent to $130 per square foot. It is very much an owner's market.

Levy says that it is common practice for office tenants to pay a "deposit" up front, which is a sum equal to two years' rent, in addition to paying their rent up front. Because demand for space is so high, concessions are unheard of: there is no free rent, tenants pay all their own alteration costs, and some tenants even pay under the table to get into certain buildings.

"It's a great shock to a Japanese owner who is used to that type of market to come over here to the States where we have 15 percent, 20 percent, 25 percent vacancy rates, and rents are $22 per square foot," he says.

"On top of that, as an owner in the U.S., you're giving anywhere from $30 to $50 per square foot in tenant work, you're paying commissions, which are seldom paid in Tokyo, and you're giving free rent for 6 to 12 months. It's a vast difference."

Levy says that the techniques of property management as they are practiced in the U.S. are relatively unknown in Japan. "Here, a building management firm collects the rent, bills the rent, does the escalation, pays all the bills, writes all the purchase orders, does the engineering of the building, minds the plant, coordinates all the services of the building, and generally runs the store.

"That concept is a bit foreign to Japanese owners because it is generally the owner who does most of this in Japan. When they see it done here, it's sometimes difficult for them to understand how a management company can do everything perhaps that an owner would do in Tokyo."

When there is a management company handling a property in Tokyo, it usually bears the total cost of running that building, says Adriaan Holt, CPM, executive director of property management for Wm. A. White/Tishman East in New York.

"We work within a budget, but we have a firm fee that we get paid whether we are over, under, or right on target," he says. "A management company in Japan will go in and quote a firm price for which they will manage a building on an annual basis which is totally inclusive. If they can lower the cost, they make more money; if the cost goes over, they make less."

That price, Holt points out, includes building operating and maintenance, costs, taxes, contractors' fees, and all the other expenses needed to run the building.

Differing ownership styles

Being selected to run a U.S. building for a Japanese owner is a matter of having done a good job for the previous owner, these experts say. Unlike the American tendency to "clean house" when a property is purchased, new Japanese owners tend to keep the existing management team in place, at least for a while.

"It's been our experience in general that, either through contract at the time of sale or through the general attitude of 'wait and see,' there has not been the kind of change that would normally follow a non-Japanese investor acquisition of the project," says Jack Whalen, vice president and director of management services for the New York region of Cushman & Wakefield.

"They take the building on status quo in maintaining the existing conditions, which means if there's a managing agent in place, that agent generally has an opportunity to stay. And there's no time frame; this situation may last for a year, two years, or more."

Cushman & Wakefield's James Montanari notes that the reason for this strategy comes from a cautious and conservative approach. "The properties which have been bought tend to be premiere properties, which have a high perceived value by the Japanese. If that value was created by virtue of XYZ Property Management being in place, then why would one change?"

For example, when Mitsui Fudosan acquired the Exxon Building of New York's Rockefeller Center for $610 million in December 1986 from co-owners Exxon Corp. and Rockefeller Center, the management was unchanged.

Gregory Sutherland, who was formerly in charge of managing the 2.2-million-square-foot building for Rockefeller Center, now holds a similar position with the building's new owner. "Mitsui Fudosan expects that the amenities and services that are being offered in the building are going to be top level and the highest quality and are going to be operated on a 'zero deficit' basis," he says.

"Mitsui Fudosan is extremely conscious of maintaining the quality and image. I find it runs down through me and through the managing agents that we offer the best in cleaning and the best in security, and that services are continually inspected whether there are problems or not."

Sutherland notes that Mitsui Fudosan has installed a preventive maintenance computer system for the Exxon building, which complements a similar system being planned for the rest of Rockefeller Center.

Competitive bidding for a Japanese-owned property that requires a new manager is also different, notes Jack England, regional manager for Cushman & Wakefield's Los Angeles office. "When there is an opportunity to obtain a management contract on a property, a Japanese owner will primarily base the decision on referal, and then negotiate.

"Once you are hired and do a good job, they treat the relationship as we might treat a relationship with our law firms; that is, as they acquire more properties, they automatically assign these properties to you. It's a relationship of trust."

Ultimately, similar goals

"In terms of the differences between managing for Japanese owners versus American or European institutional owners, there really aren't as many as most people might think," England says.

"Both owners have similar goals, that is, achieving a certain return on investment, adding value with strategic planning, and enhancing their own firm's reputation by being associated with quality properties that produce solid returns.

"The difference comes in how they achieve these goals. The American investor usually prefers to hire quality management companies and work together with them, utilizing its own inhouse staff of real estate professionals. When a Japanese owner hires us, with the exception of only one owner we've dealth with, he or she expects us to do it all."

England says that many Japanese firms tend to have very small U.S. staffs to supervise their real estate portfolios, and that in general, they are relatively unfamiliar with the American way of doing business.

As a result, U.S. property agents are often requested and expected to go beyond strictly building supervision. Such services may include due diligence, insurance placement, investment of funds, long-range planning, and capital programs.

"Whereas an American investor may look at a 5-year plan, a Japanese owner looks at a 10- or 15-year plan. Nor do Japanese owners have an aversion to spending capital dollars now to increase tenant retention and improve their return on investment in the future," he says.

England notes that their tenants' safety is often of paramount importance to Japanese owners and that among the initial capital improvements usually made to newly acquired buildings are the installation of sprinkler systems and the implementation of an asbestos abatement program.

"They are willing to spend money to remove asbestos, to sprinkler buildings, and to correct any perceived deficiency that might affect the comfort or the safety of their tenants," he says.

Differing partnership attitudes

One of the ways the Japanese are becoming owners in U.S. commercial property is by joint venturing with American partners, such as comparable life insurance companies, pension funds, or major local or regional developers.

Stephen Sinclair, president of the real estate and capital division of Chicago-based Rubloff, Inc., which is 23 percent owned by Tokyo's Orient Leasing Co., says that to Japanese owners, developers, and investors, these relationships go beyond the strictly legal sense.

"They expect you to protect and help them; it is almost like a friendship between you. As a U.S. developer working with a Japanese company, you have a higher moral responsibility to them, not just a legal responsibility to perform."

American real estate professionals who work with Japanese clients say that the homogenous society of Japan provides a system of shared business methods, beliefs, and understood values, most of which are based on a code of honor and trust.

"The American custom of heavy dependency on lawyers is not a common phenomenon in Japan," says Levy of Tishman West. "Japanese business is done much more on trust and much less on legal documentation. They are not a litigious group as we are here, and contracts are based on honor, for the most part.

"So when someone comes over here to buy a property and is faced with a roomful of lawyers with reams and reams of paper, it's a new concept for them."

There is no question that Japanese activity in U.S. real estate markets has only just begun. "There is still a learning curve going on," LEvy says.

"It will take a while, I think, because of the cultural and language differences, for Japanese owners to really feel comfortable and at ease with some of the advice they're given, and some of the methods that they ultimately will have to use.

"Generally, it's hard for them as a people, as it would be hard for us as a people, to understand cultural and business differences. It will take a while, but they'll do it, and we'll all adapt."

Janet White is president of White Marketing Services, a real estate marketing and public relations concern based in New York. A noted real estate writer, she was formerly director of public relations for Landauer Associates, Inc., a national real estate consulting firm.
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Title Annotation:managing US property owned by the Japanese
Author:White, Janet
Publication:Journal of Property Management
Date:Jan 1, 1990
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