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Google Buying New York Building? October 27, 2010

Posted by Bob Cook in Company Case Studies, Corporate HQ, Financial Planning & Analysis, Lease Accounting, Silicon Valley.
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Follow-up regarding story below:  On December 3, 2010 it was reported by the WSJ and others  that Google has, in fact, contracted to buy the building at 111 8th Avenue Building.  An interesting post on how this tech-laden building is emblematic of New York’s important role in the geography of the internet age was published by Globe St and you can see it here
 
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In a previous post I laid out the reasons why it makes sense for companies to buy their headquarters:  low prices in today’s market, low corporate borrowing costs, large amounts of cash on hand, and the forthcoming new lease accounting which will take away some of the financial-statement advantages presently enjoyed by leasing versus owning.  I had referred to recent HQ-acquisitions by Northrop Grumman and others and concluded the post with “more are yet to come”.  That logic applies not just to headquarters buildings, but to any large, strategically important building in a company’s real estate portfolio. 
 

111 Eighth Avenue

$2 Billion Purchase

Today, the New York Post announced that “Google appears close to buying the trophy 111 Eighth Ave. building, one of the largest buildings in Manhattan.”  The 2.9 million-square-foot building is rumored to have a price tag of close to $ 2 billion.  A big number, but well within the capability of Google, which is a cash-generating money machine.   Lately, it’s been generating more than $2 billion quarterly in free cash flow … so it could pay for this building with the cash generated in just three months.

Google needs New York

While this isn’t Google’s headquarters, it is one of its largest engineering centers outside of the Googleplex in Silicon Valley.   In 2006, the New York Times reported that it was the largest and … if that is still not the case … it undoubtedly is the most important Google site outside of Silicon Valley.   New York is the center of the world’s advertising industry, and that’s the industry that makes Google rich.  Google needs to be in New York to access that industry and, equally importantly, to feed off the energetic frenzy of the Big Apple.  It’s likely to need a large New York presence for a long time… an imperative in deciding to buy versus lease.

So… the purchase of 111 Eighth Avenue, if it is to be, appears to be the result of the perfect storm:  Manhattan office prices are at historic lows, Google’s got oodles of cash, and the property is strategically important.  The purchase is of interest, though, for other reasons, also.  It exemplifies bold strategic planning moves on both the part of a tenant, i.e. Google, and a landlord.

Perfect building for Google

The 111 Eighth Avenue Building is so big it actually has multiple addresses … one on each side of the building, which covers an entire city block.  Those big floor plates … greater than 200,000 square feet … make the building perfect for Google.  The bigger the floor, the more room there is for scootering around, literally.  The big floors allow Google to recreate the office environment and culture it has in California.  Also making the building a good match for Google is the fact that, according to DataCenterKnowldege.com, it “is also one of the most wired carrier hotel properties in New York, and a key intersection for the Internet’s largest networks”.  One wonders if some game-changing utilization of this capability is in Google’s plans. 

A Prescient Building Owner

One also wonders if Taconic Investment Partners, owner (and presumably seller) of the building was  particularly prescient or just lucky.  Back in 1998 when it bought the building, conventional thinking had it that big, deep floors with space far from the window line are undesirable to office tenants.  Lawyers, investment bankers, advertising account execs… they all want window offices.  Did Taconic know when it “implemented a complete repositioning plan including vacating the printing and warehouse tenants to assemble large blocks of space” that companies like Google would come along for whom the large floors were ideal?  Remember, Google was just founded in 1998.

Google’s Ambitions

Google’s ambitions for the building are unknown.  Presumably, though, it envisions expanding in the building bit-by-bit as it expands its New York office.  Google’s website today lists about 140 positions available in New York.  They’d need 30 K to 40 K square feet to accommodate those folks.  Back in January, it leased an additional 57,000 square feet to add to the 270,000 square feet it initially leased in 2005; one report puts Google’s present occupancy at 500,000 square feet  … still just a fraction of this huge building.  No one knows how much space Google might eventually occupy.  The company’s ambitions, though, seem limitless.  Making such a large investment might portend more than a desire to secure office space in Manhattan.  DataCenterKnowledge.com reports that the building “houses major data center operations for Digital Realty Trust, Equinix, Telx and many other providers and networks”.  Could the building become the center of the “parallel internet” some think Google wants to build?  The potential building purchase is sure to provide fuel for the conspiracy theorists and makes for great “Google watching”.

Start preparing your comments on FASB’s Exposure Draft on Leases October 24, 2010

Posted by Bob Cook in Financial Planning & Analysis, Lease Accounting.
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When FASB and IASB issued their Exposure Draft on the new lease accounting, they solicited comments from interested parties.   Anyone can comment about anything.  Just know, though, that comment letters are posted on the websites of the two accounting boards, and you don’t want to have foolish comments up there for everyone to see.

(As an aside: I don’t know what policies the boards have regarding inappropriate comment letters they get.  Will they post those that are off-topic or those that are obviously uninformed?  And what about those, if any, that are obscene?  Given the outrage shown by some corporate real estate folks, I wouldn’t be surprised if a letter or two shows up with some salty language in it.)

Click here for past posts on the new lease accounting.

Comments due December 15, 2010

December 15th, the due date for comments, isn’t that far away.  While you can comment about anything, the boards have released 19 questions that they’d like comments on.  These range from the conceptual, e.g. “Do you agree that a lessee should recognize a right-of-use asset and a liability to make lease payments?”  (Question 1) to the technical, e.g. “Do you agree that a lessee should present liabilities to make lease payments separately from other financial liabilities?” (Question 12)

What should real estate professionals comment on?

While the accounting boards will accept comments from anyone, including trade organizations and consultants, they are most keen to hear from those who use financial statements and from those who will have to apply the standard to prepare their financial statements.  For the latter, preparing a comment letter will usually be the responsibility of the technical accounting department and corporate real estate people will have to work through it to get their voices heard.

Corporate real estate folks need to understand, though, that many of the questions posed by the accounting boards cannot legitimately be commented upon by anyone who does not have a strong understanding of accounting and its role in facilitating information flow in the business community.   Comments that appear to come from those unschooled in accounting principles are likely to be dismissed.  Corporate real estate folks need to avoid wasting energy making comments that are uninformed.

Also, corporate real estate professionals need to understand that there may be elements of the new accounting that they don’t like but which are based on long standing accounting practice…. and objections to these will likely be considered uninformed and will not sway the boards’ opinioins.  For example, many corporate real estate folks are concerned about how the imputed interest on the lease liability is to be calculated.   The new standard calls for use of the “interest method” (as opposed to something like a straight-line amortization of the total interest charge.)  For sure, this is going to have some painful results in the form of high P&L expense in the early years of the lease… particularly for very long leases.  Nevertheless, it is naïve to expect that a special type of interest accounting should be allowed for leases.  The principle for how to account for imputed interest is already well established and, in fact, is already applied to real estate where capital leases are involved or where FAS 146 reserves have been established.  The boards are not going to allow a new form of calculating imputed interest for leases just because it will be painful.  The present imputed interest methodology is sound.  In fact, conceptually it makes sense for companies to feel a little more P&L pain in the early years of the lease; that’s when they are getting the greatest benefit of controlling an asset far into the future.  The “interest method” of computing interest is an established accounting principle; that’s why the interest calculation is not among the 19 questions that the accounting boards have put forth for comment.  I don’t think it’s up for debate.

The 19 Questions

A good guide as to how to avoid making uninformed comments is to only make comments that respond to one or more of those 19 questions.  The people who work at the boards are pretty smart.  They understand which elements of their proposal cause heartburn and where they might be able to make adjustments without conflicting with existing accounting theory and practice.  They’re actually really interested in hearing suggestions for alternative accounting treatments that can avoid the heartburn, at least as long as the suggestions don’t fly in the face of long-held accounting principles.

Here are links to the Exposure Draft so you can read the 19 questions for yourself.  They appear near the beginning of the Exposure Draft.

Click here for U.S.-based Financial Accounting Standards Board’s (FASB’s) version.

Click here for International Accounting Standards Board’s (IASB’s) version.

In future posts, I’ll provide my thoughts on each of these questions.

Click here for past posts on the new lease accounting.

Three facts that compel you to tackle the new lease accounting NOW October 17, 2010

Posted by Bob Cook in Financial Planning & Analysis, Lease Accounting, Profession of Corporate Real Estate.
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A lot of corporate real estate people have not yet begun tackling the challenges brought on by the new lease accounting.  You may be one of these.  You may think this new accounting is something that won’t affect you … that “accounting” happens downstream from your decision-making.  Wrong!   It’s going to rock your world … from how you strategize to how you manage.   Or, you may be one of those waiting for direction from your finance / accounting department, having been told … admittedly, correctly so … that the standard hasn’t even been finalized yet.   “Danger, danger!”  Maybe you need Will Robinson’s robot to warn you about what is just around the bend.  And don’t you watch action movies?  Don’t you know the bomb squad doesn’t wait until the existence of the bomb is confirmed before they spring into action?   Maybe you’ve been lulled into non-action because you’ve been told the Effective Date won’t be until 2013 or 2014, and therefore, you think you have plenty of time to address the issues.   Well, shame on your finance group, if they haven’t also told you about the comment period that ends in two months.  And double-shame, if they haven’t briefed you on the details of the accounting and its transition rules, particularly if they haven’t explained to you the meaning of:  “no grandfathering” and “retrospective application”.

Now, to be fair, the standard isn’t finalized and you might not want to “pull out all the stops” yet to address it.  There’s even a chance … ever so slight … that the standard, due out by end of June 2011, will be postponed… perhaps even indefinitely.   Still, there is plenty to get started on to prepare for its issuance.  In fact, what you should get started on is too much to list here…. but I’ll outline it in a future post.

While some of the details of the standard, as outlined in the Exposure Draft of August 2010, may be changed, the issuance of the standard, in a form close to that outlined, is pretty likely.  After all … the creation of this new standard has been in the works for several years and has followed a deliberate, rigorous process that included issuance of a Discussion Paper way back in March, 2009.  That paper outlined the general thrust of the standard … that all leases would go onto the balance sheet … and it solicited comments … pro and con …from companies and other interested parties.   Three-hundred comments were received … some supportive, some not.  The non-supportive ones did not persuade the FASB and IASB to change course.  The momentum to establish this new standard is strong.  Its issuance is not inevitable, but it’s very likely.

Now is the time to get cracking on this.  There are three facts that compel you … if you are involved in corporate real estate … to address the new lease accounting now:

Fact #1:  Comment Deadline.   December 15, 2010 is the deadline for interested parties to comment on the standard as outlined in the Exposure Draft.  Anyone can comment.    Corporate real estate execs should get involved.

It’s appropriate that comments made to the FASB and IASB come from finance departments who have the technical background to understand the nuances of the standard and to communicate their concerns in accounting language.  The finance department probably does not, however, understand how difficult it is going to be for the corporate real estate department to supply the type of data that the new accounting requires.  The corporate real estate department needs to share its perspective, particularly because that perspective will inform what-is-probably the most controversial aspect of this new standard … and that is the cost-benefit of the standards application.  Much of the cost … in terms of both out-of-pocket costs and demand on management time … will be borne by the corporate real estate department.  The finance department cannot address the cost-benefit question without input from the corporate real estate department.

Now, some corporate real estate execs may take the view that they don’t need to get personally involved because comments to the FASB and IASB from larger companies, with more resources to devote to comment letters, will cover the same concerns they would bring up.  Besides the fact that this is like a citizen deciding to not vote because he thinks his one vote can’t make a difference, there is a big problem with relying on the comments of others.   Every company is unique.  Your company may have special contractual situations that may be inadvertently affected by the new lease accounting.  You should know that the new accounting applies not just to explicit leases, but also to implicit leases.  A document doesn’t have to say “Lease” in its heading to be a lease.  Every company should be looking at its business model to see where this new accounting might apply.  Many companies are going to be surprised to find how it can apply to things like outsourced manufacturing, CoLocation datacenter contracts, and on-site solar energy contracts.  Some of these will be sorry they didn’t comment on the impact on their special situations.  Don’t you be one of these.

Fact #2:  No grandfathering.    It is almost 100% assured there will be no grandfathering of existing leases.   If existing leases were not put on the balance sheet at the time the new standard is applied, the balance sheet would become meaningless.

So… many leases being signed today will eventually fall under the new accounting.  And it won’t just be leases with expiration dates beyond the time when the standard will be put in place.  It will also be leases that expire sooner but that have options to renew for periods that go beyond the effective date.   Most sizeable leases would fall into one of these two categories.   If you are not already looking at these leases … and the relevant issues such as lease-vs-own and length of lease … through the lens of the new leasing, then shame on you.

Fact #3:  Retrospective application.    When companies first issue financial statements using the new standard, there will be a need to include prior-year comparison statements so investors can make year-to-year comparisons on an apples-to-apples basis.   Most companies will show two years of prior statements in what-the-FASB-and-IASB-call a “simplified retrospective approach”.   If you think through the timeline, you’ll quickly see that you may already need to begin collecting the required lease information, lest you end up having to scramble in three years to reconstruct what your lease data was three years prior.  For example, an Effective Date in 2013 would mean you need to have data to prepare 2011 financials using the new accounting and, in order to do that, you’d need information going back as early as 2010.  (Yes, that’s NOW!)  Unless you’re different from most companies, you  probably are not now collecting all the data points that will be needed for the new accounting.  If you don’t start now, you’ll have a huge headache later.

So, if you are one of those corporate real estate folks who have postponed addressing the new accounting because you are skeptical that the new lease accounting will have much effect on you … for example, if you don’t agree with the opinion that the spotlight it puts on corporate real estate is likely to transform the profession and what-is-expected of you … then, at least, these three facts should stir you into action.

FAS 13 and IAS 17 soon will both be history.  Learn more about the new lease accounting here.  If you’d like to follow my posts, click on the “subscribe me” on the side bar.

What happens to Adobe’s HQ (and good citizenship) if Microsoft buys the company? October 12, 2010

Posted by Bob Cook in Company Case Studies, Corporate HQ, Silicon Valley.
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Rumors are still floating that Redmund-WA-based Microsoft might buy San-Jose-CA-based Adobe.  Rumors were set off by a New York Times blog last Thursday revealing a meeting between company CEO’s.   Adobe’s stock price soared more than 11% the day the rumor started.  It’s settled back a bit since then, but still lies above the pre-rumor price.

The purchase of Adobe would be huge.   First, the price … likely to be more than $15 B …  would make it one of the most expensive tech acquisitions ever … more than Oracle’s$10.3 B purchase of PeopleSoft, its $8.5 B purchase of BEA or its $7.4 B purchase of Sun Microsystems, more than Intel’s $7.7 B purchase of McAfee, and more than Cisco’s $6.9 B purchase of Scientific-Atlanta.   It would also be the most expensive acquisition ever by Microsoft, bettering its $6.3 B purchase of aQuantive. 

More importantly, though, from a Silicon-Valley perspective, a Microsoft purchase of Adobe would be the first purchase of a sizeable Silicon Valley company by an “outsider”.   How would an out-of-town Microsoft handle Adobe?  Would it treat it as a semi-autonomous subsidiary, getting the benefits of teaming up against Apple and Google but letting Adobe manage its own way operationally?  Or would it subsume Adobe into its folds, use the Adobe operation as a foothold to tap the Silicon Valley talent pool and just merge it into other business units … so that eventually the only remaining vestige of the company we-know-as-Adobe would be the .pdf  file extension?     (Not to overdramatize, but maybe this is what Scott McNealy, former Sun Microsystem CEO, was talking about when he said “it really is mankind against Microsoft … this is why I don’t quit … I don’t want to leave my children to a Microsoft-only world.”)

As for Adobe’s HQ real estate, it would be a shame if Microsoft … or any other out-of-town buyer .,. did not let the Adobe folks run independently and call the shots vis a vis the Silicon Valley real estate strategy.  For in this regard, Adobe has been a particularly good citizen … for San Jose, in particular, and, more generally, for the “green movement”.  It would be good to keep that good citizenship going.

So what has Adobe done to be a good citizen?  First, Adobe alone, among large Silicon Valley companies, has had the nerve to locate its headquarters in downtown San Jose … and in, of all things, a group of high-rise buildings!   A million-square-feet worth!  This seems to be anathema to other Silicon Valley companies where the de rigueur is to locate in low-slung, big-footprint buildings where it’s easy to roller skate from department to department.  Sure, these buildings have lots of roof space for solar collectors, but nothing compares, from an energy perspective, to being downtown.  High-density downtowns are much easier to serve with energy-efficient public transportation than are the Googleplex’s and the Googleplex-wanna-be’s that sprawl across the Silicon Valley landscape.  (Although, to be fair, Silicon Valley is much less sprawling than are business landscapes elsewhere; some might even call Silicon Valley “urban”.)  Downtown San Jose has light rail, good bus service, might eventually get an extension of the BART subway, and probably will even get a stop on the high-speed rail line going from S.F. to L.A., if it ever gets built.  Adobe deserves kudos for being downtown.

Adobe also deserves kudos for its efforts to “green” its HQ buildings.  Back in 2006 Adobe was one of the first companies to get its headquarters a LEED (Leadership in Energy and Environmental Design) Platinum certification from the U.S. Green Building Council.  A host of environmental-friendly measures were implemented from water-use efficiency to energy-saving lighting systems to avoidance of hazardous chemicals in building maintenance.  Adobe has even installed vertical wind turbines on its buildings to generate electricity … not a lot of it … but every bit helps.

And Adobe’s good citizenship extends beyond energy-savings and the environment;  it has also had its impact on San Jose’s art scene and the scenery of downtown’s skyline.  A few years ago it installed, at the top of one of its buildings, the Semaphore, an enigmatic art piece visible from miles away that emits a secret code (which has been cracked and turns out to be the full text of Thomas Pynchon’s novel The Crying of Lot 49.)  

How would things change with a distant owner whose performance metrics for its business units would  probably not include measures of good citizenship?  Would the Semaphore remain on San Jose’s skyline?  Would the vertical windmills be maintained so they generate electricity properly?  Would the Adobe operation be eventually moved to some low-rise buildings in a misguided effort to improve expense metrics?

It’s always sad when a hometown company gets bought by an outsider.  We’ll see if the purchase happens or not.   Outsiders have tried before to buy into Silicon Valley.  There was the failed attempt by Microsoft to buy Yahoo back in 2008 and an unconsummated deal for IBM to buy Sun Microsystems in 2009.  Even if the Microsoft deal does go through, though, Adobe might be too big for even Microsoft to swallow.   Microsoft might have to leave Adobe to operate on its own.  Whatever … let’s hope the Adobe windmills keep turning.

India’s Commonwealth Games Begin Spectacularly … Let’s hope they end without mishap October 4, 2010

Posted by Bob Cook in Asian Expansion.
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Update on 17 October 2010:  The games have come and gone.  Nothing extraordinarily bad happened.   Whew!  Reviews are mixed.  The Wall Street Journal’s take was that the “India Games Fall Shy of Goals” but the New York Times noted that India Declares the Commonwealth Games a Success.   India’s poor performance …or at least the perception thereof … in preparing for the Games is likely to hurt any future attempt to get the Olympics held in India.  And that’s a big blow to the India in its rivalry with China which hosted a spectacular Olympics in 2008.  The Prime Miinister has called for a Commonwealth Games inquiry, but even if the root causes of the preparation problems are uncovered and fixed … and one wonders if they could be easily … the damage to India’s reputation as a host country for international events has been done.  It could take decades to repair that soiled reputation, particularly within the Commonwealth where the story of the Games and the preparation problems were front-page news.

Original Post:

India is unique.  It’s the world’s largest democracy, second most populous nation, third strongest attractor of foreign direct investment, and using Purchasing Power Parity (PPP) stats, the fourth biggest economy.  

It’s a place of great hope and great aspirations … a place where corporate real estate folks are spending more time … helping their companies tap the talent in India … and not just in Bangalore.   Now many are following the lead of some big companies, going to places like Mysore (Infosys), Hyderabad (Microsoft), and Chennai (Nokia).   

But, alas, India … the land of contrasts … also has the most people living in poverty, has the worst infrastructure among emerging economies and ranks dead last among those economies for economic risk.

As such, there were a lot of worries about India hosting the Commonwealth Games.  Would it be able to pull it off?   In the weeks leading up to the Games, worries escalated as facilities-still-under-construction looked to be not anywhere near ready.   Ceilings collapsed.  The Athletes Village was filthy.  England … the mother of the Commonwealth … considered not attending the Games. 

Even just a few days before the Opening Ceremony, things didn’t look so good.  The subway wasn’t ready.  Construction debris was everywhere.  Health hazards abounded.  Some athletes, citing not-very-severe  injuries, announced they would not attend.  One who did attend came down with Dengue Fever.

But … oh, ye of poor faith … we’re talking about “last-minute”, ”we’ll-get-it-done” India.  And they did.

The Games opened on time, as did the subway.  Sunday’s opening ceremony was, by most accounts, well-done … maybe even spectacular (although the bar for that superlative has been set impossibly high by the opening of the Beijing Olympics back in 2008).   So, things are looking pretty good.  Let’s cross our fingers, though.

For those of us who have done work in India, we know that it’s what’s under the surface that you have to watch out for … both metaphorically and, in the case of construction work, quite literally.   Tight deadlines, inadequately skilled workers and corrupt building inspectors make for a frighteningly bad curry.  Buildings can be made to look good, as long as you leave enough budget for redoing the aesthetic screw-ups.  But what’s underneath the surface?  That’s what you need to worry about.

And I, for one, am a bit worried.  Gathering tens of thousands of people into facilities that have been completed just-in-the-nick-of-time, with a nation’s self-image and international reputation on the line, is worrisome.  Let’s hope all goes swimmingly, that there are no mishaps and that at the end of the Games, as Commonwealth visitors leave, they cry out to their Indian host a loud “cheerio” and a louder “well done”. 

Let’s all hope.