Challenges and Opportunities: A Qualitative Study on Tax Compliance in Pakistan
Knowledge Leader - October 2011
1. Knowledge Dexus:
Global PartnershiP
Leader
social MeDia:
ceos Who tWeet
co LLiers
i n ternationaL business class:
propert y mag azine savvy travel tiPs
fa LL 2 0 1 1
The Shard lonDon’s neW icon
6. outlook 20/20 H ot to pic s m a Kin g H e a d Lin es to day
in late 2010, target
announced it was Strong loonie
expanding into Canada One of the most compelling factors for U.S.
retailers to open stores north of the Canada-
U.S. border is the value of the Canadian dollar
relative to the U.S. dollar. As the Canadian dol-
lar strengthens, it’s increasingly worthwhile to
establish Canadian stores rather than sell only
to Canadian customers online or in the United
States. For some U.S. retailers, Canada is the
largest, closest, and/or most similar market to
the U.S. market, and represents a logical move
to maintain revenue growth.
While not all retailers are compelled by the
same macro-economic factors, the exchange
rate plays some part in the spate of recent
announcements of U.S. retailers opening shop
in Canada. As recently as 2004, Canada’s
retail sales per capita were US $8,000 com-
pared with approximately US $12,000 per
capita in the United States. However, with the
appreciation of the Canadian dollar, per capita
retail spending in Canada now approximates
the U.S. By itself, this would certainly attract
new interest in the Canadian retail market,
but when one considers that the available retail
space in Canada (on a per-capita basis) is sub-
stantially less than that in the U.S., it becomes
even more attractive.
Compared to the U.S. retail market, Canada
represents a bounty of untapped potential. The
United States has 38 square feet of retail floor
area per capita, compared to only 24 square feet
in Canada. This means that Canadian retail-
ers’ average productivity is CA $530 of sales
per square foot compared to only US $320
south of the Canada-U.S. border. If American
retailers can maintain the same cost structure
and operational efficiency in Canadian stores
as they do in U.S. stores, there is the potential
for significantly greater profitability.
Target Market
Drew Keddy, Vice President of Colliers
International in Canada, leads the firm’s retail
practice and notes that Canada is considered
a very attractive destination for high-end
retailers. “Canada is uniquely positioned in
canadian economy LUres internationaL retaiL interests. terms of market attractiveness to retailers.
By James smerdon Our economy has bounced back faster than
other markets around the world and our cur-
target Corporation’s late-2010 announcement of expansion into Canada leaves Kroger, rency continues to strengthen. These factors,
Walgreens, and CVS Caremark as the only top-10 U.S. retailers who have not publicly announced coupled with high sales per square foot and
plans to open stores in Canada. Target’s acquisition of up to 220 Zellers stores continues to be a relatively low rent rates, create perfect condi-
huge story in Canadian retail, and could be part of the biggest story in North American retail for tions for international players to expand their
the next decade. presence here.”
4 | knowledge leader faLL 2011 knowledge-leader.Com
7. Sell to Canadians in Canada
largest u.s.
Establishing stores in Canada could also keep retailers
Canadian shoppers north of the border instead by revenue (2010)
of being lured to the U.S. by sales, outlet stores
1. Walmart
or other incentives used by retailers to entice
recession-weary shoppers. In Canada, total retail 2. Kroger
spending increased by a comfortable 5 percent 3. target
from 2009 to 2010, and retailers have not, by and
large, had to dramatically cut prices to maintain 4. Walgreens
sales volumes. U.S. retailers view the Canadian 5. Home depot
market as an opportunity to sell merchandise at
6. costco
full sticker price—or in many cases, at higher
prices—than they do in the U.S. 7. cvs caremark
For a U.S. retailer not currently in Canada, 8. Lowe’s
expansion north can be a logical next step in its
growth strategy. With an exchange rate that now 9. sears
favors the Canadian dollar, Canada is only slightly 10. Best Buy
smaller than California in terms of total retail mar-
ket potential. For U.S.-based retailers that have
locations or supply chains close to major Canadian years will likely see a period of declining profit
population centers, the move to establish stores in margins for large Canadian retailers and revenue
Canada is an easier decision. It’s estimated that growth for retail property owners, as increased
more than 70 percent of Canada’s population lives retailer competition impacts both parts of the
within 100 kilometers (approximately 62 miles) retail economy differently.
of the Canada-U.S. border. Many U.S. retailers Some of the major brands rumored or confirmed
could supply a first phase of Canadian expansion to enter the Canadian market include:
using existing supply chains, which significantly
reduces the investment and risk associated with • Marshalls (Part of the TJX Companies,
entering the Canadian market. which already operates Winners and
HomeSense stores in Canada and has five
Competition Affects Retailers and stores in the Toronto region.)
Owners Differently • J.C. Penney
Target has attracted a lot of attention with its • Topshop
goal of 200-plus stores and CA $6 billion in • J.Crew
sales in Canada within six years. In comparison, • Kohl’s
Loblaw Companies had sales of CA $31 billion • Dick’s Sporting Goods
in 2010, while Walmart had sales of CA $15 bil-
lion. However, at $6 billion, Target will generate the next Wave
triple the spending relative to the Zellers stores Canadians can expect to see some of their most
they will be replacing. This extra spending is not familiar national chain stores disappear as for-
likely to come from induced demand (conversion eign retailers look for opportunities to set up
Walmart, Home Depot and Costco were among
of saving to spending). shop north of the border. Some retailers will face the largest U.S. retailers by revenue in 2010.
Much of the spending that Target will attract in a decreased market share as U.S. retailers gain
Canada will be transferred from other competing prominence in Canada, while others will become
retailers. For Canadian retailers and property prime targets for acquisition as American retailers maintain economies of scale entering Canada for
owners, the impact of Target’s migration will look to move into the market quickly and easily, the first time, the Walmart and Target approach
last well beyond the initial store openings. Com- rather than on a store-by-store basis. of buying a chain with similar location and size
petitors will invest in new locations and existing With the Canadian retail sector pushing for- preferences has many advantages, including
stores will undergo renovations to establish mar- ward at a sustainably healthy rate, demand for establishing a banner across the country quickly,
ket position. Once Target stores are open, there space in shopping centers and street fronts will launching operations in familiar and tested retail
could be additional acquisitions of Canadian continue to get tighter, resulting in an increase in locations, and acquiring existing leases that have
brands that cannot compete head-to-head with lease rates, particularly in growing urban markets. lower base rates than what they would pay if they
Wal-Mart and Target. In general, the next five For retailers that need greater numbers of stores to signed brand-new leases. K l
knowledge-leader.Com Colliers international faLL 2011 | 5
8. spot l ig h t tHe people, plaCeS
illinois Center two in
Chicago’s east loop
anD eventS SHaping tHe inDuStRy
>UniqUe ProPerties
submarket is currently
83.8 percent occupied.
chi-toWn toWer
Commonwealth reit has retained Colliers International,
Chicago to market and lease 233 N. Michigan Avenue, a
1.1-million-square-foot Class A office tower in Chicago’s East
Loop submarket.
originally constructed in 1972, the 32-story office building
is part of the 4.66 million-square-foot Illinois Center at
michigan avenue and Wacker drive. also known as illinois
Center Two, it is currently 83.8 percent occupied by major
tenants including the U.s. department of Health and Human
Services, United Healthcare, Clear Channel Communications,
Motorola, and Young & Rubicam.
commonWealth reit’s purchase of 233 n. michigan
continues a recent trend of increased activity throughout
Chicago’s central business district. “The first half of 2011 has
seen a flurry of investment sales in Chicago, either through
outright sales or debt restructuring, which has resulted in
increased opportunity for a change in third-party leasing,”
said Drew Nieman, principal of Colliers International,
chicago.
c o s ta r
6 | knowledge leader faLL 2011 knowledge-leader.Com
9. > trends
> in the news
Parking
corporate Rates Hold
finance Steady
CORPORATE FINANCE SERIES
Corporate Lease Accounting #6
AT ISSUE:
The threat of imminent corporate lease accounting changes has The joint FASB/IASB task force is attempting to eliminate the
series
been lingering for the past eighteen months, certainly since well existing SFAS13 “bright line” tests, which currently provide
before the FASB/IASB joint task force issued its August 2010 a roadmap for lease classification and allow for financial
Exposure Draft. Today, the most common questions are: engineering by corporations.
> When will the new rules be finalized? THE NEW JOINT TASK FORCE’S COURSE OF ACTION:
the more things change the more they
> What will be the final resolution of the most controversial The FASB and IASB received substantial constructive feedback
Exposure Draft elements? on its original August 2010 Exposure Draft. The result has been
> What are the expected effective dates of the proposed a material course correction on certain conspicuous elements of
stay the same—at least when it comes
new standards? the Exposure Draft, including definition of “lease term,” landlord
> What should we do now to prepare for the new rule capitalization requirements and accounting for certain contingent
changes? rentals, to name a few. Please note that NO elements of the
to parking rates. according to colliers
new proposed rules have been codified. As such, all elements of
If recent history is any indication, nobody can predict with the proposed new lease accounting rules are subject to further
absolute certainty the answers to any of these questions. We can, change, adaptation and re-adaptation.
international’s national central Business
however, provide a summary of recent discussions and guidance
in the latest installment of its popular cor- for corporate executives and real estate service providers. Colliers has received feedback that the Exposure Draft has been
substantially modified from its original version. In fact, the FASB/
District Parking Rate Survey, despite
REVIEW OF FASB / IASB OBJECTIVES: IASB boards have publically stated that deliberations surrounding
porate finance series, Colliers International It is important to remember the general reasons behind the lease
accounting changes:
the lease accounting Exposure Draft are ongoing and should be
completed during the third-quarter 2011, with a revised exposure
draft publication shortly thereafter. This type of delay and revised
addresses questions about corporate lease > increase the transparency within corporate financial
statement reporting; and
> enhance the comparability of similar companies and like
approach is not uncommon for the board. Most recently the
FASB realized a similar fate relative to its Revenue Recognition
standards. In that case, the task force reissued its exposure draft
a general improvement in economic
accounting changes following last summer’s transactions.
The FASB and IASB endeavor to create a common lease standard
to incorporate the substantive changes resulting from public
comments and further review of the standards application. In any
event, we know for certain that the full new standard publication
conditions, most parking garage owners
release of the Financial Accounting Standards
to ensure assets and liabilities arising from lease contracts are
uniformly recognized within corporate financial statements.
Assets shall be classified based upon a corporation’s right-to-use
will NOT occur this summer and the timing for implementation
will be delayed well beyond the original expectation of FYE 2012. and operators did not increase parking
rates during the last 12 months. a handful
the leased property, whereas lease liabilities shall be classified
Board (FASB) and the International Account- based upon a corporation’s obligation to pay rent.
ing Standards Board (IASB) joint task force’s 1 of 2
of cities saw double-digit increases, but in
Lease Accounting Exposure Draft. Due to a most markets parking rates held steady,
delay in the new standard issuance, questions the future capital structure of the company. rose marginally, or dropped by just a few
plague the real estate industry, including While advocating a strategic approach to percent.
when the final rules will be released, what financing determination, Colliers recom- According to the survey, the five most
date the proposed standards will take effect mends a cautious approach to investment expensive parking districts (as represented
and what steps can be taken now to prepare in systems and technology. These new rules by median rate) in the United States are
for the changes. will definitely add complexity to the finan- Midtown Manhattan ($541.00), Lower
The lease accounting changes are being cial statement reporting process. In order to Manhattan ($533.00), Boston ($438.00),
drafted to increase the transparency within track lease obligations more effectively and San Francisco ($375.00) and Chicago
corporate financial statement reporting and allow corporations to efficiently implement ($289.00) per month. The five least
enhance the comparability of similar compa- lease accounting disclosure requirements, expensive are Reno ($45.00), Phoenix
nies and like transactions. The goal is to create companies with many real estate and equip- ($50.00 USD), Bakersfield ($55.00),
a common lease standard to ensure assets and ment leases will need to invest in systems and West Palm Beach ($56.00), and Memphis
liabilities arising from lease contracts are uni- technology which are currently in formative ($57.00) median rate per month. For more
formly recognized within corporate financial stages. It is widely believed that the boards information, contact Chief Economist Ross
statements. will provide ample time for recognition of the moore at ross.moore@colliers.com.
According to the FASB/IASB boards, delib- new lease accounting standards. Therefore,
erations surrounding the lease accounting without a specific and detailed understanding
Exposure Draft are ongoing and should be of these final lease disclosure requirements,
completed during the third quarter of 2011, which will affect the coding and formulation
with a revised exposure draft publication of these systems, Colliers recommends careful
shortly thereafter. Therefore the timing for consideration of capital commitments. Before
implementation will be delayed as well. investing capital and committing valuable
Colliers advocates a strategic approach to the resources in new systems, processes and tech-
current corporate financing determination. nologies, Colliers proposes “procrastination”
Today’s decision-drivers must fully incorpo- surrounding tactical implementation of the
rate the most likely lease accounting precepts. new lease accounting standards.
By proactively understanding such factors and To receive a full copy of the finance series
incorporating the prospective rules into the report, email Bret Hardy, CPA, Executive
lease-versus-buy decision matrix, your com- Managing Director of Corporate Finance for
pany will intelligently influence real estate Colliers International, at Bret.Hardy@colliers.
decisions that will have a lasting impact on com.
knowledge-leader.Com Colliers international faLL 2011 | 7
10. spot l ig h t
> q&A
EXECUTIvE INSIgHT WITH:
Karen J. WHitt
U.s. president & cHief operating officer |
reaL estate management services
coLLiers internationaL
karen whitt oversees Colliers International’s property management
team. Whitt ensures consistent service across the organization and col-
laborates with brokerage and investment sales professionals nationwide
to provide integrated real estate solutions. During her more than 20
years’ experience in the industry, she has been a national leader in
property management, handling office, retail and mixed-use for insti-
tutional clients, including TIAA, ING UBS, and Principal Financial.
She is based in Washington D.C.
if you could have dinner with any Favorite business book? Biggest accomplishment so far in
business leader, who would it be Who Moved My Cheese? by Spencer Johnson. your career?
and why? The value in this book for me is the reminder Really, my biggest accomplishment is handling
I’m on the road several days a week, so if I had that everything is always changing, and you the day-to-day challenges, and making sure to
an open dinner slot I’d choose to be home with have to be innovative and stay ahead of the enjoy the small victories.
my husband and thirteen-month-old baby, and crowd.
invite Oprah Winfrey. She’s smart, she’s not who is your role model?
afraid to take risks, and she’s genuine. I just what do you see as new industry My mom. She taught me to think outside the
wouldn’t tell her I didn’t watch her show. trends to note? box, never accept status quo and, most impor-
Property management organizations will tantly, to put others first. Knowing there are
words to live by? become true partners with their clients, rather many solutions has made solving problems
Just do it...but do it right. than just providing service. This may result in much easier throughout my life.
performance-based management fees to truly
who were your mentors? align the interests of clients and management how are you involved with your
My first boss after college, Barb Kocmur of firms. community?
Janez Properties in San Diego, who showed My husband and I have provided a foster
me how to handle challenges with grace; Marc what did you want to be when you home for more than 200 locally rescued dogs
DeLuca of Clarion Partners, who taught me were young? in addition to the four special-needs dogs that
how to deliver value to clients (as he does every A teacher. Both my parents were teachers… are part of our household. The animal rescue
day); and Dylan Taylor, who exemplifies trust and of course, I wanted summers off! organization we work with, Lucky Dog (www.
and integrity, and shows us that you can lead luckydoganimalrescue.org), provides adoption
only if people follow you. What was your first job? matchmaking and foster care in the Metro D.C.
I was a lifeguard at the local pool. (Saved two area. Last year alone, Lucky Dog kept 1,400
kids in three summers.) dogs out of high-kill shelters in the South. K l
8 | knowledge leader faLL 2011 knowledge-leader.Com
11.
12. b2b B Usin es s to B Usin es s tip s
Gas, Food, Lodging
muCh like oil and water, high oil priCes and hotels simply don’t mix.
by John b. Corgel, ph.d., and Jamie lane
a report released by PKF Hospitality the health of the macro economy to sell their normal levels, individual consumer and busi-
Research (PKF-HR) in Spring 2011 reveals products—guest rooms, food and beverage ness spending power is reduced, which in turn
a direct economic relationship between oil services and meeting rooms—oil prices should has a negative multiplier effect throughout the
prices and the U.S. lodging industry. The be a serious concern for hotel managers, inves- economy in general and the lodging indus-
special report, entitled Oil Prices and Lodging tors and developers. try specifically. Based on our study, oil prices
Risk, notes that the U.S. lodging industry will “As the price of oil has shot up and then down above $125 a barrel exceed ‘normal’ levels and
see minimal disruption if oil prices reach $125 over the past few months, many U.S. hoteliers would have an increasingly negative effect on
per barrel in 2011. However, if prices surge have worried about the impact that oil prices hotel operating performance.”
to $150 per barrel, the recovery that U.S. could have on their business,” notes R. Mark The PKF-HR’s Hotel Horizons® econometric
hotels are currently enjoying could be severely Woodworth, president of PKF-HR, an affili- demand model relies on economic data from
curtailed. ate of Colliers International. “Our analysis Moody’s Analytics to project future hotel
Since the U.S. lodging industry depends on found that when oil prices increase beyond demand levels. In describing the microeconomic
10 | knowledge leader faLL 2011 knowledge-leader.Com
13. Revenue per available room (RevPAR) gains
OIL PRICE IMPACT ON observed in the beginning of 2011 will not
continue in either of Moody’s oil-price-spike
U.S. LODGING INDUSTRY scenarios. These high oil prices have the poten-
REVPAR FORECASTS tial of halting the economic recovery; given
lodging’s dependence on macroeconomic
health, the report expects declines in economic
ANNUAL CHANGE IN REVPAR
production to flow through to lodging demand.
10% In the $150 per barrel scenario, the 2 percent
8.9%
RevPAR increase in 2012 will be entirely driven
8% by a 2 percent increase in demand as average
7.1%
daily rate (ADR) levels remain flat. As inflation
6% 5.5% powers forward, ADR fails to keep up, which
5.0% 4.6%
results in real ADR declines.
4% This trend is generally seen through all
1.9% types of locations and chain scales. PKF tested
2% which location segments are more susceptible
to an increase in oil prices. Historically, oil
0% prices have had a 99 percent correlation with
2011F 2012F gas prices and, since hotels are travel des-
tinations, one could assume an increase in
March 2011 Hotel Horizons® Baseline Forecast the price of getting to the destination could
$125 Oil Price Scenario potentially decrease demand. Not surprisingly,
hotels with drive-to business, including inter-
$150 Oil Price Scenario state, suburban and resort hotels, may see the
SOURCE: PKF HOSPITALITY RESEARCH first impacts of increased oil prices. Declines
are then expected to migrate to fly-to resort
locations once other hedging strategies—
effect of oil prices, Moody’s states: forecasts in which oil prices increase to either including taking the train or reducing other
“The most visible channel through a high of $125 or $150 by the fourth quarter vacation expenditures—run out.
which higher crude oil prices affect the 2011. The baseline scenario ($98 per barrel To test this theory, PKF inserted Moody’s
U.S. economy is higher transportation for 2011) reflects Moody’s modeled funda- $150 oil price scenario into models for each
costs. An increase in crude oil prices mental price of oil ($93.53) coupled with location. The results show the average Rev-
raises the price of gasoline and diesel. a premium of approximately $5 to account PAR change for 2011-2012. The two bars for
Higher crude oil prices also raise the cost for the supply uncertainty. This baseline sce- each location represent the baseline forecast
of heating oil and propane, which are nario also assumes the Libyan conflict will be (blue) contrasted with our hypothetical $150
used by households in the Northeast and resolved over the course of the year. oil price scenario forecast (red). The location
Midwest to stay warm during the winter. According to Moody’s Analytics, a surge in segment expected to see the bulk of the dam-
When petroleum prices rise, consumers the price of oil to $150 per barrel would trig- age is resort, where RevPAR could fall from
have less money to spend on other goods ger a mild recession, which is traditionally an average increase of 12.3 percent down to
or services, save, or pay down debt. Every defined as two successive quarters of nega- 3.7 percent. These results confirm that loca-
$1 increase in the price of crude oil raises tive gross domestic product (GDP). In the tion segments exposed to leisure/destination
gasoline prices by 2.2 cents per gallon and $150-per-barrel scenario, Moody’s forecast travel demand could see the largest declines in
cost consumers about $3 billion over the of real GDP growth falls by a maximum of future growth.
course of a year.” 2.6 percent, resulting in the loss of 4.5 mil- As long as oil prices continue to stay high,
lion jobs by 2012. they remain a concern and warrant continual
Another cause for concern for the industry The econometrically-based Hotel Horizons® monitoring. While the scenarios presented
is the continued threat of political instability demand model relies primarily on changes above have a low probability of occurrence,
in oil-producing nations that could constrain in real personal income and total payroll many of the drivers will have a greater influence
supply, and increased demand from developing employment. By introducing Moody’s oil- in our models as situations abroad unfold.
nations emerging from the global recession. spike scenarios for economic growth into To download a complimentary copy of the
Concerned with the direction of oil prices these models, the next five years begin to Oil Prices and Lodging Risk report, visit www.
in April 2011, Moody’s created two economic look vastly different. pkfc.com/oilpricesandlodgingrisk. K l
knowledge-leader.Com Colliers international faLL 2011 | 11
14. working spaCe sm a rt d esig n fo r t H e Wo rK pL ace
as new York’s energy needs spiked this
summer amid one of the worst heat waves on
record, David Kuperberg, CEO of FS Energy,
knew that a good portion of that energy was
simply being wasted.
The founder and CEO of Cooper Square
Realty (a FirstService Corporation subsidiary
and the largest residential property management
company in New York City), Kuperberg says
he has documented that many of the city’s
buildings are terrible energy hogs. For the
good of the environment and the good of his
customers, he wants to make buildings more
energy-efficient.
According to the Green Building Council,
buildings in the United States are responsible for
producing 39 percent of the nation’s greenhouse
gas emissions. The average building’s energy
consumption also accounts for as much as
25 percent of a building’s annual operating
expenses.
“When you put those two figures together, it’s
clear that reducing emissions by reducing energy
consumption is the way to go,” Kuperberg says.
“As property managers, our goal is to increase
asset values for our clients. In this economy,
one of the best ways to do that is by reducing
operating expenses. By reducing consumption,
we reduce costs and greenhouse gas emissions;
that will increase asset values.”
Changing an Industry
Together with the management team at
FirstService, Kuperberg began developing a
plan to change some of his clients’ resistance to
retrofitting their properties for greater energy
David Kuperberg efficiency—which soon grew into a more
comprehensive initiative to champion the cause
of conservation in the real estate industry.
According to FirstService President and Chief
Conservation’s
Operating Officer Scott Patterson, saving
energy, cutting costs and reducing a company’s
carbon footprint was simply the right thing to
Silver Lining
do. “We saw it as a responsibility,” Patterson
says. “Through our Residential Management
division and Colliers International, we are by
far the largest manager of properties in North
America and are in a unique position to impact
energy consumption in the built environment.
fs energy is cHampioning tHe caUse of energy We needed to act on it.”
conservation and HeLping tHe reaL estate indUstry From these initial discussions was born in
evoLve in tHe process. By Jeff Bond 2008 FS Energy, a division of the property
12 | knowledge leader faLL 2011 knowledge-leader.Com
15. management leader that aims to cut building shows building owners how much they are a building’s lighting system, can pay for
emissions through retrofits, equipment paying for energy compared to similar buildings themselves in energy savings in less than one
upgrades and maintenance changes. New York next door or down the street. And he notes year. Another popular measure is to convert
City was the first city in North America to roll that the largest potential for reducing energy dirty oil-heating systems to gas. The City
out the new plan, starting with the approxi- consumption is in retrofitting buildings, most of New York is promoting the conversion
mately 450 buildings that Cooper Square often by replacing old and inefficient equipment by passing ordinances restricting certain
oversees. with newer products. types of oil-heating systems. Following FS
The immediate goal for the energy division However, the menu of energy-saving retrofits Energy’s example, city officials passed Local
is to reduce energy costs and consumption is long and includes some very simple fixes. Law 84, requiring buildings to benchmark
in its New York properties by 25 percent by So far, FS Energy has helped improve energy their energy usage and enter the results in the
2013. Such a reduction would save more than efficiency through the implementation of 26 Environmental Protection Agency’s Energy
$30 million for FirstService clients and reduce separate projects. Energy-saving measures Star database annually.
carbon emissions by up to 111,000 tons— have included everything from replacing
equivalent to taking 110 buildings offline or a building’s heating and air-conditioning Changing the Status Quo
removing nearly 22,000 cars from New York’s system to developing cheaper procurement While the initial cost of some of the retrofits
streets. and maintenance systems to upgrading is not inconsequential, FS Energy has worked
Patterson stresses that the company isn’t lighting systems. out three different options for paying for the
focused on making money from this initiative. The division’s unique combination of skills retrofits that shouldn’t cost tenants a dime
In fact, the development of the new division in procurement, negotiating contracts and and would save building owners money in the
has actually cost the company time, money retrofitting properties has saved their clients long run.
and manpower. But he believes it is the right millions of dollars in just the first few years. The first option is for a building’s ownership
direction—one that will bear fruit for the FS Energy helped New York’s famed Plaza to pay for the upgrades out-of-pocket and then
company and its customers in the future. Condominiums save more than $500,000, collect the savings. The second is for ownership
which will be realized over a two-year period. to take an unsecured loan from one of the
Developing a Database Another property, University Towers, has banks that FirstService has made an agreement
The first step toward this goal was to create a already seen cost reductions of $200,000 per with to help fund these projects. The banks
unique database of detailed information on year, and FS Energy was able to save St. James are paid back with the energy savings resulting
every building’s current and historical energy Towers more than $330,000. from the retrofits, and the building’s tenants
consumption, which can be used to identify To no one’s surprise, many buildings in New don’t pay any extra fees. Kuperberg says that
both strengths and weaknesses in a building’s York are extremely energy-inefficient, relying in many cases such loans are paid off in only
energy usage. With this database, FS Energy on old equipment or even steam from the a few years.
can accurately compare the energy usage city’s electricity generating plants to heat the The third method is only available to certain
across its entire management portfolio. So far, properties. Tenants of such buildings have no properties and requires FS Energy to actually
the division has given Energy Report Cards control over the temperature in their units. pay for the retrofit. The company would pay
which list energy usage to more than 350 of its “In many buildings in New York, the itself back with the resulting energy savings.
properties. thermostat is literally your window,” Kuperberg In this age of enlightened environmental
“We aren’t in a position to make decisions for says with a laugh. “You have to open the window awareness, FS Energy’s idea of retrofitting
the buildings’ owners,” Patterson says. “But, as to let in cooler air to adjust the temperature in properties at no cost would seem like a
the knowledge leaders in this area, we are in a your apartment. Some of the buildings are so no-brainer. However, Kuperberg says he still
position to put forth the facts to our clients and energy inefficient that energy savings projects struggles at times to talk building owners into
help them realize the potential savings.” produce investment returns over 20 percent.” making the necessary changes. Ironically, their
Kuperberg says this benchmark information In fact, some basic fixes, such as upgrading attitude is that the deal is too good to be true.
But he says attitudes continue to evolve and
>
an increasing number of property owners are
seeing the light.
Some basic fixes, such as “The most important thing people should
realize is that it pays to be energy-conscious,”
upgrading a building’s lighting system, can pay for Kuperberg says. “And I’m not talking about
just tangentially by attracting more tenants.
themselves in energy savings in less than one year. I’m talking about saving money. The bottom
line is buildings can do well financially by
doing good.” K l
knowledge-leader.Com Colliers international faLL 2011 | 13
16. bank notes co m m erci a L fin a n cin g n e Ws
Pass or Fail
governments are pUtting tHeir BanKs tHroUgH a series of stress
tests. BUt is it enoUgH to Ward off anotHer financiaL crisis?
By Kc conWay
Following the collapse of Lehman Brothers
in 2008, the United States Federal Reserve
began to put the nation’s top 19 financial
institutions through a series of economic and
credit stress tests known as the Supervisory
Capital Allocation Program (SCAP). These
tests are an effort to create a firewall against an
advancing financial crisis.
As the commercial real estate (CRE) risk spe-
cialty officer to the New York Federal Reserve
at the time, I was engaged in these tests and,
more recently, have been teaching CRE stress
testing to bank examiners in advance of what
will become an annual event for both U.S.
and European banks. I believe stress tests will
become the modern-day symbol that a finan-
cial institution is well-capitalized—much like
the FDIC insurance logo did after the Great
Depression. Without a passing grade, a bank
will likely find it difficult to attract capital for
expansion, and its lending activities will be
constrained.
In December of last year, U.S. banks submit-
ted their “capital plans” which updated the
results of the original 2009 SCAP. All but one testing exercise of 91 banks in 20 countries. And Australia had one bank miss the 5 per-
of the original 19 institutions—Bank of Amer- in the past six months, both the U.S. and Europe cent core Tier 1 capital ratio.
ica—was deemed well-capitalized and cleared have put banks through a second round of stress
to increase its dividends. As a result, the largest tests. In Europe, the latest tests revealed: Europe is considering a TARP-like program
U.S. banks have been drawing down their loan that would inject as much as one trillion Euros
loss reserves into earnings to pay higher divi- • A total of eight banks failed or fell below to insure deposits in all EU banks except those
dends. It has been an egregious draining of the the capital threshold of 5 percent, with in Greece, Portugal and Ireland. The intention
TARP money out of the banks while the hous- an overall shortfall of $2.5 billion (EUR) is to create a firewall to contain the spread of
ing and mortgage crises have worsened. It’s hard or $3.5 billion (USD). the sovereign debt crisis—much like the U.S.
to understand how the December 2010 updated • As many as 16 more European banks will did with TARP—making the bailout palatable
U.S. bank stress tests could justify such a need to bolster capital after their core to Germany, which has opposed any more sup-
release of the allowance for lease and loan losses Tier 1 ratio dropped below 6 percent— port for Greece.
(ALLL), calling into question the integrity of or just above the assessment’s 5 percent Stress tests assess the impact of movements
these subsequent stress tests. pass-mark. in relevant economic variables (gross domes-
In the spring of 2010, Europe embarked on a • The failing banks were located predomi- tic product, unemployment, home prices, etc.)
much broader and more comprehensive stress- nantly in Spain (five) and Greece (two). on the liquidity and credit quality of a bank’s
14 | knowledge leader faLL 2011 knowledge-leader.Com
17. >
part of a bank’s risk management practices, not
Stress tests assess the impact of a regulatory mandate. And the process needn’t
be complicated or expensive.
movements in relevant economic variables on Stress testing starts with an assessment of the
the liquidity and credit quality of a bank’s assets. availability, accessibility and accuracy of infor-
mation. It then involves identification of the
resources within the bank that have the skill
and independence to assemble and analyze the
assets. And, in turn, the impact on a bank’s cap- A majority of U.S. banks still struggle to roll information to make a forward-looking judg-
ital position can be measured to determine if it up loans within lines of business and across ment about the adequacy of a bank’s capital
holds sufficient capital to weather a storm. This geographies to then stress them to sensitivity to withstand market volatility. The key to the
process relies on one huge assumption: that the analysis. During the 2009 SCAP, it was an whole process is familiarity with what infor-
banks are able to provide sufficient line-of-busi- arduous process to collect line-of-business and mation is available, how it is accessible, and if
ness and loan-level detail to subject the bank’s loan-level information from banks in order to it is timely and independent.
assets to sensitivity analysis. conduct a consistent stress test. The process can be as simple as identifying
The objective of the stress tests is threefold: It is a common misconception that the regula- the 20 largest loans in the bank that account
tory community knows all that is going on in for 100 percent of the bank’s Tier 1 capital and
• Psychological: Stress tests were created a bank because of its routine onsite exams; or subjecting only those loans to a series of sensi-
primarily to calm the markets and con- that the banks provide granular data on their tivity analyses. Or it can be as easy as requiring
vince the public that more Lehman-type loans and operations through what are known a sensitivity analysis at the end of an externally
failures or 1933-style banking crises as “call reports.” In my opinion, the regulatory prepared appraisal of the two or three most
were not looming. community did an atrocious job of monitoring influential variables in an asset’s valuation,
• equalizing: Prior to the SCAP, the the banks in the decade leading up to this finan- and then electronically capturing them into
U.S. and European banks had never cial crisis. They allowed CRE concentrations, the ALLL forecast process.
been analyzed across a myriad of met- for example, to explode without appropriate Stress testing should be mostly about com-
rics simultaneously under a uniform set enhancements to risk management practices or mon sense and prudent banking practices, but
of economic scenarios. The stress tests additions to capital. And they failed to assess it has become cover for the regulatory regime
were designed to correct this regulatory bank’s IT systems to ensure banks were capable to diffuse their failings in the decade leading
failing. of conducting line-of-business and loan-level up to the financial crisis, and justification for
• Corrective: Stress tests were designed sensitivity analysis on an electronic, rather than paralyzing regulation.
to identify how much capital a large manual, platform. The objectives of the stress tests have been
financial institution might need if the As a result of this regulatory failing, and the mostly psychological to date, in an effort to
U.S. or Europe remained in a recession data deficiencies highlighted in the original calm the market. However, they are moving in
over a protracted period of time, as well SCAP, an interagency data collection effort a direction that will become more substantive
as how much capital would be needed was initiated in 2010 to assess banks’ capabili- as line-of-business and loan-level data collec-
to create a firewall to halt an advancing ties for providing more detailed and consistent tion from the banks improves and becomes
financial crisis. loan-level information for future stress tests. It more automated.
was an eye-opening experience for the Board All we need now is a logo to display in bank
From a macro-level perspective, stress tests of Governors and heads of the OCC and FDIC windows adjacent to “FDIC Insured” that
have succeeded in meeting these objectives. to realize how little information the bank “call says, “Stress Tested with a Well-Capitalized
The market has rebounded, and banks have reports” provide—and how much a manual Rating.” K l
not closed or failed at anywhere near the pace process it still is for banks to capture basic
between 1930 and 1933 or the savings and information needed to calculate a probability Executive managing
loans crisis of the late 1980s. of default (PD) and loss given default (LGD). director of real estate
The question is, however, do we have fewer The absence of sensitivity analysis conducted analytics, prior to
bank failures today because of stress testing, or by banks at loan origination, and subsequently joining Colliers Inter-
are the stress tests masking the true underlying during the life of the loan, is shockingly poor. national, KC Conway
problems in our banking system? The answer Today, as I teach CRE stress testing to bank was the commercial
lies in a deeper understanding of what is going examiners and bankers, I remind them that real estate risk spe-
on behind the scenes in the banks and with the stress testing is really all about determining the cialty officer for the
regulatory process. adequacy of bank capital. It should be a systemic Federal Reserve.
knowledge-leader.Com Colliers international faLL 2011 | 15
18. London London’s skyLine
Bridge
is changing
dramaticaLLy
thanks to a tower
of gLass known
is
as the Shard.
By ruth BLoomfieLd
going
16 | knowledge leader faLL 2011 knowledge-leader.Com
21. the shard has been
described as a “vertical
city” because of its unique
mix of offices, homes,
hotel, spa and shops.
he said. “But it was more of an industrial area,
like much of the Thames at that time.”
That reputation has changed significantly,
and South Bank is now regarded as one of the Mark Mcalister, head of City
cultural hearts of London. Agency for Colliers International in
The Tate Modern, housed in a former power London, likens the launch of Lon-
station, is now probably the United Kingdom’s don Bridge Quarter to another
leading contemporary art gallery, attracting “new” business quarter, Canary
millions of visitors each year. In fact, it has Wharf—now approaching its twen-
become so popular that it is currently in the tieth anniversary.
throes of a major extension which will see an Like London Bridge Quarter,
extraordinary pyramid-shaped annex by the Canary Wharf is a magnet for inter-
architect Zaha Hadid built beside it. national business, and originally
The Menier Chocolate Factory is becoming one had as its centerpiece a landmark
of London’s leading “Off Broadway” theaters; tower: One Canada Square.
and Borough Market, once a dirty warren of The Shard dwarfs the 770-foot
wholesale stalls, is now an absolute treat for One Canada Square, but McAlis-
gastronomes, stuffed with charming cafes and ter believes London Bridge Quarter
stalls full of artisanal produce which can be has something more important over
bought direct from the farmland of England. Canary Wharf: location. LBQ is
And if this were not enough to tempt occupiers much closer to both the City and the
from traditional office locations in the West End West End and is already blessed with a great infrastructure.
and the City, once The Shard and The Place are In fact, even without a landmark building, the South Bank is now exerting a pull on major
complete, Sellar has his eyes firmly set on adding companies. “The tenants already benefiting from the South Bank renaissance include
to the nascent London Bridge Quarter. Time Warner, Shell and PWC. So The Place and The Shard represent the final piece in
“We have other properties here and we will the puzzle,” notes McAlister. “All major corporations will consider these buildings, and
extend London Bridge in ways which will with total occupancy costs much lower than the City and West End, such relocations will
complement what we have already done,” be good value. For Canary Wharf tenants they can save themselves the extra commute,
he says. “It is the nucleus of a new district of conservatively estimated at 30 minutes a day.”
London.” K l
knowledge-leader.Com Colliers international faLL 2011 | 19
22. ontario’s perimeter Development
is transforming the urban
landscape of suburban
communities with projects like
Breithaupt Block in Kitchener,
shown before (opposite page) and
after, as a computer-generated
rendering (this page).
Out with the
New, IN
with the Old.
In OntarIO,
develOpers
are revItalIzIng
OutlyIng
cOmmunItIes
by renOvatIng
hIstOrIc buIldIngs
and revIvIng
neIghbOrhOOds.
by sarah eadIe and
cheryl reId-sImOns
20 | knowledge leader faLL 2011 knowledge-leader.Com