Friday, February 3, 2012

Millennium, Filene’s and the Skeletons in the Closet

Millennium, Filene’s and the Skeletons in the Closet

Let me begin with a quote from the New York Time in which Tony Pangaro, Boston Principal for Millennium Partners, discusses Hayward Place in Boston. Please note the date: “‘We think we can build this summer after two years when we couldn’t,’ said Anthony Pangaro, a principal of Millennium Partners-Boston, which has previously developed luxury condominiums downtown. This month Millennium’s $200 million Hayward Place project in the theater district sought city approval to convert from 200 condominiums to 265 units, mostly rentals.” (NY Times, February, 2011).

Well, obviously that didn’t happen, given that the official groundbreaking was November 15, 2011. Yes, the mayor had his shovel out. Of course, he also misled the public in June 2011 by announcing that construction would begin in 2 weeks.

Yesterday, referring to the Filene’s site and Vornado, Vornado announced it “has reached a deal to team up with a local developer to jump start the stalled project.” (Boston Business Journal, 2/2/2012.) First of all, Millennium is not a local developer. They began in NYC, have most of their holdings there, and are headquartered there. Their website opens with a camera scanning the New York skyline. The only thing missing is a Giants logo.

Millennium did not buy the Filene’s site. They have an undefined “deal” with Steve Roth. The problem is that there has been no movement in the condition of the intended market for the site for which Vornado overpaid to the tune of $100 million. The rent the target market of users for space within a 1.2 million square foot tower are willing to pay is not high enough to generate a sufficient return on Roth’s investment.

The rough cost of developing the property (land cost + construction costs) will be roughly $500 million, according to Millennium. On a per square foot basis, the development cost would be roughly $420.00. Developers demand high rates of return for new construction because of the high risk involved. Let’s use 20% as a desired return. Let’s take the case of a potential office user. In order to meet any developer’s acceptable rate of return, an office user would have to pay roughly $110 per square foot in rent (20% of $420 + $25.00 in tax and operating expenses.) The average market rent in Boston for Class A space today is $50.00. The highest priced space is $70.00. The latter are in premier office towers in premier locations—111 Huntington Avenue, International Place, the Hancock Tower, 75 State Street—not in the middle of Downtown Crossing. Of course, the project has other components—retail and residential—but the market is still not at an acceptable rate of return. Perhaps I am underestimating the residential component but full plans have not been presented. And achievable residential sale prices do not currently fit what the cost structure seems to be at Filene’s.

Millennium cannot change the market. They bring Boston expertise to the project, but there is an awfully big skeleton in their closet and it is only 2 blocks away.

The Mayor has spent about 2 years blasting Vornado after, with full permits in hand, they legally demolished a significant part of the former Filene’s, the first step of construction and not inexpensive. When rents in the market dropped and sources of financing dried up during the recession, Vornado put the project on hold. Menino has been enraged ever since.

Let’s look at the Filene’s timeline.

1. November 2007: City grants full permit to Vornado for demolition and construction of 1 million square foot mixed use project.

2. Summer 2008 to November 2008: Demolition completed.

3. November 2008 to present: No further construction.

4. February 2012: Announce “deal” with Millennium.

Now let’s get to the skeleton in Millennium’s closet. It’s called Hayward Place. It’s been and still is a shabby parking lot on lower Washington Street facing the Paramount Theater and the Millennium-built Ritz-Carlton Hotel and Towers. The city owned the property and put it out to bid for residential development in in April 2001.

By July 2001, eight developers had submitted proposals. The bids included, as required, both project designs and price offers. All but Millennium proposed housing, in combination with other uses such as school, retail, and office. The high bidder, at $23 million, was Lincoln Property Co, in a joint venture with Equity Residential Company. Millennium bid $20.5 million. The high bidder was not awarded the site for development.

And then the “irregularities” occurred. For reasons never explained, rather than selling to the highest bidder meeting the original requirements, the BRA invited the other short-listed developers, including Millennium, to match Lincoln’s high bid. They then awarded the designation to Millennium as the developer for Hayward Place. The BRA’s reasoning for blatantly changing the requirements of the bidding process to make sure Millennium got the project were feeble. In its summary of the “bidding”, the BRA stated that the choice of office rather than housing use was explained as due to an oversupply of housing in the area. The BRA also stated that it chose this proposal for the “vitality” to be created by an office building. And, then, just for the heck of it, in June 2003, the city allowed Millennium to lease rather than purchase the land, an opportunity not granted in the original bidding or subsequent bidding.

What really happened? Lincoln Properties and Equity Residential, a combined entity with far more capital and experience than Millennium, outbid Millennium. This disappointed the Mayor. So the BRA changed the selection criteria to favor office and gave the designation to Millennium. And, after all these years, what is Millennium building on the site? You guessed right—residential. That’s the same Millennium that’s part of the new Filene’s team.

The Hayward deal was manipulated and everyone in the market knew it. As bad as that is, let’s look at the Hayward timeline and compare it to the Vornado timeline.

January 2001: Millennium designated to develop project.

November 2011: Millennium holds groundbreaking.

From 2003 to present: Millennium collects substantial parking revenue, effectively making their holding cost zero.

So let’s see. Vornado buys the Filene’s site in a private transaction for $100 million. Millennium buys the Hayward site from the city by way of a politically manipulated bidding process for $23 million.

Vornado receives development approval in November 2007, begins and finishes demolition work in November 2008, and puts further construction on hold. Time between last activity on site and today: 3 years, 2 months.

Millennium receives development approval on January 2003 and does nothing until it holds a groundbreaking on November 15, 2011. Time between last activity on site and next action: 13 years, 11 months.

The Mayor has never uttered a peep about Millennium’s failure to move forward on its eyesore. Millennium’s reasons, when given, for not moving forward match those of Vornado, namely that market pricing is not high enough to justify development and financing is not available. The Mayor never vilifies the principals of Millennium as he does with Vornado. The Mayor doesn’t call the Mayor of New York to urge him to make Millennium to build, as he did in a plea to have Vornado build.

And now, we have a team. Millennium sat on a project in the neighborhood for nearly 14 years and received no criticism. Vornado did the same for 3 years and he has been held up as the real estate devil incarnate.

I want to see development at both the Filene’s site and at Hayward Place. I don’t see how adding Millennium to the team assures this given its own hole in the ground. I hope they prove me wrong.

Wednesday, February 1, 2012

Help, I’m Sinking in a Think Tank and I Can’t Get Out

Help, I’m Sinking in a Think Tank and I Can’t Get Out

Today, the Beacon Hill Institute issued a report entitled “Massachusetts Real Estate Licensing Requirements Benefit Agents Not Consumers.” The Boston Business Journal and Banker & Tradesman ran the article as their lead columns on line.

The research article was written by Benjamin Powell, Ph.D., an Associate Professor of Economics at Suffolk University and a Senior Economist with the Beacon Hill Institute, and Evgeny Vorotnikov, Ph.D., a Post‐Doc Research Fellow at the University of Minnesota and Tuerck Foundation

In short, the writers argue that requiring brokers to take 12 hours of continuing education courses every 2 years at a cost of $100 is a) driving brokers out of the industry; b) increasing the average incomes of those remaining; and c) having no impact on claims filed against brokers at the Mass. Division of Licensure.

They have fallen victim to the trap of coincidence and effect. This fallacy was recognized in Ancient Greece and simply states that correlation does not imply causation. The opposite belief, correlation proves causation, is logical fallacy by which two events that occur together are claimed to have a cause-and-effect relationship. The fallacy is also known as cum hoc ergo propter hoc (Latin for "with this, therefore because of this") The writers even state in their report that “the cost, in terms of both time and money, of twelve hours of continuing education is unlikely to cause many full‐time realtors to exit the industry or to deter others from entering.” Not a single broker was interviewed in the article.

The requirement to take classes does not “cause” anything. The balance of their research is a measurement of coincidence, not causation. The writers use the legislation passage as the independent variable, even though they fail to establish cause, and use multivariate regression analysis to state that the legislation requiring continuing education was statistically significant in accounting a) fewer brokers, b) lower incomes, and c) lack of change in complaints against brokers. I could further critique their work for the paucity of additional dependent variables that should have been added to the list tested. But there really is not point when we are speaking coincidence, not correlation.

What is also amazing is that, at no point do the writers actually discuss the nature of the classes, and I would be willing to bet they attended none and have no knowledge of them. I have sat through 6 sessions to date. The purpose is education. There are six modules, each covering a different topic which enhances a broker’s skill sets and, above all, informs brokers of new rules and regulations affecting the profession, such as disposal of toxic waste; lender-broker relationships; and rules on the use of multiple listing services. The authors are trying to argue that obligating brokers to pay $100.00 every 2 years to bring themselves up to date should be abolished because it is too much of a burden for part time brokers. Would the writers like it to hear their doctors tell them they had not attended any industry events or training programs since receiving licenses to practice? How about their attorney? How about the pilot flying their plane?

The writers ran their statistical tests, the results of which emblazoned the papers. And yet they failed to establish any reasonable case for cause and effect. We all want to believe. That’s why we have rain dances and rub our rabbit’s feet. But, if the event occurs after we have danced or rubbed, it is a coincidence, nothing more.

The simple fact is that the requirement to take a licensing course every 2 years has no effect on the number of brokers, the income of brokers, and the number of complaints. Let me tell you what does have an effect on these three measurable facts.

1. Numbers of brokers: The number of brokers has been shrinking continuously and will continue to do so due to:

a. Real estate technology used not only in residential online “shopping” but as a single source of information for the massive commercial real estate brokerage industry. It is both a source of information and as a tool for market and financial analytics. The individual broker simply has more tools at hand which has led to a massive layoff of brokers. That has reduced the number of real estate brokers more profoundly than any other influence, and it will continue to do so. Think of Wall Street 30 years ago and today.

b. Brokerage industry consolidation has eliminated overlapping brokerages within geographic areas, decreasing the number of brokers necessary to cover a given area. The consolidation has also allowed brokers to draw on central office sophistication to further improve general skills or to develop necessary transaction documentation, allowing a standardized approach to the business, which again allows fewer brokers to do the work of one.

2. Broker Income:

a. The income of brokers has increased because there are fewer brokers for the reason state above, not because of the burden of licensing.

3. Complaints and Litigation:

a. The fact that the number of complaints has not materially changed is, once again, an instance of not understanding where the nature of complaints play out. Any broker knows that it is not at the Licensing Division. Most complaints against brokers fall under Chapter 93A of the consumer protection acts of Massachusetts through the Attorney General’s office. But there is a distinction between the complaints against a broker’s action and the actions of an incompetent broker. I would recommend the broker check the AG’s office for a true sample of complaints. I would suggest the writer’s might list as a “dummy” variable the number of houses in foreclosure and the statistical significance of the number of broker complaints.

b. What the writers fail to grasp is that the argument to end licensing requirements would lead to the real legal battles in real estate which involve contract law and, typically, the disagreement between the parties over the obligations of each party in the contract. Since brokers are the first step toward a contract, I think I would prefer a more-educated, licensed lawyer, with knowledge of changes in real estate law and regulation involved in a transaction. Of course, that would cost $100.00 every 2 years.