CLIENT: THE PHILADELPHIA STOCK EXCHANGE ACTIVITIES: TENANT REPRESENTATION PURCHASE LEASE AUDITING DATA CENTER CONSTRUCTION Printable View

Project I

2000 Market Street
34,000 square feet

The PHLX was running out of space at 1900 Market Street (the Stock Exchange Building). For strategic reasons, it wanted its expansion in another building. At the time, the rental rates being offered at 2000 Market Street were very favorable. The difficulty was that 2000 Market Street was being prepared for sale and the asset managers were cutting corners to improve net operating income after the lease transaction was negotiated, but before the lease was finalized. We prevailed, but it was a more difficult process. The actual build out was also very difficult technically because of the data cabling necessary to connect the new group to the headquarters at 1900 Market Street. Meetings with the contractor, the building’s asset manager, the architect and the consulting engineers along with all of the PHLX’ technical support personnel were held weekly. We were responsible, as the tenant’s representative, for the coordination of the construction billing and the necessary base building changes with the Landlord’s lease obligations. This included building a seven hundred square foot vault on the 8th floor.

Additional cooling was needed since the PHLX needed seven day twenty-four hour HVAC the building only had an outdated constant air system. We worked with the engineers to design and add 22.5 tons of cooling through a closed-loop supplemental heat pump system with 24-hour tenant controls.

Project II

1900 Market Street
90,000 square feet
Renegotiated and extended Lease

When we were hired, the PHLX needed expansion space and wanted to renegotiate the base lease in its existing facility to lock in favorable long term rates. There was less than one year left on the existing lease and the cost to relocate the Stock Exchange Trading Floor would have been more that $22 million. The timing also was not sufficient to accomplish a move. We recommended exercising the five year renewal option and led the effort to renegotiate the lease terms.

In the course of outlining the strategic goals for the PHLX, we reviewed the existing lease billing. With our knowledge of property management, we found significant errors in prior years' rent billings, in each case in the landlord’s favor. This provided substantial help in our negotiations to achieve a market-based lease extension. We later found one of the other anchor tenants in the building with five years remaining renegotiated its lease at the same time and although it was larger than the PHLX, it did not achieve comparable economics in its negotiations.

Once the full lease was totally renegotiated, approximately fifty percent of the space was rebuilt with new tenant improvement funds, with our acting as construction administrator for PHLX. Our understanding of the building’s HVAC system was extremely helpful in the negotiations. Most other tenants paid for a partial retrofit of their existing heat pumps, but we were aware of the issue and these costs were not transferred to the PHLX.

Project III

2000 Market Street
Sublease or Renegotiate
26,000 square feet

The PHLX sold a portion of the group that it had moved to 2000 Market Street less than a year after negotiating the lease, so we negotiated a buyout with the new landlord.

Project IV

1900 Market Street
Purchase Alternative

The PHLX had an option in its lease to negotiate for the purchase of the building in the event of a sale. 1900 Market Street is a 457,000 square foot class “A” multi-tenant office building near the center of the CBD. We partnered with a local firm to make a bid on behalf of the PHLX for the building, and while not successful, we did succeed in protecting the PHLX’s interests in the transition.

Project V

1900 Market Street
and 2000 Market Street
Tenant Asset Management Services

We acted as the PHLX’s internal/external real estate department. We supported their internal group to accomplish each aspect of their goals and objectives. We reviewed all invoices and billings and were their lease auditing firm. We were constantly amazed at how many mistakes are made when a complicated lease is not fully followed by the management firm for the building.

Project VI

1900 Market Street
Facilities Strategy
Lease Renegotiation
Disaster Recovery

Introduction

Philadelphia Stock Exchange (PHLX) had leased 112,943 square feet of office space and storage space at 1900 Market Street and 2000 Market Street, Philadelphia, housing an office occupancy of approximately 391 people. The primary lease at 1900 Market Street and the lease at 2000 Market Street expired in two years from the beginning of our planning period.

At the same time, the SEC was concerned about a terrorist threat to the Nation’s stock exchanges. It appeared likely that a new SEC rule would require all exchanges to construct a backup or duplicate data center and trading floor and maintain it as a “hot site”, one capable of being implemented on very short notice. To take this possibility into account, along with the pending termination of the two primary leases, PHLX retained REIS to assist in its evaluation.

The Process

Starting in January 2003, REIS and PHLX proceeded as follows:

• Developed a full facilities strategy based on planning assumptions set between REIS, PHLX senior management and its Board.
• Retained a consulting engineering firm to prepare Outline Specifications for the engineering requirements and estimated costs for a duplicate data center, trading floor and office space.
• Retained a space planning firm to develop the parameters for all three components, office, trading floor and data center.
• Time lines were established for moving the entire operation by the lease expiration date.
• REIS developed the financial parameters of a “base case” to measure other opportunities.
• REIS then conducted a search of the three strategic locations set forth in the planning assumptions, Philadelphia CBD, the 30th Street area, and the Camden, New Jersey waterfront, for buildings or sites that would match the strategy and the engineering and space planning requirements. Additional sites were added during the search period as they became available, with some twenty-five sites investigated in all (including specific sites for data center only).
• All viable buildings and sites within the areas set forth in the planning assumptions were toured with representatives of REIS and PHLX while renewal discussions were opened with the owners of 1900 Market Street. Only undeveloped sites owned by established developers were considered.
• PHLX and REIS opened discussions at the City and State level regarding public assistance. REIS and PHLX focused on Keystone Opportunity Improvement Zones (KOIZ) which abated certain State and local taxes through 2018.
• PHLX’s accounting firm was retained to estimate the value to PHLX of relocating the entire operation or just the data center to a KOIZ. More than half of the value of a KOIZ move could be realized with just the data center move.
• REIS and PHLX developed a request for proposal (RFP) for a lease, including optimal flexibility for expansions, contractions and early terminations.
• A short list of buildings and sites was developed and customized RFPs were sent to each. Some were for the combined operation, some for just the office and trading floor areas and some were for the data center only.
• Buildings with viable responses were further evaluated by the engineering and architectural firms and cost estimates for tenant improvements were developed using either the developer’s contractor or one selected by PHLX with REIS help.
• More detailed cost estimates for moving the data center and separately moving the trading floor were verified using a specialized computer consulting firm, in conjunction with IBM.
• Consideration was given to all financial structures including:
  • Lease;
  • Joint Venture;
  • Purchase; and
  • Cash flow participation.
• The stay-put option at 1900 Market Street received a great deal of special attention, including:
  • A satisfactory resolution of outstanding disputes regarding past lease billing practices with a negotiated settlement worth more than $300,000 to PHLX;
  • A detailed engineering evaluation of base building upgrades necessary to allow PHLX to remain;
  • Expansion options were developed based on strategic planning assumptions, including replacement space for the two subleases within the building and at 2000 Market Street;
  • Commitments from ownership to keep an open dialogue on the future management of the building; and
  • Electric meters measuring both demand and consumption were installed at the 1900 Market Street data center, resulting in significant savings to PHLX.
• Proposals from all viable buildings were reviewed by REIS, including:
  • Refining and defining proposals fully so that all issues addressed in the RFPs were considered;
  • Confirming building data and evaluating the engineering and space planning analyses of each;
  • Preparing present value and cash flow analyses of each and comparing these to the base case (a pro forma analysis prepared by REIS based on an assumed extension of the current lease for 15 years at current terms);
  • A real estate evaluation of each, including location, quality of ownership and management; and
  • In the case of 1900 Market Street, a full draft of a lease amendment was prepared using outside counsel in order to precisely define the duties, obligations and rights of each party to a lease extension.

Next Steps

After Board approval, REIS took the following steps:

• Select 1900 Market Street as the “stay put” alternative;
• Duplicate the Data Center at a newly constructed building at the Navy Yard capable of accommodating the data center, a hot site for an emergency relocation of the trading floor, necessary office space primarily for programmers and the ability to construct a 50% addition to the building on short notice. This was very valuable to PHLX particularly because of the KOIZ zone projected benefits.

Project VII

Purchase Alternatives

The new lease at 1900 Market Street was negotiated to include a purchase option in favor of PHLX, which was exercised by PHLX with our help. REIS then sold the right to purchase by marketing the building to the investor market. PHLX was so pleased with our work that we received major appreciation in one of the PHLX board meetings.

Project VIII

New Data Center

Based on the parameters developed above, REIS proceeded to finalize a lease with Liberty Property Trust at its Navy Yard location. This involved designing a site that while located near the Delaware River was above the 500 year flood plane, bringing in the required fiber optic cables from two different central office locations, including one in New Jersey, bringing in duplicate electrical service and duplicate water supply. REIS worked with Liberty Property to select the base building architect and the general contractor and then attended all job meetings with frequent tours of the site.

Construction took 18 months and was extremely demanding. The cost of construction alone, without the fit-out, approached $300 per square foot. It was completed on time and on budget.