7 Ways to Manage Vacant Building Risks

Recessionary pressures are in full force again, and another wave of layoffs does not bode well for the commercial real estate market. Vacancies in office buildings and warehouses rise as businesses close their doors, and property management companies have a lot on their plate as they simply try to maintain non-producing properties. A recent example of the risks clarifies the issue.

A Missed Sale in a Sluggish Economy

An office building in Texas that had been empty since the precipitating events of the recession had an asking price of $1.1 million in 2011. After a long period of dormancy, a local prospective buyer came knocking, stating he was interested in obtaining the property by January 2012 for a move-in of his growing business.

After some negotiation, a price of $850,000 was settled upon. The prospective buyer secured a banker and began a budget bidding process with general contractors. The more contractors who were invited to participate, the greater the variance was in the construction costs. The banker and the prospective buyer collaborated and offered the management company a much lesser sum of money. The owner’s price was lowered to $650,000 because of the added construction costs. So, what was the problem?

Vandals had removed all the copper from the large HVAC units on the roof, requiring an unanticipated, six-figure sum of money. Additionally, there were 350 fluorescent light fixtures that had been destroyed and the electrical service panels in the building had been scavenged for copper. Broken glass was scattered throughout the building and the restrooms were caked with mold. The more the potential buyer looked into costs of construction, the less attractive the 40% reduction in the asking price became. The seller not only lost the sale, he also suffered the continuous financial drain on his investment property. It has become a money pit.

Mitigating Losses With Tighter Security

What could have limited the exposure of this property to vandalism and the severity of the loss? With the exception of the mold, most of the nonredeemable casualties of the building could have been prevented by a security system which included intrusion detection, monitoring, and video surveillance. Not only do these systems offer a forensic record, they also offer a beneficial deterrent factor.

An investment of no more than $25,000, possibly much less, could have saved the property management company an easy $300,000 in losses. Additionally, the negative drain on the future value of this latent money could easily grow to a loss of $1 million dollars or more. The property might sit for another four years without a suitor.

Seven Security Components to Manage Risk

Security considerations should include the following:

  1. Perimeter electronic detection of rooftops and outbuildings containing the mechanical equipment
  2. Interior motion detection systems
  3. Glass break monitoring devices
  4. Prominent video surveillance cameras
  5. 24/7 monitoring services to interface with local law enforcement authorities and building owners
  6. Controlled lighting (interior and exterior) monitored by a nighttime security company
  7. Quarterly fire alarm inspections

This is not an exhaustive list. Property owners will have to decide what makes the most sense in terms of risk management. The cost of doing nothing, or too little, however, can be devastating.

Systemic Risk Management

On the three-year anniversary of the Lehman Brothers bankruptcy — and with it, the beginning of the financial crisis that threatened a run on at least a dozen major global banks — a rogue trader was discovered to have defrauded his employer, the Swiss bank UBS, of nearly $2 billion.

What’s $2 billion between former friends, you might ask?


$2 billion isn’t going to bring down a bank of UBS’ size. $2 billion isn’t going to ignite another downward spiral of credit payments coming due. $2 billion isn’t going to hurt that badly, even if UBS is now reporting that the incident may cause it to go into the red for the third quarter.

So more than anything, what this undetected fraud highlights is just how poor the risk management still may be at one of the world’s biggest banks. And coincidentally — or perhaps not so much so — the head of risk for UBS was formerly the head of risk for Lehman.

“It’s astonishing given the technology, the systems, the emphasis on risk. UBS has been focusing on it, post-crisis they’ve put more focus on it than a lot of other banks,” the industry source said.

“I’m surprised that this many years after [previous rogue trader] Nick Leeson there are still the Jerome Kerviels of the world and now this one. How does a 31-year-old rack up a $2 billion loss without anybody noticing?”

Others said the crisis showed lax supervision at UBS and threw the spotlight on an industry that will always compel some staff to take excessive risks to keep ahead of rivals.

“No rogue trader works in a vacuum, and UBS’s management must have taken its eye off the ball to allow a trader to operate on this scale without sufficient supervision and without the systems to monitor his trades,” said Simon Morris, a partner at UK law firm CMS Cameron McKenna.

Worse still is the fact that UBS is unlikely to be the one isolated financial firm that has dragged its feet in implementing better protocols to avoid, or at least discover, threats. No, many of its peers are likely also not yet as far along as they should be — three years later.

Fortunately, some of the laws mandated by the Dodd-Frank financial sector reform act are starting to kick in. It remains to be seen if these new rules will help, but one of them mandates companies to create a plan that will help officials (namely, the FDIC) unwind and deconstruct complex transactions in the event they go belly up.

Submitting these plans, which have been called “corporate living wills,” is essentially giving the government “Tell Me How You Will Fail” blue prints.

The New York Times blog Deal Book breaks down the concept.

The basic idea is simple: big financial companies have to submit plans that explain how they would structure a future bankruptcy case or orderly liquidation authority proceeding if they were failing. The plans have to be written for two scenarios: one in which a financial institution alone fails, and one in which it fails as part of a broader crisis. In addition, financial institutions would have to disclosure their exposure to other significant financial companies.

The wrinkles start to develop when you see that the rules provide that the plans have to be made with an assumption of no governmental funding. That makes sense given how Congress has restricted the Federal Reserve’s §343 powers as lender of last resort, but it is not very appealing, especially for the systemic crisis scenario.

If not the government, precisely who is going to provide funding when the bankers are in severe trouble? And how precisely do you pay for a bankruptcy case — even a Chapter 7 liquidation case — with no funding? It probably involves the equivalent of leaving a failing bank in a vacant lot in Newark.

As Deal Book blogger Stephen Lubben notes, the schedule of this whole exercise means that finalized plans may not be on file with the FDIC until 2014. That, as well as more fundamental issues some have raised, make this an imperfect method to manage systemic risk in the financial system.

But considering that the government was making no attempt to manage systemic risk in any systematically way prior to the crisis, this can at least be considered progress.

As for whether or not it is a solution to the next global financial crisis that threatens to drag the world into a replay of the Great Depression, hopefully we will never have to find out.

Inefficient Health Care Bureaucracy Costs Physicians $27 Billion Per Year

Everyone knows that the U.S. health care system is inefficient. This hurts both the nation and the employers that offer coverage to their workers. But a new study by researchers at Cornell University and the University of Toronto claims that the average U.S. physician pays $61,000 more in administrative costs per year than their Canadian counterparts.

In sum, this adds up to a $27 billion overage each year.

The U.S. health insurance bureaucracy costs doctors some $27 billion extra per year compared with Canada’s single-payer system, researchers found.

The study, published in the journal Health Affairs, found per-physician costs in the United States averaged $82,975 annually, while physicians in Ontario averaged $22,205 — primarily because Canada’s single-payer healthcare system is simpler.

The researchers also found that nurses and physicians staff spend nearly 21 hours per week on administrative duties. Those in Canada spend just 2.5 hours.

The systems, population and health factors of each nation are, of course, not identical. But these are staggering numbers — particularly on top of yesterday’s news that family health care coverage has eclipsed $15,000 per year for the first time.

The New York Times explains this in the “Survey of Employer-Sponsored Health Benefits, 1999-2011,” a joint study conducted by the Henry J. Kaiser Family Foundation and Health Research & Educational Trust.

A new study by the Kaiser Family Foundation, a nonprofit research group that tracks employer-sponsored health insurance on a yearly basis, shows that the average annual premium for family coverage through an employer reached $15,073 in 2011, an increase of 9 percent over the previous year.

“The open question is whether that’s a one-time spike or the start of a period of higher increases,” said Drew Altman, the chief executive of the Kaiser foundation.

The steep increase in rates is particularly unwelcome at a time when the economy is still sputtering and unemployment continues to hover at about 9 percent. Many businesses cite the high cost of coverage as a factor in their decision not to hire, and health insurance has become increasingly unaffordable for more Americans. Over all, the cost of family coverage has about doubled since 2001, when premiums averaged $7,061, compared with a 34 percent gain in wages over the same period.

Here is a link to the full study.

The Passenger Bus Safety Inspection Strike Force

Back in May we ran the very cleverly named article “Next Stop: Better Bus Safety.” (Nice work, Emily.) It addressed the concern that many of the new, discount bus companies sending dozens of buses up and down the Eastern Corridor every day were experiencing fatal accidents. Around that time, lawmakers started to take notice.

Two accidents, which killed 17 people combined, involved buses bound for New York, so Mayor Michael Bloomberg put the Manhattan Traffic Task Force on the case. And New York Senators Chuck Schumer (D) and Kirsten Gillibrand (D) co-sponsored a bill that would introduce the Motorcoach Enhanced Safety Act, legislation that would require buses to have safety belts, anti-ejection windows, tougher roofs that can withstand rollovers and increased fire resistance.

To further promote safety, the Department of Transportation last week hosted its National Motorcoach Safety Summit, during which stakeholders gathered to discuss ways to protect passengers and announce a new wave of surprise inspections.

At the summit, [Federal Motor Carrier Safety Administration] Administrator Anne Ferro announced an upcoming two-week sweep of thousands of surprise safety inspections.  The Passenger Bus Safety Inspection Strike Force involves inspections of motorcoaches, tour buses and school buses around the country.  Over the past five years, FMCSA has doubled the number of safety reviews of our nation’s 4,000 carriers.  I’d much rather hear about a bus failing an inspection – proof that our system is working – than think of the consequences if that bus were still on the road.

Later, participants discussed best practices to increase vehicle and driver safety and effective public outreach tools to make sure consumers choose a safe company every trip and every time.

Despite the recent spike in high-profile crashes, bus safety has long been one of the safest ways to travel.

And through events like the safety summit, officials are trying to keep it that way.