Paul R. Harvey

Wednesday, 28 February 2007 19:00

Border crossing

As new offshore markets evolve, the many intricacies of these foreign tax jurisdictions come into play. When coupling unfamiliar offshore tax rules with U.S. tax laws, there are certain crucial strategies to consider before, during and following the establishment or acquisition of a foreign business.

“In order to maximize your inter-company relationships and minimize your global tax, you need to keep these rules in mind as you plan and set up your structure,” says partner Jon Davies of Armanino McKenna LLP.

Smart Business recently spoke with Davies about how U.S. companies planning an offshore move can safely navigate through foreign tax jurisdictions and minimize their overall effective tax rate in our ever-expanding global economy.

When planning a move offshore, what are the first steps?

The main consideration when a U.S. company expands overseas is an issue called permanent establishment — or taxable presence — in the foreign jurisdiction. This is defined either by the local tax rules in that jurisdiction or by an applicable treaty between the U.S. and that country.

One way to create permanent establishment is when you have a salesperson operating in the foreign jurisdiction, negotiating and concluding contracts on behalf of the U.S. company. Another test is when a company is providing pre- or post-sale service or support or other types of personal services in that jurisdiction that would theoretically be liable for compensation. These are general rules that should be confirmed in each country.

What is the process once permanent establishment is confirmed?

At this point, you need to determine the most beneficial entity to set up to define that presence. Generally, this will be a branch or a subsidiary (corporation) in the local jurisdiction. Now it becomes a decision matrix. You’ll need to determine how to compensate this inter-company relationship — whether it’s on a cost-plus basis, a percent of sales revenue from those activities, or one of a variety of transfer-pricing methodologies.

What if business activities do not merit permanent establishment?

Once you’ve analyzed the activities to be performed and determined that they are not going to create a permanent establishment — because you’re just doing sales solicitation or product demos, for example — then you must decide what kind of non-taxable presence you need to register, if any. In some jurisdictions, you need only register as an employer for that employee and submit the proper payroll filings. Other jurisdictions may require the establishment of what’s called a ‘rep office’ or representative/liaison office.

Should businesses utilize a tax professional in each foreign jurisdiction?

I always liaise with a tax expert in each country to make sure we’re not running afoul of some intricate rule. Accounting firms often have networks they can tap, and experienced consultants usually develop a large personal contact network they can call upon. Companies should contact their U.S. tax adviser, who can provide a proven reference.

What countries offer the most favorable tax environments to U.S. companies?

At this time, many countries have ‘tax holiday’ programs, where you don’t pay tax for a specified time period. China, for example, has certain jurisdictions and economic zones where you may pay zero tax for a few years, then 50 percent of a reduced tax rate for a few more years, and then you move into the reduced tax rate. Other countries are offering tax credits and incentive tax rates if you’re conducting research-and-development activities in certain jurisdictions.

Keep in mind that locating in a foreign jurisdiction should be based on business reasons — not because of any individual tax benefit. Once you’ve selected the optimal country, you must also find the most beneficial economic zone within that jurisdiction.

What factors may inhibit offshore business?

The U.S. tax is on a worldwide basis, which is different than many other foreign jurisdictions. The U.S. wants to tax you on all your income everywhere.

Controlled Foreign Corporations (CFCs) are foreign companies controlled by U.S. shareholders. CFCs must operate under very strict rules about how to treat the income they receive. Even though a foreign corporation earns it, the revenue could be taxable in the U.S.

As CFCs develop their international structure, they must keep in mind the type of income that a particular jurisdiction or subsidiary is going to receive and ensure that it’s not going to be treated as deemed dividends or Subpart F income under these CFC rules.

JON DAVIES is an international tax partner with Armanino McKenna LLP in San Jose. Reach him at (408) 200-6411 or For general information, phone (925) 790-2600.

Wednesday, 31 January 2007 19:00

The $67 billion question

Can you name something that refers to a liquid, exists only in the ozone, must be continually defended, and is worth more than $67 billion? It’s the brand name Coca-Cola, one of the most well-known brands on the planet.

Brand names are often more valuable than the combined physical assets of a company, a key reason that companies fiercely police their brands. Words like “aspirin” and “elevator” were once brand names owned by successful entities.

“The initial cost of brand protection may seem daunting for many companies,” says J. Todd Timmerman, administrator, Intellectual Property Law Department, Shumaker, Loop & Kendrick LLP. “But it pales in comparison with the value that a brand may ultimately possess.”

Smart Business spoke with Timmerman about how to establish, police and protect a brand name, and why it’s money well spent.

What is a brand?

A brand, or trademark, is whatever in the marketplace distinguishes goods or services originating with one source from those originating with another. It can be a word, a design, a symbol or a combination of these elements, among other things. Using our Coca-Cola example, consumers are familiar not only with the product’s name, but also the design elements on its cans, slogans like ‘The Real Thing’ and others.

What steps should a company take prior to adopting or using a brand?

First, you must ensure that when you choose a brand, you’re not going to infringe on the rights of others. To determine this, you should conduct a thorough search of all available records in the United States. The search should include the federal trademark register, all 50 state trademark registers, as well as common-law databases. Many law firms have access to online searching tools and also regularly call on searching companies that specialize in these kinds of searches. Both sources can generate reports very quickly and efficiently.

Second, adopting a protection and registration strategy concurrent with the use of a new mark is extremely important. All trademark rights in the United States arise as the result of use. These rights can be expanded or enhanced by federal or state registration, but those registrations are also tied back to use. A company should take steps to preemptively protect the mark by seeking a federal registration of the mark, or one or more state registrations in areas where they might conduct business — not to mention international registrations.

How can federal registration protect a brand’s future value?

Common-law rights are based on the use of a mark and extend geographically as far as the trademark has a reputation.

For example, let’s look at two companies named ABC Corp. — one initially based in Florida and another in Washington state. Over time, if both companies’ rights expand, they could find that one has rights in certain areas of the country, while the other has rights in the other parts, and neither has the right to invade the territory of the other. This is why a federal trademark registration is so important. It takes what could be a local or regional right, and expands it to what essentially amounts to a prior nationwide right, even absent nationwide use.

What could result from an incomplete search or a failure to register?

If you are forced to change your brand after the public has come to know you or your product by a certain name, a number of substantial expenses come into play. A name change usually involves new signage, collateral materials and — most likely — a public relations campaign to let the public know you are assuming a new brand.

You could also be liable for monetary damages from an infringement suit, as well as disgorged profits that you’ve earned with the brand. At the very least, you could be forced to pay off the original user of the brand name.

How can a company protect established rights in a brand?

It is extremely important that companies continually police their brands. A grass-roots policing program can be used where the sales force keeps its eyes open for potential infringers or misuse of the brand. There are also services that monitor the Internet and the marketplace for brand abuse.

Once infringements are identified, they must be addressed. If you allow infringement to continue, you may ultimately be stripped of your trademark rights. This can be an expensive and painful process. You are generally much better off dealing with infringements promptly, rather than letting them linger and putting your company in a position where it has to explain its delay.

J. TODD TIMMERMAN is administrator of the Intellectual Property Law Department of Shumaker, Loop & Kendrick LLP. Reach him at (813) 227-2243 or

Wednesday, 31 January 2007 19:00

Medical insurance underwriting

Advancements in the medical industry create many opportunities for physicians to participate in nonstandard procedures. Examples of these opportunities can be seen in the pages of most metropolitan daily newspapers where advertising seeks participants for clinical trials and new medical processes.

As technology evolves and new procedures become standard, a physician needs to be conscientious that the medical liability he or she carries provides coverage for these new procedures. Some policies will limit the scope of operations the physician practices in, and anything outside of this scope is not covered in the case of a loss.

Physicians may believe they are well versed on their insurance policies, but often they are not up to speed.

“I find many physicians engaging in nonstandard procedures which, due to advancements in technology, seem as daily protocol to them,” says Tara Williams, business account executive at Hilb, Rogal & Hobbs of Southwest Florida. “However, the insurance carriers writing the restrictions on their policies are not looking through the same eyes as today’s physicians, and many of the modern procedures are not covered by the standard professional liability policy.”

Smart Business spoke with Williams about the unique insurance exposures generated by evolving technology, nonstandard procedures and clinical trials.

What are examples of nonstandard procedures that might create insurance problems for physicians?

In today’s medical industry, we are seeing an increase in outpatient surgery procedures, teller-radiology and teller-medicine exposures, anti-aging procedures and clinical trials. There have been an increased number of physicians working in walk-in clinics and retail shops like Wal-Mart and Target. The exposures outside of the standard office and hospital environment can be of concern. Many times, these types of exposures are not covered under the physician’s professional liability policy.

What kinds of insurance issues are created when a physician engages in a new clinical trial?

A major area of growth in the health care industry is a result of clinical studies. Physicians see this as a way to further their education and participate in the evolution of medicine.

Even though these studies can bring significant improvement to the health care industry, many times they generate unexpected results and financial loss to those involved. Participation in clinical trials involves multiple parties of interest and therefore insurance coverage becomes very intrinsic.

A physician needs an insurance professional’s help to evaluate the exposures created by participating in a clinical trial, as well as securing the appropriate policy to cover such a nontraditional exposure.

A few years back, many physicians were electing to not purchase professional liability coverage. Is this still the trend?

As we all know, the current insurance crisis in Florida has now evolved from medical malpractice to increased property rates and lack of capacity. In fact, medical malpractice is not even on the agenda for legislative session this year. The insurance market is currently considered ‘soft’ on the casualty side of table. Liability rates have been reduced and coverage offered has been broadened. Medical malpractice liability continues to be pricey in comparison to other states, but this is just a result of the litigious mentality in Florida.

There are physicians who continue to go bare — but other options are available to those who chose to do so. One of these options is a called Medical Legal Defense Reimbursement, a product that received an XI rating by the popular A.M. Best Co. The coverage protects a physician’s assets by providing reimbursement for legal expenses incurred by having a medical malpractice claim. It is a type of partial coverage that is accessible for a reasonable premium.

Are there any additional exposures that physicians need to protect themselves against?

Yes. Today in the health care industry, patient privacy is very important and legally mandated. Physicians possess and must secure for their patients a significant amount of personal information — stored electronically as well as in paper files.

The exposures present in a physician’s office are substantial in terms of personal identity theft, cyber extortion and network security. This coverage can be obtained through many of the carriers focused on the health care industry. Each carrier has its own unique terms and conditions, so it is important for a physician to make sure the privacy protection insurance that he or she chooses completely addresses the needs of the individual’s practice.

Physicians may believe that patient identity theft could not happen at their practice because they have adequate precautions for dealing with personal information. That may be the case. What they might not think of are the costs they would incur to investigate or defend themselves against an allegation, even if it is unfounded.

TARA WILLIAMS is a business account executive at Hilb, Rogal & Hobbs of Southwest Florida. Reach her at (941) 554-3112 or

Sunday, 31 December 2006 19:00

Maximum banking relationships

Every new business chooses a bank to serve its financial needs. In years past, selection criteria probably included physical proximity to the institution, the interest rates and fee structures, or perhaps a solid relationship with the branch manager. Today, most banks offer nearly identical services — but not identical service.

Like a marriage, banking relationships need to survive both good times and bad times to flourish. When a company is doing well, it’s very easy to have a good banking relationship. “At the end of the day, when a business is choosing a commercial bank, it must focus on the relationship aspect of the selection,” says Terri L. Cable, executive vice president of FirstMerit Bank’s Southern Ohio Region, which includes Columbus. “A positive relationship creates the flexibility required to meet the challenges faced by small, middle-market and privately-held companies.”

Smart Business spoke with Cable about banker/client relationships and the importance of selecting a bank that understands your business.

Should a growing company consider changing banks?

When a company is healthy and growing, it is clearly not the time to change banks, unless there is some irresolvable issue in the current relationship or a need that your bank cannot accommodate. Just because you’re growing doesn’t mean you need a new bank. You want to work with the bank that best knows your business and can relate to you as a partner while your operation grows. And it’s a two-way street — the client should also understand how the bank is positioned and be educated about what it offers.

In a difficult banking relationship, it usually gets back to one thing — communication. The bank needs to research the industry and understand the complexities and challenges of the business. The client also needs to understand the bank’s expertise and its limitations. Communication as a process needs to occur continuously. Otherwise, a disconnect will surely occur at some point in the relationship.

Are there benefits to using multiple banks?

Yes. When a company is experiencing rapid growth, it may be beneficial to add banks to increase credit capacities. Additionally, when a growth company has acquired a diverse set of challenges, both domestically and internationally, it may be beneficial to investigate a multi-bank strategy. However, if the company is a growing, small or middle-market business and owner-managed, a single relationship typically can meet your needs.

How can a positive banking relationship help a company grow?

The key word here is relationship. A strong banking relationship exists because your local banker — and the senior management of the bank — has ‘institutionalized’ you as a customer. They understand your business, your goals and the opportunities your business is presented with. I like to say this scenario is priceless. They will be with you during the good times and the bad times. They’ll be responsive, consultative and solutions-driven. That’s how they can help you grow.

What are the first steps to selecting a banking institution?

The very first step is to understand the value proposition of the prospective bank. What is its area of expertise? How effective are its relationship managers? What is the background of senior management?

Second is how it is positioned for responsiveness. Where is the decision-making authority — local or centralized? Do customers have access to senior management? Can you get to know multiple layers of management within the bank? There are situations where you’ll have turnover at your bank. If your primary contact departs, it’s very important that you know the layers above this person, people who also know you and your business, so there is no disruption.

A prospective bank should ask the tough questions. Does it understand the cyclicality you face and the unique challenges in your industry? It should also define how you are going to communicate.

Can banks bring new business to their clients?

Absolutely. There are many situations and multiple ways that can occur. Banks often hold business development functions, inviting prospects and customers to network so they can get to know one another, talk about their businesses and learn more about the institution’s services. A strong banker/client relationship promotes opinion sharing and referrals as opportunities arise.

TERRI L. CABLE is executive vice president of FirstMerit Bank’s Southern Ohio Region, which includes Columbus. Reach her at (614) 545-27997 or

Friday, 24 November 2006 19:00

Serve and protect

Nonprofits are essential to the health and welfare of our citizens and also crucial to our economy. According to The Urban Institute, National Center for Charitable Statistics, more than 1.4 million nonprofits in the U.S. pay more than 8 percent of total wages earned.

In order for these essential charitable networks to remain healthy, they must protect themselves from the same — and sometimes additional — legal liabilities faced by any other sector.

“There is absolutely no reason a nonprofit operation should not carry insurance,” says Christine Papa, vice president of Hilb, Rogal & Hobbs of Southwest Florida. “There are many types of risks, and they need to be aware of the potential legal exposures that, with a large claim, could cause them to become insolvent.”

Smart Business spoke with Papa about the inherent risks faced by nonprofits and how the right insurance program can provide cost-efficient and comprehensive protection.

What are some common misconceptions of insurance for nonprofits?

The biggest misconception is that they cannot be sued. They can be sued just as easily as a for-profit business. Nonprofits defend themselves against many claims, especially in regard to directors and officers liability and employment practices liability. In fact, employees of nonprofits bring on about 80 percent of all claims filed against nonprofit organizations.

Another misconception about nonprofits is that they are all the same. Nonprofit organizations vary in size and in purpose, and each nonprofit provides a different service to the community; therefore, their risks vary.

Additionally, there is a misconception that a simple general liability policy is adequate insurance for a nonprofit. General liability is only one of the important insurance coverages needed by a nonprofit.

What are some unique insurance exposures for nonprofits?

Nonprofits need general liability coverage for their fund-raising activities. Golf tournaments, theater productions and other events can increase their exposure. Volunteers should be included as an insured under the general liability insurance. Most insurance providers that specialize in nonprofits include this, so volunteers are covered when they are working for an organization.

Many nonprofits have volunteers operating motor vehicles, and often have individuals driving their own vehicles. Others have employees going from home to home to visit with clients. Nonprofits could have an exposure from owned and/or non-owned vehicles.

Directors and officers liability coverage protects the directors, officers, managers and employees for claims against them resulting from a wrongful act. In concert with this coverage is employment practices liability insurance. With such a high percentage of suits brought by employees of nonprofits, this crucial coverage protects management from claims arising from wrongful termination, discrimination and harassment.

Additional unique exposures include professional liability coverage for nonprofits that perform counseling or have professional staff members; abuse and molestation coverage for organizations with exposures involved with caring for or counseling children; and crime exposures for nonprofit volunteers who handle money.

Finally, many nonprofits are not aware of volunteer accident coverage. This provides medical coverage, up to a specified limit, for volunteers. It’s written for a specified amount, and the premium is based on a maximum number of volunteers. This policy reduces the number of possible volunteer claims being filed under the nonprofit’s general liability and affecting their claims experience.

How can a risk management program reduce liability, exposure and costs?

Most nonprofits are on a very limited revenue stream, and risk programs help keep their insurance costs down. An effective risk management program identifies, analyzes, controls and administers risk to help reduce the potential hazards and exposures.

Programs are based on the size of the organization. Large, national nonprofits may have strictly enforced and designated programs, while smaller nonprofits may simply have their insurance carrier perform a loss-control inspection to provide them with recommendations to correct issues that could cause a future loss.

How can a nonprofit best determine its insurance needs?

Nonprofits need to choose a broker that has experience in insuring nonprofit organizations. A broker with expertise in that area knows what markets to approach to best service a nonprofit’s unique needs. There is no cookie-cutter approach to nonprofit insurance; every nonprofit is different in size and purpose, and it’s the broker’s job to help identify and develop a program that suits specific needs.

CHRISTINE PAPA is vice president, Hilb, Rogal & Hobbs of Southwest Florida. Reach her at (941) 554-3111 or

Friday, 24 November 2006 19:00

Why engage a location adviser?

When a company makes the strategic decision to relocate, expand or consolidate operations into a new location, it faces challenges and decisions that are beyond the scope of the normal conduct of business.

Effective site selection is a complex undertaking that requires extensive data analysis, planning and execution for a successful outcome. To safely navigate in these waters, many companies choose to engage a location advisory firm.

“The stakes are high and so are the possibilities for less-than-optimal execution,” says Dolores Seymour, managing director of Industrial Services at Colliers Arnold. “An experienced location adviser can guide corporate executives in making logical, defensible and successful decisions, with the assurance that they have not overlooked incentives worth millions of dollars to their bottom line.”

Smart Business spoke with Seymour about how a location adviser can design and implement a relocation plan and how a company can remain focused on core business issues throughout the process.

What crucial areas of relocation can be overlooked without professional advice?

Government incentives and tax savings can be overlooked or not realized to their fullest extent, leaving money on the table. Demographic data can be misinterpreted, leading to confusion at best or a bad decision at worst. Competing internal politics can lead to a subjective decision that does not enjoy full support within the company.

To plan well, the company must understand the labor market, the business climate, the incentives and real estate availability, as these factors apply to their specific needs.

How does a location adviser add value to site selection?

There are the obvious ways, in terms of financial gain and tax savings. Perhaps of equal importance is the fact that the location adviser works through an objective and well informed process. He or she conducts a needs analysis that helps the company understand the key issues and location drivers. In most cases, going through the process helps a company focus on its real objectives and key issues, which makes the relocation or expansion succeed fully.

If a company is planning relocation or a new facility, it is often a strategic move where confidentiality is critical. They may be moving into another market to challenge competition or increase sales. The adviser can maintain anonymity for the client while performing studies and negotiating incentives.

What types of companies would most benefit by working with a relocation adviser?

The range of companies that will benefit goes from those engaged in manufacturing to high-end regional offices for service organizations. If they are not experts in real estate, site selection, demographic analysis and governmental incentives, and if they do not have excess internal staff who can dedicate their time to a relocation project, they benefit enormously from using an adviser. Most companies have found they are most profitable when they concentrate on their core business.

What additional resources do advisers bring to the table?

Location advisers have up-to-date and multiple computer and database technologies. They are experienced and can customize the search to reflect a company’s real objectives. Clearly, if your core business is analyzing and locating sites and understanding government incentives, you have more experience, tools and staff to devote to that task than if your business is manufacturing computer parts.

A larger real estate organization with a global affiliation of independently owned real estate services firms is able to provide expert local real estate knowledge, so it can implement the consulting advice with local and direct site selection and negotiation.

Is relocation consulting cost-prohibitive or can it actually reduce the final costs?

Perhaps I can best answer with an example. One relocation expert was working with a company whose controller thought that $300,000 would be his best incentive on a manufacturing relocation in the U.S. The expert identified opportunities he was not aware existed. As a result, they were able to negotiate a package of $3.6 million in incentives and grants. The consulting fees are very reasonable and provide clients with a great deal of value for the money.

Can a relocation adviser work within the company to lessen any internal politics that might arise due to differing needs and opinions?

The adviser is in a position to challenge all of the client’s assumptions and to help prioritize issues, so that the outcome will be logical and defensible to the board, employees and stockholders. He or she can maintain confidentiality internally to elicit the most accurate responses without creating conflicts.

DOLORES SEYMOUR, MCR, CCIM, SIOR, is managing director of Industrial Services at Colliers Arnold. Reach her at (813) 221-2290 or

Friday, 24 November 2006 19:00

Value-added exits

When the day arrives for a business owner to transition his or her life’s work on to the next custodian, many complex issues must be addressed to realize maximum value at closing.

Entrepreneurs with a significant emotional stake in their business often are tempted to tackle the sale process. They know the business inside and out and believe they are best suited to bring it to market. But owners who want to maximize value should turn to an intermediary to develop and implement their exit strategy.

“An intermediary is skilled at negotiating and — more importantly — understanding all the ways to extract value and put a price tag on that value,” says R. Todd Lazenby, managing partner of WP Capital Partners LP. “Nine times out of 10, the intermediary can garner a much higher total result than if the client did it on his or her own.”

Smart Business spoke with Lazenby about exit strategies, adding value to a sale and what separates brokers and investment bankers.

What is the difference between a broker and investment banker?

Brokers are highly qualified to deal with smaller, fairly simple businesses up to approximately $12 million that don’t have the corporate governance issues and capitalization issues like multiple levels of debt and equity, a large number of shareholders, dissenting shareholder transactions, different classes of shareholders and other concerns.

Investment banks add value to larger transactions with their ability to bring a much broader scope of potential investors or buyers to the table, and their ability to structure transactions that create higher yields for more complex companies.

Sellers should be aware of this difference.

What categories are analyzed before a business is brought to market?

An in-depth evaluation of the company’s business model, its core competencies, the quality of books and records, the level of automation and types of technologies that are employed, its supply-chain, its organizational structure, and the scalability of the company are critical up front.

Typically, the depth and breadth of management should be a key concern. Who are the people? What kind of culture has been engendered? Does the company revolve concentrically around the entrepreneur, or is a team executing on all cylinders? Prospective buyers have to be able to evaluate post-closing execution risk.

One of the most important factors for positioning the company and maximizing its value is identifying competitive and comparative advantages that the company has relative to competitors. What is its pricing model — is it leaving money on the table? Does it understand its point price elasticity of demand; if it raises or lowers its price, how will a change affect the demand function?

Finally, the company’s costs and margins must be scrutinized. Buyers will want a guarantee of future acceptable margins, especially if the purchase is highly leveraged. Another crucial area reviewed is the delivery channel used to get products or services into the market. Does a heavy customer concentration issue exist, or is there a diverse array of clients? These are critical items that drive ultimate value.

How and when are problems with these areas addressed?

Some categories should be addressed before going to market while others can be adjusted during the process. An experienced intermediary can play a critical role in assisting companies to shift their business models, before and during the marketing phase. I’ve advised companies on radical moves such as changing their entire revenue model, focusing on recurring revenue, switching from a P.O. (purchase order) basis to a contract basis, or switching from sole sourcing to competitive bids.

Can the previous owner remain involved with the company?

Owners frequently misconceive that they will be obfuscated after spending their life building the company. Actually, there are methods that create liquidity for the seller but allow him or her to stay on board longer-term. Sellers can become owners in the new enterprise. We will typically negotiate operating covenants or blocking rights, so they have a strong voice in how the company functions thereafter.

What should a seller look for in retaining an investment banker?

The broker or investment banker hired should be sophisticated in his or her approach to valuing a company and demonstrate a track record of performance in this regard. Analysis of all components is crucial.

Many times, splitting the company into pieces and having the parts individually valued maximizes aggregate value. One entity may generate strong recurring revenue or maintain critical operations and relationships, while another controls intellectual property or holds new products that haven’t yet been patented or brought to market. Identifying and quantifying these value drivers is the key.

R. TODD LAZENBY is managing partner of WP Capital Partners LP, a division of Whitley Penn LLP. Reach him at (972) 392-6697 or

Wednesday, 25 October 2006 20:00

The current real estate cycle

The amount of information available to real estate market analysts grows exponentially every year. Just a decade ago, the most current numbers used to predict how the market might perform were already two or three years old.

Now armed with an abundance of timely data, the real estate industry can better tell us where we are, where we’ve been and where we’re going. These statistics are the basis for real estate cycles that affect both residential and commercial markets.

“If investors know the market is going down, they tend to become more conservative, and if they know it’s going up, they likely will become more aggressive,” says John Stone of Colliers Arnold. “And if they don’t know what’s taking place in the market, they tend to sit on the sidelines.”

Smart Business talked to Stone about the current real estate cycle and how history will show buyers and sellers where the market may be headed.

What is the basic methodology of a real estate cycle?
Whether we like it or not, history tends to repeat itself in some fashion every time the market heats up, ultimately reaches a peak, cools off, settles down, and then starts all over again. The only questions are when, how much, and for how long.

What sector is leading the way into the next cycle?
Historically, the residential market — single and multi-family — has led the way into and out of most real estate cycles, and this cycle appears to be holding true to history. The office, retail and industrial markets tend to follow suit 6 to 18 months later.

Where are we in the current cycle?
According to our research, existing home sales in Florida hit its peak in June 2005 with 25,552 sales, as reported by the Florida Association of Realtors. The category has been declining ever since, with June 2006 sales of 18,089 — a decline of 29 percent. Sales of multi-family investments in Florida hit its peak in October 2005 with a record $800 million in sales, according to Real Capital Analytic. Since then, sales have declined by 35 percent, with June 2006 producing a volume of $520 million.

What forces are driving the current real estate cycle?
Every cycle has its own personality, and this one is no different. Rising interest rates routinely prove to be one of the strongest influencing factors, especially when paired with negative consumer-confidence levels that ultimately affect all sectors. This cycle appears to be following a similar course with interest rates starting to climb and 30-year mortgage rates up 60 basis points since the middle of 2005. However, rates are still at historic lows, comparatively speaking.

The rising interest rates, coupled with record high oil prices and two horrific hurricane seasons, have eroded consumer confidence, setting the stage for this phase of the cycle.

How will insurance rates influence the next cycle?
There is no question that the ongoing insurance crisis is having a chilling affect on all aspects of business, including real estate. Most in the industry agree that it will influence real estate values going forward, but no one knows how much. The insurance crisis may prove to be the single biggest challenge ever faced by our general population, regardless of a person’s level of interest in real estate. Only time will tell.

Where do the commercial sectors appear to be heading?
Office, retail and industrial sectors are still moving along with tremendous investor and user interest. The question is, How long can it hold out? The insurance crisis and general economic pressures are starting to strain even the strongest of wills.

According to cycle history, what sectors are predicted as strong markets for today’s investors?
Despite all of the challenges faced by the residential and commercial sectors, real estate in general has proved to be one of the most viable investment vehicles available, and there is no reason to think this will change any time soon. I still promote multifamily investments, due to their ability to quickly offset rising operating costs with increased rents. However, diversifying your investment portfolio is always the best advice.

How do owners and investors utilize real estate cycle information?
Most investors want to buy when the cycle is in the cooling-off phase, or at the bottom of the cycle. Owners want to sell when the cycle is near its peak. For most owners and investors, timing a sale or purchase is a combination of good planning and a little luck.

JOHN W. STONE, CCIM, is principal and director of multifamily investments at Colliers Arnold. He is the past chairman of the Colliers Multi-Family Advisory Group for North America. Reach him at (727) 442-7184 or

Wednesday, 20 September 2006 20:00

Hot spots?

Relocating your business is a massive undertaking. A myriad of elements must seamlessly dovetail to lessen the impact on the bottom line. Moving day is not the time to discover that crucial features of the new location are unsuitable for your operation.

“Choosing the right location for your business is a major decision that requires time and expertise to achieve an optimal outcome,” says Patrick Duffy, president of Colliers Arnold.

“We assisted a financial institution when they needed a new ‘money center’ for the transfer of cash. The initial instructions we received were focused on cost of the real estate and proximity to highways, but after talking with their operational team, we learned that work force training and security issues were so intense, the primary driver was actually employee retention after the move. We identified a cost-efficient location with good access to the highway network, and most importantly, within an acceptable commute zone for their existing employees. Turnover after the move was minimal.”

Alternative location analysis involves a matrix of many factors. Every company is different, so their criteria will vary based on their unique set of requirements.

Smart Business asked Duffy to explain the key elements of a successful site assessment and why you should not sign a lease or purchase agreement without one.

How does geography impact site selection?
Determining if your business is driven more by proximity to your customer base, your employees, modes of transportation or perhaps other support facilities can be the primary driver for site analysis. For example, retailers are definitely more interested in locating near their customers; high-skilled labor-based companies tend to be more interested in being near their employees; manufacturing and distribution users need employees and need to keep transportation costs down by locating near convenient shipping routes such as interstates, rail, airports and seaports; doctors tend to congregate near hospitals; lawyers settle near courthouses.

What factors should be considered when selecting between several viable locations?
Assuming that you have multiple alternatives in your target geography, narrowing the list to the best option requires both a quantitative and qualitative approach. When deciding between alternatives, the base lease rate (cost per square foot of space leased) is not always the primary driver.

Total cost of occupancy includes all costs associated with leasing the space over the term of the lease. The base lease rate is the main cost. Other charges including taxes, insurance, maintenance, landscaping, management fees, after-hours a/c charges and parking fees differ from property to property and landlord to landlord. Escalation charges (rent increases over time) are also negotiable and can obviously have a significant impact on the total cost of occupancy over time.

When is bigger not necessarily better?
The efficiency of buildings and space can also vary greatly. In office space, the relationship between the floor space that a tenant can actually use (inside the walls) and the square footage he or she pays for (including the common area use like lobbies and common restrooms) is measured by an add-on or load factor. Load factors vary from city to city, ranging from approximately 15 percent to 23 percent. They have a real impact on the effective cost of occupancy. Calculating the cost per useable square foot as a base of comparison allows for a more appropriate benchmark based on cost per square foot.

Even within the determined useable space, the efficiencies of space vary. Odd-shaped buildings or buildings with narrow or overly wide floor plates can create inefficient areas within the tenant’s space. Many times, we use floor plans with desks, delineated to determine how many people can actually occupy the space, and use cost per person as a point of comparison. In industrial buildings, we may lay out rack systems with sufficient spacing for forklift equipment to determine the efficiency of the space for a particular user. Retailers typically have a set plan for product display that requires a certain number of aisles with specific spacing.

What additional features might help identify a superior location?
On the qualitative side, a building or space that is more aesthetically appealing may help attract and retain valuable employees or customers. Ease of access (ingress/egress) may make the location more convenient. Proximity to restaurants for efficient lunch breaks may be a decision point.

What is the typical timeline for a successful relocation?
In a relatively tight market, which exists in Tampa Bay today, you should start your relocation planning at least 12 months in advance of your planned move date. This will allow time to determine your criteria, search the market, negotiate a lease or purchase contract, and build out the space to meet your needs.

PATRICK DUFFY is president of Colliers Arnold. Reach him at (813) 221-2290 or

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