In leveraging among 17 major competitors for a giant federal government transaction, Chicago-based Walsh, Higgins & Co. responded in typical fashion, devising an innovative strategy that set it apart and won the assignment.
At stake was the coveted $150 million, 540,000 sq. ft. Internal Revenue Service data processing and administrative computer center to be built on a four-acre site in downtown Detroit.
The competition for the job was fierce as well as costly. Of the 17 firms that went after the transaction, 1 1 submitted final bids. Walsh, Higgins & Co. employed a team of 18 consultants who worked over an 18-month period starting in spring 1991 to prepare its bid. In all, the company spent $750,000 up front in preparing its proposal with no guarantee that the investment would pay off.
Many might believe that the government would make price the most important consideration for a project of this magnitude, but that was not the case.
"The government ranked the bids on the basis of technological merit as well as price, seeking the best value," points out John W. Higgins, chairman and chief executive officer of Walsh, Higgins & Co.
Higgins is seconded by Nanette Myers, contracting officer with the General Services Administration (GSA), the government's business manager and real estate agent. "We looked for the offer that represented the best value for the government, not necessarily the lowest price," she says.
"Our firm had the best technological solutions and we also provided a unique public financing vehicle for funding the lease," Higgins adds.
"We looked at the IRS not as a government transaction but as a large build-to-suit user with a technologically challenging assignment," says Gerald A. Pientka, president of Walsh, Higgins & Co.
The company encountered challenges. A number of the finalists in the bidding said the lease could not be funded without a long list of lease amendments. For example, the lease stipulated that the lessor has responsibility for all capital repairs and operating expenses. As such, innovative financial structuring solutions were required in order to consummate the financing.
Company goes public
Walsh, Higgins & Co., however, found a solution - go to public financing. The company teamed up with Salomon Brothers to structure an innovative public capital markets financing that could be sold on Wall Street. In accomplishing that objective, Walsh, Higgins and Salomon Brothers structured a system of passthrough certificates. Using these, the base rent would be transferred via a trustee to pay the investors the required debt service.
After structuring appropriate reserves for capital repair and operating expenses, the first-ever public offering, capital-market transaction for a GSA lease received an AA+ rating from Standard & Poor's and an AAA from Duff & Phelps. By achieving a lease rating comparable to the credit rating of the U.S. government, the company was able to sell the securities at a spread of 85 basis points over the 10-year U.S. Treasury note rate. The architect of the financing plan for Walsh, Higgins & Co. was Pientka.
"The IRS-Detroit facility was not your average transaction by any measure," he says, "but in reality, the process we followed was basically the same as we use every day. We regularly customize the makeup of the development team to the project at hand and produce extensive plans prior to contract execution - or, in some cases, even before being awarded the transaction. In that way, we are able to set ourselves apart from our competition by offering the best design and value"
The IRS facility, scheduled for completion in this month, includes a 10-story office building, a 10-story parking garage to accommodate 850 car, and a separate four-story energy center housing emergency generators and electrical feeds with backups to ensure that the computers never go down. Walsh, Higgins & Co. will own the facility in accordance with the long-term GSA lease.
The IRS project provides graphic demonstration of how the company finds new solutions to meet the challenges of large projects.
However, the thread of innovation that marks Walsh, Higgins & Co. work is evident through other examples, as well.
The new Blue Cross-Blue Shield of Illinois 28-story headquarters in downtown Chicago is one such example. The $200 million structure is under construction on vacant land near the firm's current headquarters in the Two Illinois Center Building at 233 N. Michigan Ave.
Critics took immediate aim at the project, saying it made no sense to put up a new 880,000 sq. ft. office structure when more than 20% of Chicago's downtown office space is currently vacant.
They overlooked the fact that fastgrowing Blue Cross needed to expand and found construction of a new headquarters more cost-effective than staying in its present space or moving to vacant office space in another building. The company anticipates savings which can help arrest the spiraling costs of health care to its customers.
The architectural plan is by Lohan Associates Architects, Chicago. Walsh, Higgins & Co. will develop a structure containing vertical "add on" permitting expansion to 48 stories. In addition, the structure's mechanical core of heating, cooling, communications and elevator systems will be able to "grow" upward. Groundbreaking is scheduled for spring with completion due in 1997.
Mission's focus is service
As a full-service real estate company, Walsh, Higgins & Co. says its mission is providing clients with the highest levels of service and quality in all areas of development, build-to-suit services, corporate real estate services, program management and asset management.
Chairman Higgins says the company strategically pursues development opportunities by creating value, managing risk and developing innovative solutions for complex real estate problems. As a result, the company has created a portfolio of highly successfull office, industrial and residential real estate developments.
The firm's philosophy is to apply a practical, aggressive, value-added approach, refined on projects developed and managed for its own account, to each client assignment. This owner-oriented approach has enabled the company to successfully provide comprehensive real estate services to a wide range of corporate, institutional and public sector clients.
Since it was founded in 1980, the company has developed and built more than 12 million sq. ft. of commercial real estate projects across the nation, in addition to four major Midwest business parks totaling 450 acres. Its sister company, the Walsh Group, is its full-service general contractor.
Successful companies usually reflect the vision of the executives who run them. It is no different with Walsh, Higgins. In describing what the company does best, Higgins says: "Ever since our beginning, we have focused on customer service. We have emphasized one-stop shopping and single point responsibility. Clients can come in here and have all of their real estate needs served under one roof."
Pientka adds, "We offer cutting edge financing capabilities coupled with a talented development staff that comes up with complex solutions to real estate problems."
Walsh, Higgins & Co. has 75 employees organized into five basic business groups including development, build-to-suit services, program management, real estate services and asset management.
Real estate development is conservative in terms of speculative risk but aggressive in terms of addressing market demand, Higgins says. The company has successfully developed projects in excess of $1 billion.
In the area of build to suit, the firm's goat is to develop cost-efficient solutions that meet exact client requirements in respect to business operations, design criteria, location, budget and timing.
"Often times, price is not the most important consideration in build-to-suit," Pientka notes. "It is a tremendous source of comfort to a client to realize that we provide a single source responsibility. Clients quickly realize that all the necessary details are taken care of within the organization."
In the area of corporate and real estate services, the company offers specialized consulting and advisory financial, tenant representation, relocation and construction services.
The program management area provides a significant portion of the company's business, according to Thomas R. Samuels, executive vice president and partner of the firm. "In former years, many organizations would handle their own real estate projects, but now more are outsourcing the work, hiring third-party teams of experts to develop and manage their projects for them," he says.
"We have a disciplined, goal-oriented practical management approach on real estate projects successfully developed for our own account and we bring this experience to our project, development and construction management assignments," Samuels explains. "As program managers, we act as an extension of the client's staff to direct and coordinate the multidisciplined team necessary to successfully complete each step of the project."
Every Walsh, Higgins program management assignment provides a single source of responsibility and accountability to the client. "It represents an institutional variation of design/build," Samuels points out. "From the staffing standpoint the same types of skills are used on an interchangeable basis. When the project is completed, it is turned over to the client."
Walsh, Higgins & Co. has provided program management for a broad range of projects including the1-5-0 million reconstruction of Chicago's Navy Pier for the Metropolitan Pier and Exposition Authority; the city of Chicago's $40 million four-plant recycling program; and the renovation and restoration of the city's oldest public building, Old St. Patrick's Church and School.
The latter, opened to the public in 1856, is the only remaining project designed by Asher Carter and Augustus Bauer, two of Chicago's earliest practicing architects. A three-year renovation and replacement of outdated electrical and mechanical systems will ensure a structurally sound building for the present and future use. George Maher, business manager of Old St. Patrick's, comments, "We consider ourselves the caretakers of this precious building and we want to make sure that we pass this legacy on for future generations to enjoy."
In another innovative project, Walsh, Higgins will serve as program manager for a major new underground parking garage at Chicago's Museum of Science and Industry. The new garage will accommodate at least 1,500 cars on the north side of the museum at 57th Street and Lake Shore Drive. The garage is the centerpiece of a $43 million plan to improve access to the museum, reduce surrounding traffic congestion and set the stage for the institution's long-range planning.
Samuels says the project represents a unique privatization effort in which city, state and federal funds have been authorized for use by the non-profit museum. The designing phase of the project is expected to require 12 to 15 months.
In the area of asset management, the company currently is responsible for managing over 4 million sq. ft. of office, industrial, retail and residential properties and more 500 acres of multiple use business and office park developments. The firm manages buildings from an owner's perspective based on its ownership experience.
This is the same aggressive, goal-oriented approach the company has developed and refined in successfully managing assets for its own account, Higgins and Pientka emphasize.
"When we say we're a full-service real estate company we mean just that," says Higgins. "Our success in delivering what we s we will is reflected in repeat business some of our clients have come back for the third and fourth time."
Firms decrease build-to-suit activity
Higgins recalls the early days of the company and its first development, done on a spec basis. It was 100 Park Plaza, a 250,000 sq. ft. office building in Naperville, Ill., a suburb of Chicago.
"In the early 1980s, there was a demand for office space in the expanding suburbs and most developers were putting up spec properties. We found that we would start negotiations on spec, a tenant would be, come available, and we'd complete the project as build-to-suit.
"We anticipated that build-to-suit would be the coming trend in real estate and were one of the few doing it at that time. It's interesting to observe that build-to-suit, which became a very crowded field, now has come nearly full circle as many firms are no longer involved in it."
"Many developers are not offering that single point of responsibility today," adds Pientka.
"As we have grown, we have adjusted our focus, but what we have always had is a very clear focus on where the needs are. We do the kind of forward thinking that enables us to respond to those needs before they become well-recognized trends," Higgins says.
In addition to the IRS-Detroit facility, the company is particularly proud of three other properties among its many blue-chip developments. They are:
* Its FCB Center headquarters at 101 E. Erie St., Chicago; the 20-story, 227,000 sq. ft. center is named for its principal tenant, the advertising firm of Foote, Cone & Belding. The land owner, the Metropolitan Water & Reclamation District, occupies the lower seven floors.
In 1983-84, the District wanted a new headquarters built on the site which was occupied by a building. Walsh, Higgins won rights to the project in competitive bidding over several other developers, with its promise of quality construction and unusual design.
The on-site building was condemned and, in order to qualify the project legally for financing, Walsh, Higgins created two air lots. Floors one through seven constitute air lot A and floors eight through 20 constitute air lot B. They are two separate buildings, or "a building within a building," each with its own separate systems.
"It was a unique transaction in melding the public sector and the private sector at an extremely attractive location," Higgins concludes.
* The Chrysler Corp. Distribution Center, High GroveNaperville Business Park, Naperville, Ill.
Chrysler's MOPAR parts distribution and training center, completed in 1994, totals 327,000 sq. ft. There is also a 125,000 sq. ft. expansion option on the 22-acre site to accommodate future growth.
Chrysler chose Walsh, Higgins & Co.'s High Grove-Naperville Business Park as its location and the company as its developer after a thorough evaluation that took 20 months. The building itself is a showcase for the latest in distribution technology and logistics. Features include a state-of-the-art carousel and conveyer system, which enables the center to ship over $3.5 million in parts per week.
* The John Sexton & Co. Distribution Facility, High Grove-Glendale Heights West Campus Business Park, Glendale Heights, 111. Sexton, a wholly owned subsidiary of Rykoff-Sexton Inc., is one of the nation's top manufacturers and distributors of food products.
Walsh, Higgins was selected for the 185,000 sq. ft. build-to-suit lease transaction because of its knowledge of freezer/cooler requirements, having the preferred design for the facility and an appealing lease rate structure, Pientka says.
Walsh, Higgins & Co. West Campus Business Park provided a central location with excellent expressway access for Sexton's distribution operation. Rapid expressway access and strategic location were also important criteria for Chrysler.
Higgins and Pientka foresee continued growth in outsourcing of real estate requirements by public and private organizations. "It is a reflection of the reductions in corporate facilities departments coupled with the growth of independent consulting firms and real estate brokerage firms," Higgins says.
Pientka adds:We believe we have the market expertise to solve problems that can't be solved as effectively in-house. Going to the outside represents a more cost-effective method of handling real estate needs today. As a result, many companies which owned and managed an extensive number of facilities are outsourcing."
Higgins says: "We are very optimistic about the future. We've been extremely fortunate in the past 15 years and expect to see our growth continue. It goes back to our beginnings, and what we view as the importance of customer service. This company will focus very clearly and strongly on controlled growth and creating value for customers'needs in the years ahead," he concludes.
John Bell is a Chicago-based freelance writer.