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Crunching the numbers

Information continues to drive the real estate industry. Increasingly, proper maintenance of accounting data is a critical first step in making sound investment decisions. Real estate companies demand accounting applications that are efficient, flexible and user-friendly. In turn they are presented with more attractive accounting software options as vendors take a more aggressive approach in designing cutting edge software.

The challenge for vendors Accounting software vendors have had to react to changing client needs. As the real estate industry becomes more sophisticated, so must its software packages. The Information Age has hit real estate with full force, which places a demand on vendors to improve their ability to exploit data and to access it more readily.

According to Robert Cummings, senior director of real estate applications for Windsor, Conn.-based SS&C Technologies, the ability to harness information sets real estate executives on a much faster track. "It all starts with the accounting data," he says. "Once that data is organized, it becomes information. Then, if you are able to manipulate and analyze that information, you will have intelligence. When intelligence is used for actionable decision-making, you gain competitive advantage."

Pressure to be analytical, flexible In an age when public markets have increasing influence on real estate, financial reporting and accounting practices have become increasingly scrutinized. "Clearly, as real estate investors have looked to the public markets for capital, financial software has taken on a profile that didn't exist before," says Walley Hussey, partner in charge of real estate systems for New York-based PricewaterhouseCoopers.

"In the past, property managers were required to report to the lenders, not investors," he says. "The institutional investor looked at property management and accounting software as a tool to be used by a third-party manager. The investor would then just sweep the data into their back office operations. That is no longer the case."

The new class of accounting systems provides users with features that allow better use of data with more sophisticated querying systems and drill-down capabilities. The investors are now able to dig into the data, analyze it and act.

"The need for these accounting systems to be flexible and scalable is critical," says David Voigt, senior manager of real estate operations and systems consulting for Deloitte & Touche, New York. "In real estate, the ability to act quickly and decisively has been the difference between the successful and less successful companies. [Users] want a technology system that supports them rather than stands in the way of the organization's ability to act decisively."

The emergence of REITs has also heightened the importance of accounting technology by placing more emphasis on financial reporting. The increased reporting volume has required more efficient systems. "REITs came on the scene and demanded more discipline and uniformity in reporting," says Hussey. "Since they are public companies, there is more reporting, and consequently, more stress on accounting systems. It is no longer a special project to close the books. Analysts and the Securities and Exchange Commission require this accounting routinely."

Growth and consolidation have also placed added stress on the accounting function. The ability to address growth, through both acquisition and consolidation, has become an important requirement for accounting software. The industry buzzword is "scalability," or the ability of the software to assimilate an increasing number of properties.

"The rise of REITs brought forth the era of bigger is better," says Hussey. "The increased volume in terms of properties under management obviously puts more stress on accounting solutions."

If a firm increases the size of its portfolio, it may not want to increase the size of its staff. "They want technology to bear the pressure of increased accounting work," adds Cummings.

The international expansion of many firms has also provided some challenges for technology users. "Typical vertical players are forced to look at the issues that arise with growth, such as the globalization of their portfolios and clients with operations around the world," says Hussey. "They need a system that can deal with different tax structures, currencies and languages. These can be some tough issues."

The drive for efficient, flexible and scalable accounting systems has placed increasing pressure on vendors to produce an integrated solution where multiple information technologies are combined seamlessly.

"Integration is an area where the real estate industry is trying to catch up with other industries," says Voigt. "On the accounting side, the general ledger is the core of the accounting system. Any software solution is only as good as its ability to interface with other enterprise applications.

"Tenant billing and property management systems, accounts payable, construction management systems, work orders, fixed-asset systems that run amortization and depreciation schedules, all have to tie into the general ledger system," he adds. "To date this has been an elusive goal, but the objective has been determined."

Though larger firms have been the catalysts for many software advancements, improved technological performance is now expected from companies of all sizes, not just the big players. "Smaller property management firms are now providing service to large institutional investors," Voigt says. "Greater institutional involvement has also heightened the demand for rapid and responsive access to information."

Catching up with technology Industry trends force changes in clients' needs and ultimately shape the vendors' products. New technology applications play a major role in shaping the latest products, as well. While The real estate industry has resisted new technology, the importance of leveraging information is closing the technology gap quickly.

The most obvious change is the switch from DOS-based systems to Windows. This example of real estate's tenacity in sticking with outmoded technology is dying hard. Many industry observers believe that the majority of real estate companies still use at least one DOS-based software product.

The trend toward more open systems and centralized data warehousing supported by client server technology also has improved scalability and access to information, as well as control technology costs. "Client server technology has liberated the desktop user," Cummings says. "The information is now more available and free to use and customize."

SQL server and new database technology furnish users with many of the capabilities they require. Users analyzing financial information can now drill down from a consolidated number through each layer of detail quickly and easily. "SQL server technology has allowed software developers to create powerful querying capabilities, which allow the user to locate and retrieve information much easier," says Cummings. "The data is not stuck in a box."

Internal and external access to information is also being improved through the use of open systems. "We are moving toward open database systems, so there is greater access to core systems for better information flow," says Voigt. "With more open, relational databases, third-party data mining tools have improved access to information."

The Internet is also exerting its influence. "The use of the Internet both internally, through Intranets, and externally to communicate or expose the performance of assets is increasingly important," Voigt says. "Three years ago, users wanted the ability to access accounting information in a spreadsheet format. Now, they want it in PDF or HTML format, so they can interface with a Web page."

Systems are also relying on more centralized architecture to help contain technology costs. In the past, all of the nuts and bolts necessary to run a particular system were stored on each desktop computer. This is known as "heavy client" architecture. "Thin client" architecture pulls the necessary logic to run systems from a host system.

"Thin client applications cut down the costs of the local computer by reducing the amount of power the PC has to have," says Voigt. "Real estate technology systems have lagged behind other industries by almost a decade and are just catching up to the finance and manufacturing industries now." How quickly end-users adopt software solutions that utilize these new technologies will vary between real estate companies, but software providers have begun to incorporate more of the available technology.

The players The lines dividing software vendor categories have blurred in recent years, as providers reworked strategies and product lines to adjust to market conditions and new technology. Software packages also are affected by industry consolidation, as evidenced most recently by the announced acquisition of Clearwater, Fla.-based DYNA Software & Consulting Inc. by Houston-based ARGUS Financial Software (see "Industry Insider," p. 6).

According to Hussey, providers of real estate accounting systems can end up split in two ways: by the size of the clients' portfolio and by the scope of the solutions they offer. "Traditionally we have seen two groups of providers: the desktop-based low end and mid-range high end," he says. "Portfolios in excess of 2 billion sq. ft. would potentially look at the high end. Most others looked toward the low end.

"Some of the familiar names on the traditional high end include CTI Ltd. and J.D. Edwards," he adds. "In the past, smaller portfolios turned to Yardi Systems, MRI or Skyline. Another split has evolved between traditional vertical industry vendors and ERPs, which stands for enterprise resource planning."

The ERPs are cross industry players and represent the new big guys on the block. The ERP's aim is total integration of property accounting with overall corporate accounting software. Most of these vendors are new in the world of property accounting - Peoplesoft, SAP, Oracle and Baan.

"Manufacturing went to an integrated system that provided a total enterprise-wide management tool during the last five to 10 years," says Voigt. "That same concept is now reaching the real estate industry. The real estate industry talked a lot about integration, but until recently the solution usually entailed a disparate clustering of systems."

Providing this level of integration is an ambitious goal that has not been met fully by the majority of the new ERP vendors. Real estate is a relatively new concentration for them, but they are using considerable cross-industry experience, not to mention R&D dollars, to solve integration problems. Still, the consensus is that the required functionality of their real estate solutions is still not a reality.

There is one exception, however. Denver-based J.D. Edwards is considered unique in that it is an ERP vendor that has specific real estate solutions. While its software has always extended across many industries and national borders, the company has provided software specific to the real estate industry for 10 years.

"J.D. Edwards has grown substantially as an ERP-type vendor," Hussey says. "For companies looking for ERP benefits such as an extensive product suite in areas including cost management, human resource management and maintenance management with tools to negotiate globalization issues, it is the vendor of choice."

Chicago-based Jones Lang LaSalle concurs with Hussey, having signed on with J.D. Edwards. "We are not just implementing another software system," says Cathy Stephenson, management services chief of staff for Jones Lang LaSalle. "It is process innovation - a whole new way of doing business."

But ERP vendors are not the answer for every organization. The familiar vertical players have been leveraging new technology to improve the scalability and flexibility of their products. The other traditionally high-end vendor, CTI, has chosen a different strategy than J.D. Edwards.

"CTI has remained an industry-specific player with all software development staff and resources dedicated to the real estate industry," Hussey says. "They have created a mix of tools that address other real estate issues such as integrating property management and notes applications that concentrate on work flow activities, asset planning and lease origination."

CTI designs software originated with the REIT industry in mind.

The company's ownership roll-up feature helps set the company in good position for its clients. "One of the more difficult accounting challenges companies face is the efficient and accurate consolidation of different

entities," says Craig Lofton, executive vice president of Dallas-based CTI. "Most systems use report writers for this, but accounting for different ownership structures is complex.

Our product supports multiple ownership definitions, maintains a complete set of books at each accounting level (accrual, cash, GAAP, etc.) and provides separate options to roll up ownership levels individually and all together."

Clients respond to functionality Konover Property Trust, a Cary, N.C.-based retail REIT, recently switched from a DOS-based system to CTI. "The deciding factor with CTI was that it is an integrated real estate system," says Pat Miniutti, executive vice president and chief financial officer for Konover. "Our previous system didn't have a job-cost function. CTI also had some special modules, seamless integration with DYNA analytical software and single-step lease entry. Our previous system had come out with a Windows product, but it was not fully tested."

Cleveland-based Management Reports International (MRI) is another vertical real estate solutions provider battling for market share in this competitive market. The company has taken advantage of new technology to improve the functionality of its accounting product so that anyone can use and customize the system. "MRI has constructed their own tool set on the front end, and have moved away from their proprietary database by adopting SQL server technology on the back end," says Hussey.

New York-based Clarion Partners, recently switched from the DOS-based system to the Windows version of MRI. "Our firm went though a features and functions analysis to decide which system we needed to run our business," says Sandy Jacolow, senior director at Clarion. "We wanted an open system on a Windows NT server with good connectivity with other software, one that provided export capabilities and easy data access. We also needed software that was highly customizable by the end user without having to turn to a programmer. MRI provided the tools to modify fields and reports so we could quickly adapt to changing market conditions," she says.

Santa Barbara, Calif.-based Yardi Systems was one of the first vendors to offer a Windows product and seeks to provide solutions not only for large users, but for smaller companies as well. Yardi offers three product lines varying in degrees of sophistication and feature sets.

"Our clients range from smaller local mangers to institutional investors," says Karen Edgar, director of marketing. "While there are many features that help us stand out, probably the most important overall aspects of the system are its scalability, flexibility and broad product line."

While Yardi has been implemented at firms such as Cushman & Wakefield and CB Richard Ellis, their systems also serve the needs of smaller managers. One example is Seattle-based Unico Properties which manages more than 5 million sq. ft. of office and retail properties.

"What we like most about the software is its flexibility," says John Lamb, Unico's chief financial officer. "Depending on how the user sets up the database, there is good back-end access and flexibility. We can do a lot of things that we couldn't do in the old days without a lot of additional programming."

SS&C's Skyline product provides users with a comprehensive set of real estate and financial data elements. "Real estate users are looking to solve business problems in a rapidly changing investment environment," SS&C's Cummings says. "Our goal is to make the accounting process frictionless, so our client can concentrate on the big-win transactions."

An appropriate accounting software system is the foundation for the effective use of information for real estate companies. Efficiency, the ability to manipulate data and scalability - including integration with other real estate software - will be essential characteristics of successful accounting software in years to come.

"Traditional low-end vendors are getting bigger and more sophisticated, while the upper-end ERP vendors are scaling down and concentrating on developing real estate specific functions," says Hussey. "This is good news for real estate firms. They will have better choices for their software needs."

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