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Making money, '90s style

Setting a property apart is no longer as easy as providing a better swimming pool, tennis court or exercise room. With the amount of information and services on the Internet growing exponentially, and as consumers clamor for faster, easier connectivity solutions, high-speed data service is becoming the required amenity of the new millennium.

Making money from that amenity through shared revenues with telecommunications providers has sparked owners' initial interest in providing the service, but in some properties, the ancillary income is now considered secondary to the competitive positioning high-speed Internet access provides.

At Englewood, Colo.-based Archstone Communities, where 91% of residents own a computer - 71% of which are online - high-speed data services "are a competitive necessity," says vice president Kathleen Keating-Hanafan. "We introduced high-speed Internet connectivity as an added value amenity, but now consider it a requisite for doing business in this market segment," she says, adding that the service continues to present opportunities that are now beginning to snowball.

Dan Doyle, director of special projects at Village Green Companies of Farmington Hills, Mich., says, "The ancillary income from providing a high-speed data service originally drove our decision to offer it. But as telecommunications technologies have advanced, the service offerings themselves became more important to us than the revenue share they generate. Now we offer high-speed Internet connections as an amenity, and we're making money on them, too."

Providing a competitive telecommunications capability to residents is popular for three reasons, says Steve Lefkovitz, vice president of housing and finance for the National Multihousing Council (NMHC) in Washington, D.C. "First, [providing telecommunications capability] can help distinguish one property from another," he says. "Two, it may generate extra revenue. Three, technology is exciting and sexy, and people want to stay ahead of the pack. The multi-dwelling unit (MDU) industry is a competitive one, and the players are competitive people. We see technological changes coming to other industries, and we want to see them in ours, too."

Ancillary income from telecommunications services is particularly important to today's REITs, which must maximize the return on every property investment. In the past, REITs took the capital risk by investing in a property and telecommunications offerings like long-distance service, then passed the service revenue streams to the communications industry without being compensated for their financial risk. A harder look at potential non-rental income streams has changed that now.

"There's a tremendous amount of capital in play in the MDU market, and everyone is trying to maximize returns," says Andrew Ariza, managing partner of MediaCom, a Las Vegas-based multifamily ancillary services provider. "Among non-rental income programs, telecommunications services typically net the largest economic results."

Regarding income from telecommunications services, Ariza states, "There's no excuse for not creating and receiving ancillary income from telecommunications, given the economics, history, successes and various options available. However, the process requires a complete dedication and focus of an experienced and full-time staff. The real question becomes, 'How involved in this do I really want to be?'" Ariza says consulting firms like his provide theassistance owners need to make the best possible decisions and implement the best programs for their residents and properties.

Voice, video and data Long distance telephone service has been a source of non-rental income to the apartment industry for many years, followed by entertainment attractions such as video services - both satellite and cable television. Today's new construction and retrofits are introducing newer, high-capacity telecommunications lines such as fiber-optic cables to the curb or to the apartment, in lieu of traditional copper wiring on which our cities' infrastructures were built. These more advanced technologies create the possibilities for sophisticated telecommunications solutions today and in the future.

There is nothing from a renter's standpoint that is unique about local and long distance phone service, besides some price differences. Video entertainment service begins to introduce some uniqueness, however: Available offerings such as direct broadcast satellite (DBS) service bring a lavish selection of channels and digital-quality picture and sound, and can be marketed as an amenity to differentiate a property, with a percentage of the service income generally available to the property.

High-speed Internet service is a whole different ball game with regard to capital investment, product offerings, pricing, features, ancillary income and the competitive positioning it produces. To the renter, if Property A offers a dial-up service over traditional phone lines, and Property B offers direct, low-cost Internet access that's 100 times faster than dial-up, and with a package of sophisticated features, Property B is in a better position to attract and retain that customer. To owners, competitive positioning and ancillary income drive each other to create an attractive benefit.

Some communities design, install and manage their own infrastructure to gain control of the gateway, while others rely solely on the provider, without making a capital cost. Service providers see the multifamily market as providing a unique, focused environment for Internet service, and value representation by the property manager, who can lock in those customers from the start. No one is closer to this market's point of sale than the manager or leasing agent, and service providers will pay substantial revenues for capturing their tenant business.

Challenges and success stories Despite these benefits, industry experts agree that owners should remember one key point about ancillary income from telecommunications services: It's not worth it if you're messing up the real estate.

"If you're bringing in a substantial revenue share, but you're losing tenants because the service is poor, then the money is not worth it," asserts Russ Wyatt, manager of market development for Irving, Texas-based Marconi Communications (formerly RELTEC), a manufacturer of telecommunications equipment. "If your core [objective] is to be at least 95% occupied, the promise of high ancillary income doesn't equate if it comes at the expense of negative experiences that result in renters leaving the property when their leases expire."

In addition to renters associating service difficulties with the community overall, which taints the property's reputation, renters presented with service problems usually turn to the property manager, who generally is not equipped to provide a solution. Even when service providers offer a customer service number, calls will still come to the property office, and that can be problematic.

The sign-up process itself can also be a challenge, often requiring a half hour or more to sell and complete forms for telecommunications services for each tenant. "Some sign-up forms are a complete nightmare," explains Frank Canty, vice president of RTE Group, Inc., a Boston-based consulting firm which specializes in telecommunications issues. "In many cases, the amount of revenue that owners share with leasing agents is not enough to cover the effort. Many service providers have recognized this problem in the MDU market and have designed very simple programs and sign-up procedures, along with prizes for leasing agents that sign the most tenants. The ancillary revenue may not be as great, but these simpler programs are very easy to implement, and that's a good thing."

Properties gaining ancillary income Given in simple form, ancillary income presents a challenge for operators as a non-core business initiative. However, some of the country's leading apartment companies involved in ancillary income from phone, video and/or high-speed data services have begun honing their services to a science.

Archstone Communities. Archstone Commun-ities finalized its voice, video and high-speed data telecommunications offering in February and is in the process of launching it in its 291 communities across the country. The offering is built on a variety of technical solutions, depending on the property's market and environment, and includes deals with several local and long distance telephone companies, franchised cable operators and independent data service providers.

One of the highlights of Archstone's high-speed Internet offering is a branded community Web page, consistent among each property. Residents will see the same Archstone logo, graphics, messages and links as any other Archstone resident in the country with Internet connectivity. The Web page plays a big part in Archstone's overall branding strategy, which is to provide the same identity and level of customer service across all markets.

Archstone's ownership of the infrastructure is another highlight of the company's approach to telecommunications services. In all new builds, Archstone is designing and laying its own copper, coaxial and/or fiber cabling networks on the properties, eliminating the company's dependence on the service providers.

Since Archstone is investing the capital dollars for its own services, and not the providers; the company obtains a greater percentage of revenue generated from its residents' use of voice, video and data services.

"One cable company's contract stated that because the firm invested the dollars in the infrastructure, it would give us a certain maximum percentage of ancillary income per subscriber," explains Keating-Hanafan. "By owning the infrastructure, service providers can't make this kind of argument. The return on investment is our problem, not theirs, so we have the flexibility to ask for and get more ancillary income.

"My strongest advice to apartment owners is to keep as much control of their infrastructures as possible," says Keating-Hanafan, who came to Archstone from the telecommunications industry. She states that the majority of apartment owners today are locked up in contracts with telephone and cable companies, and don't have user access to the wiring. Owners should therefore begin to renegotiate their contracts then either rebuild, overbuild or provide a new solution. "When you design, install and own your property's wiring, you also understand it better, and that allows you to make better decisions regarding the providers and the services you choose," she adds.

JPI. JPI, an Irving, Texas-based developer and property manager specializing in the multifamily market takes a different approach to infrastructure ownership. Gus Villalba, senior vice president and head of ancillary income projects, believes infrastructure ownership can be risky since it is difficult to know what the best delivery systems will be down the road.

"Our strategy is to gain economies of scale and superior service by partnering with the major industry players. Since our core competency is in the apartment business, not telecommunications, we have the experts handle our infrastructure. We protect ourselves by partnering with the quality, brand names in the industry, and by building contracts that are as flexible as possible. For example, an upgrade provision dictates that our partners be technically competitive; they are required to enhance their architecture as new industry developments unfold."

Villalba explains that in exchange for an exclusive, national marketing agreementfor servicing its 24,000 apartment units, with 15,000 under construction, JPI's telecommunications partners cover the cost of installing the best possible technology and architecture, upgrade as necessary, and offer a revenue share. He says that JPI can't strike a long-term strategic alliance with a leading telecommunications company that makes an investment in a property's infrastructure without giving the company something in return, which is the exclusive marketing agreement, under which JPI represents only that one company as the preferred provider.

Village Green Cos. At Village Green Cos., which has been receiving ancillary income from telecommunications for almost three years, Doyle agrees that high-speed Internet access in particular will be demanded by the residents of tomorrow. "Property owners must sit down and learn about these offerings, or risk the potential of becoming obsolete in the services the community can provide," he states.

Village Green promotes high-speed Internet access in roughly 75% of its portfolio of about 25,000 units in 100 properties. The company is not now focused on laying its own wiring, but is evaluating the merits of ownership. Doyle says the company is considering agreements in which the phone company lays the wiring, but reverts ownership of the infrastructure back to Village Green at the end of the contract. The company is also contemplating the installation of its own infrastructure for high-speed data services, to be administered by a third party specialist.

Doyle says the most important thing about entering into an agreement to gain ancillary income from telecommunications services is "to avoid long-term commitments. Know your options. Perform a great deal of due diligence. If 10 years from now you're still locked into an agreement that doesn't guard against changes in technology, for example, the negative impact on the value of your asset can be significant," he says. "The contract won't be attractive to a potential purchaser, either, who might not be able to get out of it. And because of ongoing mergers and acquisitions in the telecommunications industry, the company you bring in today may not be around in a few years."

Pinnacle Realty Management. Pinnacle Realty Management of Seattle is a third-party manager of multifamily real estate, with about 96,000 apartment units in 43 states. The company is testing a project using T1 accelerators to provide high-speed Internet access to the property.

These electronic devices amplify the capacity of existing phone lines and create a sense of larger bandwidth by pushing more data through a conventional wires than they could otherwise handle. This is an alternative to providing high-speed Internet access via the installation of new, higher capacity wiring.

Stan Harrelson, president and chief executive officer of Pinnacle, reports that the tenant cost for connection has not been finalized, but that "$20 per month for unlimited usage is about the maximum we could charge. We don't know how profitable the program would be, or whether we're trying to jump into an already crowded field of service providers," he proclaims.

Harrelson says Pinnacle's headquarters office of about 105 employees enjoys high-speed Internet access with T1 accelerators, which cost roughly $6,500 to install, and carry a usage charge of about $1,000 per month for all employees.

Consulting services Las Vegas-based MediaCom was formed in 1998 to provide owners, developers and mangers with the resources of a full-time, experienced ancillary services department without the overhead and expense of an inhouse organization. The company specializes in the research, negotiation, execution, implementation and marketing of revenue generating and cost savings programs specifically designed for the multifamily industry.

At RTE Group, Canty says that when owners look at the whole range of competitive and financial factors associated with a telecommunications offering - from doing nothing to implementing the most sophisticated technologies and revenue-generating programs available - doing nothing is not the answer. q

Owners interested in developing ancillary income from telecommunications services can obtain more details from professional organizations such as the NMHC, the National Apartment Association (NAA) in Washington, D.C., and/or The Multifamily Consortium in Houston. A complete overview of service offerings can also be obtained from this independent Website:

The first place to look for a quality service provider that will also share its revenue streams is in an existing portfolio of vendors, such as the incumbent telephone and franchised cable television providers. Evaluate the terms of existing contracts to see if there are provisions for ancillary income. If the contracts can't be located, request in writing that the service providers send a copy.

If ancillary income isn't mentioned in your current contract, inquire about renegotiating for it, perhaps by upgrading a channel line-up in return for a revenue share. Most incumbent local exchange carriers (ILECs) have formal MDU programs that pay a fee to owners for signing customers. If an owner is unsatisfied with the terms, he should consider a competitive, high-quality local and long distance provider that will agree to pay a revenue share.

On the data side, owners who do not have a contract with an Internet service provider should speak with their ILEC, existing cable television company and/or independent third party Internet service provider about data services and revenue sharing programs.

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