Brazil That Steven Dolman, Vice

¶ … Brazil that Steven Dolman, vice president of Hines, is determined to complete on time but that is sadly running into numerous operational difficulties. The Torre Almirante office tower in Rio de Janeiro was a 36-story, Class AA office tower and a complete innovation in the city. Problematic issues ranged from the glass window specifications to the material for the gold leaf lobby ceiling.

There were concerns about the fire protection system, whilst the freight elevator shaft contained substantial problems that could possibly involve substantial modification of the project leading to furthering the bureaucratic procedure in order to require and fill out further forms. The budget - $51.3 million -- was Hines largest investment input in Brazil and, given the country's current sovereign rating, performing a credible exit strategy was complicated at best. Brazil, Hines targeted market, had been going through a fluctuating real-estate period with prices and demand intermittently booming and sinking.

When Hines first started his Brazilian marketing analysis in 2000, prospects for real estate were promising. In December 2001, Hines made a $2.5 million down payment to Banco Interatlantico for the acquisition of the Torre Almirante site. Municipal approvals permitted the site room far more density and height that was generally awarded. The site, however, not only had a tragic history but was also accompanied with various technical problems.

Since some of these technical problems were huge, and conditions of historical preservation were tantamount to site construction, Hines had to employ a particularly competent general constructor. RAMSA, amongst other major mechanical, structural and other design sub-consultant, served as the Design Architect for both interior and exterior design, whilst Searby served as team coordinator. Issues that had to be taken into consideration were the environment's impact on the employed material (should the tower's facade be glass or stone), length of time to complete construction, and cost of the entire project.

The fire system was also problematic since, although modern, it was, paradoxically, unacceptable to Rio's outdated fire code regulations. There were problems with the payment too with Steve having to move from a budget-proposal to an incentive-based approach but one of the largest problems came from discovery that the freight elevator shaft was slightly misaligned and had to be adjusted. The options involved here were either one of great expense or of redesigning the cabin, which would transgress Hines' original contract regarding preservation.

When it came to marketing, Hines needed the support of major opinion-makers in order to gain popularity and appeal for his project. However, certain variables involved in Hine's innovative enterprise would make this approval not so easy to achieve. Leasing the office was also difficult to come by since tenants in that markets generally wanted to be assured that the building would be completed successfully before committing to a lease. Investors were, therefore, pressurizing Hines to show results. Finally, the exit strategy was problematic and its case complicated.

One option was to sell all, or part of, Torre Almirante to international investors, but the procedure could create conflict-of interest situations for leasing. The alternative a Fundo Imobiliario (FI), a Brazilian REIT, offered potential but the system was comparatively young. The problems the Steve Dolman had to resolve, in short, were the following: the project was enormous and Hines was under immense investor pressure to complete it successfully and submit at deadline.

The numerous networks involved in the building (from architects to engineers and so forth) had to be skillfully maneuvered; logistical concerns such as gold-leaf elaboration, glass, and elevator design had to be worked through, and then there were concerns such as legal compliance and REIT funding all of which had to cover -- but not exceed- the exorbitant budget. What are the opportunities, barriers and resources for Hines in Brazil? The opportunities consisted of the marketing boom during the time Hines leased the building.

An opportunity for Hines, particularly when considering international leasing would be Brazil's warm social environment, and rich culture. Rio was also one of the most beautiful cities in the world and a major tourist attraction. A further opportunity for Hines was the oil opportunity thriving and booming in Rio de Janeiro, high demand in the office market, and the fact that the Centro was easily accessible by several highways, bus routes and subway system as well as local and international airports located close to the district.

Class AA vacancy rates, too, were extremely low, and Rio was an emerging market city. Hines caught it at a good time. Barriers included the fact that existing building stock ranked way below international standards and site and approval processes were complex and tedious. Leasing also proved challenging partially due to the fact that the Brazilian Civil Law Code "was an intricate and complex legal system that left room for endless legal battles and weak enforceability" (Segal & Pinho, 2004, p.10). Brazil, in effect, lacked foreclosure laws. Transplanting U.S.

technology to Brazilian soil was unwieldy since Brazil was still culturally and technologically behind existent construction international standards and, therefore as Searby, one of the engineers involved in the team, explained it: "Processes, systems and designs that looked and worked well in the U.S., sometimes weren't as appropriate for or available in Brazil" (Segal & Pinho, 2004, p.6). Finally, there was the potential for another economic crisis and, given fiscal issues peculiar to Brazil, implementing an exit strategy was extremely problematic.

Resources, on the other hand, included Brazil's relatively cheap labor costs which enabled Hines to expand his construction crew to fit his budget. What would you worry about if you were an investor in the deal? The extremely long-time horizon involved; the effects of liquidity, particularly since this is an innovation and involved far more density and height that was generally awarded. The site, however, not only had a tragic history but was also accompanied with various technical problems.

Given Brazil's fluctuating currency and economic situations, I would also be concerned about liquidity. In short, the three components that Poorvu (2003) discusses would all concern me: (a) cash flow -- whether I would receive sufficient leasing interest in the building so that revenues generated and financing proceeds realized would be promising and profitable and that cash expended for maintenance and other expenses would be relatively minimal.

b) Tax effect -- the building's technical and regulatory complications would concern me as well as, and in particular here, their effect on tax regulations and requirements. c) Future benefits -- the profit that owner, hence shareholder, would gain following tax from sales or refinancing of the property. Taken into consideration would be prior mortgage amortization and change in value of the asset. In addition, another three main reasons would restrain me from investing.

These would be: lack of Brazilian foreclosure laws, lack of an exit strategy, and potential for another economic crisis. Describe the basic steps of the development process. What kinds of construction risks does Steve or any developer face? The steps of the development process are scouting out development locations, gaining municipal approval to purchase the site and acceding with their permit regulations, negotiating with previous owners, finding an architect and construction company to develop the project. Hiring laborers, and other mechanical, structural and design consultants, completing and producing related documents.

Municipal approval processes have to be won for any desired change and gained throughout, and finally there are the leasing and marketing issues where developers, ultimately, attempt to engineer an effective exit strategy. Risks include historical and environmental regulatory codes to follow, where Steve, and, in fact, any other developer, has to cohere with city regulations for construction.

The building has to fit in with the cultural and local environment, in both a wider and more local scale, and technological construction has to cohere to that used in the current country. Steve, for instance, faced various problems here in regards to the fact that not only was his fire system ahead of that of the country's but that he faced several conditions that restrained him from altering the building due to historic preservation.

More so, his engineers were impeded from transplanting more advanced American methods and technology to construction since "Processes, systems and designs that looked and worked well in the U.S., sometimes weren't as appropriate for or available in Brazil" (Segal & Pinho, 2004, p.6). The building may have, as did in this case, numerous technical problems that are only discovered when work is underfoot. These problems may necessitate more expense that the original budget allowed.

If you were Steve Dolman, how would you resolve the issues regarding the glass or the gold leaf in the lobby? Would you want the building leased to one tenant or multiple tenants? Would you pursue domestic or international tenants? Who should be responsible and who should pay for the elevator mistake? The glass is actually not an issue since Pontual, an architect with more than 30 years experience of working in Rio, had stated that Rios's high temperature and strong sun incidence would be detrimental for its implementation, besides the fact that the building's location would prevent the facade of glass from reflecting the consistent sheen that they wished it to.

Time delays and cost would be an additional concern. I would, therefore, go for Brazilian-produced material and forego the glass. In regards to the gold leaf, I would also go for the cheaper local material, but I may decide to conduct some impromptu surveys amongst potential businessmen of the market that I am seeking in order to identify their aesthetic opinions in regards to internal and external architectural decoration. I would use the results of these surveys to lead me in my final selection.

I would prefer to lease the building to multiple, rather than to one single tenant, particularly given Brazil's lack of foreclosure laws and its bungling leasing system. Multiple tenants would pose less of a risk and would also, simultaneously and hopefully, provide me with the desired publicity that I would like for this development to attract further lessees in the future. Multiple tenants may also induce public interest in the project that may lead to further acquisition and development of a future similar scheme.

From a practical perspective too, given that this is a 36-storeyed building, Dolman would have no choice but to lease to multiple tenants. I would prefer international to local tenants for various reasons: international tenants would be less aware of the complicated Brazilian leasing laws and of the building's tragic past.