Bringing it together through cooperation and hard work

What do you get when you mix a large manufacturer in need of an industrial campus with five property owners spanning two municipal taxing authorities? TAR’s Commercial Transaction of the Year for 2001.

If you think negotiating a large commercial real estate deal between two parties is tough, then the award-winning transaction brokered by Scott Jessen and Scott Morse of The Morse Company in Richardson will amaze you. These gentlemen persuaded several landowners and major developers to shelve their projects, combine their property holdings, and cooperate as a single entity so The Morse Company’s client could construct its new industrial campus.

This single-client transaction required Jessen and Morse to use their comprehensive market knowledge and negotiation skills, as well as act as the single-point-of-contact representation for more than 10 actively involved parties–the client, developers, architect, attorneys, and economic-development directors, among others.

Landing the right site

The transaction took shape in July 2000 when Flextronics International, one of the world’s largest contract manufacturers of electronic equipment, hired The Morse Company to act as its local-market representative. California-based Flextronics wanted to expand and consolidate its existing North Texas facilities to one industrial campus. The company’s initial plan called for a four-building campus totaling 500,000 square feet, with potential expansion to 1.2 million square feet.

The search for a campus site began with the evaluation of different submarkets in the Dallas-Forth Worth area based on the availability of a skilled and educated labor force, municipal tax incentives, land, transportation infrastructure, and convenience for current employees located in different area submarkets. The search quickly narrowed the possible areas to the region in and around Richardson’s Telecom Corridor.

Concurrently, The Morse Company walked Flextronics through a careful analysis of the costs, benefits, and detriments of leasing versus owning. Considering the energized real estate market and the premium for locations in and around the Telecom Corridor, Flextronics elected to put the development into a synthetic-lease arrangement that allowed the company to treat the project costs as an operating expense, but maintain the greater control associated with ownership.

One 148-acre site met all Flextronics’ criteria and emerged as the logical location. However, the land was owned by five different parties and spanned two municipal tax jurisdictions: Richardson and Plano.

Cooperation is not a dirty word

Two of the tracts, totaling 77 acres, were owned by major area developers Jackson-Shaw Company and Catellus Development Corporation. Both had plans in place to develop on their tracts several speculative, multi-tenant, one- and two-story buildings. Another critical tract was under contract to a developer for a future hospital.

A comprehensive site plan revised the necessary land area to 110 acres, and Jackson-Shaw and Catellus were approached about the idea of one buying the other’s interests in their particular tract. Both resisted. But Morse and Jessen knew they could get the developers to work together. Catellus’ tract was land-locked, and Jackson-Shaw’s land would benefit greatly from a joint venture.

"We evaluated and discussed the current market conditions with each party," Morse said. "Through our research, we were able to show that the element of risk for one developer was high going into a declining market. And we showed the other developer that by working with us, we could immediately enhance the value of his land."

The Morse Company then helped Flextronics move to acquire the critical 50-acre parcel adjacent to the developers’ tracts. "We made a significant financial commitment to prove our sincerity," recalled Morse. "Each party was given the opportunity to develop a portion of the campus, which created an immediate income opportunity for them."

During this time, Flextronics acquired another local company that was already in negotiations with Catellus for a new Garland development. The process was immediately redirected to incorporate this company into the new Richardson/Plano campus development. Sensing a looming critical decision, both developers approached Flextronics and The Morse Company with a plan to develop their tracts in tandem.

Flextronics accepted the developers’ proposal with the caveat that the entire process be seamlessly integrated. Architectural design, construction and its materials, thoroughfares, landscaping, and overall functionality had to be incorporated into a single cohesive development.

Making one out of many

The Morse Company now had the necessary parties working together to make Flextronics’ campus a reality, but managing the various participants involved posed new challenges. "We had to assemble the land parcels confidentially so as not to artificially inflate land values," said Jessen. "We had to convince two developers with opposing profit models to coordinate. Plus, we were dealing with a major project in a declining economy."

Flextronics entered into a binding letter of intent to purchase the 50-acre tract from the hospital developer and binding build-to-suit agreements with Jackson-Shaw and Catellus. They brought in an architect to design the four buildings and the overall campus layout. Once the buildings were laid on the site, Jackson-Shaw and Catellus traded land so that the 50-acre tract was absorbed, and each developer had two buildings situated on their land.

The first phase of the development covered approximately 47 acres of the entire site, and Catellus continued to own the remaining 30 acres. Flextronics agreed to a purchase option to be exercised at some time in the future.

A single lease form was drafted once the construction drawings were bid, and a shell cost and appropriate tenant-improvement allowance were established. The developers agreed to waive their individual standard lease agreements in favor of the negotiated document, customized for each developer. The lease agreements included purchase options, which could be exercised upon substantial completion of shell construction, for a pre-negotiated price. The leases were executed in early 2001.

A cooling real estate market prompted Catellus to push the purchase option, which Flextronics agreed to, as the technology market was also cooling.

Morse recounted, "The slowing economy further motivated the developers to continue to work with us. From Flextronics’ perspective, it made us continually review the business model for the campus and the economic benefits. Flextronics stayed true to their vision that this facility would be a long-term growth strategy."

In November 2001, the building shells were substantially completed, and the next month, Flextronics exercised its purchase options for all four buildings. Eventually, Flextronics expects more than 5,000 people to work at the complex.

Everybody wins

Morse and Jessen always felt confident that their business model would work for all involved parties, but weren’t positive the deal would happen until well into the project. "It wasn’t until late in the process that we felt comfortable that Flextronics’ upper management in California had finally bought off on the plan and were prepared to follow through," said Morse.

The Morse Company received many accolades for its management of this complicated deal, but Jessen points out that the other parties also benefited. Plano and Richardson received large additions to their tax bases. Flextronics benefited from long-term cost savings and the efficiency of aggregating several different units together into a single location. And developers Jackson-Shaw and Catellus gained the experience and exposure that comes from handling significant high-profile development for a major international tenant.

This was a landmark assignment for The Morse Company that proved a small local company can be effective and creative at solving the facility problems of international tenants. Morse said, "This project has put us into a new category and will open new doors for us."

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Scott M. Jessen, CCIM, (middle) and Scott A. Morse, CCIM, (right) of The Morse Company in Richardson accept the 2001 Lone Star Award from TAR Immediate Past Chairman of the Board John Eckstrum.