MARCH 2007

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IAMC INSIDER



IAMC members Dave McComas, Rob Downey, Shannon Johnston and Lane Johnson (l. to r.) are the Memphis- based backbone of the ServiceMaster real estate team, headed by fellow IAMC member Frank Betancourt (not pictured), vice president of real estate.

Names:
Frank Betancourt, vice president of real estate
Lane Johnson, director of real estate
Dave McComas, senior project manager
Shannon Johnston, project manager
Rob Downey, project manager

Organization:
The ServiceMaster Company

Portfolio:
1,200 properties, mostly occupied by Terminix and TruGreen units; 600 U.S. branch operations; 90 percent of work is on leases; over 400 transactions in 2006.

Memphis Knows the ServiceMaster Difference
   After investing $15 million in its Downers Grove, Ill., headquarters as recently as 2002, IAMC member organization ServiceMaster in October announced it would relocate its world headquarters to Memphis, where all of its divisions and 2,420 employees were already based.
   Best known for its Terminix pest control and ChemLawn lawn care businesses, the company will relocate all of its 165 well- paying central office positions to southwest Tennessee. In addition, ServiceMaster says that it will create about 335 new jobs in Memphis over the next five years. The median wage for the new jobs will be $67,300. Among the company's past Memphis investments were a $7- million office expansion in 1999 and a 500- job customer contact center in 2000.
   "We are committed to building even closer working relationships between our functional and operational teams. It makes sense to have those teams housed at our Memphis campus, where we have the largest investment and concentration of employees and operations," said J. Patrick Spainhour, ServiceMaster chairman and CEO.
   The company was giving Downers Grove employees until mid- December to decide whether to make the move south or not. Relocation costs are expected to total around $30 million.
   The announcement shortly followed the Oct. 18 vote by the Memphis- Shelby County Industrial Development Board (IDB) to approve ServiceMaster's applications for payment- in- lieu- of- taxes (PILOT) incentives. Helping community coffers from another angle will be the estimated $50 million in housing sales if all current headquarters workers transfer.

PILOT Not Automatic
   The Memphis- Shelby County PILOT program gives approved companies a property- tax freeze. Qualifying firms only pay taxes on the value of the land on which they expand before it was developed. Shelby County does tax the structures that house PILOT companies' expansions, but at only 25 percent of the value of the added space.
   The company filed two PILOT applications because it is still considering two options, with a decision expected by the end of April 2007. One of the headquarters options that ServiceMaster outlined was to further expand at Ridgeway Center Office Park in East Memphis.
In choosing Memphis for its headquarters, ServiceMaster will join fellow corporate citizens with two capital letters in their names: International Paper, FedEx and AutoZone.
The Ridgeway location now serves as the company's principal operational site in the city. In its other PILOT application, ServiceMaster outlined building an entirely new headquarters on a greenfield site. The company has contracted for a 100- acre office zoned site in the Memphis reserve area along I- 385.
   Choosing a greenfield headquarters site would entail building four 150,000- sq.- ft. (13,935- sq.- m.) facilities by the end of 2011 and investing $122.7 million, according to ServiceMaster's application. Expanding at the Ridgeway site would cost between $10.5 million and $12 million, the company said. ServiceMaster requested a 14- year PILOT exemption for expanding at Ridgeway. The IDB reduced the term to 12 years, an incentives award that the company says will save it $8 million. For the greenfield option, ServiceMaster received approval for the 15- year PILOT exemption that it requested, the maximum time frame that program allows. The greenfield incentives would save the company $18 million, ServiceMaster's application indicated.

A Busy Team
   On the same November afternoon that Spainhour announced the exploration of a possible sale of the $3.78- billion company, its Memphis- based real estate team of seven people held a luncheon celebrating its 400th transaction of the year. Then Site Selection interviewed four members of the team, all IAMC members: Lane Johnson, director of real estate; Dave McComas, senior project manager; Shannon Johnston, project manager; and Rob Downey, project manager.
   Together they bring 95 years of industry experience to bear on the company's busy matrix of facilities and transactions, 90 percent of which involves leases, many of the 5,000- sq.- ft. (465- sq.- m.) variety. Almost three quarters of ServiceMaster real estate transactions involve industrial property occupied by some 600 U.S. branch operations. Johnson says the lion's share of the 1,200- property portfolio is composed of operations in the company's Terminix and TruGreen units, which average 4,000- 5,000 sq. ft. (372- 465 sq. m.) and anywhere from 10,000- 20,000 sq. ft. (930- 1,858 sq. m.), respectively. A snapshot of recent transactions included several five- year leases with two five- year renewal options, a build- to- suit leaseback in Arkansas for an eight- year term with two five- year renewal options and the lease of an unused second floor of a Terminix branch in San Diego to a construction company that will result in a positive cash flow of $50,000 annually to operations.
   Johnson's resumé includes experience in the retail and hospitality sector, while McComas counts experience with Fischer & Co., CB Richard Ellis and the FedEx real estate team on his resumé. He is one of the professionals serving in a support role on the Memphis project.
   "The PILOT program was designed precisely for projects such as the ServiceMaster HQ," McComas says. "Our president and CEO, our Group and Company presidents, and our senior vice presidents of finance, tax, legal, HR, special counsel and real estate brokerage professionals worked on a team coordinated by the vice president of real estate, Frank Betancourt [also an IAMC member]. Our approach was to first understand intimately our internal costs associated with our alternatives, secure input and buy- in from all members of executive management, structure our PILOT application uniquely for the alternatives of this project and then discuss the impact of the project with governmental authorities at the state, county, city, and city council levels. A mutual understanding of the impact of this project was developed and the PILOT application was approved."
   Barbara Connolly, the company's director of state and local tax, sits on the board of the Council on State Taxation. Asked to describe her role in site selection at ServiceMaster, McComas says, "the tax consequence associated with site selection such as that for the corporate HQ is a critical consideration, and Barb has been a team leader overseeing this area of interest. She has done a superb job of analyzing the potential impact of multiple sites on future taxes. ServiceMaster is a good corporate citizen and only sought to offset some of the high cost associated with relocation of our corporate HQ. She had done a good job of educating both politicians and the public that PILOTs are not a tax giveaway. If our HQ stayed in Chicago, we would continue to pay tax in Chicago and to the state of Illinois. These are not taxes that Memphis, Shelby County or Tennessee would have ever seen. All the PILOT really does is offset enough of our cost that our larger mission of executive management is better served with the headquarters being in Memphis along with company operations."

How Things Work
   ServiceMaster used to handle its real estate on a sporadic basis through a service provider, with most transactions being handled at the field level by a manager. There was an administrative function, but no centralized plan of attack.
   That changed five years ago when Johnson and Betancourt came on board. Their immediate goals were to centralize processes, negotiate the business and standardize and negotiate the contracts. One early challenge was getting things going earlier than the typical "month or two before the end of the term," says Johnson.
   "We're now nine to 10 months out on a standard procedure," he says. "I survey them all to see if there are more difficult markets – in some cases, we need to start 18 to 24 months before the end of their terms."
   On the technology side, McComas says the database and project management systems developed by Johnson and Betancourt "have been continuously modified to streamline our jobs. Lease administrators and project managers have provided practical feedback which has been heard and incorporated beautifully. The system meets our needs far better than any canned or custom system I have seen or utilized."
   "It's a direct result of Frank and my different experiences at the companies we've worked at," says Johnson of the Axcess- platform system. "To track existing leases and transactions, I'd say we rival anybody. It doesn't have high octane, but we don't need it." However, the company is constantly benchmarking against everybody else – one of the reasons all four belong to IAMC.
   The second issue was providing the type of support that would fit in with operations. Managers used to doing their own transactions were now confronted with a full- service provider. But confrontation was minimal and buy- in was nearly universal.
   "One thing Frank and Lane did was offer the services on a voluntary basis instead of mandatory," says McComas. "When you make it mandatory, it seems to build a natural resentment. The way they presented it was a support service to buy into or not, and let us demonstrate our value. Because of that, the relationship between the field and the real estate department is just excellent."
   "We haven't had to go begging for business," adds Johnson. "Word of mouth is our best educator. We take this monkey off their backs, negotiate, get the approvals, and it's truly a night and day difference from whence they came. We're to a point now that very little goes on out there that doesn't have our involvement."
   Part of the buy- in is what McComas calls the very open atmosphere at the company.
   "Shannon knows the CFO at ChemLawn, knows all the divisional VPs and has known them for a long time," he says of Johnston, who oversees the ChemLawn division. "Rob knows all of them across all the companies, and I've gotten to know all the Terminix folks. We're allowed to communicate with who we need to – I have worked in places where the boss wouldn't let me send an e- mail over his head. That can be difficult."
   Asked what they look for in both service providers and economic developers, McComas says of real estate brokers, "I look for their ability to grasp our facility requirements along with market knowledge and negotiating skills. Effective communication skills with our internal customers and with us are essential to keep projects moving smoothly on schedule, and securing a quality location under budget."

"Economic developers tend to be too focused on larger opportunities and frequently overlook our smaller transactions."
– Dave McComas, senior project manager, ServiceMaster Corp.

   "We're looking for people who understand our needs and our place in the marketplace. It's something we want to replicate anywhere we can, and that's one of the things we hold out there. If we find a service provider who understands, we use them across the business units, so we're not always giving them just one transaction."
   "It's important to think outside the box as to our needs," adds Johnston. "If it's difficult to find a two- and- a- half- acre parcel with a small industrial building, you have to look at non- traditional solutions. We've started going into truck terminals or closed auto dealerships because we need a large parcel with small building on it."
   For economic developers, McComas has a focused message: We count too.
   "Economic developers tend to be too focused on larger opportunities and frequently overlook our smaller transactions which may still impact a local community with 25 to 35 new jobs," he says. "These positions are with a Fortune 500 company and are accompanied by very good pay and benefits. I realize they are constantly looking for the HQ project, the home run, but they should be paying closer attention and targeting projects such as ours. Our type of projects come along much more frequently and yet I have had more than one economic development group tell me that they do not have any incentives for our projects. There is very little interest in a project of this size, which is a huge mistake."

A Sense of Commitment
   Johnson's teammates point out successful incentives negotiations in Lafayette, La., and Willoughby, Ohio. But problems do arise, and it's the in- house tightness that helps discover a solution.
   Johnson describes a recent situation in a constrained industrial market in an upscale southwest Florida area with only two industrial parks in the entire county. After Johnston had done "exceptional" work helping find a property, the county reneged, says Johnson. "We had an unbelievable fire drill on our hands, and Shannon pulled it off again in short order. It typifies the problems we have for the requirements we have. We did our homework and it wasn't enough. The county reneged because they thought they could. She stayed with it."
   "They were very cooperative the second time around," adds Johnston. "I take my responsibilities very personally, because if I don't do my job, there's going to be a branch that won't have a place to operate."
   "You can't outsource that type of commitment," says Johnson, mentioning a similarly creative solution that Downey helped improvise in Galveston, Texas, involving the sale of a building and a release from six years of obligation. "These people don't have options to shut down the business and get back to it in a few months."
   "We have street cred," jokes Johnston.
   "We're always looking for the angle," adds McComas, "and we are all the time uncovering cases where the landlord has increased and increased our rent over time we had paid for those tenant improvements initially, and there was no reason for that rent to keep going up – it was pure warehouse space from the landlord's perspective. We went in and took the rent back to industrial rates. It made sense to the landlord and to the business unit – we essentially got them a few years of free rent."
   Asked how ServiceMaster's legendary ethos and servant- oriented mission find their way into negotiations and agreements involving facilities and real estate, McComas says, "ServiceMaster employees are accountable to 'Honor God in all we do, Excel with Customers, Help people develop and Grow profitably.' These goals are broken down into everyday actions such as 'Doing the right thing,' 'Making it easy for the customer,' 'Helping people reach their goals,' and 'Acting as good stewards of our investor's capital.' This corporate philosophy is embedded in our day- to- day real estate mission. We try to do the right thing for our operations groups and we treat our landlords and property managers with respect.
   "Having worked in many companies throughout my career, ServiceMaster is the most employee- and customer- oriented company I have ever been affiliated with and it is a most pleasant place to work," McComas says. "We are constantly focused on improving our internal customer service and taking all we can possibly take off operations so they can better focus on customer service."
Adam Bruns and Jack Lyne

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