QUESTION & INSIGHT

eborah Rochkind recently stepped out of the whirlwind that was AOL TimeWarner’s real estate group after seven years managing AOL’s 5- million- plus square- foot (465,000- sq.- m.) portfolio in 15 countries. Most of her time at the Internet giant was spent working on financial management, mergers and acquisitions, lease negotiations

Deborah Rochkind

and data center site selection.

   In October 2006, Ms. Rochkind joined Venable LLP as a partner in the law firm’s Tysons Corner, Va., office. In addition to her new assignment at Venable, she serves on the Loudoun County Economic Development Commission and is chair of its Transportation and Infrastructure Committee. Site Selection Editor Mark Arend caught up with her in early November, as she was settling into her new role as service provider to clients with whom she has much in common.

   Site Selection: You joined the real estate department at a high- tech industry icon at a pretty interesting time, given the rapid growth associated with Internet companies. What was it like?

   Deborah Rochkind: When I joined AOL in January 1999, the legal department only had about 20 lawyers. The company was rapidly expanding and was cutting edge in terms of the Internet. The legal people weren’t really specialists, but rather generalists. One of them, an international attorney, was taking care of lease and real estate matters at the time. When the company really started to expand, the general counsel determined that they needed a subject- matter expert, and a friend there thought it would be the perfect job for me – and they hired me. They needed someone with experience in real estate and real estate financing. I knew going in that that was what I would be doing, but I also knew I would be picking up more general things as well. I didn’t realize when I joined that the company would expand worldwide at the rate it did.

   Initially, a lot of my work was focused on financing, because the company didn’t have lots of cash, and we were financing everything. Within a year, that changed, and the focus became building data centers, getting call centers, and as the company’s population of employees expanded, getting space. We branched out into the international world mostly through acquisitions. I didn’t know exactly what I was getting into, but it was right up my alley. There was a comfort zone, which was good.

   SS: Given all the mergers and acquisitions you were involved in at AOL, what is your impression of real estate’s role in the process? Was it a front- burner or back- burner consideration to those closing the deals?

   DR: I represented the real estate group and department in doing acquisition due diligence for our acquisitions. One of the biggest struggles, which a lot of real estate or facilities people deal with, is that real estate is a large expenditure in a company’s budget when a company gets to be fairly large. And the commitments are fairly long term, so you’re making a big commitment for the company. When you’re doing an acquisition, [real estate] gets very little attention in the process. It’s very frustrating, because you could acquire an incredible company – maybe for the people or the technology or what they do. Well, they could be sitting on a toxic waste dump, but if the company really wants that technology or that company, they won’t pay attention so much to the real estate issues. Many times, they proceed with the acquisition, and you’re left to deal with and manage the real estate issues. I know that happens in other companies, too.

   It is unfortunate that real estate is not given as much attention in those processes as it warrants. M&A lawyers and business development people at companies should give real estate a more serious look, and it should be a more important factor in a determination of an acquisition. I don’t think it is, unfortunately.

   SS: Is it fair to say that many in senior management in corporate America undervalue the importance of real estate to their organization’s financial performance?

   DR: That’s correct. Real estate needs to be looked at in two equal components. Your best deal getting in, and ease and minimizing your exposure to get out. It is so important from a corporate perspective to have an exit strategy with every real estate decision that is made, and to understand the risks of making that real estate decision.

   Real estate could kill a company. If you are a fast- growing company and sign a lot of leases for Class A office space for 10 years, and the economy turns or something happens to your industry or to your company, if you don’t have a strong exit strategy that you have vetted and negotiated, having outrageous termination fees or not being able to get out of that space could tank a company. In a cyclical economy, that is really important. Companies are foolish if they are not being strategic in their growth. Don’t take the whole 100,000- sq.- ft. [9,300- sq.- m.] building – take half, even if you have to pay a little bit more of a lender premium, but you can get expansion options. Don’t saddle yourself with costs and expenses that you don’t need at that time.

   SS: With so many tasks now coming under the real estate manager’s purview, what is job one?

   DR: It is imperative to do the financial analysis. At the end of the day, it’s how well you can sell a transaction to your CFO. It’s important to have a strong relationship between the real estate person and the CFO. That’s the deal right there. Somebody along that line has to approve it, and it’s money. You do financial analysis of a four- year, full- building lease versus a partial with expansion options, and so forth, and sell it to your CFO. It’s that important. Some CFOs won’t pay attention when you’re talking about 5,000 or 10,000 square feet, but if you’re starting to look at a 5 million or 6 million square foot portfolio where 50 percent of your leases are 5,000 or 10,000 square feet, they should. And a real estate professional should be consolidating all of that, doing portfolio reviews and comparisons of square footage costs. It all varies. It is much more efficient and cost- effective for a company to have a 30,000 or 50,000 square foot space than a bunch of 5,000s. That’s an education process. I am seeing a lot of companies restructure so that the real estate manager and CFO reporting structure is much closer – that kind of access is critical.

   SS: Where do you stand on the timeless question of own versus lease?

   DR: A portfolio should have a healthy mix of both. Any owned real estate should have an exit strategy, such as the ability to sell an individual building when downsizing in the case of a campus. I don’t think you should put all your eggs in one basket. That mix depends on the company, but I don’t know that in the ever- changing marketplace you should own your specialty types of real estate unless it’s core to your business. For a manufacturer, owning the main plant is probably smart, but then I would mix that in with leased property as well. Then if manufacturing expands, you lease – own your bare minimum.

   At AOL we owned the data centers, because that is core to AOL’s business. It’s challenging when it’s so integral to your success and your failure to be in a leased building. It was better for AOL’s business to own the centers.

   SS: What were the real estate challenges associated with being a fast- growing Internet company?

   DR: With a company like AOL, we were a great tenant in the eyes of landlords. We never paid security deposits, we never got asked for parent guarantees. We were viewed as a good credit company. The biggest challenge for a real estate professional was being able to deliver the space quickly enough. Lease negotiations often took longer than anticipated, so we might get a little bit behind, and we’d run out of space. There was always that internal pressure to deliver space. On the other hand, at a large company, your negotiating position is a lot stronger, so there was that upside, as well.

   SS: How were sites for the data centers selected, and how were project teams organized?

   DR: We did that in conjunction with the technology group – the network operations team and related groups. Typically, there was a reason why they wanted to go someplace or not go someplace. They knew the fiber, the reliability and the power grids. With respect to the data centers, with the exception of the one in California, we did site selection in conjunction with economic development departments and to some degree real estate brokers.

   In AOL’s corporate services department, there is a head of corporate services and then several groups, and I was in the real estate group. Others are construction and tenant- improvement groups. Within an operations group, there was a core group that handled the data center operations. I worked on site selection and made sure the land was entitled so we could build a data center, apply for special exceptions or amendments, anything we needed to do. I worked closely with the construction team, which would usually get a general contractor and engage a construction company. I’d also go through the design process with the operations team and the technology team, which would “own” the data center. It’s pretty routine; we’d work closely with subject- matter experts on data centers.

   SS: What role did incentives play in determining where data centers and other facilities were located?

   DR: They are extremely important, and they should be for everybody. There’s money out there, and no company should leave money on the table – even for simple leases. When you’re putting $500 million of computer equipment in a building that is 100,000 or 200,000 square feet that’s a lot of equipment. Tax codes in the late 1990s and early 2000s didn’t address sales and use taxes and personal property taxes on computer equipment. The code never anticipated putting that much computer equipment in a facility. We went in and negotiated to have some of those rates changed, so you pay lower taxes on that.

   [I realize some see incentives as only important on the back end], but most of our experience doing the incentives really was at the beginning of the data- center boom. So we were really on the front end of that. We weren’t going to make commitments to build these multimillion- dollar facilities without a partnership with the county and state. Today, it’s a little different, because a lot of it’s already out there and it’s de minimus what you’re going to have to change. But unless there’s a driving business need where you have to be in one city and one state, and you don’t really have a choice, incentives should be factored in early on in the site selection process.

   SS: Any thoughts on the service- provider community now that you are no longer a client?

   DR: I was part of a council of real estate managers involving the AOL TimeWarner business units. We leveraged our position in the marketplace.

   The brokers I was using at the end of my time there were all top- notch, very strong partners. They knew me, what I liked, what I tolerated and wouldn’t tolerate, and they managed things accordingly. There are some terrific service providers out there, and developing a personal relationship is key. It’s also important not to put all your eggs in one basket, to spread the business out a little bit. Competition is healthy, and keeps them on their toes; they know it’s not a shoo- in that they will get the next deal. We have a lot of choices out there.