Ready or Not, Here Comes Y2K

If only the Y2K bug could be gotten rid of as easily as its counterparts in
the natural world. It cannot, of course, and there is a palpable sense of foreboding
surrounding the run-up to Jan. 1, 2000, when non-Y2K-compliant computers will assume
it?s 1900.

There is an even stronger sense in some circles that if an industry or player in
an industry hasn?t figured out how to eradicate the bug by now, then they deserve what
they get. That may be true, but all professions, corporate real estate included, must be
cognizant of the repercussions associated with lapses in compliance, even in seemingly
unrelated areas.

“While many government and industry officials — especially those in the financial
services sector — have been quite forthcoming in discussing the Y2K bug, the
commercial real estate sector has been something of an anomaly,” writes Nitin
Manchanda, a manager at PricewaterhouseCoopers, New York, in the Spring 1999
edition of that firm?s Global Real Estate publication. “This is particularly true in
key areas such as property and facilities management, where some industry experts
believe technological problems may have their most significant impact.”

The reason, says Manchanda, is that most property and facility managers rely on
manufacturers? systems, which may or may not be fixed or replaced, depending on the
manufacturer. Consider the systems involved, which make desktop PC compliance seem
trivial: security systems, boilers and air chillers, thermostats, utilities, lighting, elevators,
environmental and energy management systems, power generators and smoke detectors,
among others.

Scenarios involving non-compliance of any of these systems can affect
building owners and their tenants, opening the door to a flood of litigation.

“An owner that?s not prepared [for Y2K compliance] may not be in a good
position to remedy problems if they are undercapitalized or insolvent,” says Valerie
Dunbar, an attorney with Pollina Corporate Real Estate, Park Ridge, Ill., which primarily
represents tenants. “If those are the reasons for non-compliance, there may be limited
recourse for the tenants, she adds.”

Whether building owners or tenants, real estate executives by now should have
dealt with a Year 2000 Readiness Disclosure Statement, which building owners can make
to tenants and other interested parties. Legislation enacted in 1998 now protects owners
from the statement?s use in subsequent litigation, says Dunbar. The legislation was meant
to encourage dissemination of information surrounding Y2K preparedness.

Litigators? Dream Come True

If anyone actually benefits from Y2K, it will be the legal community.
According to a Pollina Corporate Report article on Y2K co-authored by Dunbar
(3rd Quarter 1998; Vol. 9, No. 3), “The legal implications of the Y2K problem are
staggering.

Gartner Group, an information technology consulting firm, has estimated the
cost of remediation to be from US$300 billion to $600 billion and predicts that the costs
will put many companies out of business. Government sources estimate a 2 percent
impact on the gross national product, a figure some analysts consider to be conservative.
Commentators predict the private litigation costs in excess of $1 trillion.”

Even the process of getting ready for the year 2000 can cause problems, Dunbar
cautions. Tests meant to ensure compliance could backfire, causing loss of business
functions or other consequences, and that can and has led to litigation, she observes. “The
more severe the business interruption or problem is, or the more egregious the non-
compliance, the more likely there is to be litigation.”

Dunbar also anticipates problems
related to sorting out liability among, for example, landlords and utilities in cases
involving power disruptions, as well as other service provider types. “A question I would
look to answer is whether the landlord is still responsible for vendor, subcontractor and
utility failures, she points out.”

Some corporations have implemented data gathering programs as part of their
lease-renewal procedure. Parties are asked to furnish Y2K readiness information to keep
companies apprised of progress in this area. “My concern is the quality of the information
that comes back, if anything comes back at all,” says Dunbar. “I would urge people to not
make that just a pro forma-type exercise, but rather to actually analyze and pay attention
to that information and to consider how damaging it might be if there were a problem
with a property.”

The other key area in which the Y2K bug may make its presence known
is in the software programs that automate so many commercial real estate business
functions. Experts urge users of such programs to leave no stone unturned in the search
for code that is non-compliant.

Leading vendors are confident in their systems? readiness for Y2K and have been
for some time. The only time we ever bump into Y2K problems is when clients have
created their own in-house system; nearly half the time, we are replacing in-house
systems, says David Nelson, director of consulting services at Westmark Harris
Advisors, Santa Monica, Calif. “That?s something we look for during data conversion.”
Westmark Harris markets a lease management system called Strategen.

Nevertheless, it would be na?ve to assume that all compliance wrinkles have been
ironed out in the industry?s software-supplier product lines. Y2K conversion is a massive
undertaking for many technology providers, and much as they would like to, few can
guarantee a smooth transition.

    SS