NAIOP SoCal President and Kidder Mathews regional president Eric Paulsen recently sounded the alarm on the lack of commercial real estate industry engagement on legislation that can prove detrimental to the industry’s interests. Actions such as emailing or calling a lawmaker’s office or checking a candidate’s voting record before casting a ballot happen too infrequently, in Paulsen’s view. Connect CRE invited Paulsen to go into depth on the problem as well as possible solutions. Here’s what he told us:

Q: Is the legislation that is harmful to the commercial real estate industry primarily at the state level, the local/regional level, national or a combination of the above? What are some examples?

A: Most of the legislation impacting commercial real estate is at the state and local level versus the national level. Too often politicians try to solve the right issue with the wrong approach, or don’t have enough understanding of the potential impacts and create more economic damage than benefit.

Examples include:

• For four consecutive years, NAIOP has dealt with state legislation that would have shut down nearly all warehouse development across California, eliminating jobs and hurting local economies. The latest version was AB 1000. NAIOP SoCal mobilized thousands of members and allies who contacted state legislators in opposition to AB 1000. While we stopped AB 1000, the author, Assemblywoman Eloise Reyes, has vowed to continue pushing for this harmful legislation. We must be ready to respond. We can provide logical counterproposals; educate those who don’t focus on commercial real estate of the harmful impacts of the proposal; and mobilize people to demand retraction of the proposal.

• At the local level, industrial properties have become the new enemy as several cities have enacted or considered adopting a warehouse moratorium as well as seeking to downzone and dramatically restrict not only the size of industrial buildings but what kind of tenants owners can have. These zoning ordinances are restrictive, and changes are made without notifying property owners and with no economic analysis of the impact on the industry or community.

• In Los Angeles, voters passed Measure ULA, impacting all property types. It stipulates that sales of residential and commercial property valued at over $5 million but less than $10 million are subject to a tax of 4%, while sales of properties valued at $10 million are subject to a tax of 5.5%. These crippling new taxes have depressed further growth and development in Los Angeles.

• In 2021, the South Coast Air Quality Management District (SCAQMD) adopted the indirect source rule (ISR) creating complex regulations governing over 3,000 warehouses. This rule requires warehouse owners and operators to either reduce truck emissions (i.e. by using electric trucks) and/or pay a substantial amount to the SCAQMD. This imposes additional annual costs on warehouses of approximately $1 per square foot, totaling close to $1 billion. No plan was presented by the SCAQMD on how these revenues will be spent. More importantly, most people assume these regulations are “sticking it to the wealthy,” but most if not all this cost is passed along to all of us as consumers.

Q: Has there been more legislation enacted in recent years or has there been less resistance/opposition from the industry?

A: CRE is the new demon as we are often portrayed as wealthy individuals harming the environment and not generating jobs, or as wealthy corporations that need to contribute more to fixing all the socio-economic issues plaguing our cities. CRE is the new revenue source as much of the legislation is a money grab to support other issues. Often it is local agencies who seek funding to increase general fund budgets. The WAIRE point system is an example of this. There is no way an industrial building will be compliant enough to solve for all items being demanded, so the operator ends up writing “mitigation” checks to the local city.

Apathy is costing the CRE Industry billions of dollars. More legislation detrimental to CRE, and common sense, has passed in recent years than ever before and the CRE industry has let it happen. Many politicians are elected with less than 10% of the vote and depending upon how you count, anywhere from 60% to 80% of our politicians have never held a private sector job. We must inform and educate the public and politicians on how critical the commercial real estate industry is to every aspect of life and how every one of their decisions impacts us individually versus as an industry or corporation.

Q: Industry associations can help keep members informed – what are some ways in which members can help industry associations?

A: NAIOP SoCal is devoting significantly more resources to legislative affairs because we must advocate for our industry in front of city and state officials. The chapter testifies before Planning Commissions, City Councils and State Legislature. NAIOP SoCal also updates members on pending local and state issues and rallies members to testify before state and local jurisdictions to show local government leaders that their actions matter.

Oftentimes legislators are unaware of the effect of the bill they are proposing. One politician in San Francisco wanted to ban the ability to evict a commercial tenant during COVID which had the potential of making every single contract in the state of California null and void, all to save his favorite restaurant.

Measure ULA in Los Angeles has not generated nearly the funds that politicians expected because it instead became a deterrent to invest in the city, dropping transaction volume by over 70%. Sale transactions reset the property tax basis in properties. Not only is it not raising the money hoped for, but it is stifling transaction volume and new investment which is minimizing money in potential recurring tax dollars.

It’s simple. Politicians want to get reelected, so they weigh the issue and side with the largest voting block either for or against that issue. Members need to make that call, send that email, and educate others not from our industry what the impact will be of upcoming legislation, and if they can, financially support groups that are doing all the above.

Q: Can you provide a “success story” illustrating the kind of industry involvement in shaping or opposing legislation that you would like to see more of?

A: Yes! NAIOP SoCal defeated AB 1000, which would have shut down nearly all warehouse developments across California. We mobilized thousands of members and allies who contacted state legislators in opposition to AB 1000. But this battle is far from over.

For the first time in history, NAIOP SoCal is sponsoring two bills in the State Legislature.

First, AB 2904 boosts transparency and doubles the notification period to property owners statewide when cities propose zoning changes that impact the value and use of their property. In mid-May AB 2904 unanimously passed the State Assembly and is now in the State Senate.

Second, NAIOP SoCal and CBPA sponsored AB 2433, the “California Private Permitting Review and Inspection Act.” AB 2433 would expedite the permitting and plan check processes by allowing developers to use private professional services if a local agency fails to meet a 30-day deadline. AB 2433 has unanimously passed three Assembly Committees and we are pushing to get it approved by the State Assembly.

Our goal is to get these bills signed into law. With these bills, we are playing offense. When our industry, which impacts every single person each and every day, is willing to make a simple phone call or send a brief email, it makes a difference.

Data center operators who need development cash fast are increasingly issuing securities when revenue can’t keep up with growth.

RagingWire CA3 Data Center in Sacramento, California

Flexential announced last week that the company raised $2.1B through a securitization offering — effectively a bond issuance. This was the largest asset-backed securities issuance in the history of the data center industry, the company claims.

But while it may be the largest, Flexential is just one of a number of private data center firms to issue similar securities in recent weeks as operators look for new ways to fund development and keep up with the ever-increasing demand for data processing and storage.

“Securitization is becoming a trend as others [data center operators] including Aligned Data Centers, DataBank, and Vantage Data Centers, have all raised capital via similar securitizations,” DataBank Senior Director of Interconnection Product Strategy Christian Koch wrote on his Foundations blog. 

The debt issued by Charlotte-based Flexential is backed by 23 of the company’s facilities across 14 markets in the U.S., accounting for more than 1.28M SF of combined data center space, according to Foundations. Newmark Knight Frank appraised the portfolio at $2.7B. 

This kind of debt offering is a relatively new phenomenon for the data center industry, but recent weeks have seen a wave of similar securities issuances. In the past two months, Vantage and Databank raised a combined $563M through separate securities issuances. Aligned Energy raised $1.35B by issuing debt in August. 

Data center firms turning to securities have generally not been coy about their motivation: funding development that wouldn’t be possible with existing revenue. DataBank’s offering last month was explicitly to finance development and expansion in Salt Lake City, Denver, Virginia and New York, while Flexential’s press release says the debt was to “support rapid growth and development.”

“The offering dramatically improves the company’s investment grade credit profile, lowers the cost of capital, and allows Flexential to deploy greater data center capacity to meet accelerating demands in new and existing markets,” the company said in a written statement.

Flexential’s offering also reflects another financing trend across the data center space — so-called sustainable securities linked to the company’s ability to meet environmental goals.  

$1.6B of Flexential’s $2.1B offering requires that facilities built with the funds meet certain power and water usage benchmarks that the company is collectively calling its Green Finance Framework.

“The level of detail contained within our new Green Finance Framework will ensure discipline in this strategy and our sustainability performance,” said Garth Williams, Flexential’s Chief Financial Officer. “We will look to achieve this through energy- and water-efficient cooling, cleaner power systems, and renewable energy options.”

Much of Aligned Energy’s $1.3B securities issuance in August was similarly linked to the company’s ability to meet sustainability targets. In the past year, a handful of other data center or telecom companies — including data center giants Digital Realty and NTT — have also raised funds or converted debt to structures tied to sustainability and ESG goals.