Real Estate Aspects of Recovery Centers
- Published on October 25, 2007
Dedicated Hot Site
A company may own or lease a dedicated standby center. This is a separate facility, constructed and maintained by the company for its own use in a disaster. It may stand idle without being used, except in case of emergency occurring at the company's regular facility. The benefits of such a dedicated facility are:
- Assured access. There is no sharing or prioritization with another user of the same facility. There is no risk of being bumped or fighting for space in the facility.
- Compatibility. As the center is designed only for one company, this increases the likelihood that in a disaster the back up systems will take over with maximum effectiveness.
- Flexibility. As technology changes, it is easier to make revisions in the back up systems to match the company's now current systems.
Thus, the dedicated stand-by center increases the likelihood of achieving the best response to disaster. However, cost is a serious drawback. There is the high cost of creating redundant or excess capacities, and the acquisition and/or construction, equipping and maintenance, and carrying costs of real estate - all while the facility stands idle awaiting use in an emergency.
There are alternatives to cut or recoup costs. The facility may be regularly used by a non-priority tenant which agrees to relinquish the site when a disaster occurs. Another option is to share in the creation and use of the contingent center with one or more other companies on a reciprocal, primary or secondary basis. In this way there can be mitigation of the cost of real estate acquisition and development and of much infrastructure. The premise is that it is unlikely that more than one potential user will have a disaster at the same time, especially when the companies involved have 'home sites' in different geographic areas.
This arrangement could take the form of a joint venture. There would need to be a formal agreement detailing the circumstances under which the site may be used (including sharing priorities if there was a multiple user disaster) and the costs involved. The agreement would also deal with secrecy and confidentiality concerns which sharing of the facility creates for each user.
However, in either the lease or joint venture, which of the companies will jeopardize its own business viability by obligating itself to share or relinquish the center in a disaster?
Some arrangements are therefore only 'best efforts' - where back-up is promised so long as the time is available. If a disaster occurs, and use of the site is needed immediately, there is no practical legal remedy if the present user refuses to vacate in violation of the agreement.
In most states, one can't use force to recover the facility. Nor would a company want to do so. Resort to the courts is too slow a process when a 24 hour recovery time is needed to access the site.
Therefore, some companies would not consider these arrangements as viable alternatives to the dedicated site.
One alternative is to create the back up site in the company's facility at another location. When a company has more than one computer facility, it may be able to provide its own back-up for certain critical applications - especially if they are in separate geographic locations and are compatible.
Each site backs up the other, so every site must be designed and equipped for some but not total redundancy. As some normal company functions must be sacrificed in a disaster to allow for critical needs, this solution is a shorter term one than the dedicated standby facility.
Another alternative is to subscribe to a hot site facility from a commercial vendor. The company books contingent seats and pays monthly reservation fees. In a disaster, the company uses computer hardware, office space, utilities and communications in the vendor's remote location.
For the company, there is no real estate acquisition, leasing, construction and equipment component. There is, however, a risk of being bumped in a multiple or regional disaster, because each seat is sold a number of times to different subscribers.
In that event, the company could be pushed to an inconvenient secondary location, or would have to share or allocate computer or data processing or office space in the center with other subscribers. The reservation in the center is also limited to a specified time frame.
Mere ownership or lease of real property in another state can trigger the requirement to qualify to do business in that state; even when the property stands idle.
If the actual user does not wish to qualify in that state, the problem can be solved temporarily by taking title or entering into the lease in name of a subsidiary or affiliate of the actual user company - then only the subsidiary or affiliate must qualify to do business.
However, when actual use by the user company's employees occurs, upon the contingency of the disaster (or for other company business), this will trigger a requirement for the user to qualify.
Likewise, the mere ownership or lease of real property may subject a company to corporate income tax in a jurisdiction. This problem can similarly be resolved through use of the subsidiary or affiliate designation, but only if permissible under the local tax rules. If tax is payable (either because of mere ownership or actual use), most states do not simply tax the local asset, payroll or local sales - in these states the local fraction may be small, based upon the relatively small activity or small length of time (during the disaster) when the business was conducted. However, the tax may be meaningful when the small fraction is applied to the entire company-wide income.
Uses. The facility must be capable of accommodating special uses, such as higher density emergency occupancy than in a normal office or light manufacturing facility, greater electrical supply and demand, greater HVAC, uninterrupted power supply, and special communications link-ups. There should thus be a preliminary architectural and engineering assessment of feasibility and cost.
Zoning. As acquisition and renovation is costly, to achieve savings, the site may well be situated ina 'back office' type area or even in a warehouse or light manufacturing area. If the company is purchasing a building in a warehouse or light manufacturing area, it must check the zoning laws to determine whether an office use is permitted in that zoning district.
Density. The company may want to use the center for a much higher occupancy density in an emergency situation than normal usage reflected in the certificate of occupancy for the building and in its constuction. Building codes call for infrastructure which is a function of density of usage, such as floor load, emergency exits, HVAC capacity, bathrooms, and, in a multi-floor building, fire stairs) the building code tests are self-correcting for density of usage - so the building can be redesigned to allow greater density - more exits, greater HVAC, and more bathrooms. Thus, structural changes might be required to accommodate a higher density use.
Compliance with the building code is a legal requirement, so greater density use than code allows could be a violation of law. An accident or injury while the building was being used in violation of law could trigger the civil liability of the company. Also, criminal liability can be placed on corporate officers in the event of a criminal violation of a building code by the company, when the officer was responsible for and directed the activity.
Normally the amount of parking is a function of building square footage, not occupancy. If the building was originally constructed for light manufacturing or warehouse use, it may have parking in a lower ratio than an office use parking ratio, so that there may be insufficient parking for office use. Adding parking requires special approvals.
In a multi-tenanted building, the hot site facility creates certain unique issues. A dedicated power or uninterrupted power source is required, but not every building has this feature (its own generator and/or duel power feed) or would be able to allow a tenant to construct this feature.
Extra power is necessary, but not every building has sufficient power capacity to meet the special electric load requirements of the facility. The feasibility and cost of running extra electric risers and hook-ups must be determined.
Special communications may be required to link up with other company facilities and to obtain special back-up communications sources in case the normal provider is affected by an emergency. Roof facilities such as a satellite dish may be necessary.
It is very likely the buildings' standard HVAC will not be sufficient for the special computer and electrical usage of the facility. As a result, the tenant may need to install supplemental HVAC. Twenty-four hour access will be needed so the tenant will be able to use the facility whenever needed in an emergency.
A business continuation strategy which includes a 'hot site' must focus on all of the above real estate issues. By understanding in advance the special real estate related issues, the company's real estate executives can serve an essential role in the planning process.
Richard E. Strauss is chair of the Real Estate Department for Moses & Singer, LLP.