As we pass the middle of 1998, the Year 2000 problem, also called the "Millennium Bug" and Y2K, has become the hot media topic. Everyone from industry analysts and consultants to technical gurus and the ever-present doomsayers are talking about what will happen when Jan. 1, 2000, comes and many computer programs fail to recognize the last two digits "00" of the year as the year 2000 and not 1900. Unless modified, software applications will misread the year date, potentially causing miscalculations and failures throughout the system, and even crashing the system.
The complexity of the Y2K problem, especially as it affects the real estate industry, dwarfs any problem in recent memory. It affects the entire chain of commercial real estate and crosses property types. Compounding the problem is the tremendous interdependence of real estate firms on external partners, suppliers and service providers all connected by computer systems or dependent upon data from an endless array of sources. Nearly every aspect of a company's operation relies upon date-sensitive data and is at risk, including leases, budgets, estimates, contracts, human resource systems, payroll, accounts payable and receivable, purchase orders, and building systems' operation and maintenance.
Y2K is the most pervasive problem to ever affect the real estate industry short of rising interest rates and may potentially be the most damaging. Many experts predict Y2K problems and related litigation will trigger a recession both here and abroad. It will certainly divert critical resources from companies' core businesses and erode productivity. The chain effect and repercussions of other companies' failure to remediate their Y2K problems within the narrowing timeframe left cannot be precisely predicted but is likely to be devastating.
"I think it's a serious issue, more so with equipment using embedded microchips than for property management or accounting software," says Clarine Nardi Riddle, senior vice president of Government Affairs for the National Multi Housing Council (NMHC).
The NMHC is advising members to inventory their properties early and to address key safety, insurance and legal issues and to anticipate contingencies. In addition to providing educational forums, they are urging members to contact vendors directly to ascertain which ones are Y2K compliant.
Estimates on the economic damage stemming from Y2K problems vary widely. Government sources estimate a 2% impact on the gross national product, but many analysts consider this very conservative. An article on Y2K legal issues by the law firm of Thelen, Marrin, Johnson & Bridges LLP posted on the Year 2000 website puts the cost of fixing Y2K at $300 billion to $600 billion. An article posted on Timberline Software's website puts the figure at $800 billion and up.
"The financial impact of the Year 2000 bug is staggering," says Kenny M. Smith, partner, Deloitte Touche's real estate operation and systems consulting (ROSCO) practice. "Costs on the software side run anywhere from $2 - $5 per line of code among possibly millions of lines of code."
Time is running out With problems affecting 1999 dates and applications that make projections, technical consultants say the deadline for tackling the Y2K problem properly is Dec. 31, 1998. Other experts warn that the date "9/9/99" (used as an error code by programmers) may also trigger shutdowns. Beyond the technical issue of compliance, there are a whole host of related issues that determine the extent of a company's liability for consequences derived from Y2K failures. The extent to which a company conducts due diligence related to Y2K compliance, the timing of those actions, and detailed documentation are also pertinent to proving a company acted responsibly.
Corporate directors responsible for Y2K oversight may find themselves personally liable in the event of Y2K failures and subsequent damage to other parties. According to legal consultant Warren S. Reid, who specializes in cases dealing with officer and director liability, an officer or director will not be able to avoid liability for Year 2000 negligence using ignorance as a defense. The topic has been too broadly mentioned in the media for anyone to claim they were unaware of it.
According to legal experts, estimates of the litigation companies could face as a result of Y2K now exceed $1 trillion. Companies may be liable if their failure to fix systems negatively impacts another firm with which they do business.
"We foresee a tremendous amount of litigation coming as a result of Y2K mishaps," says Smith. "There's a greatof risk, more so for firms that haven't done adequate due diligence. Companies should have swat teams ready to address Y2K issues starting in 1999."
Yes, Chicken Little, the sky is falling Apparently, many firms are operating under the "chicken little" theory. They don't see the sky falling, so they're not doing anything about Y2K. A survey of 500 small-business owners, conducted by the Gallup Organization in Princeton, N.J., for Wells Fargo Bank in San Francisco reported in ComputerWorld, found that 75% of those small businesses surveyed who were familiar with the Y2K issue had yet to address the problem and 50% did not have plans to do so. Only 6% even viewed the threat as serious. The survey indicated that 5 million or 82% of small businesses in the United States are at risk for year 2000-related failures.
The majority of potential problems are related to computers (used by 78% of the small firms surveyed) and 34% are at risk of failure for such equipment as cash registers, telephones and elevators that use time-dependent microchips. Nearly 11% face potential litigation from having sold, leased or installed noncompliant equipment.
According to an article by Mark J. Stuhlmiller posted on the website www.year2000.com, the Gartner Group predicts that approximately 50% of all companies with latent Millennium Bug defects will have their computers crash on or after Jan. 1, 2000. Stuhlmiller highlighted the fact that few firms had addressed Year 2000 issues in their annual or quarterly reports, particularly given the impact the issue is likely to have on those companies' fiscal performance.
Legislation introduced this May in Congress by Rep. James Leach would require the White House to report within 90 days on steps the nation's critical industries, such as banking and transportation, are taking to ensure their computers are Y2K compliant.
The government is having its own share of Y2K problems as evidenced in a June 3 report by the IDGService that cited 12 out of 24 departments or agencies had below average records regarding Y2K compliance as assessed by a U.S. House subcommittee progress report. The lack of preparedness by many government agencies could result in serious disruptions in the nation's air traffic and for industries dealing with the government. The Environmental Protection Agency, which interacts extensively with the real estate industry, does not expect to be fully compliant with Year 2000 until 2006.
A model program In an industry where some companies have been slow to respond to Year 2000 concerns, Camden Property Trust, one of the leading apartment REITs with a portfolio of more than 50,183 units, has moved early in the game to address Y2K, and its program is a model for what firms need to do to minimize the impact of Y2K on their operations. Camden is also one of the few firms to openly talk about Year 2000 issues and possible repercussions in its annual report. The firm's discussion of Y2K conversion issues outlined to investors the company's plan, what was achieved to date, and identified potential risks from third-party vendors and service providers.
"Too many leaders in the real estate industry are just shrugging their shoulders as if the Year 2000 problem were not worth worrying about," says Ric Campo, chairman and CEO of Camden Property Trust. "A lot of people haven't awakened to the fact that there's a problem with a deadline that can't be put off. We recognized it as a serious concern internally early on and our concerns were echoed by investors, credit agencies and our attorneys."
To aid understanding of the problem, Camden created written Q&A sheets answering Year 2000 questions for internal and external use.
Public companies are obligated by federal and SEC requirements to report on all issues that may affect the company's financial performance in any way. Camden's inclusion of Y2K in its annual report is a prudent effort to meet its fiduciary and corporate responsibilities.
Camden has formulated a comprehensive written plan that provides a step-by-step protocol for identifying Y2K areas of concern and resolving them. The plan identifies the key staff responsible for managing the Y2K effort and contains a detailed timetable for mitigating all noncompliant areas and thorough testing of all vulnerable systems and components. All Y2K efforts are carefully documented as evidence of due diligence. A database of vendors has been established to track contact with vendors and record the status of their compliance with Y2K. All existing Camden vendors are being sent letters and response forms regarding their Y2K compliance. All of Camden's new contracts have or will contain clauses concerning Y2K compliance.
"Our information technology people have been very diligent in tackling this problem and staying on top of it," says Campo. "Too many people in the industry have just assumed the problem away. A lot of companies with old, proprietary systems are going to have problems. I can foresee pockets of economic impact from firms who haven't dealt with the problem. As far as property management and accounting software, the industry standard ones are all Y2K compliant or will be well ahead of the curve."
An organization takes the lead With 16,000 members across the spectrum of commercial real estate, including those who manage more than half of the nation's office space, the Building Owners and Managers Association (BOMA) International has been one of the most proactive organizations in the industry in addressing Y2K. BOMA released a comprehensive guide last January titled Meeting the Year 2000 Challenge: A Guide for Property Professionals and also maintains a comprehensive section on its website dedicated to Y2K along with extensive links to other sites with Y2K expertise and information. The guide has been co-sponsored by CTA Inc., a Rockville, Md.-based company specializing in Year 2000 assessment and remediation services and information systems.
"The Year 2000 problem is not just technical - it represents a major operational and management concern," says W.S. Garland, president of BOMA International. "Imagine if tenants were billed for 95 years of back rent or the difficulties they would face if their space were locked or not heated. The safety, insurance and legal ramifications are staggering."
The guide, designed specifically for property professionals, explains how to develop and implement a year 2000 plan and how to communicate progress with tenants, lenders, insurers and other business partners. To date, 10,000 copies have been sold.
According to Michael Jawer, author of BOMA's Year 2000 guide: "Year 2000 compliance is an extremely serious challenge for owners and property mangers. They need to thoroughly assess the readiness of their systems or face an array of consequences if they fail."
Jawer says that in general, the older your hardware or software is, the more vulnerable it will be to Y2K related problems. However, he maintains, any program that relies on dates to do calculations could be confused and fail to work correctly. A number of the property management firms questioned, who work with a broad range of property management and accounting software, have indicated problems with Y2K dates were found, particularly among the DOS-based versions of these applications.
"This is a problem that goes well beyond the scope of simply being a technical issue to be left for MIS people to deal with," says Jawer. "It's also a building systems and operational concern with grave legal and financial consequences tied to it. It affects everything - apartment buildings, offices, retail, convention centers, hotels, restaurants, hospitals, nursing homes and industrial facilities."
Jawer says that the primary concern is with what's called embedded systems - equipment that is run by preprogrammed microprocessors. These embedded microchips run elevators, heating and HVAC systems, life safety, fire, security, access control and lighting systems. If they fail due to Y2K, the result can be stranded or locked out tenants, phones and fax machines out of commission, elevators stalled or out of operation, and basic building services thrown into disarray.
The guide also contains model letters, contracts, checklists, inventory forms covering 25 different building systems, and model language for business and legal documents. Property management checklists can also be downloaded from BOMA's website under the Y2K portion of the site.
"It may not seem too late for many companies, but [around this month is] when you need to have a program kicked off if you're going to have an opportunity to assess every aspect of a building and its systems," says Jawer. "From the end of [this summer] going forward there more than likely will not be enough time for adequate due diligence."
According to Henry Chamberlain, a senior vice president with BOMA, it will take on average about 50 to 120 hours per building to perform an audit, dependent on the total square feet of the building and nature of its building systems.
"While many members are starting to focus on Y2K now, they need to be really aggressive if the job is going to get done," says Chamberlain. "There's a rapidly dwindling supply of technical people available and as the deadline draws nearer, there will be even fewer and their prices will definitelygo up."
Chamberlain warns that not all of the fixes may work and stresses the need to have fallback contingency plans and manual methods for overriding critical systems.
Property management firms Property management firms such as Insignia/ESG and Compass Management are confronted with Y2K issues in their own organizations as well as in the scores of properties they manage for clients. In some cases, they've been brought into buildings that have been through foreclosure or change of ownership, and it takes extensive detective work to determine the status of building systems and components. Their broad exposure to different types of properties in varying locales, climates and conditions gives property management firms a viable pool of experience to draw upon in dealing with Y2K issues. These firms also benefit from greater efficiencies and economy of scale and from leveraging national accounts with vendors like York and Trane.
"We're already compliant in our corporate offices," says Anthony Liflieri, managing director for operations at Insignia/ESG. "We fee manage 170 million sq. ft. of properties nationally and it was important to address Y2K early on. We began tackling Y2K issues in February '97 by surveying the systems of the buildings we manage. It's been a similar process to the CFC phaseout."
Liflieri outlined a program based on prioritizing systems based on the critical functions they served. Next, manufacturers were contacted and action plans developed. Extensive testing followed by simulating Y2K and then adjustments [to existing systems] were made or new systems installed that were Y2K compliant.
"We've spent 50 to 100 hours per building to assess and test for Y2K compliance," says Liflieri. The critical areas to address deal with life safety and security. It's important to set up lines of communication with vendors, consultants and the organizations you interface with."
Insignia/ESG has developed contingency plans to respond to potential failures that may affect safety, access to buildings, HVAC systems and elevators. Liflieri points out that teamwork among on-site people, in-house engineers and vendors was essential. He also stresses that senior management support was critical to ensure Y2K issues were allocated the resources and attention necessary.
Atlanta-based Compass manages more than 180 million sq. ft. including on-site property teams in more than 250 cities and more than 5,000 buildings internationally.
"So far, we haven't uncovered any major or insurmountable problems," says Ken Manson, executive vice president of operations for Compass. "The reality is that Y2K is a massive nuisance that has generated an excessive amount of paperwork inventorying systems and tracking vendors."
According to Manson, Compass has a comprehensive program led by senior-level groups, its IT staff and its risk-management group, coordinated under the auspices of its Project Control Group. The parent company, Lend Lease Group of Australia, is even further along than its U.S. constituencies in addressing the problem according to Manson. The company has run a lot of beta tests on dozens of properties using random criteria to see how they respond and to date have not uncovered any major problems.
"We found some flaws in low-cost bar code scanners that we use and that was fairly easy to correct," says Manson. "Life safety is our major concern, of course, and heating and security systems. Some DOS-based software we use have been found to be not compliant. We've found, in general, that elevator manufacturers have been way ahead of everyone else in making their systems compliant."
Compass sees addressing Y2K issues as a major fiduciary responsibility to its clients and to investors to ensure that assets retain their value. The company has instituted broad-based contingency planning and nationwide training for its staff and has added extra staff to meet Y2K-related needs.
"I'm genuinely concerned that smaller firms will not have the time or resources to address this problem," says Manson. "Somewhere in the country lights are going to go out after Jan. 1, 2000."
Manson stresses the need for firms with multiple properties to develop local contingency plans and to contact local utilities such as electric companies to ascertain whether there will be any problems with service delivery.
The experts While large organizations may have the in-house technical resources to deal with Year 2000 challenges, many midsized and smaller firms do not. Even larger firms may find that their IT staffs are too overburdened with standard operational responsibilities to deploy the personnel and time needed to focus on Y2K problems. In addition, in-house programmers may not have the specific expertise to deal with the multitude of computer languages and nuances of all the applications that may be affected. In these situations, relying on outsourcing the problem to expert consulting firms may be the most effective route. For companies going this route, the choice is among specialized computer consulting firms, contract programmers and systems analysts, and specialized software tools.
CTA, which co-sponsored the BOMA Y2K guide, specializes in providing Year 2000 assessment and remediation services for an organization's embedded systems. Their services are certified by the Information Technology Association of America's (ITAA) Century 2000 Solutions methodology and backed by extensive experience with the federal and local government, and commercial clients in 24 states. CTA's clients include many real estate management firms, the Port Authority of Boston, Los Angles Worldwide Airport and the Department of Veteran Affairs. It is one of the few firms providing a formal warranty on its work. "From our experience, embedded systems offer the highest risk for failure to commercial real estate firms," says Sy Inwentarz, president of CTA Commercial Systems, a wholly owned subsidiary of CTA. "It's strategically important to assess mission critical systems and ensure they are compliant."
The sheer number of systems that could be affected can be overwhelming, says Inwentarz. According to his information, there are some 40,000 elevators in Manhattan alone and only 2,300 technicians available to service them. Should a large number fail simultaneously, getting them operational quickly may prove impossible.
While Inwentarz thinks there is still enough time left for companies to meet the Y2K challenge, he urges them to begin the process as soon as possible.
"We've had strong success remediating Y2K problems, but even those companies can be jeopardized by other systems that are noncompliant," says Inwentarz. "This is a function of how interdependent we've become technologically. Right now about 30% of the real estate industry has resolved their Y2K situations. That leaves a majority of the firms at risk. I think it's safe to say that Y2K problems will create a recessionary scenario in the Year 2000, the question is how severe it will be."
Another solution especially pertinent to smaller firms without the financial resources or the manpower to tackle Y2K challenges comes from Turnkey 2000, a subsidiary of San Jose, Calif.-based Ravel Software, which has produced a suite of Y2K tools for Oracle.
"We've developed a software package we call the Y2K solution in a box," says Achol Foda, vice president of marketing for Ravel.
Turnkey's Y2K in a box application is an automated solution that provides a cost-effective method for scanning and correcting computer code and enables in-house programmers to do the job themselves. To date, most Y2K remedies focused on mainframe-based files and not the countless files residing on desktop PCs. The application has support for as many as 17 computer languages.
Turnkey's software will address noncompliance that results when application calculations involve dates that may be misinterpreted and in situations where the date variable for century is not defined in an application's language.
"There is a great deal of apathy and too many people who do not even realize they have a problem," says Foda. "It seems as if the world is waking up industry by industry, but by the third quarter of this year, I think we will run out of technical people capable of addressing the problem."
These companies provide more information on the Year 2000 bug. Check out their websites on the Internet.
GSA Public Building: servicewww.globe.lmi.org/lmi/pbs/y2k/products
U.S. Small Business Administration: www.sba.gov/y2k
Y2K.com - Legal and Management Information: www.y2k.com
Year 2000 Information Center/Millenium Bug: www.year2000.com
Y2K Non-IT Assistant: www.y2knonit.com
Year 2000 Journal: www.y2kjournal.com
Information Technology Association: www.itaa.org/year200.htm
Microsoft Year 2000 Center: www.microsoft.com/year2000/
Gary North's Y2k Links: www.garynorth.com/y2k/search_.cfm
Mortgage Bankers Association Y2k site: www.mbaa.org
Freddie Mac: www.freddiemac.com/function/y2k/index.htm
U.S. Gov. Year 2000 Gateway for Info. Tech.: www.itpolicy/gsa.gov/mks/yr2000/y2khome.htm