Bifurcating Commercial Real Estate…

Posted on January 31, 2012 by MREA

…could get worse (or better). This truly depends on which camp you associate with regarding the economic divide that is now a larger topic of debate in our country. As for policy that is directed towards a remedy, both political parties could not be wider opposed to proposed solutions from the other, which is certainly indicative of our political and economic divorce.

The dichotomy is evident throughout the consumer world. For an example, high end retailers such as Nordstrom are recording excellent profit, and the low end, Dollar Stores, is doing great volume. As for the middle, JCPenney is laying off.

Apple has the highest market capitalization for a technology company (or any company for that matter) with continued pricing power, yet products and inexpensive technological innovations from Google continue to see enormous, reliable volume. Yahoo and Blackberry are getting slaughtered.

From a real estate perspective, multi-family is witnessing increasing occupancy levels from above normal rental activity and, on the opposite end, high end homes are picking back up once again as salaries, stock market and stable investments are paying greater tangible and mental dividends.

Farm and shale land are all the buzz, with prices quadrupling during a recessionary period, yet large tracts of land unloaded by lenders are dirt cheap. Midsize land tract owners and developers have had no place to hide, with speculative plays now in another’s coffers.

This all said, there remains activity in the middle and it is improving, which is absolutely essential for commercial real estate to fully function as a healthy investment consideration. When the headlines such as ‘commercial real estate is gradually improving’ echo throughout, it is the middle where analysts tend to concentrate. As for the high end, which I consider to be strategically located, newly developed, and freshly tenanted, it is going up, while the low end is dissolving. The middle (aka. the fence) is falling on one side or the other.

As for our firm, we are well positioned to guide and administer needs of the small (combining forces), middle (established, seeking to compete in other markets or adopt new identity) and large (strengthening and capitalizing on current position); we have solutions for all.

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8 Brain Benders (from easy to more difficult):

Property sales prices may be $600 per square-foot tenanted and will likely continue higher. What could change this trend? Stronger Dollar.

Property sale prices may be $6 per square foot vacant and will continue lower. What could stop this trend? Lower Oil Prices.

Lease Rates will continue improving. What will change this trend? More Problem Banks.

Rental concessions will likely continue to increase. What will change this trend? Mortgage Rates Moving Higher.

Tenants will begin to purchase buildings. It is going to happen. As for cautions, several purchases on high end will eventually suffer due to current and future price speculation and a small percentage on the low end with sacrifice their business principles for a real estate play that will weaken their competitive position in the long run.

CPI will likely remain steady. What will change this outcome? Stock market decreases significantly.

Buildout costs will continue higher. What will change this trend? Fannie and Freddie are officially taken over.

Eyesore buildings will continue to worsen. What could change this trend? REIT prices continue higher.

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Stop, Go, Stop, Go, Stop…Go!

Posted on January 11, 2012 by MREA

2012 is shaping up to be a good year for commercial real estate practitioners with a recession now becoming less of a reality. By simply observing search queries that funnel to this blog (by no means an economic indicator), it would appear that we will see steeper interest in the consummation of land purchases for proposed developments, as well as the disconnection of locked down building construction plans.

It is our responsibility to observe and record trends on how the money migrates within commercial real estate sectors to properly advise our clients within health care. And, over the past few years, we have remained exceedingly cautious in advocating large, speculative investments into the sector. As my financial advisors always remind me, the trend is your friend and the trend remains down.

But, as the stock market has remained trapped in a trading range for more than a year, coupled with a stable outlook for real estate investment trusts (REITS), where pent up demand has the potential to make a bold re-emergence, our interest, as well as our clients, is certainly improving.

As for a simple analysis on capital migration, the last year+ has witnessed investor interest rocket higher in areas such multifamily and farmland with, and without, fundamental, long-term supportive cases for upside to continue within the either sector. See, one investment type can be characterized as deflationary and the other inflationary, and both are highly speculative with the potential be burned if the glut of homes is efficiently dealt with and economy/dollar stabilizes.

This type of investment activity implies that money is burning holes in the wealthiest of investment capital and/or non-domestic capital is playing a larger role than is being reported. In any case, this risky capital allocation suggests that once a firmer footing in the economy is gained, the beaten down sectors within commercial real estate sectors will see tremendous activity.

What are indicators that suggest money is moving into commercial real estate? Certainly, studying the largest investment houses is important, but also leasing activity through tenant relocation or expansion is another. From a middle market perspective, we believe keeping an eye on investment in land by seasoned developers or JV interest in more speculative plays could be the catalyst in determining when to enter the neglected business investment sector. For instance, if news publications get a hold of large plots of land or large urban infill tracts transferring, it may be time to contact your brokers again.

Until then, we are all running the red light.

Hospital Real Estate Strategy: 2012 and Beyond

Posted on November 14, 2011 by MREA

The following approaches, which are being implemented by hospitals and indicative of the strategies that our firm is undertaking, are beginning to take effect across the nation.

Monetization.

For an example, Baylor Health Care System chose to extract capital from its existing medical real estate portfolio through a real estate monetization process. In addition to generating funds that could be used to support new strategic initiatives, the system’s leaders believed that the proceeds generated from the disposition of to-be-constructed and existing facilities would enable the organization to obtain more favorable debt yields, as the liquidity from the monetization was perceived as a positive offset to the new liabilities it will pose. In this case, the health system started the initiative by identifying and qualifying real estate advisors. The organization selected an advisory group that had the capabilities of analyzing both owned and leased real estate, had access to an extensive database of investors and developers, and was experienced in working with physician real estate owners. After running a competitive bidding process, the health system selected one group to acquire its real estate portfolio. The transaction generated a tremendous amount of liquidity for the health system and created a future real estate partnership. The formal transaction process also served to inform major healthcare real estate investors/developers of the health system’s growth strategy. Doing so has created a potential set of financing options for the organization’s future real estate development capital needs. Any monetization process does not come without its challenges, however, given the fact that several potential parties may become involved (health systems, developers, investors and physician group owners, international, etc) seeking to purchase the facilities, all with separate, unique objectives. Also, the time required for the ideal purchaser to perform due diligence is usually much longer than what is anticipated. However, if the purchaser is knowledgeable about keeping open transparency, it alleviates the concern that may be among the staff and physician groups who have knowledge of the potential transaction.

Renovation.

Another approach that which will save cost and time, one that we will see for years to come, is to renovate existing facilities rather than building new. Clear Lake Hospital recently decided to redevelop/expand the woman’s and children’s units as well as the Heart and Vascular unit. They are incorporating a new 150,000 square-foot facility Patient Tower with state-of-the-art operating rooms, pre-operating and recovery rooms plus a 30-bed adult ICU. As hospitals will continue their growth via acquisition or partnership with physicians, new facilities are necessary in a competitive healthcare arena. As hospitals slow their growth, they will monetize and either pay down debt, growth through outpatient facilities, search for other partnered projects or renovate other existing facilities.

Cost Control.

Materials costs are another area that hospitals will be more aware for expense control. As an example of this approach, a hospital that our firm has negotiated, sought bids for the development of a new satellite medical office building. The process yielded many proposals, but one developer’s proposal to use tilt-wall construction for the building, rather than a more costly method, was deemed more favorable than the others. The developer’s construction budget was approximately a moderate percentage lower than that of other bidders. After careful consideration, the hospital ultimately chose the developer for the project—with favorable results. By keeping the construction costs low, the facility has been able to attract tenants with market-competitive rental rates as well as construct a well built facility that will endure the elements.

Joint ventures.

Real estate owners have enjoyed attractive financing by using sizable portfolios of real estate as collateral for bank loans or lines of credit. Hospitals that partner with a real estate investment trust (REIT) or a private real estate company can also benefit from the partner’s core “real estate competency.” For example, real estate companies are able to bring services such as property management, development, and space planning services to the hospital’s assets. Some also are able to share savings related to the packaging of the medical facilities that they may acquire or develop, creating cost savings opportunities through economies of scale. As is typical of such arrangements, once the medical facility was completed, the real estate owner became the landlord and leases the facility back to the hospital, thereby allowing the hospital to simply play the role of tenant and focus on its core competency: providing healthcare services. This underscores the symbiotic relationship between real estate owners and their healthcare clients which will be more prevalent in the future as hospitals exit the real estate business. The owner-partner will rely on the medical tenants’ present and future credit quality for their own cost of capital, so they have an incentive to align their interests with those of their tenants. This relationship between the hospital and the real estate capital source allows the hospital to focus its funds on its core mission.

Robert S. “Bob” Lowery is Managing Partner with MREA | Medical Real Estate Advisors, a full-service Houston-based healthcare real estate firm.

Alternative Ways of Purchasing Medical Real Estate

Posted on October 31, 2011 by MREA

The most common ways of purchasing medical real estate is through direct purchase, participation in a real estate partnership vehicle with other investors [such as general partnerships, limited partnerships, various corporate entities, and, in Texas, limited liability companies (LLCs), as well as investments in real estate securities such as Real Estate Investment Trusts (REITs).

Alternative Ways of Purchasing Medical Real Estate

Section 1031

Real estate can be acquired via tax-deferred exchanges under Section 1031 of the IRS Code, in which a client “trades” one investment property for another, deferring the taxes due on the sale of the exchanged property. This allows the doctor to reinvest “pre-tax” dollars in another real estate investment, potentially benefiting from appreciation on the larger investment. The physician may also exchange one larger property into two or several smaller properties and pay tax consequences for each one as those properties are sold as cash is needed.

Tax and Risk Management

The way a physician takes ownership of real estate will affect the tax treatment of income and profit. For example, having an LLC-owned investment property will provide him/her with the same protection from individual liability as a corporation, while allowing him/her to have much more favorable tax treatment. Real estate can be bought directly by purchasing it in the following manners:

1. Paying cash,

2. Paying a cash down payment and acquiring a loan,

3. Paying cash to the seller who is financing, or

4. Financing the purchase by using either new real estate financing, seller financing, or credit borrowing when a lender is willing to loan solely on the strength of, and the financial statement of, the borrower, or a combination of these.

Trading and Secured Loans

Real estate also can be acquired by trading other valuable assets, sometimes in combination with financing. A client can obtain interests in real estate by making loans on real estate assets that are secured by a deed of trust or a mortgage. Another method is to invest as a participating lender. In such an instance the borrower needs to agree to provide equity kickers or participation in cash flow whereby the lender (doctor) can benefit directly from the real estate performance.

Equity Participation Plans

With an equity participation, the physician-investor can profit or gain from the sale of the property, sometimes in a preferential manner (i.e., the money the doctor loaned is returned, with interest, and a predetermined percentage or portion of the gain is given to the owner/borrower before distribution of the sales proceeds). Similarly, the doctor can participate in annual cash flow, giving a fixed or a fluctuating amount depending on the performance of the investment. As a lender, many of the benefits of ownership of real estate are not available to the MD, but the doctor should have a security interest in the property and no direct responsibility for operation of the real estate investment. Also, if possible, the borrower should provide additional guarantees of performance. The borrower could do this by providing additional security, such as the deeds of trust on the borrower’s house, other real-estate, and the acquired property; bank letters of credit; or guarantees of performance from people other than the party to whom the money is originally loaned.

Assessment

If a physician-investor is considering acquiring or lending on real estate, s/he should check with his professional advisors, including accountants and attorneys, before proceeding. The doctor’s attorney should review any contracts or agreements before the client signs anything. The physician also will need a due diligence review to ascertain both the relative values of the real estate on which money is being loaned and the borrower’s track record and background.

Healthcare Real Estate: Past, Present, and Future

Posted on May 27, 2011 by MREA

Continuing on our path towards emerging from what some have considered the worst downturn since the Great Depression, the majority of the Greater Houston medical landscape has weathered the storm in good shape. Now, with the advent of healthcare insurance reform, many supply-demand economists are predicting a solid future for the healthcare real estate industry and its continued growth.

Availability of Capital

Although medical real estate did not experience the same severe disruption to capital lines that commercial real estate faced in late ’08 and through ’09, capital remained available to the sector; albeit at a higher cost. Debt financing demanded greater equity, higher pricing, guarantees and committed take-out financing, which made it it difficult to finance real estate projects. Many institutional investors were on the sidelines. However, the projects with average to good fundamentals were funded.

From this experience, the industry was forced to adapt to a lower tolerance to risky ventures. Thus, due to this collapse in rick beginning in ’08, we can guarantee investors will no longer come to expect 90 percent debt financing, sub-6.25 percent cap rates and lax underwriting by lenders. Significantly higher equity requirements, a strict focus on Class A and newly built properties, rigid due diligence procedures, and higher pricing have become the standard.

Pre-2008, many of the larger banks consumed financial instruments that we now know were toxic waste, subprime mortgages being the most publicized. In 2007, and well into 2008, banks were issuing funding commitments on development projects with 0-25% pre-leasing. When the credit markets turned south, most of those projects were canceled, foreclosed upon, or the related hospitals booted the developer and either shelved the project or turned it over to another managing entity. Those institutions that maintained sensible lending criteria and stuck to their knitting remained in the market and found a loyal group of developers/borrowers. Lender due diligence has become more rigid. Pre-leasing requirements of 65-75 % on new development projects are now required.

Unfortunately, many real estate practioners are attempting to enter this sacred market without ever stepping a toe in. These recent entrants into the market will find themselves redlined and eliminated from further consideration, due to a lack of reliable capital, a depth of experience, or both. On top of this, the relationships that have been developed by hospital to physician, physician to physician, and physician to developer requires a long history of accomplishments prior to jumping in head first.

Hot Investment Sector

Throughout the recession and the credit crisis, an imbalance between the supply of buildings and the capital seeking to acquire them has caused values to remain buoyant. Prior to the recession, capitalization rates were firmly trending downward, driven by higher prices and sustaining a seller’s market. Cap rates were in the mid- to low-6s with a few trades breaking the 6 percent barrier. Once the recession hit, the volume of transactions subsided as credit was difficult to obtain, driving down values and sending cap rates north of 8.5%. Meanwhile, most medical buildings continued to exhibit strong fundamentals during this period, unlike commercial office, industrial and retail properties which have suffered increasing vacancies, delinquent tenants, past due loan payments and lenders calling loans.

This imbalance is more pronounced today as institutional investors such as REITs are flush with cash seeking quality investments. Hospitals are the main source of supply as they consider monetization strategies to sell non-core real estate assets. Because a financial strategy of diversifying capital sources is gaining strength among the hospital community, the volume of monetization transactions and outsourcing new development projects to ‘established’ healthcare real estate players should increase. There is ample capital awaiting these opportunities.

Search for Stability

Many hospitals and health systems suspended projects during the recession. Why? Inaccessibility of capital, weaker operating performance due to declining patient revenue and increasing bad debt and charity care, uncertainty surrounded the economy and employment, and the political gamesmanship regarding healthcare reform. Even when capital was available, hospital CEOs and their staffs made strategic decisions to delay expansion efforts because of these market uncertainties.

Overarching all of this, however, is the future pace of an economic recovery. As of today, economists are debating the threat of deflation, a double-dip recession, and the potential onset of inflation. We are in tenuous economic times, both domestically and internationally. Consumer confidence is lower than estimates. Housing prices continue to search for a bottom. Commercial real estate loans are defaulting at an alarming pace. Corporations hoard cash awaiting the next economic shoe to drop, thereby delaying capital spending… hiring. Until the economy finds its footing, our country will face high unemployment rates, depressed capital spending levels and consumer cautiousness. Healthcare providers will continue to struggle over decisions to proceed with new facilities.

Construction Costs..Up or Down?

One of the recession’s benefits has been the resulting decrease in construction labor and materials. Depending on the region of the country, developers have experienced a 10-20 percent reduction in construction costs over the past 18-24 months. This phenomenon, though, may be short lived as the market has experienced increases in most construction items. However, with little competition from the commercial real estate market for new construction resources, stable construction prices may prevail a bit longer.

A Final Word

All said, where the healthcare real estate industry goes from here may appear promising or frightening, depends entirely on your working experience within the sector. While I would implore real estate professionals to always seek more education and relationships within this sector, be prepared to serve an already serviced industry.

CRExtract: 12.8.2010

Posted on December 8, 2010 by MREA

Opportunities await retail property investors as market slowly recovers - Single-tenant net-leased properties with national-credit retailers will remain the most sought-after deals as high-net worth individuals and well-funded REITs compete for acquisitions. Unimpressive returns offered by alternative investments and ongoing stock market uncertainty continue to heighten private buyers’ appetite for low-risk, corporate-backed assets. Cap rates for these deals have already compressed 50 basis points this year. Yields will tighten further in 2011 but should stabilize by midyear as returns approach pre-recession levels. Lower cap rates and a shortage of high-quality assets listed will expand acquisition targets for many buyers, and properties leased to well-known franchisees will garner more attention and clear the market faster. Cap rates for these assets will average 50 basis points to 150 basis points above those for best-in-class investment-grade deals, depending on the financial strength of the guarantor. SmartBusiness

‘Special Servicers’ Getting Creative – “Special servicers are getting creative with how they’re working out the assets in this environment,” says Frank Innaurato, an analyst at Realpoint. “Rather than foreclosing on an asset, they are placing more properties in receivership and giving the receiver the right to sell the asset directly.” Avoiding foreclosure offers an additional advantage: Special servicers can sell properties with modified CMBS debt already in place. Take the case of an Arizona court’s decision in August to let a portfolio of distressed apartments be sold by a receiver for $133 million. Bill Hoffman, president of the receiver, San Diego-based Trigild, said the move allowed the buyer to assume existing financing, delivering a higher price than if the portfolio had been sold out of foreclosure. Wall Street Journal

Ashley Furniture Stores Going Out of Business -The Ashley Furniture stores in the Logan Town Centre and on Galleria Drive, Johnstown, will soon hold going-out-of-business sales after a court decision Tuesday in Allegheny County Court. The stores’ owner, Roomful Express, was placed in receivership under pressure from lenders owed millions, the Pittsburgh Post-Gazette reported on its website. Altoonamirror.com

CRExtract: 10.7.2010

Posted on October 7, 2010 by MREA

Follow the Money: Another $6.9 Billion Pours into Real Estate Investors’ Coffers - Companies and funds reported raising $6.88 billion in September for real estate-related investments and financing. The funding imbalance continues however, as the buying power of the portion of funds targeted for properties is far more than the total value of monthly acquisitions lately. Of the total amount raised in September, $5.47 billion was raised from publicly offered shares in REITs and real estate operating companies with a little more than half of that money specifically to be used debt repayment or refinancing. The other $1.42 billion came from private fund raising efforts and is all earmarked for new investment. Pooled investment funds including private equity and hedge funds raised $730 million of the total of private efforts – the lowest monthly amount for such funds this year. The highest percentage of funds raised (approximately 23%) was earmarked primarily for office-related investments. Funds targeting multifamily investments raised 17% of the total; health care-related real estate 15%; and industrial-related 10%. Funds targeting investments related to hotels, retail and debt/mortgages each accounted for about 8% of the total. Costar

LEED and the Future of Green Building – The ultimate goal that the building design community should strive for is zero energy buildings. Net zero energy buildings are defined as buildings that have zero net energy consumption annually. There are several examples of buildings all over the world that have already achieved net zero energy usage. However, the technologies and systems required to achieve this outcome require significant upfront investment. This is a significant barrier to entry that is impeding the extensive implementation of net zero energy concepts. A number of initiatives, such as Department of Energy’s (DOE) Zero Energy Commercial Building Initiative (pdf), the Consortium of Zero Energy Buildings and Architecture 2030, are conducting significant research to provide guidance in this regard. The next 20 years will likely see a tremendous growth in net zero buildings. Green codes, regulations, and voluntary programs such as LEED will constantly evolve themselves to push the building community toward achieving the coveted net zero status. Reuters

CRExtract: 9.20.2010

Posted on September 20, 2010 by MREA

Commercial real estate prices near recession lows in July: Moody’s – Commercial real estate prices dropped another 3.1% in July, the second-straight month of declines and only 0.9% above the recession low in October 2009, according to the credit rating agency Moody’s Investment Services. Retail prices in the South declined 31.5%, contrasting to the 12.9% gain in the East. Apartment prices in the South also fell 1.4% over the last year and 44.2% in the previous year. Apartment prices in the South peaked three years ago and declined 48% since. HousingWire

How Have REITs Impacted the Market Since Their Inception 50 Years Ago? – The benefit of REITs are numerous. First off, relative to other stock type investments, they are required by law to return at least 90% of their earnings in the form of a dividend to stockholders. While most REITs, like most real estate operators focus on one specific asset class, say office or retail, they typically buy trophy assets for their portfolios in order to inundate themselves from market fluctuations and occupancy loss (generally speaking there’s always a flight to quality during recessions). Given their access to public capital, something most REITs competitors do not have, they really changed the commercial real estate investment game. Benzinga

Back to the Future on Commercial Management – I can’t tell you what type of building we’re looking at, but I can tell you what type of owner we’re looking at. We want the owner that understands the intrinsic value in the bricks and mortar, and the lobby and the operations in the building—and sees the true value in the building. If you’re approached with this and you don’t understand how good management is a stepping stone to good leasing, you’re not for us. I mean, we need someone who’s really going to understand that concept. And leasing is tough these days; and over the next three or four years, they say it’s going to get tougher and tougher. So you have to separate your building from the others. And, really, the only way of doing that is by good management, and good management doesn’t have to cost more money to the owner, which is the other key. The Commercial Observer

CRExtract: 8.2.2010

Posted on August 2, 2010 by MREA

Second Quarter Loan Originations Flat Year Over Year, Says MBA – Among investor types, loans for conduits for CMBS saw an increase in loan volume of 106% compared with the first quarter; loans for life insurance companies saw an increase in loan volume of 57% compared with the first quarter; originations for GSEs increased 21% from the first quarter to the second quarter of 2010; and loans for commercial bank portfolios decreased by 2% during the same time span. Compared with the first quarter, second-quarter originations for hotel properties saw a 405% increase. There was a 114% increase for industrial properties; a 107% increase for health care properties; a 56% increase for office properties; a 38% increase for multifamily properties; and an 11% decrease for retail properties. NREI

Get on the REIT Side of the Market – Public real estate, represented by the REITS, is on a much better track than private real estate. The former has access to the capital markets and took advantage of market conditions last year to recapitalize as the stock market bottomed. Private real estate, in contrast, has yet to bottom. Financing is still an issue and public real estate – the REITs – is able to pick up cheap properties from private sources. According to Kuykendall, REITS represent only 15% of the total commercial real-estate market. Therefore, it is no surprise that investor perceptions of real estate are not in line with the data. For the residential sector, the cognitive dissonance is especially paralyzing but it does set up an opportunity for chart watchers based on sentiment. Barron’s

FDIC Bags Five More Banks – When I screened all 7,932 FDIC-Insured Financial Institutions, I found 1,286 overexposed to C&D loans, and another 1,433 overexposed to CRE loans only. That’s 2,719 banks or 34.3% of the 7,932 that are under stress from commercial real estate loan exposures. When I analyzed loans versus loan commitments, which I call “pipeline,” even more banks are feeling additional stress. A “normal” or “healthy” pipeline is when 60% of the C&D and CRE loans are outstanding versus a bank’s total commitment to these types of loans. Of the 7,932 FDIC-Insured Financial Institutions, 4,101 or 51.7% have a pipeline above 80% funded, which is a sign of collection problems. Of these, 1,321 have a pipeline that’s 100% funded, which is 16.7% of all banks. It is therefore not surprising to find that all five private banks that were closed last Friday were extremely overexposed to C&D and CRE loans with loan pipelines of 81.7% to 100%. Forbes

2010 CMBS Modifications – Lenders and special servicers are moving more commercial loans through the REO process, which is also putting downward pressure on delinquency rates. The amount of loans either 60-plus days delinquent, in foreclosure or in the REO process reached 7.95% in July, up 12bps from June. Broken down by category, hotels had the highest 30-plus day delinquency rate at 18.4% in July. It’s a 60bps fall from June but still up from 4.7% in July of last year. Multifamily properties held at 14% from last month. Office and retail loans both increased from June, up to 6.3% and 6.9% respectively. Housing Wire

Help proposed for distressed commercial property owners – The International Council of Shopping Centers, which along with a number of other real estate interests, have signed onto the bill, offered an example of how the bill would work for a $30 million shopping center bought in 2007 with a $24 million loan, but now valued at $22.5 million:

An investor pays the owner $7 million to acquire 30 percent interest.

Eighty percent goes to lower the loan to $15.5 million and 20 percent for improvements.

The bank writes off $1.5 million of the original loan (a cheaper approach to foreclosure).

And the owner, while giving up equity, gets lower monthly payments and $1.4 million to improve the property.

Norm Miller, a vice president at Co-Star Group that specializes in real estate analysis, said the bill might help some owners and offer attractive tax benefits to investors, but would likely distort the commercial real estate market, favoring distressed properties over new projects. Sign On San Diego

Wells REIT II Purchase: Fees Galore and Possibly More?

Posted on June 30, 2010 by MREA

Wells REIT’s purchase of the Foster Wheeler building on 585 N. Dairy Ashford in Houston, TX may give hope to a deflating office/tenant market in Houston, especially in the Energy Corridor where several newly constructed buildings sit near empty, but this acquisition has hair all over it.

Per Costar, Wells already has a Houston presence. It purchased the Weatherford Center on 515 Post Oak, yes Weatherford. It also paid $285 per square foot for 5 Houston Center at 1401 McKinney, to which 1 tenant over 5,000 SF has been signed in the last 2+ years and is advertised for lease at around 90% occupancy, with several leases coming due.

With regards to Wells REIT II – the prospectus. Look out for those fees! And, Supplement 1.

Now, regarding Leo Wells and Wells Reits…

Leo Wells on Commercial Real Estate:

From my perspective, there were no mispriced bargains in the core stabilized sector last year, and pricing appeared fair and responsible. In fact, a handful of recent transactions in the office sector illustrated how high-quality core properties are selling for prices that are higher than last year.

Leo Wells on Leo Wells:

As a result of all of these influences, I’ve developed some foundational principles which you may have noticed on the home page of http://www.LeoWells.com/:

Glorify God
Care for people
Remember that money is simply a tool
Maintain integrity
Emphasize ethics

This is by no means a comprehensive list of all I believe and try to practice, but it will at least give you some idea about the core values that shape my thinking. Your guiding principles might not be exactly the same. But I would encourage all of us to pause every now and then to reflect on our values, and whether those values are consistently manifested in our lives. I believe it was Socrates who once said, “The unexamined life is not worth living.” This is no less important in business, as those of us who own businesses must constantly assess whether the policies and practices of our companies are consistent with our core values and founding principles. It’s amazing how easy it can be to get off track when we don’t hold ourselves accountable!

Leo Wells on Kicking the Can:

As I’ve said before, many of us in commercial real estate have eagerly anticipated good properties becoming available for purchase due to distressed situations. For a variety of reasons, however, few of these buying opportunities materialized in the past year.

In my last blog post, I mentioned the continued interest of foreign investors as one reason why core stabilized real estate has been able to hold its own. Another reason is that regulators do not seem to be pressing lenders to foreclose on delinquent real estate.

Now, ReitWrecks on Leo Wells & Wells REITs:

Indeed, it would be easier and cheaper to hire Johnny Cochran to bail you out of a murder charge than to somehow come out ahead on a non-traded REIT investment. You would also be leaving much less to chance. In addition to the upfront commissions of 7 percent paid to your broker and a dealer/manager fee of up to 3 percent paid to the sponsor, there are individual property/asset acquisition fees of up to 2.75 percent, property financing fees of up to 1 percent, disposition fees of up to 1 percent, and asset management fees of up to 1 per annum, plus expense reimbursements. The net result is that out of a $10,000 initial investment, only about $8,000 would remain to buy property.

Obviously, these fees encourage only two things: sales of non-traded REIT shares and purchases of property – any property – at almost any price. David Swensen, Yale Endowment’s chief investment officer, singles out the Wells REITs in his book, “Unconventional Success” (pages 70-75). Swensen obviously knows his way around alternative investments, and his opinion of Wells is unambiguous:

“No rational buyer can compete with the Wells acquisition machine’s willingness to overpay for product. As a consequence, investors suffer the double indignity of high fees and poor investment prospects.”

On top of it all: Because several references point out that Wells’ dividend payments to shareholders exceed(ed) the norm, coupled with the fact that not one of Wells’ 92 properties is listed for sale, per website, suggests this story is far from over.

View several Wells REIT investors who are currently trying to get their money back, here, as well as the Businessweek article on Non-Listed REIT’s, a ticking time bomb for the commercial real estate industry.

MREA | Medical Real Estate Advisors

Precision Guidance for Healthcare Real Estate

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