Non-billionaire HNW investors are increasingly competing on large-scale commercial assets.
Not so long ago, the vision of high-net-worth (HNW) investors in commercial properties entailed doctors and lawyers passing the hat at the country club in an effort to buy an eight-unit apartment complex in town or the retail strip across the street from church. In recent years, however, this image has been washed away in a veritable flood of HNW capital propelled by increased sophistication and growing incentives.
Billionaires have long been a fixture in this landscape. For instance, the late Paul Allen’s Vulcan Real Estate has led the redevelopment of Seattle’s South Lake Union neighborhood with billions of dollars invested in 37 construction projects. These homegrown ultra-rich are complemented in U.S. commercial real estate acquisitions by the investments of sheiks from the Middle East, Chinese billionaires and other uber-wealthy foreign nationals. However, these family offices are essentially institutions themselves.
What has been new and different over the last several years is the powerful emergence of non-billionaire HNW investors as direct acquirers of large-scale commercial properties and meaningful investors in private equity real estate funds. This trend coincides with the dramatic concentration of U.S. wealth in fewer hands over the last two decades. It has been augmented by increased transparency in commercial property markets, concern over stock market volatility for investments in publicly-traded REITs and, more recently, enticing tax incentives for property investments. Another significant factor in the rising profile of the HNW investor is the growing influence of “alternative” wealth managers who invest their clients’ capital—sometimes pooled together to optimize buying power—in a custom-tailored suite of private equity investments, including commercial real estate funds and direct property investments.
These advisors and their clients believe that liquidity is over-valued, particularly for the very wealthy, and that the price premium placed on CUSIP’s is too significant. In the low-yield environment that has prevailed since 2011 and looks likely to continue, alternatives such as private equity, infrastructure investments and commercial real estate promise superior returns. Commercial properties offer strong cash flow, tax advantages underpinned by interest and depreciation deductions and the backing of hard assets. With commercial real estate offering ever-increasing transparency and liquidity, many view this asset class as the least alternative of the “alts.”
Non-traded REITs and crowdfunding platforms have sprung up to compete for the dollars of individual investors, and these have made a significant impact in commercial real estate capital markets. However, many of these vehicles are laden with heavy fees. Savvy investors who are truly high-net-worth and have other options for putting money in commercial real estate have found these “Main Street” outlets unappealing. Increasingly, the evidence shows, HNW investors are turning to direct property acquisitions and closed-end funds.
A June 2018 study by CapGemini found that real estate is the third-largest asset class held by HNW investors, accounting for 16.8 percent of total portfolios, having risen 2.8 percent since 2017. In terms of direct investments in commercial real estate, research firm Real Capital Analytics measured a 28 percent increase in $2.5-million-plus property acquisitions by HNW investors through the first three quarters of 2018 in comparison to the same period a year ago. Similar growth has been witnessed in HNW commitments to real estate funds. A January 2018 survey by KPMG indicated that its respondents expect that, in 15 years, HNW investors will be the second largest source of fund capital, trailing only defined contribution pension plans—many of which are controlled by HNW investors in the form of 401(k) plans and self-directed IRA’s. Of course, this represents a dramatic turn of the tables with defined benefit plans, endowments and foundations declining into the single digits over the next decade and a half.Back to Top
$72.SM Buy Tops for '18 In Colorado Springs
Buchanan Street Partners closed 2018 on a high note, completing one of the largest apartment transactions of the year in Colorado.
The Newport Beach-based real estate investment management firm paid $72.5 million for Creekside at Palmer Park, a 328-unit complex five miles east of dowtown Colorado Springs.
The deal went for about $221,000 per unit. By total price, it was the largest sale of the year in that city, according to the buyer.
The 16-building property, built in 2003, totals 325,700 square feet, and is on nearly 20 acres of land. It was about 95% leased at the time of sale.
Buchanan Street has bought about 14,000 apartment units since its founding 20 years ago, initially by providing capital to regional operating partners.
More recently, it has begun to buy and operate multifamily deals directly. It's bought four complexes under this model since mid-2017, all in Utah and Coloradoareas "where we believe there to be excellent job formation and investment value to be realized," Chief Executive Robert Brunswick told the Business Journal last week.
About a year ago, it paid $60 million for a complex in Lafayette, Colo., just outside Boulder.
Buchanan Street said it intends to hold onto the Creekside property for the long term.
Colorado Springs is an attractive investment market for Buchanan Street, according to Kevin Hampton, multifamily executive vice president for the investment company. "Increases in the region's economic activity and population continue to favorably impact the demand for multifamily housing."
Orange County Business Journal - Mark MuellerBack to Top
By Laura Calugar
Buchanan Street Partners has finished construction on a 298-unit luxury community in Herriman, Utah. The company also began leasing the apartments, which are restricted to residents age 55 and over. Incline at Anthem is a Class A multifamily asset that Buchanan purchased in 2017 while it was partially completed.
Located at 11901 Freedom Park Drive, the property is adjacent to the southern boundary of Daybreak, Utah’s largest master-planned community. Downtown Salt Lake City is roughly 23 miles away. Apartment interiors feature contemporary designs and finishes, programmable thermostats and lighting and USB charging outlets. Amenities include:
• a clubhouse
• fitness center with a yoga
• swimming pool and spa
• fire pits and barbecues
• pet terrace
“It’s the first active adult, luxury multifamily community of its kind to offer residents a youthful, social and vibrant living experience usually found in apartments designed for Millennials,” said Kevin Hampton, executive vice president of Buchanan Street Partners, in prepared remarks.
In April, Buchanan acquired Pinnacle Fort Union, a 160-unit community on the southern outskirts of Salt Lake City, from RK Properties, for $31.8 million. At that time, the value-add investment represented the company’s second purchase in the area.
Image courtesy of Buchanan Street PartnersBack to Top
Late-cycle investing calls for close attention to all potential risk/reward scenarios.
By: Robert Brunswick
Markets develop their own momentum and when a feeding frenzy takes hold, undisciplined investors often throw caution to the wind. They want a piece of the action and fear being left in the dust. Even discerning investors can rationalize stretching on underwriting assumptions, figuring that if costs are slightly underestimated or income is overstated the rising tide will lift their boat, too.
Early in a recovery cycle, riding the crest has its place. When investments are underwritten based upon recent dynamics, it’s hard not to justify optimism, particularly if the preceding trough has been deep. When one identifies the swell, jumping on board, even with some level of abandon, can be rewarding.
Late-cycle investing, however, is much trickier. Will the wave deliver the rider gently to shore or crash on the rocks? In the real estate market, has a paradigm shift been created by exponential improvements in transparency and efficiency? Maybe we’re in for a soft landing this time around, with relative restraint in the lending and development arenas, as compared to the lack of restraint during the last recession.
It’s difficult to watch others playing the game while caution keeps you on the sidelines. This is particularly true for investment managers and operators whose corporate finances and compensation structures rely upon transactional activity and ever-growing assets under management to keep the organization afloat. Capital providers need to be wary of this investment motivator and should encourage management structures that neutralize this incentive.
By the same token, holding a market view that the cycle has some run left or that the landing will be soft doesn’t make an investor undisciplined. The foundation of markets is differing views on either side of the same trade. However, it’s critical to develop these views from an analytical perspective that identifies elements of risk and opportunity and forecasts their relative influences on the future. In the real estate capital markets, factors warranting consideration and analysis include but are not limited to:
- Spreads vs. non-real estate investment opportunities
- Institutional real estate allocations vs. targets
- Dry powder in private equity real estate funds
- REIT trading prices vs. NAV
- Foreign capital flows
- Impact of leverage
- Tax incentives
We all view these risks through different lenses. It’s amazing at times how divergent risk-return assessments can be. A property that is viewed as holding value-add to opportunistic risk early in the cycle often tends to become viewed as core/core-plus later in the cycle, with correspondingly diminished returns despite carrying the same actual fundamental/property risk as before. This “risk creep” can lead to misalignment between capital and business plans/expected returns. Capital seeking value-add returns may find itself locked in lower-yielding core investments if lofty growth expectations don’t materialize. The exit from these investments, while predictable, will be predictably disappointing. Conversely, returns for true core investments may become compressed below target ranges late in the cycle, forcing investors to take on greater risk to achieve yields attained earlier in the cycle…adding on risk at exactly the time it should be laid off.
A racecar driver holding a lead entering the final laps of a grand prix must calculate with his crew if he can afford to keep the pedal to the metal. If doing so causes him to have to make another pit stop, then net time might be lost, while sprinting to the finish might cause him to run out of fuel and cost him any spot on the podium. The pit crew will also have observed what his competition is doing. So, too, late in this real estate race, when mistakes are amplified and there is precious little time to make up for them, investors hoping to see the checkered flag must maintain the discipline of an analytical framework for risk assessment.
Robert Brunswick is co-founder and CEO of Buchanan Street Partners, a real estate investment management firm based in Newport Beach, Calif.Back to Top
Buchanan Street Partners, a Newport Beach, California-based real estate investment management firm, has provided $4.1 million in short-term bridge loan financing for the acquisition and repositioning of Pacific Apartments, a 13-unit multifamily complex in the Mar Vista neighborhood of Los Angeles, California.
Buchanan Street closed the loan quickly for an unnamed repeat client, providing for 80 percent of the purchase price and renovation costs.
“OUR FAMILIARITY WITH THE INVESTOR AND OUR ABILITY TO QUICKLY ASSESS THE MERITS OF THE BUSINESS PLAN FOR THE PROJECT ENABLED US TO MOVE VERY QUICKLY ON THIS LOAN,” SAID JOSEPH MAEHLER, SENIOR VICE PRESIDENT AT BUCHANAN STREET PARTNERS. “THE PROJECT’S LOCATION NEAR LA’S SILICON BEACH AND THE STRONG MARKET FUNDAMENTALS THAT DEFINE THE AREA ALSO PLAYED A MAJOR ROLE IN OUR DECISION.”
Pacific Apartments is located in Mar Vista and is one block from Venice Boulevard and Centinela Avenue, an area in LA’s Westside known for trendy restaurants, coffee shops and specialty stores. Nearby Silicon Beach is home to over 500 technology companies including Google, Apple, Amazon, Yahoo!, YouTube, Facebook, and others.
The property, which was vacant at the time of sale, will undergo a complete renovation, including the addition of two rental units. Extensive interior remodeling is planned, including all new kitchens, plank flooring, modern lighting and energy efficient air conditioning. Exterior upgrades will include new landscaping, painting and façade improvements.
“Mar Vista is one of the last affordable Westside neighborhoods adjacent to the booming Silicon Beach,” added Maehler. “We recognize the value of this asset along with the value that can be created in bringing the older housing stock up to date. Small multi-unit rental properties, consisting of 2 to 49 units are a staple of the Los Angeles housing supply but are also considerably dated and in need of renovation. We see great potential in this local asset class.”
Buchanan Street provides first mortgage capital and structured financing for commercial and multifamily properties. The company’s debt lending platform provides construction and bridge loans in the $3 million to $30 million range.Back to Top
Delving deeper into the geographical jargon of market tiers sheds light on investment trends and value-add opportunities that would have gone overlooked just a decade ago.
By: Robert Brunswick
The real estate industry is known for its shorthand captioning of complex topics, often assuming that industry participants share common background knowledge. Since this is not always the case, delving a little further into the geographical jargon of market tiers sheds light on investment trends and value-add opportunities that would have gone overlooked just a decade ago.
How are certain geographies designated into tiers? Many variables contribute to these groupings, including the size of a real estate market (think spread of risk and economic diversity), the historical volume of transactions (speaks to liquidity) and population and local domestic product (addresses work force availability and attraction to businesses). However, these variables should not alone dictate investment decisions. Housing affordability, regional tax status, workforce demographic trends, educational infrastructure and quality of life all contribute to the fundamentals that help define market segmentation.
Let’s put some numbers to these market tiers. Today, the greater U.S. has over 50 MSAs with populations over 1 million and 30 MSAs with populations over 2 million, yet there are only five to seven cities typically designated as core or primary or gateway markets. New York, Boston, San Francisco, Los Angeles and Washington, D.C. always appear on these lists, and sometimes Chicago and Seattle make the cut. The next tier, with a secondary moniker, numbers 15 to 20 cities (e.g., Phoenix, San Diego, Denver), with the remainder defined as tertiary or third tier markets (e.g., Pittsburgh, Salt Lake City, Las Vegas).
We often hear that certain institutions will or won’t invest in a city when it doesn't make their hierarchy ranking. While it is important to rely on research and an investment protocol, this grand standardization model leaves many opportunities untapped in an increasingly fragmented commercial real estate marketplace. Painting markets with a broad brush can lead to redlining that fails to adequately account for growing efficiencies in capital flows (both in the real estate industry and the broader economy), improved transportation/distribution infrastructure and greater workforce mobility. These factors have combined to fuel economic growth in secondary and tertiary markets, creating opportunities that will be missed by those constrained by traditional market segmentation.
An expanded universe of opportunistic buyers and sellers has taken notice, however, and in a big way. Commercial property transaction volume in the secondary and select tertiary markets grew from $2 billion in 2000 to $45 billion at the end of 2017. The potential for increased yield for those investors willing to consider non-gateway investments can be anywhere from 150 to 400 basis points on a levered basis, yet with how much more risk?
Certain risk variables in less liquid markets are immutable, including economic recovery that lags the primary markets, as witnessed in this current cycle, or a more rapid retreat when the going gets rough. This “last to rise, first to fall” phenomenon can create a shorter investment window and require a more precise timing play. Additionally, secondary and tertiary markets sometimes fall prey to industry concentration risks that drive a boom or bust profile, as we’ve seen in the past with Houston, San Jose, Orange County, Calif. and Las Vegas. Given these risks, investments in these secondary markets depend on strong property fundamentals— principally investment basis and durable cash flow—during periods of risk aversion and illiquidity.
We have found tangible value in not competing with the bigger institutions who might exhibit a herd mentality driven by their standardization models, and thus have found solid risk-adjusted returns in markets where sound and sustainable demographic and economic drivers underpin improved property fundamentals.
Robert Brunswick is the co-founder and CEO of Buchanan Street Partners, a real estate investment management firm that focuses on real estate investing through direct acquisition of commercial and multifamily properties in addition to originating and funding debt for third-party owners of real estate.Back to Top
Based on Buchanan Street’s research, the firm decided to make improvements to the property’s dated buildings with flex/R&D office repositioning via updated spaces for research and labs prior to the sale.
SOUTH SAN FRANCISCO—Buchanan Street Partners purchased Dubuque Center, a three-building 112,000-square-foot flex office and R&D campus, in 2015 as a value-add investment that would capitalize on the strong demand for flex office space surrounding the biotech-focused Oyster Point submarket. In addition to physical improvements, Buchanan Street focused on converting underperforming industrial space into laboratories and other life science uses.Back to Top
Prudence dictates that we prevent our industry from going backwards and losing the credibility that we have worked so hard to gain.
By: Robert Brunswick
Real estate development in the U.S. has historically been driven by entrepreneurs with great ambition and visions of grandeur, but thin pocketbooks. Lacking their own controlled or discretionary capital, these developers needed to sell their ideas to banks, pension funds and other investors. This reality dictated more leverage, as equity was expensive and diluted the entrepreneur’s take-home profit. This was never more evident than in the 1980s-1990s when the S&L industry often provided close to 100 percent loan capitalizations. We all know how that played out, with a crashed real estate industry starved for the equity capital it was missing in the first place.
Today’s real estate industry has joined other institutional asset classes with improved discipline, protocol and process as demanded by both investors and regulators. Public debt and equity, an educated workforce, and transparent and standardized reporting all have enhanced capital’s confidence in real estate as an asset class. Investors’ real estate appetites have been further buoyed by their need to access alternative investments and the cashflow predictability of real estate in a yield-starved environment.
The Financial Crisis of 2008-2009 set in motion another factor that is very influential in today’s evolved real estate market - a greatly enhanced regulatory regime. Many industry participants would argue that such regulation has overshot its target, as is often the case in these dramatic cycles, thereby reducing leverage with more restrictive underwriting protocols for the banking industry. The benefit to those of us who invest in real estate, however, has been a marketplace that now requires, broadly speaking, more equity to satisfy the lenders’ current playbook. Aside from the benefits of a more prudent investment balance sheet, higher equity requirements have also boxed out less capable and undercapitalized players from participating in the industry. This new, less-levered real estate world was then further buttressed by a lack of yield in other conventional asset classes such as bonds and equities, prompting more capital flows to real estate given its comparatively favorable yield proposition.
Increased capital flows have naturally translated into property price appreciation and significant cap rate compression. We must ask whether real estate is overpriced, and whether investors should seek more leverage to offset this yield erosion. We are now seeing a partial rollback of the Dodd-Frank regulations, allowing community banks more lending flexibility. While we all would like to attain more yield, we should stay disciplined and realistic as to these trade-offs. Prudence dictates that we prevent our industry from going backwards and losing the credibility that we have worked so hard to gain.
The equity well is deeper than it’s ever been, with global dry powder for closed-end private real estate funds at their highest point in history. Foreign investment remains robust as many offshore investors seek the safe haven and favorable cash flow of U.S. commercial real estate. These trends bode well for our collective “sleep at night” quotient as we reassess the continual tussle between fear (more equity) and greed (more debt). Given our still fresh collective memories of 2009-2010 and our current stage in the property cycle, fear seems to be maintaining a slight edge…as it probably should.
Robert Brunswick is the co-founder and CEO of Buchanan Street Partners, a real estate investment management firm that focuses on real estate investing through direct acquisition of commercial and multifamily properties in addition to originating and funding debt for third-party owners of real estate.Back to Top
Buchanan Street Partners purchased Green Valley Corporate Center North Tech Park V and VI, four office buildings totaling 158.3k sf that are part of a larger master-planned office park in Henderson, NV. Buchanan Street acquired the buildings in an off-market for $27.8 mil ($175/sf) from American Nevada Company.
The buildings were 64% leased at the time of sale. Buchanan Street plans to infuse new capital into the buildings’ common areas and restrooms and provide funds for leasing costs.
Tech Park V and VI, located on 14 acres at 2300, 2310, 2340 and 2350 Corporate Circle Drive, benefit from excellent freeway access at the nearby intersection of I-215 at North Green Valley Pkwy. Numerous retail stores and restaurants are located nearby and McCarran International Airport and University of Nevada, Las Vegas are a short drive away.
“With two large blocks of vacancy that can accommodate tenants ranging in size from 10k sf-40k sf, an above standard parking ratio of 7 spaces per 1,000 sf and available building signage along I-215, we believe that these buildings will generate great interest from large national and regional companies,” said Matt Haugen, vice president at Buchanan Street Partners.
The seller was represented by Rick Reeder and Brad Tecca of Cushman & Wakefield, along with assistance from Geoffrey West, Jayne Cayton, and Michael Dunn, also with C&W.Back to Top
With concessions ticking up and rent growth slowing, is it time to question or finetune allocation levels and strategies in multifamily investing?
By: Robert Brunswick
The stability, durability and continued capital flows into multifamily investing permeate
today’s headlines, with industry pundits believing apartments to be the most popular product type with real estate investors in 2018, second only to industrial. Mixed signals abound among varying markets, and it’s important to dissect and triangulate the real data as the analytics don’t always tell the full story.
A first quarter report from Fannie Mae cited:
- Positive, but slowing net absorption in 2018 compared with 2017 (CoStar)
- Surging apartment development, peaking at over 440,000 units nationwide and up 16 percent from 2017 (Dodge Data & Analytics)
- Rising nationwide vacancy rate predicted to approach recent historical average of six percent by year-end (Fannie Mae)
With concessions ticking up and rent growth slowing , is it time to question or finetune allocation levels and strategies in multifamily investing? Two principal factors are worthy of consideration here: geography and investment horizon.
Nationally, development is projected to keep pace with net absorption, as Fannie Mae projects net rental demand of 380,000 to 460,000 units in 2018. However, parsing geographies more discerningly reveals that new multifamily construction has been heavily concentrated in America’s largest cities, where pockets of oversupply are projected. New York, Boston, Washington, D.C., Chicago, Los Angeles and San Francisco present some of the highest unit construction per capita in the country, yet are all projected by Moody’s Analytics to experience job growth in 2018 that lags the national forecast of 1.5 percent.
All markets do not bear these metrics though, especially in select secondary markets where Fannie Mae reports the ratio of projected population and employment growth to rising apartment inventory is more favorable. Cities such as Houston, Dallas, Austin, Texas, Salt Lake City and Portland, Ore., even while seeing brisk construction, are forecast to increase job growth between two to three percent amid continued rental escalation. Two markets worth investigating include Phoenix, where projected 2.6 percent employment growth forecasts the demand for 10,000 units against projected 2018 delivery of 8,000 units, and Las Vegas, where projected 2018 absorption is double the number of units under construction.
Development nationwide should peak in 2018, as planned units in comparison to those under construction taper off, even in cities with the most active pipelines. This suggests that investors with a longer hold horizon may see their patience rewarded when new supply is absorbed and vacancy rates level off. Several long-term demographic trends also bode well for multifamily absorption and rental rates:
- Householders continue to delay marriage and childbirth, thus tending to remain in apartments
- Population growth in many areas, particularly in the Southwest, is being fueled by immigrants who tend to be renters
- Real household income growth is occurring only in the upper 20 percent of earners, rendering home ownership less affordable for many
- Student loan debt, which doubled as a percentage of GDP between 2006 and 2012, stymies home ownership for younger households
- Conversely, the 65+ baby boomer generation, America’s most rapidly growing domestic cohort, is demanding more rental housing as they age out of owned homes and reevaluate their investment and retirement options
In our view, investors who choose their geographies wisely and take a long-game approach should see their properly selected multifamily investments buoyed by these market and demographic trends, while enjoying relatively predictable cash flows in the interim.
Robert Brunswick is the co-founder and CEO of Buchanan Street Partners, a real estate investment management firm that focuses on real estate investing through direct acquisition of commercial and multifamily properties in addition to originating and funding debt for third-party owners of real estate.Back to Top
One of the busiest apartment developers in North Texas is partnering with two out-of-state investors on a new, mixed-use project near the Galleria shopping mall.
Newport Beach, Calif.-based Buchanan Street Partners and Minneapolis-based CarVal Investors will pump $16 million into the first phase of the Alpha West development in Farmers Branch. Irving-based apartment builder JPI is constructing a 409-unit, $74 million apartment complex as part of the project at the southwest corner of Inwood and Alpha roads.
JPI and Dallas-based Bridgeview Real Estate are developing the site which will include retail, hotel and office space as well as the apartments.
Strong regional growth and the opportunity to work with JPI on a major project in the dynamic Galleria submarket made the investment compelling for Buchanan Street Partners, Bob Dougherty, partner at the firm, said in a prepared statement.
Jefferson Alpha West will have a resort-style pool, a two-story clubhouse and a fitness center. It will be within walking distance of the Galleria.
Up to 300,000 square feet of office space, 100,000 square feet of retail and a 155-room hotel are also planned in the broader Alpha West project.
A building wave around the Galleria is beginning even as the city and developers grapple with a plan for the fading Valley View Mall nearby. Counting Jefferson Alpha West, JPI has three new rental communities in the works in the Galleria area along the west side of the tollway.Back to Top
Buchanan Street Partners has acquired the 160-unit Pinnacle Fort Union community, located on the southern outskirts of Salt Lake City, as a value-add investment.
Following the recent purchase of a 240-unit community in Denver’s Lafayette submarket, Buchanan Street Partners has acquired Pinnacle Fort Union, a 160-unit community on the southern outskirts of Salt Lake City, from RK Properties, for $31.8 million. The transaction represents Buchanan’s second recent purchase in the area, bolstering the company’s presence in in the Midwest.
The property is located at 1151 E. 6720 S. Cottonwood Heights, adjacent to Interstate 215. A Walmart-anchored retail center and Fashion Place Mall are less than a seven-minute drive away, while downtown Salt Lake City is within a 20-minute drive.
The new owner purchased the property as a value-add investment. Significant upgrades are planned, including a rebranding campaign, as well as interior and exterior remodeling. According to Yardi Matrix, the community comprises 48 one-bedroom, 76 two-bedroom and 36 three-bedroom apartments.
"Salt Lake City is among the fastest-growing regions in the nation due to strong job growth that is fueled in no small measure by the region's high quality of life, "Kevin Hampton, executive vice president at Buchanan Street Partners, told Multi-Housing News. "Pinnacle Fort Union appeals to the lifestyle needs of its residents with walkable access to retail services and plentiful on-site amenities, including abundant open space in a park-like setting, a swimming pool, spa, club house and fitness center."
Berkadia’s Managing Director James Wadsworth represented the seller and the buyer.Back to Top
We believe certain real estate investments will have enhanced after-tax yields in 2018.
By: Robert Brunswick
What better way to kick off the new year than to discuss the new tax law and the gift we all just received as real estate investors? The new tax legislation will impact investors and their investment strategies as we all continue to search for yield and source opportunities within the alternative investment landscape. As equities and bonds continue to demand outsized liquidity premiums we believe certain real estate investments will have enhanced after-tax yields in 2018.
Points to consider:
- The tax law changed the treatment for income from pass-through vehicles, including REITs and other vehicles that own real estate. The new law allows for a 20 percent pass-through deduction, which when coupled with a top tax rate adjustment from 39.6 percent to 37 percent yields a new top marginal tax rate of 29.6 percent on real estate investments.
- These benefits could, however, have certain limitations subject to individual investors’ total taxable income, resulting in additional hurdles involving wages paid by an entity and the depreciable basis of the underlying property.
- Capital gains treatment for developer/sponsor promotes/profits participations were left alone, with the exception that any long-term capital gain allocable to their carried interest now requires assets to be held for more than three years rather than the previous one year. While individual investors (non-sponsors) will still realize long-term capital gains treatment after one year, they might question the alignment with their developer/operating sponsor depending on the business plan and risk profile of a particular investment.
- 1031 exchanges have remained largely intact, creating a further advantage for real estate and its tax deferral benefits, save for certain personal property that no longer qualifies for tax deferred treatment.
There are other general considerations activated by the tax change which might impact the broader real estate investment climate within the housing sector. The adjustment of the standard deduction for married couples filing jointly moved from $12,000 to $24,000, making it more enticing to rent vs. own when compared to the prior law’s treatment regarding property tax and mortgage interest deductions. This certainly will prompt many to forego or reconsider renting vs. buying, potentially buoying an increase in demand for rental housing.
REITs may become a preferred investment vehicle due to their eligibility for a 20 percent deduction without any limitations, enhancing the appeal of REITs relative to other yield-oriented investments. It is important to remember that publicly-traded REITs don’t necessarily trade based on real estate fundamentals as they are non-correlated to the less-efficient private investment market place.
One might project that this legislation could help to break the impasse between buyers and sellers on pricing, a dynamic that kept a lid on transaction volumes in 2017, but now might create an increase in new investment opportunities.
Further, corporate tax reductions may fuel increased demand for commercial property as companies grow existing businesses or start new ones, providing for improved occupancy and income from real estate investments.
We believe these changes broadly suggest that real estate investing will continue to look attractive vs. other asset classes, the latter of which are unsheltered by depreciation and interest expense with its ordinary income taxed at the top rate of 37 percent. That said, happy continued hunting for your real estate investments and congratulations on your raise.
Buchanan Street Partners Purchases Recently Completed Luna Bella Community from
A Lafayette apartment complex has sold for $60.25 million to a California firm in the first major apartment sale of the year for the area.
Luna Bella, constructed in 2015 by Milestone Development Group, sold to Buchanan Street
Partners, for $251,041 per unit.
The acquisition represents Buchanan Street’s investment focus on high-quality apartment
assets in suburban locations near major metro areas. The company also recently purchased a 298-unit complex in metro Salt Lake City.
"Our investment in Luna Bella provides the opportunity to expand our multifamily portfolio with an active apartment community that has outstanding amenities and is in close proximity to several employment centers in metro Denver," said Kevin Hampton, executive vice president at Buchanan Street.
Since its founding, Buchanan Street has invested more than $6.5 billion in real estate.
The 240-unit Luna Bella includes a 5,400-square-foot clubhouse containing a variety of highend amenities. The complex is located at 695 S. Lafayette Drive.
Buchanan Street was attracted to the property in part because of supply constraints that exist in the apartment market in metro Denver, which are exacerbated in and around Boulder, where the University of Colorado and high concentration of tech workers have resulted in restricted supply and higher average rents than most of metro Denver.
"The acquisition of Luna Bella was also appealing due to the strong economic and demographic fundamentals in metro Denver," Hampton said. "Denver’s high quality of life and highly educated workforce is attractive to employers and residents alike."
Doug Andrews, Shane Ozment and Terrance Hunt, all vice chairmen at ARA, A Newmark
Company, represented Milestone Development Group.
For more information on this sale, please see CoStar Comp #4134004.Back to Top
Newport Beach-based Buchanan Street Partners has closed a $20.8M construction loan to a developer for Newhall Crossings, a mixed-use project in downtown Newhall in the Santa Clarita Valley.
Buchanan officials did not disclose the name of the developer, but multiple media outlets have previously reported the developer of the project is Serrano Development.
An email to Serrano Development was not returned Monday night. A spokesperson for Buchanan said the company could not divulge the name of the developer.
Buchanan Street’s loan for the highly anticipated development highlights the ongoing investments in Santa Clarita, the fourth-largest city in Los Angeles County and about a 45-mile drive north of downtown Los Angeles.
Newhall Crossings is at the intersection of Main Street and Lyons Avenue in Old Town Newhall. The mixed-use development will consist of 47 apartment units and 20,164 SF of retail space. It is part of a larger development in the area that includes a Laemmle Theatre and a five-story parking structure.
“Newhall is truly coming into its own as a suburban market yet with a ‘new urban’ look and feel in its downtown area,” Buchanan Street Partners Vice President Matthew Doerr said in a press release.
“Millennial demographic trends point to increasing demand for an urban lifestyle in a suburban location, and given its proximity to the Newhall Metrolink Station, we think Old Town Newhall is poised to capitalize on that opportunity,” Doerr said.
In September, housing developer FivePoint Communities settled with an environmental group to push ahead with its $13B, 21,500-home Newhall Ranch project. If fully built and filled out, in the next several years it could bring in 60,000 more residents to the area.
Doerr said the area’s growth was one of the strong factors influencing the company's decision to finance Newhall Crossings.
Buchanan Street provided a 77% loan-to-cost, nonrecourse construction loan for Newhall Crossings. JLL’s Brian Halpern and Alex Kane arranged the financing for Buchanan Street.Back to Top
Tracking the trend of increasing alternatives allocation is worth a longer look, as it is indicative of a shift by HNW investors and will result in increased capital flows into real estate.
By Robert Brunswick
The rethinking of traditional investment allocations is causing high-net-worth (HNW) investors to seek ways to diversify their investment portfolios, especially given the current low yield environment. The increased allocation to alternative investments, such as private equity, hedge funds, commodities and real estate, is aiding HNW investors in achieving improved portfolio diversification, a hedge against future inflation and increased current yield, with certain tax benefits in the case of real estate.
Portfolio challenges for HNW investors
HNW investors have traditionally looked to stocks and bonds, with their market breadth and attractive liquidity, for the bulk of their portfolio allocations. While historically effective, the traditional approach to investing will be increasingly challenged as future equity returns are likely to be significantly lower and fixed income returns continue to be low in this “new normal” environment. HNW investors, and to a greater extent ultra HNW investors, are showing greater interest in alternative assets as a means to diversify their portfolios and achieve more attractive risk-adjusted returns.
Given the current liquidity premium characteristic of conventional equity and fixed income
markets, and the relative increased (liquid) cash positions among HNW investors, investment
managers, generally, are of the belief that most HNW portfolios are over-allocated by prior
standards. Further, many alternative investments now offer certain forms of liquidity, enabling
increased allocations in alternatives yet with flexible exit strategies.
The increasing shift toward alternatives
Until recently, alternatives warranted a roughly 10 percent allocation to the typical HNW
investor, perhaps even up to 20 percent. The move towards higher allocations for alternative
investments within a HNW investor portfolio is increasing, to a large extent due to the low
correlation when compared to traditional asset classes. Investment managers are commonly
advocating a much greater allocation to alternatives, ranging from 20 percent to 40 percent. For
ultra HNW investors, an alternative asset allocation in the mid-40 percent range is not
A considerable amount of new independent RIAs are being formed to allow advisors who are
leaving traditional brokerage firms to provide clients with an “open architecture” platform. This
creates increased flexibility in providing clients more diverse investments, including alternatives,
than the limitations incumbent with approved brokerage platform products.
Additionally, advisors are leaving traditional brokerage firms to avoid the perceived conflict of
earned commissions on proprietary products, as opposed to compensation for assets under
management in an open architecture platform. Not only does this diversification help HNW
investors, it eases the difficulty by smaller investment managers in accessing advisor platforms.
Tracking the trend of increasing alternatives allocation is worth a longer look, as it is indicative
of a shift by HNW investors and will result in increased capital flows into real estate. By
combining a variety of alternative assets in a HNW portfolio, notably real estate, a more optimal
diversification can be created, one that avoids the liquidity premium found in traditional asset
classes, benefits from low correlation and provides investors with enhanced portfolio returns
and current yield.
What are the market cues that can help pick opportunities that will generate returns that align with portfolio goals?
By Robert Brunswick
As high-net-worth (HNW) investors and family offices look to increase their portfolio allocations in real estate, the multifamily sector continues to offer attractive investment opportunities. HNW investors demanding predictable cash flows from core properties or value‑add yields on ground-up and redevelopment projects can meet these objectives in the multifamily sector. In this context, what are the market cues that can help pick opportunities that will generate returns that align with portfolio goals?
Risks and rewards of multifamily investments
While gateway markets such as San Francisco and New York City are attractive, they have also experienced significant multifamily development. That new supply can dampen rental rate increases, and when factoring in the high cost of entry in gateway markets, returns are more quickly impacted when rent growth stagnates. Conversely, secondary markets, like Salt Lake City and Denver, have seen comparatively less new development despite strong population and job growth. We think that these markets provide more predictable returns and a more attractive option for HNW investors.
Millennials are increasingly demanding more rental housing, and developers are responding with designs and amenities that serve their predicted behaviors. The increase in the development of smaller units in urban environments is one example of this. That said, investors need to exercise caution when too much of this type of product is being delivered in certain markets. Like generations before them, millennials will eventually look to purchase homes in good school districts for their families, and likely in more suburban areas.
Separately, growing contingents of older renters want higher-quality finishes and amenities. Many assets, even those just 10 years old, do not reflect the preferences of these renters, creating an opportunity for savvy investors to acquire and implement a redevelopment strategy.
Increasing ROI on multifamily investments
Multifamily can be a strategic long-term investment opportunity for HNW investors, but there are important things to note in the achievement of yield. Location, asset quality and strong market fundamentals must align with investment strategies and sound underwriting. The management of an asset is also a key driver for success.
Implementing upgrades to finishes, amenities and technology, including package management, smart thermostats and security systems, are additional means of effectively adding value and enhancing returns. As an example, energy-efficient upgrades can both reduce operating costs and result in financial savings when using agency debt.
Package management is another example of changing tenant needs. The growing adoption of e-commerce has tenants receiving far more package deliveries than just a few years ago, and successful communities will effectively manage this influx of deliveries. Enlisting third-party vendors that have developed innovative solutions to the problem of package theft is highly attractive to renters who shop online.
Multifamily investment mistakes to avoid
Is there too much capital in your target investment market? If so, unrealistic rental growth assumptions or underestimated increases in operating expenses will impact the integrity of the pro forma. Will cap rates hold? In markets where cap rates have dropped below 4 percent, the margin for error is magnified. Accuracy is a must when assessing risk in an ultra-low cap rate environment.
Adequate underwriting of capital costs is another area for caution. The old standard of $250-per-unit capital reserve may not hold up in the face of changing tenant preferences, especially when considering the costs of keeping up with advances in technology.
There are a variety of factors that we believe will result in increasing opportunities—in the right apartment markets—for HNW and family office investors. As construction lenders reign in new lending and equity investors become more cautious, we expect the current development pipeline to shrink. When combined with the changing demands of renters by choice, we believe that there is an increasing opportunity to improve existing apartment assets and generate attractive returns.Back to Top
SEPTEMBER 29, 2017 | BY CARRIE ROSSENFELD
Developers should build in markets that will absorb new construction pipelines adequately because, in some markets, rents are now softening as supply is exceeding demand, Buchanan Street Partners’ Tim Ballard tells GlobeSt.com.
NEWPORT BEACH, CA—Apartment developers should make sure to build in markets that will absorb new construction pipelines adequately because, in some markets, rents are now softening as supply is exceeding demand, Buchanan Street Partners’ president Tim Ballard tells GlobeSt.com. Investors looking to maximize ROI in real estate have historically considered financing multifamily developments, but Buchanan Street Partners has seen various shifts that investors must consider prior to making a deal, Ballard says.
Buchanan recently began a $50-million age-restricted, multifamily development in the Greater Salt Lake City area. The property, once complete, will meet provide upscale amenities, pleasing views and access to retail and public transportation. In addition, Buchanan Street has activated a programmatic effort to expand the company’s multifamily investment portfolio by investing $500 million in multifamily projects in three years.
We spoke with Ballard regarding the multifamily market, how he views its current state and strategies for other investors.
GlobeSt.com: How would you characterize the current state of the multifamily market, and what are your predictions for 2018?
Ballard: The multifamily market is starting to show signs of weakness in some of the major markets, but continues to attract massive capital flows. The last few years have brought a flood of new multifamily construction projects. As a result, the sector is likely to see a softening of rent growth in markets that have high deliveries. Despite increased vacancies in some of the primary markets, there are many secondary markets that continue to demonstrate strong fundamentals.
GlobeSt.com: What tips do you have for choosing the right multifamily developments for your investment?
Ballard: Make sure you build in markets that will adequately absorb new construction pipelines. Many of the gateway-city markets, like San Francisco and New York City, have seen significant new development. Rents are now softening as supply is exceeding demand. Conversely, while some secondary markets have seen less new development, we are still seeing strong population and job growth in cities like Salt Lake and Denver and are attracted to those markets.
There has been a lot of talk about Millennials never wanting to buy a home and creating product to serve their predicted demand. This has resulted in significant development of smaller units in urban environments that cater to this population. We believe there is a risk that too much of this product is being delivered. Furthermore, like every generation before them, Millennials will ultimately want to purchase homes in good school districts for their families. Many of the urban developments don’t have the benefit of desirable school districts or the environment that families will likely seek. We are also seeing a growing contingent of older renters by choice that are seeking higher-quality finishes and amenities. This has created an opportunity in improving the current apartment stock since many assets, even as new as 10 years old, do not reflect the preferences of these renters.
GlobeSt.com: How can investors increase ROI on multifamily transactions?
Ballard: Multifamily developments can be profitable investments, but there are several things investors must keep in mind. Assuming you get the big things right—location, quality asset and strong local market fundamentals that are consistent with your underwriting—it then becomes all about execution of the little things. Factors that come to mind are unit finishes and amenities consistent with tenant demand, technology integration that benefits tenants (i.e., package management, smart thermostats, security, etc.). As an example, energy-efficient upgrades not only reduce operating costs but also result in significant financial savings when using agency debt. Package management is a great example of changing needs. Today’s tenants receive many package deliveries—much more so than just three years ago. Many communities don’t have adequate ways of managing the influx of deliveries. Leasing offices are often closed when tenants get home from work or packages are delivered to front doors, resulting in an increase of theft. There are vendors like Parcel Pending that have developed innovative solutions to this growing problem.
GlobeSt.com: What are some common mistakes you see multifamily investors make?
Ballard: It’s easy to make mistakes with any investment, but there are a handful of things that are very important to get right. Is there too much capital in your target market? If so, you often see investors making unrealistic growth assumptions and “playing with the numbers” to make a proforma appear attractive on paper. Will cap rates hold? In some of the major markets where cap rates have dropped into the 4%-or-less range, a 1% increase would result in a 25% lower residual value, potentially crushing your returns.
Make sure you adequately underwrite capital costs. Often investors assume that a standard $250-per-unit capital reserve is adequate when in reality it costs far more to keep your property in good condition as well as to remain competitive.
Rents don’t always grow. The normal proforma I see has 3% to 5% rent growth forever. We are late in the cycle with a lot of new construction. I am sure that we will see periods of time over the next decade where you see a flattening of rents on a good day with a decline of rents likely in many markets during periods of economic contraction.Back to Top
Buchanan Street Partners have purchased a bank-owned multifamily project from Key Bank and Bank of the West. Cushman & Wakefield represented the sellers of the property, which is a partially completed, 298-unit, age-restricted apartment community in Herriman, Utah. Buchanan Street plans to carry out a $25m construction project on the property, bringing the total value to about $50m once completed.
“Capital is largely being raised right now by very large investment managers in multi-billion dollar funds to buy the largest assets in gateway cities,” said Timothy Ballard, co-founder and president of Buchanan Street. “Secondary markets, whether Salt Lake City, Dallas, or Austin, have a better quality of life and employers and employees are moving to these cities because of it.”
As Baby Boomers retire in greater numbers, Ballard believes that the demand for apartments with condo-like qualities in active communities will intensify. “In addition, developers are building smaller units rapidly in urban areas because they say the thesis is that millennials will always live in these apartments, but we don’t believe that to be true – there’s a softening demand for apartments in really expensive cities, and construction financing is harder to get,” said Ballard. “Millennials are getting married, having kids, moving to the suburbs and buying homes; they’re just doing it later.”
Buchanan Street launched its multifamily investment platform in March 2017 to diversify the company’s investment business, and plans to invest $500m in the sector over the next three years. “The sector is very expensive right now – it is flush with capital and the marketplace is competitive,” continued Ballard. “Today is not a good time to go out and acquire a large multifamily portfolio, as the low-hanging fruit is largely gone.”
The company also recently hired executive v.p. Kevin Hampton to complete its multifamily investment portfolio. “Multifamily complements our existing portfolio—a majority of which is currently invested in office assets, Ballard said. “Much of the office portfolio is of a transitional nature, where we stabilize the asset and sell. We look at multifamily as a cash-flow driven play, and buy to hold for the long term.”
The firm’s plan to increase its return on these investments includes making amenity upgrades to the properties, such as installing improved finishes and appliances, and creating resort like amenities, in order to attract the renter by choice, Ballard noted. “There are also opportunities on the operating side as energy efficient technologies have improved – this even results in interest rate savings as agency lenders incentivize borrowers to make these upgrades.”
Buchanan Street plans to finish construction on its new Utah acquisition by early 2018. The project is located near Daybreak, which is Utah’s largest master-planned community.Back to Top
A compelling case is made for investing in secondary and suburban markets, which remain below peak valuation and present protection against a possible market correction.
By Robert Brunswick
Ultra-high net worth (HNW) investors and family offices remain challenged to achieve acceptable risk-adjusted returns amid the current robust economic cycle. U.S. commercial property prices have broadly surpassed the previous peak, impacting yields on core, core plus and value-add assets, especially in primary markets.
Trends in capital flows and property fundamentals suggest strong support for this pricing. Looking deeper into the post-recession recovery reveals that all markets are not created equally; appreciation has been uneven.
A compelling case is made for investing in secondary and suburban markets, which remain below peak valuation, offer room for rent growth and present favorable protection against a possible market correction. Assets in these markets that have healthy supply/demand characteristics and opportunities to add value can deliver risk-adjusted returns that align with investment portfolio goals.
Enhanced value-add yields in secondary markets
An arbitrage opportunity exists for HNW investors in non-major markets and in non-core properties. Safety-minded institutional investors flock together and drive up prices for trophy assets in the early stages of recovery, then grow dissatisfied with the resultant low yields as economic and property fundamentals strengthen. As the institutions branch out to secondary markets in search of higher returns, savvy HNW investors can reap the benefits.
The positive influence of these capital flows can be augmented if non-core properties can be repositioned into the core investment channel. Repositioning value-add activities in this case may include lease-up, renovation, portfolio aggregation, re-tenanting, rebranding and other actions that increase cash flows and diminish risk. These activities can enable investors to realize a “double lift” in yield from value-add properties in secondary markets.
Middle-market inefficiency, investor opportunity
Segmenting the market based upon asset size also contributes to strong risk-adjusted returns. A disproportionate share of capital has been raised in the post-recession cycle by billion dollar “mega-funds.” These funds symbolize institutional investors’ desires to invest with the largest managers, effectively consolidating more capital with fewer managers.
This concentration of capital has manifested itself in the rapid appreciation of the highest-value core U.S. properties. With so much capital to deploy, these mega-funds skew capital flows toward $100-million-plus properties. Foreign investors share a similar bias for investments of this size. The outgrowth of this larger-is-better trend is comparatively less capital seeking assets valued below $75 million, thus creating opportunistic pricing inefficiencies.
Follow the jobs
Another primary driver favoring secondary markets is employment. Non-gateway cities have outpaced gateway markets markedly in terms of percentage job growth, with the primary exception being the San Francisco Bay Area, where prices are at all-time highs. Notably, many of these second-tier cities also boast strong job growth in absolute numbers (e.g., Dallas, Atlanta, Phoenix and San Diego).
Citing the Bureau of Labor Statistics, job growth from the third quarter of 2015 to the third quarter of 2016 was fastest in the lower-density suburbs of large metropolitan areas, with populations over one million. Employment grew 2.2 percent in those counties, slightly ahead of growth in higher-density suburban counties (2.1 percent) and in urban counties (2.0 percent) of large metropolitan areas. Concurrent with this shift is slightly higher population growth in the suburbs as well.
We believe commercial property fundamentals are solid and are projected to remain so for some time. Barring unforeseen exigent events that could shake up the U.S. economy, supply and demand should remain well-balanced, leading to steady occupancy and rental gains over the next several years.
Employment factors, domestic capital flows (both debt and equity) and the inflow of foreign capital are projected to buoy asset values and keep a lid on cap rates. Within this environment, we believe premium risk-adjusted returns can be realized over the next several years by playing to the edges.
Appreciation of larger properties in gateway cities has been so dramatic that they may carry more risk of price declines than under-appreciated assets that tend to be smaller properties in secondary markets and submarkets. These smaller assets, mostly suburban office buildings, generally offer strong yields to investors, are comparatively insulated from supply risk and present compelling rental economics to tenants. Investors in these middle market properties may find less competition on the buy side today and are likely to benefit from capital flows trending towards these secondary cities down the road. Those who reposition non-core assets in secondary markets into core-quality investments may also realize a “double lift” by combining income gains with increasing buyer demand.Back to Top
By Lisa Brown
HOUSTON—Although many were not so lucky, Buchanan Street Partners and Boxer Property report that office assets did not sustain any flood damage and give high praise to property management teams for heroic efforts.
Before Hurricane Harvey, there was increasing opportunity in Houston’s office sector as a result of the distress in the energy sector, according to Buchanan Street Partners. After Harvey, how are those investments holding up?
“We will all have to take a breath about what’s happened with Harvey,” Robert Dougherty, partner at Buchanan Street Partners, tells GlobeSt.com. “But our properties have survived relatively unscathed.”
The three properties owned by Buchanan Street Partners are Sam Houston Crossing II, the Offices at Kensington and 2100 W. Loop South.
Sam Houston Crossing is a 160,000-square-foot office building located at 10344 Sam Houston Park Dr. that was acquired by Buchanan earlier this year. The property has frontage along Texas-8 Beltway between US 290 and State Highway 249, in a location central to housing ranging from entry to executive level.
Buchanan Street Partners acquired the Offices at Kensington, a two-building class-A property in Sugar Land, TX in 2012. The 170,774-square-foot office property, located at the intersection of State Highway 6 and US Highway 59, has a 10-year occupancy average of 92%. It is located on a 15-acre lake with decorative fountains, 2-1/2 mile walking path, and has covered and uncovered parking with on-site property management in First Colony.
2100 West Loop South is a 16-story class-A office property located in the Galleria. This retail and entertainment complex offers dining and shopping, hotels and athletic facilities. The 16-story property has 162,336 square feet of space, with the typical floor plate at 10,500 square feet. The West Loop South asset was built in 1974 but renovated in 2014.
“We were very fortunate that all three of our Houston assets did not sustain any flood damage, unlike so many others throughout the metro area,” Mark Oddo, senior vice president at Buchanan Street Partners, tells GlobeSt.com. “Our property management teams through Transwestern did a superb job of securing the properties and informing tenants on a regular basis. In particular, at our Galleria asset (2100 W. Loop South), the building engineer stayed onsite at the property for several days and nights (he slept at the building) to make sure the building did not sustain any damage from rising floodwaters in the area.”
In addition, Houston-based commercial real estate firm, Boxer Property, is also open for business at 95% of its 58 Houston properties. After its first priority to confirm the safety of all Boxer employees, property assignments were made to inspect property grounds and buildings for flooding and water damage. With some special logistics planning, management and maintenance staff made adjustments to their regular assignments to assess properties close to their homes or from accessible freeways. As of early last week, all properties had been inspected to ensure the safety and availability for customers to return to work.
“Boxer has been extremely fortunate. All employees and property staff have been accounted for and we’ve avoided any significant property damage, so far” said Marc Vecchio, operations director of Boxer Property. “We’re continuing to assess our properties and are ready for our tenants to return to their offices.”
Boxer Property recognizes that many other businesses have been impacted by the flooding and has made special pricing and short-term office space available for those displaced by Harvey. Helping the community stay safe and recover is its priority, the company says.Back to Top
Private lenders may have the solution for the sector’s ‘sweet spot’ projects
By Matthew Doerr, vice president
Chatter within the commercial real estate industry suggests we have reached, if not surpassed, the crest of the current market cycle, but the industrial sector is stronger than ever.
According to JLL’s 2017 industrial outlook report, vacancy rates on the West Coast are between 1 percent and 5 percent. With no signs of oversupply, or any economic, retail or logistical trends that point to a reverse in course, investors and developers continue to seek construction loans for industrial projects, while lenders remain open to working with commercial mortgage brokers and their clients within this space.
Industrial demand has unveiled attractive lending opportunities, especially given the sector’s abbreviated construction timelines. Quick completions allow borrowers to minimize whole-dollar interest costs on industrial-based construction loans, compared to an office or multifamily project of the same size.
This demand for industrial space creates a win-win situation, right? Unfortunately, not for the middle-market industrial sector, in which construction projects range between 50,000 to 250,000 square feet and costs range between $10 million to $30 million. It is in this “sweet spot” where banks, brokers and borrowers have experienced increased execution risks, especially if they are seeking conventional leverage on a nonrecourse basis. In many cases, an apparent funding gap has formed as banks, brokers and borrowers search for creative ways to capitalize these projects.
Prior to the recession, banks were the largest source of nonrecourse construction financing. Today, they have returned to the market — albeit on a limited basis. Implementation of the final regulatory capital rules for institutions under the supervision of the Federal Deposit Insurance Corporation (FDIC), which took place in early 2015, caused banks to tighten lending standards, which led to increased execution risks for borrowers when securing construction financing, thus diminishing access to predictable capital solutions.
To mitigate risk, most banks are generally willing to provide nonrecourse construction loans at about a 50 percent to 60 percent loan-to-cost (LTC) ratio, and these terms may only be available to existing bank clients. If a qualified borrower is willing to provide recourse, the bank may increase the leverage up to 60 percent to 65 percent. Many developers simply do not have — or may find it too expensive to invest — 40 percent to 50 percent equity to complete the project capitalization and, consequently, seek a creative solution to meet their financing needs.
Borrowers may turn to a mezzanine lender to fill the gap between a bank loan and the typical 15 percent to 20 percent equity to complete the capital stack. Many mezzanine lenders, however, may find this type of structure unattractive because the mezzanine portion of the capital stack for a middle-market industrial construction project is about $5 million or less. For some lenders, this falls short of their targeted transaction size.
If a mezzanine lender agrees to provide a loan of this size, it would require an intercreditor agreement with the bank lender, which can result in a lengthy, complicated and often costly exercise for the developer. Further, intercreditor negotiations pose added risks for the developer and mortgage broker in closing a deal. Smaller mezzanine loans, when available, likely bear above-market interest rates and fees to offset the small transaction size.
In addition to the aforementioned nuances, banks may avoid lending on any projects classified as high-volatility commercial real estate (HVCRE) because of the increased loan-related costs they may face. For a loan to avoid being classified as HVCRE, the borrower must contribute at least 15 percent of the appraised-as-completed value of the asset before receiving bank financing, and the loan-to-value (LTV) ratio cannot exceed 80 percent.
“ Intercreditor negotiations pose added risks for the developer and mortgage broker in closing a deal. ”
There are very real situations, however, that may cause a loan or property to be classified as HVCRE that may not be immediately apparent. If a borrower has owned a piece of property for an extended amount of time, for example, or acquired it below the appraised market value, the actual cash investment is small and often far less than the required equity piece for bank financing.
Beyond the difficulty of securing funding from banks for middle-market industrial construction projects, many developers and brokers have witnessed a lack of predictability around HVCRE and have become reluctant to arrange capital from multiple sources.
Risks of partnership
There are qualitative and quantitative reasons why mortgage brokers and developers are reluctant to secure multiple sources of funding to meet the 80 percent LTC target for middle‑market industrial construction loans.
First, integrating two pieces of capital through an intercreditor negotiation increases the risk for deals to fall through because of senior-lender requirements that are often strict. A mortgage broker must tediously tend to the negotiation of multiple agreements that govern the partnership between the two lenders to ensure certainty of execution.
Furthermore, borrowers recognize risk that can potentially impact their business plan when securing a loan from two capital sources. The perceived lack of certainty of execution presents borrowers with heightened risk if:
- They are ready to secure permits to prepare the land for development;
- They need to begin construction immediately to respond to market demand; or
- They have a pre-signed lease or purchase agreement that requires a specific construction start date.
Regulations, tiresome negotiations and increased transaction costs have created an apparent barrier in lining up construction funding for middle-market industrial projects. Although obtaining capital for attractive industrial deals in a tight market can be challenging, some borrowers can find success if they turn to private lenders who are responsive and can provide custom solutions for a project.
For many mortgage brokers, opportunity may exist with the “one-stop shop” private lender that can execute the entire capital stack — minus borrower equity — and take a borrower up to 75 to 80 percent of the project cost with certainty of execution.
Within this framework, the cost of a nonrecourse construction loan from a private lender can be on par with the blended cost of a bank loan and mezzanine loan. This can be a win-win situation in which mortgage brokers are able to close quality transactions and borrowers can strike with flexible, nimble capital to accurately and swiftly respond to the healthy industrial market.Back to Top
Robert Brunswick | Aug 03, 2017
Real estate investing today vs. in past cycles is buoyed by a predictable debt and equity market and transparency.
Commercial real estate has been used effectively in ultra-high-net-worth (HNW) and family office portfolios as a means to enhance yield in a return‑starved market. This enhanced yield has not been lost on the greater institutional marketplace, however, where sovereign wealth funds, domestic pension funds and life insurance companies have flooded the market with capital, prompting concern over the potential for a pricing bubble.
So why does real estate remain appealing to high-net-worth investor portfolios?
It is important to remember that real estate still functions predominately within a private marketplace, and with certain inefficiencies that, when properly priced and sourced, can provide returns in excess of comparable benchmark indexes. Real estate still offers predictable cash flows, tax benefits and a hedge against inflation, and thus remains highly appealing; most HNW’s and family offices are targeting as much as 10 to 15 percent of their investment portfolio to real estate.
Real estate investing today vs. in past cycles is buoyed by a predictable debt and equity market, a greater educated real estate workforce and transparency of reporting with access to immediate valuation. Taken together, this permits sophisticated investors to continue allocating capital to real estate with predictability of performance.
The sphere of real estate investment opportunities for HNW investors is widening
Today’s real estate investment landscape has broadened for HNW investors with the ability to customize their investments regionally, by product type, by sponsor and within both debt and equity investments. Further, HNW investors can tranche their real estate investments across varied risk-return scenarios for appropriate diversification. Often, these investors deploy capital without competing directly with institutional investors.
Interestingly, these non-gateway cities display many positive demographic trends, including continued job growth that enhances property rent rolls and income performance. In the West, these demographic trends have provided certain supply and demand imbalances that produce attractive market rental increase opportunities and enhanced exit liquidity.
There are always challenges. What are the solutions?
Most HNW’s and family offices succeed in sourcing a consistent pipeline of opportunities through regional and relational sponsors, who in turn are sourced directly or through third-party investment management firms, and thus create a diversified basket of real estate investments.
Many in this investment group have also become more active in their sourcing by investing in debt transactions, taking advantage of the tightened banking regulatory environment to access a real estate product more akin to a fixed income investment.
Both of these approaches require sophisticated investors to be more active in sourcing and underwriting their real estate investments to ultimately recognize this increased yield opportunity. For sponsors, the ability to deliver sound investment opportunities is met with consistent demand for a higher real estate allocation among HNW investors and family offices.
Robert Brunswick is the co-founder and CEO of Buchanan Street Partners, a real estate investment management firm. He also currently serves as a board member of the Hoag Hospital Foundation, founding member of the UC Irvine Center for Real Estate and his professional affiliations include membership in the Urban Land Institute (ULI), Pension Real Estate Association (PREA) and Young Presidents Organization (YPO).Back to Top
REAL ESTATE BRIEFLY
Newport Beach-based Buchanan Street Partners has acquired Bayland Building, an office project near Levi’s Stadium in Santa Clara. Buchanan Street bought the building from Sleepy Hollow Investment Co. for $32.3 million and will execute capital improvements. The 116,000-square-foot building is 100 percent leased to four tenants led by Inphi Corp. Bayland is at 2953 Bunker Hill Lane is within walking distance to the Santa Clara Convention Center, Levi’s Stadium and a light-rail station. Eastdil Secured’s San Jose team represented the seller in this transaction. Buchanan Street represented itself.
Encore for Education, a commercial real estate industry charity concert, raised $161,345 to benefit Music Matters, a program created by Buchanan Children’s Charities and the Orange County Community Foundation to restart Orange County public schools music programs. This was the fifth Encore for Education since Buchanan Children’s Charities was founded in 2007 and was attended by more than 1,300 people. Funds raised will go toward purchasing instruments impacting more than 1,000 students annually at the Ocean View, Cypress and Centralia School Districts. The grant also allows the districts to hire music teachers and purchase supplies to launch elementary music education programs.
Back to Top
JERRY SULLIVAN | Monday, May 8, 2017
CASA joined Buchanan Children’s Charities and the OC Community Foundation as beneficiaries of Encore for Education, which raised $160,000 with Cheap Trick as the headliner on April 20 at the House of Blues. “Generous sponsors from the real estate industry” helped, with Newport Beach-based Buchanan Street Partners a key sponsor.Back to Top
Janice Bitters | Commercial Real Estate
Buchanan Street Partners has purchased the Bayland Building near Levi’s Stadium in Santa Clara for $32.3 million, and its first order of business will be to upgrade the property with new amenities on-site and improved common areas, the company said Friday.
The seller, Sleepy Hollow Investment Co., had owned the 116,000-square-foot building at 2953 Bunker Hill Lane for more than two decades before the transaction was finalized last week.
At one time, the company touted itself as a long-term investor that is “able to effectively manage market fluctuations as a result of this approach,” according to its website, but the company has been selling off properties in recent months. Earlier this year, Sleepy Hollow also sold off 14 other buildings in the Bay Area to five different buyers for $130 million. The company was represented by Eastdil Secured’s San Jose office in the recent deal.
Representatives from Sleepy Hollow did not returns requests for comment Friday, but Robert Dougherty, partner at Buchanan Street, said in an interview Friday that as he understands it, the Bayland Building was among the last properties in Sleepy Hollow's portfolio.
“What attracted us to the opportunity was that it was the last property in their portfolio, so we felt like we had a motivated seller on the other end of transaction,” he said.
The sale of the four-story building, which sits on a 3.61-acre lot on the north side of Bunker Hill Lane between Great American Parkway and Betsy Ross Drive, works out to about $278 per square foot or $8.94 million per acre.
The property also includes a two-story parking structure on-site, as well as surface parking that wraps around the building. The property comes with 461 parking spaces, or about four spots per 1,000 square feet of office.
Dougherty said the building, originally erected in 1987, is set to get new HVAC and other technical, back-of-house upgrades.
It’ll also get more contemporary cosmetic finishes throughout the building and new indoor and outdoor lounge areas. Buchanan Street will also be putting in a canopy over the entrance of the building, new landscaping and electrical vehicle charging stations.
The building is about a half mile away from Levi’s Stadium, near a growing number of office and retail options.
“That location is compelling,” Dougherty said. “We think that with the improved product we will be able to put forward – thanks to our renovations – it should be a very attractive property.”
The building has four tenants, though 60 percent of the space is taken up by semiconductor company Inphi Corp. Other tenants on the property are also tech companies, Dougherty said.
Though the active leases at the site aren’t very long-term, Dougherty said the planned improvements will make the building more attractive to both existing tenants and others when it is time to renew the agreements.
He also noted that the property is currently leasing at rates below market value for the area. Buchanan Street Partners plans to bump up those rents to be more in-line with the current asking rents in Santa Clara.
As of the end of last year, the average asking rent rate for Class A office space in Santa Clara was $4.52 per square foot, according to data released by CBRE, which will be managing the property.
One advantage that the Bayland Building may have over other office properties in the area is that it is multi-tenant, offering one of the few options for smaller tenants to scoop up space in Santa Clara, Dougherty said.
“If you are a 7,000- to 20,000-square-foot tenant, we present a pretty compelling option when a lot of the larger buildings are occupied by the tech behemoths,” he said.
The acquisition is Buchanan Street Partner’s first Silicon Valley purchase in about a decade. The company sold off its last property in the Valley in 2008, though it continued to own buildings in the mid-Peninsula area and in Marin County.
Looking forward, the recent Silicon Valley acquisition is not likely a sign that Buchanan Street will begin digging for more property in the area, Dougherty said.
“We are concerned about valuations in Silicon Valley right now,” he said. “But we are always on the lookout for that miss-priced asset.”
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Buchanan Street Partners closed an $8.6 mil loan for construction of The Roosevelt, a 32-unit residential townhome development in Tempe, AZ. The project, located at 225 South Roosevelt St in Tempe, will be developed by a joint venture between a regional multifamily developer and a private real estate investment firm based in Scottsdale, AZ.
The Tempe submarket continues to benefit from growth in the insurance, finance and technology sectors, which has helped anchor demand for residential projects like The Roosevelt,” said Matthew Doerr, vice president at Buchanan Street Partners. “We were attracted to this new construction financing opportunity because the project differentiates itself from other residential developments with an energy efficient design and modern façade that caters to the region’s tech-forward culture.”
Cindy Hammond of Churchill Commercial Capital aaranged the 74% loan-to-cost, non-recourse solution over a 24 month term. Buchanan Street previously provided the borrower a quick-close land loan to acquire the 1.7 acre infill site in mid-2016.
The Tempe North office market continues to outperform all other submarkets in the Phoenix metro with 1.7 msf of positive net absorption in 2016. Major employers in the immediate area include State Farm Insurance, Microsoft, Morgan Stanley, Silicon Valley Bank and Arizona State University. The Roosevelt’s proximity to Mill Avenue will benefit the project because Mill Avenue is the premier live-work-play destination in the Phoenix metro.Back to Top
Buchanan Street Partners, a real estate investment firm based in Newport Beach, Calif., that invests debt and equity capital on behalf of institutional and private investors, announced March 28 its launch of a new multifamily investment platform. As part of the initiative, the company plans to deploy $500 million over the next five years to acquire and manage value-add and core-plus assets.
Kevin Hampton, former president of PLC Apartments, also in Newport Beach, has been hired as an executive vice president to lead the company’s new initiative.
“There are a variety of factors we believe will result in increasing opportunities in apartment markets. As construction lenders rein in new lending and equity investors become more cautious, we expect the supply pipeline to shrink,” said Tim Ballard, president and co-founder of Buchanan Street Partners, in a statement. “When combined with the changing demands of renters by choice, we believe there's an increasing opportunity to improve existing apartment assets and generate attractive returns in doing so.”
Historically, Buchanan Street has invested in more than 14,000 multifamily units, often serving as the equity partner. Going forward, the company will focus on acquiring properties directly. Hampton and his team will pursue opportunities in the Western United States, with an immediate focus on Denver, Salt Lake City, and Phoenix.
While at PLC, Hampton oversaw the company’s investment strategy and execution. Previously, he led development and investment operations across the West at Associated Estates, a publicly traded REIT, and prior to that served as vice president of development at Western National Realty Advisors. During his career, Hampton has been responsible for the development of more than 15,000 apartment units across the West.
“As we grow our investment business, we will also seek additional multifamily experts to bolster the team,” said Hampton in the press release. “We believe our human capital is our greatest investment and are currently in search of a multifamily acquisition analyst and a vice president of asset management to join us.”
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By Carrie Rossenfeld
NEWPORT BEACH, CA—In many coastal California markets, there is a tremendously deep investor base focused on California, often resulting in pricing that has outpaced fundamentals, Buchanan Street Partners’ president Tim Ballard tells GlobeSt.com. As we recently reported, the firm has purchased a 224,000-square-foot transit-adjacent office tower in Denver’s largest office submarket and is eyeing other markets outside of California. We spoke with Ballard about what is drawing the firm to these other markets and what their buying strategy is for these other regions.
GlobeSt.com: What is attractive about investing in markets outside of California?
Ballard: We are focused on markets that offer a combination of strong local economies and pricing levels that offer attractive risk-adjusted returns. The challenge in many coastal California markets is the tremendously deep investor base focused on California, often resulting in pricing that has outpaced fundamentals.
There are two important trends that I believe are causing this. Foreign capital continues to increase its investment in US markets. However, as we have seen in past cycles, this capital rarely moves beyond the coasts. Combine that with the continued growth of mega real estate funds that have $2 billion to $15 billion of equity that are primarily focused on the largest markets where they can deploy capital into large assets, and you can see the result of all of this capital pushing into the California coastal markets. We are concerned that this is not sustainable over the long term.
GlobeSt.com: What attracted you to 5613 DTC in Denver?
Ballard: There are three primary attributes that make Denver and this recent purchase an attractive investment. First, the region continues to have strong job growth, which results in tenant demand. Next, we have a value-add strategy for 5613 DTC. This is a vintage 1980s building that we purchased at approximately half of replacement costs. It has not had the necessary capital to compete with newer, class-A product in the region. We intend to improve the building significantly to bring it up to class-A standards. Lastly, one of the most attractive attributes of this building is that it is transit oriented and situated in an excellent location. 5613 DTC is adjacent to a light-rail station in one of Denver’s premier business parks. The immediate office submarket is the largest in the Denver metro and anticipates completion of a $1.5 billion mixed-use project that will continue to increase the attractiveness of this location.
GlobeSt.com: Which other markets are you eyeing, and why?
Ballard: There is still a lot of opportunity to find quality assets at good prices where we can execute a business plan that adds value to the investment. While we are still active in some California markets, we continue to look for additional opportunities in Texas, Phoenix, Denver and Salt Lake City.
GlobeSt.com: What else should our readers know about your investment strategy for 2017?
Ballard: As we enter into our 18th year, Buchanan Street continues to innovate and seek new investment opportunities for our diverse investor client base. In addition to direct acquisitions, we continue to look for bridge-lending opportunities in the West in the $5-million-to-$25-million range. We fill a void for transitional properties or assets that need rapid execution. We will also be more active in the multifamily investment space in Salt Lake City and Denver.Back to Top
By Katherine Feser
While Duke Realty is shedding its suburban office assets across the country, Buchanan Street Partners is in acquisition mode.
The Newport Beach, Calif.-based investment firm has added a third local building to its portfolio with the purchase of Sam Houston Crossing II, a 160,000-square-foot office building at 10344 Sam Houston Park.
The building, completed by Duke Realty in 2013, is fully leased by Forum Energy Technologies, Pemex and First American Title Co.
Distress in the energy sector, as evidenced by a glut of empty office space, has brought values down an estimated 10 to 15 percent from peak levels of 2013 and 2014, said Matt Haugen, vice president at Buchanan Street Partners.
A fully leased building with tenants committed for at least four more years made the Sam Houston Crossing building attractive. Also, the company was familiar with the area, having previously owned nearby Beltway 8 Corporate Centre 3 and 4.
“We were able to get the cash flow in place but don’t have to take any near-term risk,” Haugen said.
Houston’s office market might take anywhere from 18 months to four years to fill the space given back by the energy industry over the last two years, Haugen said.
The company’s other local properties, which cater to smaller tenants, are doing well, Haugen said. The 2100 West Loop building, which has undergone $3 million in improvements, is 90 percent leased. The Offices at Kensington in Sugar Land is 98 percent leased.
Buchanan Street Partners has purchased a number of buildings in Dallas and San Antonio over the last two years, but this is its first in Houston since 2013. The company has invested in all types of real estate in Houston over the last 15 years.
The sale, handled by Jared Chua of CBRE, represents one of the final suburban office buildings to be sold by Duke Realty. It recently sold buildings in Washington, D.C., and Indianapolis while turning its focus to industrial and medical properties. Indianapolis-based Duke Realty owns several industrial properties across the Houston region.
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OC-based Buchanan Street Partners has closed on two west coast office buys, in Denver and Houston. The properties total 384k sf in combined size.
In Denver, Buchanan Street Partners purchased 5613 DTC, a 224k sf, transit-oriented office tower located at 5613 DTC Pkwy. The building was sold by SteelWave LLC.
Buchanan Street plans to complete extensive improvements that include investing significant capital in tenant spaces, common areas and building systems. Additionally, the company will look to strategically improve the tower’s fitness center, lobby and elevators, cafe, conference center, parking deck, and outdoor patios. The building is currently 80 percent occupied with available suites ranging from 2k sf to 17k sf.
The 12 story tower is situated in a highly prominent location adjacent to the I-25 Fwy and within walking distance to the Orchard Light Rail Station. 5613 DTC is within the Denver Technological Center (DTC) in Denver’s Southeast office submarket, the largest submarket in the Denver metro. Denver’s Southeast region consists of 34 msf of office space and is home to many Fortune 500 companies that are attracted to its proximity to executive and employee housing, a strong retail amenity base and accessibility via multiple transit options.
Tim Richey, Mike Winn and Chad Flynn of CBRE represented the seller in the transaction. Buchanan Street represented itself. Terms of the deal were not disclosed.
In Texas, Buchanan Street Partners acquired Sam Houston Crossing II, a 160k sf office building
located at 10344 Sam Houston Park Drive in Houston. The asset was sold by Duke Realty for
an undisclosed price. This is Buchanan Street’s sixth acquisition in Texas in the last 24 months.
Sam Houston Crossing II is a three-story office building that is 100 percent leased by subsidiaries of Forum Energy Technologies; PEMEX; and First American Title Company. The property has frontage along Texas-8 Beltway between US-290 and Texas State Highway 249, in a location central to housing ranging from entry to executive level.
Jared Chua of CBRE represented the seller in the transaction. Buchanan Street represented
BY LISA BROWN
HOUSTON—There is optimism due to a diversified economy beyond energy resulting in net positive job growth during the last 18 months, a rebound of the energy sector will stimulate added job creation and population in the region is increasing.
There is an increasing opportunity in Houston’s office sector as a result of the distress in the energy sector. Although the energy sector has recovered significantly, valuations have dropped materially, according to Buchanan Street Partners.
“Houston has experienced difficult times due to the energy sector’s instability. However, we are optimistic about the market long term,” says Matt Haugen, vice president at Buchanan Street Partners. “Houston is one of the top 10 population centers in the nation and we believe in its long-term economy.”
Amid that increasing opportunity and optimism, Buchanan Street Partners has acquired Sam Houston Crossing II, a 160,000-square-foot office building located at 10344 Sam Houston Park Dr. The seller was Duke Realty and the price was undisclosed.
Sam Houston Crossing II is a three-story office building that is 100% leased by subsidiaries of Forum Energy Technologies, PEMEX and First American Title Company. The property has frontage along Texas-8 Beltway between US-290 and Texas State Highway 249, in a location central to housing ranging from entry to executive level.
“The market surrounding Sam Houston Crossing II is becoming an increasingly popular employment hub in Houston because of its central location to a wealth of housing. Large companies are making office decisions based on location and are attracted to this region because it can minimize employees’ commute times and appeal to a larger percentage of the workforce,” said Haugen.
This is Buchanan Street’s sixth acquisition in Texas in the last 24 months. Buchanan Street plans to seek opportunities in Houston and anticipates actively acquiring significant assets in Texas in 2017.
“Buchanan Street is optimistic about Houston’s office market because of a couple of reasons: The business community has diversified beyond energy, resulting in net positive job growth during the last 18 months even though the number of energy jobs fell, a rebound of the energy sector will stimulate additional job creation during the next 12 to 18 months and drive absorption in the area, and there’s a growing population in the region,” Haugen tells GlobeSt.com.
Jared Chua of CBRE represented the seller in the transaction. Buchanan Street represented itself.
As previously reported, year-end 2016 total office leasing activity settled at 8.9 million square feet, down significantly from 18.4 million square feet in 2014.
By Jill Jamieson-Nichols
Buchanan Street Partners has acquired 5613 DTC with the intent of taking the high profile southeast suburban office tower to the next level.
Buchanan Street bought the 12‑story, 224,015-square foot office building, which sits along Interstate 25 at the foot of the Orchard light-rail station pedestrian bridge, from SteelWave LLC. Terms weren’t disclosed, but Arapahoe County records show the price was $32.75 million.
The buyer plans extensive improvements to attract and retain tenants looking for first-class space in Denver’s largest office submarket.
“This is an attractive investment for us because of the building’s strong in-place tenancy, excellent location, attractive view corridors and value-add potential,” said Chris Herthel, Buchanan Street Partners senior vice president. Herthel said, “5613 DTC is an amenity-rich property that is well-positioned to benefit from a comprehensive rebranding and capital improvements plan.”
Buchanan Street plans to invest significant capital into tenant spaces, common areas and building systems. It also is looking to strategically improve the tower’s fitness center, lobby and elevators, café, conference center, parking deck and outdoor patios. It expects its investment to amount to $6 million to $7 million over the next three to four years.
The building at 5613 DTC Blvd. is 80 percent occupied with available suites from 2,000 to 17,000 sf. InteliSecure Inc., Farnsworth Group, EPS Settlement Group, Wells Fargo Advisors and GE Johnson Construction Co. are among its 24 tenants.
Investor interest in 5613 DTC was quite strong, according to CBRE’s Chad Flynn, who handled the transaction with Mike Winn, Tim Richey and Jenny Knowlton.
“It checked the boxes for institutional buyers in that it has structured parking, is on light rail and had a real value add component to it because of the vacancy,” Flynn said. Building features include 9-foot ceilings; efficient, 21,000-sf floor plates; and 4:1,000 parking. The building was built in 1982 and renovated in 2006.
Denver’s approximately 34 million-sf southeast suburban office market houses numerous Fortune 500 companies that are attracted to its proximity to executive and employee housing, retail amenities and accessibility.
“We have seen companies increase their focus on commute times for employees and now making office location decisions based on proximity to housing. The light-rail location was an important factor in our decision to purchase this property because it provides tenant employees an alternative and efficient commute option,” Herthel said.
“The property amenities provide an intrinsic value to tenants that should further appreciate as future developments in the area and access to labor pools become key decision factors for companies,” he added. “We anticipate the repositioning of 5613 DTC will elevate the building’s profile above its current peers and be an attractive option for Class A office users.”
Buchanan Street Partners is a Newport Beach, California based real estate investment management firm that invests in debt and equity capital on behalf of institutional and private investors.
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NEWPORT BEACH, CA—The CRE finance market is watching to see whether the Trump administration will advocate changes to Dodd-Frank and how those changes could impact the securitization and banking side of the market, Buchanan Street’s Matt Doerr tells GlobeSt.com.
The commercial real estate finance market is watching to see whether the Trump administration will advocate changes to Dodd-Frank and how those changes could impact the securitization and banking side of the market, Buchanan Street Partners VP Matt Doerr tells GlobeSt.com. The firm recently provided a $16-million loan to refinance 21845 Magnolia St., a 29‑acre industrial facility in Huntington Beach, CA, recently purchased by subsidiaries of Shopoff Realty Investments. The loan represents the company’s ongoing strategy to provide reliable bridge financing for value-add real estate.
Buchanan Street also recently provided an $18-million loan to a major Los Angeles-based development firm for the acquisition of an existing shopping center in Granada Hills, CA. The loan was funded through Buchanan Street’s proprietary bridge lending platform and provides additional funds for interest, pre-development expenses as well as “good news” funds if entitlements are secured. The borrower recognized the attractive in-place zoning, which may permit high-density commercial and multifamily use. The “by‑right” zoning designation greatly enhances the site’s redevelopment appeal.
Lastly, Buchanan Street continues to expand by recently adding Chris Cervisi as assistant VP to its debt-investments team to meet its growing business and market demand. Cervisi joined the team last month with more than eight years of experience structuring equity and debt and is responsible for sourcing, structuring and underwriting real estate debt investments. In his previous role, he was focused on office and retail acquisitions and asset management, including underwriting, market research, business-plan formulation, reporting of fund investments and dispositions.
We spoke with Doerr about these two transactions and the hiring of Cervisi, how they all relate to the company’s strategy going into 2017 and where he sees the private-lending market heading.
GlobeSt.com: How are the refinancing of the Huntington Beach industrial/land property, the acquisition loan for a San Fernando Valley shopping center to be redeveloped and the addition of Chris Cervisi related to your company strategy?
Doerr: These most-recently funded loans and the hiring of Chris are tangible indications of not only our platform and personnel growth, but the positive reception of the Buchanan Street brand within the bridge-lending business. These loans specifically affirm our Western US regional focus and adaptive structuring capabilities in customizing varied loan solutions. Chris’s diverse background on both the equity and debt side of the ledger allow us to further build out our talent base to serve our broker and direct borrower relationships.
GlobeSt.com: What type of growth do you envision for your company in the next year?
Doerr: Since our company’s inception of the mortgage-lending business, we have continued to grow our active pipeline and loan closings, which point to an increased production year for us in 2017. Anecdotally, we have seen a significant increase to our pipeline within the past 60 days aligned with the recent uptick in interest rates. In addition to our bridge lending, we also provide institutional mezzanine capital for larger projects. Both products are becoming more active within the construction lending area where banks have been negatively impacted by the increased regulatory environment.
GlobeSt.com: How do you see the future of the private-lending space?
Doerr: We believe that the private-debt-capital space will continue to capture more market share in the wake of HVCRE rules and other regulations. The CRE finance market is watching to see whether the Trump administration will advocate changes to Dodd‑Frank and how those changes could impact the securitization and banking side of the market; however, it’s unlikely that any changes will occur in 2017, and regardless, there will always be a need for predictable private capital to meet varied and customized borrower demand. There continues to be a need for capital that can provide structuring flexibility, responsiveness and certainty of execution. We pride ourselves on our discretionary, efficient and expeditious closing process.
GlobeSt.com: What else should our readers know about your company?
Doerr: As we enter into our 18th year, Buchanan Street continues to innovate and develop new investment products for our diverse investor client base. It is evident that real estate is becoming a significant part of an investor’s asset allocation, with its ability to offer fixed-income characteristics while providing tax advantages and an inflationary hedge. Accordingly, we are continuing to explore new property segments for portfolio diversification to satisfy our increased client demand.
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By Carrie Rossenfeld
IRVINE, CA—The Center for Real Estate at UCI’s Paul Merage School of Business paid tribute to four of the top leaders in the real estate industry at a recent awards luncheon and presentation of the lifetime achievement award at the Hotel Irvine here. The luncheon was sponsored by FivePoint, a California-based community real estate development company, and Kennedy Wilson, a global real estate investment company; more than 500 guests attended the celebration.
Among the honorees were Douglas C. Neff, partner/president at IHP Capital Partners, who was presented with the 2016 Lifetime Achievement Award. According to long-time friend John Duncan, “Doug is one of the brightest people any of us know. He’s also one of the most competent and one of the most effective.” Larry Webb, CEO of the New Home Co., commented, “Doug is a powerhouse in the real estate industry. He’s easily the smartest guy in every room.” Gordon McNeill, president of Sage Hill School, added, “In an organization, there’s always a few people who really transcend the entire institution. Doug is one of those people.”
Marco Vartanian, SVP of Colony, Starwood Homes, received the 2016 Rising Star Award. John Cushman, chairman of Cushman & Wakefield, Inc. remembers giving Vartanian advice. “I told him to always remember one thing: the early bird gets the worm, and the harder you work, the luckier you get. And, that’s Marco.”
According to Vartanian, “What motivates me is to encourage the people I work with to see a vision of the future that is greater than what they can see for themselves. I think of myself as a service provider for all of the people I work with every day.”
Other award recipients included Timothy L. Strader, Sr., founder/chairman of Starpointe Ventures, who received the 2016 Distinguished Service Award, and Robert S. Brunswick, co-founder and CEO of Buchanan Street Partners, who received the Orange County Community Foundation Power Packed Philanthropist Award.Back to Top
Buchanan Street Partners in Newport Beach has provided a $16 million loan to refinance 21845 Magnolia St., a 29-acre industrial facility in Huntington Beach recently bought by subsidiaries of Shopoff Realty Investments. Buchanan Street financed roughly 50 percent of the acquisition cost, according to a statement. Shopoff is planning a large-scale mixed-use development at the site to include single-family homes, townhomes and open space as well as hotel, commercial and retail components. Buchanan Street’s nonrecourse first mortgage provides Shopoff new capital to support the pursuit of entitlements for the master-planned development.
Buchanan Street also provided a $18 million loan to a Los Angeles-based development firm for the acquisition of a shopping center in Granada Hills. The loan was funded through Buchanan Street’s proprietary bridge lending platform. The firm financed about 65 percent of the cost on a 12-month term.
The firm also added Chris Cervisi to its team as an assistant vice president. He will be responsible for sourcing, structuring and underwriting real estate debt investments.Back to Top
NEWPORT BEACH, CA—Most people may not know that roughly 70% of commercial real estate is valued at $40 million or less, Buchanan Street Partners’ Matt Doerr tells GlobeSt.com. Doerr was recently appointed VP of the firm to lead the company’s growing bridge-loan platform under Buchanan Mortgage Holdings, the company’s proprietary lending business. His appointment comes at a time of increased lending activity, following the recent closing of three loans totaling $30 million. We chatted exclusively with Doerr about the firm’s bridge-loan program, which accommodates the middle market of commercial real estate financing.
GlobeSt.com: WHAT DO YOU HOPE TO ACCOMPLISH IN YOUR NEW ROLE WITH BUCHANAN STREET PARTNERS?
DOERR: First off, I was very excited about joining Buchanan Street because they have a great reputation and history as an active capital-markets participant in both the debt and equity space. What was appealing to me was their creativity and full capital-stack conversancy, and the opportunity to help lead and build the debt platform. My goal is to further Buchanan Street’s lending brand and presence within the western states and position our platform as a leading bridge/construction lender among sponsors and intermediaries. In this regard, we consider "sponsors" to be borrowers that are bringing forth a portion of equity and seek a larger portion of debt. Likewise, "intermediaries" is our term that represents the brokers that are in search of capital sources on behalf of borrowers. Moving forward, I hope to educate intermediaries and help them further their capital-solution options to their clients.
GlobeSt.com: TELL US ABOUT THE FIRM'S BRIDGE-LOAN PLATFORM AND WHY IT'S EXPANDING.
DOERR: Interestingly, most people may not know that roughly 70% of commercial real estate is valued at $40 million or less, within what is considered the “middle market.” We have built our bridge lending practice to accommodate this significant borrower base and believe that private lending with an institutional-quality experience will be in great demand.
That’s the backdrop, but more specifically to the current lending environment, Buchanan Street continues to see dislocation in the middle-market CRE lending space that is driven by an evolving regulatory environment and is impacting not only regulated banks, but also CMBS issuers and investors. As Dodd-Frank and Basel III implications continue to play out, more and more CRE owners/developers will seek flexible-debt platforms to provide reliable, custom-tailored capital solutions. Specifically, our product caters to a $5 million-to-$25 million loan request that can accommodate quick-close, bridge, acquisition and construction needs.
GlobeSt.com: WHAT INVESTMENT TRENDS DO YOU SEE EMERGING?
DOERR: We’re still seeing experienced sponsors find interesting and accretive real estate investments, so opportunities do exist. However, finding reliable and predictable acquisition or bridge capital has been a challenge, given some of the reasons I mentioned. Well-capitalized and responsive lenders can add value by offering thoughtfully structured quick-close capital or by providing non-recourse construction financing to experienced developers. Lately we’ve seen the small- to middle-market construction financing market really tighten, which has pushed more requests to private lenders. For example, industrial real estate in the Inland Empire is in high demand right now. If a developer wanted to build industrial and could commit 25% of the construction costs, a few years ago a bank could have provided that financing. Now, because of HVCRE regulations and other drivers, a developer in this situation is likely to source non-recourse capital in the private lending space.
GlobeSt.com: WHAT ELSE SHOULD OUR READERS KNOW ABOUT PROPRIETARY LENDING?
DOERR: We are a significant real estate owner and operator ourselves, typically on larger asset sizes, and therefore we are an active user of debt. So, we have built a lending platform that’s responsive to the broader CRE capital market environment, yet engineered to be flexible and provide sponsors and intermediaries with the certainty of execution that you need from a bridge lender. In today’s market, it’s important to understand a lender’s level of discretion over their capital and their approval process. Sponsors and intermediaries should be aware that opportunities to secure bridge capital still abound, and they should align themselves with a proven lender.Back to Top
Newport Beach, CA-based Buchanan Street Partners is expanding its bridge loan platform and adding a key executive. Matthew Doerr joined to lead Buchanan Mortgage Holdings, the company’s proprietary lending business.
Doerr brings more than 13 years of experience underwriting and managing debt and equity assets in excess of $1 billion, including roles at MUFG’s Union Bank and iStar Financial. He will lead the structuring and underwriting of loans originating from Buchanan Mortgage’s balance sheet for acquisition, construction, redevelopment or project recapitalization across Western markets.
Buchanan Street Partners’ Tim Ballard notes that recent regulatory changes imposed on banks by the Federal government provides an increased “opportunity to participate in space that was previously controlled by banks.”
The company is experiencing increased lending activity, including three recent loans totaling $30 million.Back to Top
By Candace Carlisle
California-based real estate investor Buchanan Street Partners intends to keep snapping up properties in major employment hubs in Dallas-Fort Worth as companies continue to relocate and expand in the region.
"We are continuing to look for more investments in the Dallas market," Matt Haugen, vice president at Buchanan Street Partners, told the Dallas Business Journal. "People have seen what we have done with our current investments and we are becoming recognized in the marketplace as having an active ownership with very responsive, thoughtful investors."
The two-building office complex sits adjacent to Dallas Love Field and was recently acquired by Buchanan Street Partners as part of a larger investment strategy.
Haugen said within the investor partnership at Buchanan Street Partners there's been a strong interest in Dallas-Fort Worth. In the last 16 months, Buchanan has acquired four office properties in central employment areas in North Texas.
Recently, Buchanan purchased Bluffview Towers, a two-building, 196,356-square-foot office complex at 3860 and 3890 W. Northwest Highway near Dallas Love Field Airport from Commercial Developments International for an undisclosed sum.
The firm wanted to acquire the property because of the increased passenger traffic at Dallas Love Field as executives take advantage of the close proximity of the airport to Dallas' urban core after the expiration of the Wright Amendment. Buchanan plans to put capital into overhauling the lobby and common areas of the building.
Compared with Preston Center office rents, Bluffview Towers has a normal delta of $6 per square foot to $8 per square foot rental rate, which will attract companies looking to land in close proximity to the airport and executive homes, Haugen said.
"Dallas is such an important market to us really because of job growth," he told me. "You need job growth to really enhance rental rates and year-over-year job growth in Dallas is 4.6 percent, which is far ahead of the national average and one of the critical numbers we look for when we make an investment."
Haugen said the investment firm would like to buy two additional properties by the end of the year in Dallas. That bullish investment is expected to continue into next year as Dallas maintains a sustainable trajectory of moderate growth, he added.
With limited new construction, in part because banks aren't willing to lend on many speculative projects, there's a rush on buying existing commercial real estate.
"Companies are coming out of California and into Texas and so we see a long-term viability into buying and investing in this marketplace," he said.Back to Top
By Lisa Brown
DALLAS—The law expiration is drawing more corporate users seeking proximity to the airport and executive housing communities such as Bluffview and Preston Hollow.
According to Buchanan Street Partners, Dallas Love Field experienced an 87% increase in passenger traffic year-over-year in September 2015. This increased activity followed the October 2014 expiration of the Wright Amendment, a 1979 federal law that limited long‑haul flights out of the airport.
Bluffview Towers, a 196,356-square-foot two-building office property adjacent to Love Field Airport has been acquired by Buchanan Street. The Love Field traffic bump-up prompted Buchanan to purchase the buildings for an undisclosed amount from Commercial Developments International (CDI).
“We have noticed a significant change in the area surrounding Love Field. The surge in traffic and business at the airport was a major factor in the buildings’ purchase,” said Matt Haugen, vice president at Buchanan Street Partners. “We anticipate local expansion as corporations view this area as a more preferred location, both for daily commutes and accessibility to the airport for business travel.”
Bluffview Towers is located at 3860 and 3890 West Northwest Hwy., near the affluent Bluffview and Preston Hollow neighborhoods, within three miles of Preston Center, an 800,000-square-foot retail and dining center. Bluffview Towers is currently 82% occupied with several long-term tenants. The property features an Embassy Suites hotel on site, which was not included in the purchase. Buchanan Street has plans for lobby improvements and tenant common area upgrades to bring the project up to class-A standards.
Haugen tells GlobeSt.com: “Additionally, the rapidly growing rental rates in Uptown and Preston Center have caused the options around Love Field and specifically Bluffview Towers to become an attractive option for users that want to locate in the area for a more affordable price. We are going to reposition these buildings and bring them up to a first-class standard. It seems these two buildings have flown under the real estate community’s radar, and we plan to leverage the growth at Love Field to elevate the building and put it on the map as another Buchanan Street building in Dallas. We believe in the Dallas market.”
The Wright Amendment limited flights between Love Field to airports only within Texas and its four neighboring states: Arkansas, Louisiana, New Mexico and Oklahoma. Its expiration allows flights into Love Field from major cities such as New York, Denver, Los Angeles and Washington, DC. It is expected to draw more corporate users seeking proximity to the airport and executive housing communities such as Bluffview and Preston Hollow.
The Bluffview Towers purchase marks Buchanan’s fourth acquisition in the Greater Dallas area in the last 16 months. Buchanan Street also recently purchased several other buildings that are poised for growth as a result of positive absorption and infrastructure improvements. The properties include Tollway Plaza, a prominent two-building property in Addison, TX, Richardson Office Center I & II in Far North Dallas and Granite Tower in Northwest Dallas along LBJ Freeway.
Jack Crews, Evan Stone and Lauren Zimmer of JLL represented CDI in the transaction, while Buchanan Street represented itself.
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By Robert Brunswick, CEO of Buchanan Street Partners
NEWPORT BEACH, CA—As the CMBS market continues to slow, how will the capital markets sector be affected? Buchanan Street Partners’ Robert Brunswick weighs in on the subject EXCLUSIVELY with GlobeSt.com.
Much has been reported about the CMBS market continuing to slow, plateau, freeze—fill in your own verb. GlobeSt.com spoke exclusively with Robert Brunswick, CEO of Buchanan Street Partners, to get his take on how this trend is affecting the capital-markets sector now and in the future.
GlobeSt.com: As wider spreads translate into higher costs for borrowers on CMBS loans, what alternative financing solutions are coming available?
Brunswick: When we talk about CMBS, we first need to frame what it has brought to the real estate markets and where it might be lacking. The advent of CMBS brought much-needed liquidity and additional participants to the debt markets—both improving liquidity to the market and further validating real estate as an asset class in terms of investor fluency and their ability to assess risk and return. In turn, real estate debt through CMBS now competes with capital flows to other asset classes and the greater volatility of the liquid markets. Geopolitical issues, market cycles, rating agency moods, increased regulatory requirements and past CMBS performance all affect the day-to-day pricing of new origination and resale and purchase of existing bonds. Therefore, we need to be careful to not overreact when CMBS goes down or up since it is not an indicator of the demise of CMBS but instead recognition of the variables that impact its daily pricing.
In the past few years, we have seen a reduced volume of new issuance of CMBS, due in part to what happened with prior performance of CMBS and in large part due to real estate’s devaluation in the last cycle. Rating agencies were questioned as to their objectivity and the bond’s ultimate performance. Where are we today? CMBS bonds now have to compete with all other asset classes and types of bonds, and with that there is a more disciplined assessment of its associated collateral and cash-flow predictability. It’s currently difficult to provide borrowers with a predictable rate within the CMBS market until the loan is ready to close, thus limiting current origination volume. Further, banks and life insurance companies are much more active in their availability today, offering borrowers more predictability of outcome. Additionally, there is a trend for many buyers of real estate to de-lever (or bring in more equity to) their acquisitions and real estate, which plays more into the hands of the life- insurance companies and banks.
A majority of CMBS originations have catered to those borrowers seeking higher leverage to satisfy a refinance, a secondary or tertiary market consideration, or reduced equity position on assets that might not fall into a bank or insurance company’s lending parameters. CMBS has historically financed riskier assets, and with rating agencies starting to now see slippage in underwriting quality, and with the pending new risk‑retention rules for CMBS taking effect in December under the Dodd-Frank Wall Street Reform and Consumer Protection Act, the bond-buyer market has become skittish, limiting originator capabilities.
With this uncertainty, many private lenders (shadow banks) are being formed and/or becoming more active to provide capital for the potential shortfall. We ourselves have set up a private-lending vehicle to provide a predictable capital source for those transactions that have good sponsorship, are properly sized, might require some structure but couldn’t go through a conventional CMBS underwriting or do not have the necessary time to wait. The private-lending market can be an interim source of capitalization for many borrowers, but it’s not a long‑term solution. As people fix their assets’ problems or buy assets and stabilize them, interim financing can be a short-term solution, but not a long-term one because the property cannot withstand the higher yield associated with these types of loans. This ultimately creates a lower-priced source of capital available to those buyers. To fuel this type of lending, many investors are eyeing the debt space since it affords a more predictable yield with tangible subordinate equity.
There are roughly $250 billion of CMBS loans maturing between 2016 and 2018. If the property is not sold, the refinance lender is either the new CMBS market or a private lender who might accommodate the transitioning nature of the asset. Interestingly, though, a lot of prior CMBS borrowers have defeased their loans early given the attractive refinance markets, brought in more equity and are now refinancing through banks and insurance companies. We have to recognize that CMBS, for most borrowers, has never been the first choice.
GlobeSt.com: What does the uncertainty in the CMBS market mean for buyers and sellers of commercial assets? What does it mean for asset values?
Brunswick: For every transaction, only 10% of the market uses CMBS. I would draw the conclusion that CMBS by itself is not going to drive down valuations or cause them to pause. There are other factors, such as the greater economy, the lack of significant growth in rent rolls, the over-exuberance of pricing as investors are wanting to put their money to work and get some yield. But this is a levered asset class, and as leverage is reduced, that will mean less yield on your equity. You’re either going to be willing to accept lower leverage with less yield on equity, or sellers will have to be more realistic on pricing their assets given the reduced leverage that is available to buyers. A slowdown in sales is not solely attributed to the debt markets; it’s a variable. You can put your money to work in other asset classes that might be better priced to get the yield you thought you were getting in real estate. Real estate appreciated too quickly.
GlobeSt.com: What does this turmoil mean for borrowers as originators stop making CMBS loans because it’s now dramatically more difficult to price loans due to the inability to predict the future cost involved?
Brunswick: Most borrowers who use CMBS either have a relationship with a particular lender or they have a higher-leverage requirement, and CMBS is their only option vs. going to a bridge lender who might charge more. Spreads have actually reduced recently as the bond buyers have come back into the market a little bit. They were in the 350 range, and are now 310 to 320, depending on the asset. It’s becoming a known reality that if you do a CMBS loan, you have to live with the volatility of not knowing what your rate is going to be until you close. That’s a tough presentation for borrowers as they want certainty of pricing. It’s creating volatility on the buy/refinance side, and it means that these borrowers will have to put more equity to work and accept some volatility.
GlobeSt.com: What else should our readers know about alternative financing solutions and CMBS?
Brunswick: A lot of folks are now saying they’d rather be in the debt seat than in the equity seat. They will put more in debt until they get comfortable with the valuations of CRE or debt yields are driven down on the private side. There will be varied debt players who will start to backfill the capital markets as their investor base reconciles this mispricing and opportunities present themselves, and investors recognize that the risk-adjusted yield is more attractive on the debt side than the equity side at the moment. CMBS is not going away. It will come and go as capital does and as the market adjusts. The market is pretty smart and will price and adjust accordingly.Back to Top
By Robert Brunswick, CEO of Buchanan Street Partners
Last year, the Federal Deposit Insurance Corp. (FDIC) implemented its Regulatory Capital Rules, a new set of directives intended to address regulatory deficiencies that contributed to the 2008 banking collapse. The regulations impose significant limits on bank acquisition, development and construction (ADC) loans, and create an opportunity for loan originators, specifically nonbank lenders, to expand their ADC offerings.
The most notable change requires banks to increase the amount of capital set aside for ADC loans that exceed loan-to-completed value standards or do not comply with minimum real-cash equity investments. The nonconforming loans affected by these regulations are characterized as High Volatility Commercial Real Estate (HVCRE) loans. The new laws were first released in October 2013 and implemented at the start of 2015.
The new reality
Banks that were major players before the recession have returned to the market, but on a limited and inconsistent basis. Lenders have been producing ADC loans at a significantly lower volume than the peak in 2007, causing a decline in the market share of ADC loans originated by regional and community banks.
Under the Regulatory Capital Rules, banks must categorize an ADC loan as HVCRE if it fails to meet several conditions. Chief among them are the following: The borrower has contributed at least 15 percent of the appraised-as-completed value of the asset before receiving bank financing; and the loan-to-value ratio of the financing does not exceed 80 percent. Also, loans for land development must not exceed 75 percent LTV.
This new ruling affects bank offerings on HVCRE loans nationwide, limiting borrowers’ access to capital — and leaves the door open for private lenders to swoop in, especially those able to serve unmet demand with flexible loan structures and efficiency.
Clarifying the rules
The FDIC has issued clarifications of the law over the past year. First, if a loan is initially classified as HVCRE financing, it remains so until the acquisition, development and construction loan is refinanced with a permanent loan. Nonetheless, a loan cannot be classified as permanent if it is based on the “as completed” value of the project. Furthermore, these clarifications included a distinction between the “as completed” and “as stabilized” values, so that the latter value cannot be used to determine whether a loan meets the definition of HVCRE financing.
Clarifications also established that borrowers may not withdraw capital generated internally by a property during the term of an HVCRE loan. Neither unrelated real estate assets nor grants from state, federal or municipal governments, or nonprofits can be included as part of the borrower’s 15 percent equity contribution; and preconstruction deposits on condominiums cannot be counted as a borrower-equity contribution.
Also, junior liens collateralized by the property, cannot be considered part of the 15 percent contribution. It is not clear yet whether mezzanine loans secured by partnership interests and originated by a lender unrelated to the bank will circumvent this rule. Borrowers are, however, permitted to include land contributed to a development project as a part of the required capital. The value of this contribution must correspond to the borrower’s real-cash equity in the land. For example, if a borrower purchased a site in 1980 and since entitled it, the cost basis is the original land purchase price plus the entitlement expenses. This is a major shift in bank regulations, creating a void that can only be filled by nonbank construction lenders.
A borrower’s contributed capital can include soft costs, such as brokerage fees, marketing expenses or costs of feasibility studies. Project costs paid to related parties for developer’s fees, leasing expenses and brokerage commissions, and management fees may be included in the soft costs — provided they are reasonable in comparison to fees paid to third parties for similar services.
The new regulations do not preclude banks from originating HVCRE loans. In the wake of their implementation, however, some banks may determine that HVCRE loans will not generate sufficient returns as compared to alternative investment options because of the additional costs associated with higher reserve requirements. This situation presents greater opportunities for flexible, nonbank lenders to move into the space.
Impact on Lending
The regulations have created a competitive advantage for private lenders in funding high-leverage construction loans, construction mezzanine loans, and highly structured bridge and land-acquisition financing.
A study by Joseph Rubin, Stephan Giczewski and Matt Olson of Ernst & Young LLP pointed to several significant effects of the new regulations:
- Higher capital requirements from the borrower could result in banks shifting assets away from the commercial real estate sector;
- Interest rates could increase to account for the increased costs; and
- Borrowers may be forced to shift to higher-cost private lending sources.
Although the new capital regulations impose limits on bank lending, banks are not out of the picture. According to the Ernst & Young study, a minority of commercial real estate loans are likely to fall into the definition of HVCRE because banks already avoid loans with LTVs of 80 percent or above, and most borrowers acquire development sites simultaneously with, or just prior to, the closing of the acquisition, development and construction loans.
Even among nonbank institutions, there are relatively few lenders that specialize in loans with LTVs above 80 percent. But there is demand for such loans, as well as opportunities for nonbank lenders. Their biggest advantage is the ability to structure flexible debt more quickly than banks, and commit to deals while banks are still evaluating them.
Some other situations where nonbank financing is a good fit include:
- A borrower has owned the land for a significant period of time, but has a very low real-cash basis;
- An asset has increased in value because of rezoning, or the entitlement process;
- A borrower seeks more than 80 percent of cost-construction financing for a preleased, investment-grade, credit-tenant building;
- A borrower requires cash out from unit sales to fund unrelated projects — for example, a situation in which a condominium developer previously arranged an 80-20 percent split of unit-sale proceeds to pay a principal or dividends; and
- A bank rejects a borrower’s assertion that developer’s fees included as part of the contributed equity are justified by the market (a standard that has yet to be defined by regulators).
Cadence Capital Investments purchased five buildings on Sunset Blvd in Hollywood with plans to deliver a multi-story building that is pre-leased to upscale regional grocer Gelson’s Market. The purchase was funded with a $12.9 mil loan provided by Buchanan Street Partners.
Gelson’s choice for the seven-parcel assemblage was based on the location’s high traffic count, at the intersection of Sunset and Gardner St, plus affluent area demographics. The new store location will be Gelson’s second in Hollywood, following the success of its West Hollywood store. A first quarter 2018 opening is planned.
“This was an attractive investment because of the project’s irreplaceable location in an area of Hollywood that is experiencing substantial redevelopment and revitalization,” said Mark Reese, vice president of Buchanan Street Partners. “Cadence Capital Investments is working on a truncated timeline to meet the increasing demand in the surrounding neighborhood.”
A low retail vacancy of 4.4 percent in the West Hollywood market speaks to the high demand by retailers, punctuated by lease rates of approximately $60 per-square-foot. The immediate neighborhood is undergoing a redevelopment renaissance, with new retail shops, restaurants and mixed-use developments either in progress or planned.
“As we grow our active lending platform, this high profile project was the perfect transaction to kick off 2016,” said Reese. “There is currently an increase in opportunity for private lenders to provide acquisition, development and construction loans due to regulatory changes imposed on banks by the Federal government.”
Buchanan Street has invested and structured approximately $17 bil on behalf of institutional and private investors across a broad range of equity and flexible debt real estate investments throughout the United States. In the last year, the company has funded more than $77 mil in loans in Nevada, Oregon, California and Arizona.Back to Top
By Kelsi Maree Borland
LOS ANGELES—The investor buys the Gateway Corporate Center in Diamond Bar, saying the market and surrounding markets, like Pomona and West Covina, are “historically very stable.”
Buchanan Street Partners has purchased the Gateway Corporate Center in Diamond Bar from Cornerstone Real Estate Advisers, an affiliate of an institutional buyer. The sales price was not disclosed, however, sources unrelated to the deal say that the investor purchased the property from $44 million. While this is Buchanan’s first Diamond Bar purchase, it knows the surrounding areas well and was attracted to the purchase for the strong location.
“This submarket is historically very stable and remains well occupied relative to other submarkets in Los Angeles, and we think that is largely a function of its central location and the ability of employers to draw employees from a lot of different areas surrounding this property, whether it is from L.A. County, Orange County or the Inland Empire,” Chris Herthel, SVP at Buchanan Street Partners, tells GlobeSt.com. “That is what initially attracted us and we don’t think that will change in the future. We have been active in this market, and we will continue to look for additional opportunities.”
Buchanan Street focuses on the second-tier market, where Herthel says that they can buy below replacement cost with less competition than more primary Los Angeles markets. “We are very active in mid-market properties when it comes to size, so that is anywhere from $30 million to $50 million in high-quality office properties throughout the US,” he adds. “This property fits that profile perfectly. It is a good size, and it is best in class in a good infill stable market that produces consistent cash flow out of the box. There are some improvements to be made as well, whether it is through renovation or a little bit of lease up. This property really checks all of those boxes.”
The property is in good condition and has been institutionally owned and maintained. It has 94% occupancy, so there is some upside with room for additional leasing and to push rents. Herthel says that the may also do some light renovations to the lobby and other common areas as well as the building systems. The investor will hold the property in the medium term, as is typical for its investment strategy.
Jeff Cole and Ed Hernandez of Cushman & Wakefield represented both the buyer and the seller in this transaction.Back to Top
The Paradise Valley Corporate Center, near Cactus Road and Tatum Boulevard, sold for $37.4 million to a California-based real estate investment firm.
Cushman & Wakefield’s Executive Director Chris Toci and Director Chad Littell negotiated the sale to Buchanan Street Partners, and no other outside broker was involved.
The office complex is currently 94 percent leased.
Paradise Valley Corporate Center is a Class A office project in the Scottsdale and Paradise Valley are, and has access to about 2.3 million square feet of walkable amenities and easy freeway access, Toci said.
The 4-story Paradise Valley Corporate Center was built in 2002, and has 198,534 square feet of office space, featuring large, flexible floor plates, spacious lobbies, ample glass lines, and an onsite deli.
“The property enjoys immediate access to approximately 2.3 million square feet of walkable amenities, convenient freeway access, an attractive Scottsdale address, and is surrounded by the highest demographics in metro Phoenix,” said Mr. Toci. The demographics in Scottsdale/Paradise Valley are the highest in metro Phoenix with average annual incomes of $109,000 in Scottsdale and $132,000 in Paradise Valley.Back to Top