Master Planner David Craig welcomed us into his experience center which he built to sell the vision of his development to buyers, investors and city officials.
Click Play for Photos.
10 years in the making, this development is well on its way toward completion as a stand alone city, named after founder David Craig. Every site on the property is branded "the hospital at Craig Ranch", "the TPC at Craig Ranch" etc.
While the naming convention is a little off putting to some of the team, the development speaks for itself and the "Monuments" to mark the entrance to his project do serve the purpose of creating a sense of arrival. He had to accumulate a large amount of land to make this a viable development and has installed $500m worth of infrastructure into the project. This money will come out to him in a modified TIF called a 380 Tax incentive. It is basically the same as a TIF, but has far fewer restrictions on what the money gained can be used for.
The deal is that the City of Frisco does not charge him tax on the land, and will pay him back in the future from the proceeds of the 380 instrument. This I feel was a masterful piece of negotiation as he has basically bought the infrastructure from the city with their own future earnings. These earnings would of course not exist if the development did not go forward.
The development includes everything necessary for a traditional lifestyle, including hiking/biking paths, a medical district, an industrial/office district, a residential district and various amenities including health and lifestyle plus a golf course.
Mr. Craig is well connected with many different high profile sports players and has managed to brand off portions of the project as Olympic training grounds.
He has had a very hard time getting the zoning requirements for this "New Urbanism" concept wherein a downtown area is introduced into sub-urban areas. When he started there was no residential zoning at all, and now there is high density zoning that is flexible in areas to allow the city to change over time to match the market.
School districts are under Allen and Frisco Independent School Districts. McKinney, the city that this development falls in has made some deals with them to give ad-velorum tax benefits to those districts to ensure they don't drain the other cities.
The sum of it all is that this developer is trying very hard to create a place where you can enjoy the benefits of a CBD without any of the congestion, live and work in a place that is large, but small enough to seem like home and essentially never have to leave.
Mr. Craig and the City of McKinney are hopeful that this project will be a long term one and eventually turn into its own vibrant and successful city.
Friday, May 28, 2010
Aloft Apartments
This adaptive reuse in the CBD of Dallas is very interesting. They have applied for historical status on the building and have received tax credits through this process.
Click play for photos of the project
Their view was to "leave the historical things in their original condition while building in new and improved things where necessary. Bare concrete walls are a common theme in the building. An anecdote shared with us was of an older lady, not in the target demographic, who called the front desk asking why they had not finished the construction process on her room.
They have pretty good occupancy in their building but complained that the market is shopping around too much. They feel a lot of pressure with people asking for discounts ALL the time. This has driven their rental rates down to the $110 range. They would budgeted and planned to be in the $150 range on this $105k per room cost hotel. This is below their usual room cost of $135k per room, and one of the owners mentioned that they would be looking to reuse more buildings in other markets as the unique feel and lower costs make it an attractive prospect.
The hotel is designed as a loft-condo feel, with a broad range of features that appeal to 30'ish year old people. The i-Phone generation they jokingly called us. Ted, one of the owners, lived up to the name as he was poking around on his i-Phone a few times during the meeting.
They presented a short history of the building, and its usage, a highlight of which is a chute which used to run the entire way down the building to the train tracks that ran under the property. This is now a conversation piece and has been closed off despite the expression of interest in using it for a "fast escape fire safety device" by some of the team.
All in all, this project is well done and well positioned to take good advantage of the convention center and new market of younger executives.
Click play for photos of the project
Their view was to "leave the historical things in their original condition while building in new and improved things where necessary. Bare concrete walls are a common theme in the building. An anecdote shared with us was of an older lady, not in the target demographic, who called the front desk asking why they had not finished the construction process on her room.
They have pretty good occupancy in their building but complained that the market is shopping around too much. They feel a lot of pressure with people asking for discounts ALL the time. This has driven their rental rates down to the $110 range. They would budgeted and planned to be in the $150 range on this $105k per room cost hotel. This is below their usual room cost of $135k per room, and one of the owners mentioned that they would be looking to reuse more buildings in other markets as the unique feel and lower costs make it an attractive prospect.
The hotel is designed as a loft-condo feel, with a broad range of features that appeal to 30'ish year old people. The i-Phone generation they jokingly called us. Ted, one of the owners, lived up to the name as he was poking around on his i-Phone a few times during the meeting.
They presented a short history of the building, and its usage, a highlight of which is a chute which used to run the entire way down the building to the train tracks that ran under the property. This is now a conversation piece and has been closed off despite the expression of interest in using it for a "fast escape fire safety device" by some of the team.
All in all, this project is well done and well positioned to take good advantage of the convention center and new market of younger executives.
City of Dallas
Mr. Mayor and the group
It was interesting to meet with the City of Dallas. Firstly, we met with the director of the parks department, Paul Dyer, who wields much more power than you would initially think when considering the title he carries. His department is over the entire Dallas county parks, including white rock lake, all of the downtown parks and numerous other ones scattered throughout the city.
Eminent domain is one of the tools that he uses to construct new parks according to the master plan that they have invested in. There is a plan for the CBD and another for the city in general. A recent anomaly in the process is a park off of main street where the city has forced the sale of a parking site. The problem comes in where they have delayed the development to coincide with the planting season for the trees in the park. They have managed to gain $40k per month in revenues off the site in the mean time as it continues to operate. The city is not supposed to use eminent domain to raise funds so this is a source of concern for the prior owner.
If your property is too expensive for the city to afford, they will not be able to take it, an incentive to invest in more affluent areas if ever I heard one.
One project that has been launched to raise the value of the land adjacent to the parks is the new bridge park over Woodall Rodgers, a massive, one of a kind park that will span 6 acres of space, and include soil that is 4ft deep, allowing trees and larger plants to thrive. This will be a true park, the real impact of which will be to connect uptown and downtown into one larger area.
Mayor Tom Leppart was kind enough to pose for a photo with us after the time spent in the board room. He is very positive about Dallas's position in the nation with regards to growth, and green building standards. He also mentioned opportunities in the south of Dallas in areas that have traditionally been in the affordable housing price range.
Dallas is a changing city with the new trinity river project; a new bridge connecting the west side of Dallas with the CBD, the Calatrava Bridge; the University of North Texas building a new campus in the south, creating opportunity for a college town; and a growing population.
The Mayor is very progressive with these incentive and other development programs as he was the CEO of one of the larger building companies in the U.S. prior to his current office. He has an intimate understanding of the process and challenges that developers face day to day, and has taken steps to make the process easier and faster.
He was whisked away after his photo op, off to change the city for the better.
Teresa O'Donald, the director of sustainable development and construction came with many interesting ideas about the city's homeless, the economic future of the northern parts of Dallas and the contrast between responsible owners and irresponsible ones.
She mentioned the concept of "regional fair share" something which she feels the other cities' are lagging on. Many of the other cities solution to the homeless in their area is to send them to Dallas. This approach has been used recently in Hawaii with a controversial decision to provide one way air tickets to homeless people to Los Angeles. The cities around Dallas's approach to this is to limit low cost public transportation to their areas, thereby making it very hard for homeless to move around.
The future for Dallas is in redevelopment. The City has encouraged owners of vacant buildings to sell through a vigorous process of code enforcement, which typically carries a high cost. There are 40 vacant buildings downtown, 3 of which have sold under this policy. They hope to have these buildings redeveloped and offer numerous incentives.
These incentives include, Tax Increment Financing districts, Municipal Management Districts, Historic Tax Credits, Tax Abatement and others.
One innovative method of raising funds in the current economic climate is the introduction of EB-5 visa process. Traditionally this visa was one where an investor could invest $1m dollars and gain a green card. Requirements include creating 10 sustainable American jobs within 2 1/2 years. They now have reduced the investment rate to $500k per family, and have appointed a fund manager to expedite the process.
Karl Zavitkovsky is the director over this process and travels to Asia often seeking new investors for the program. The program pays back the $500k to the investor over 7 years, and is flexible in how the money is used, as equity, debt, secondary debt etc.
David Whitley is a city designer who is helping execute the new paradigm of "good design paves the way for the future." The City has shifted its focus toward design as an attraction to both commercial and residential owners and tenants in the CBD.
The City have a grand view of Dallas, and believe that we are the best city in the region, the most forward thinking in terms of green development and the best designed city. Holding 5 of the 10 top cites after the recession, this view is understandable.
Paul Dyer
David Whitley
Ms. Theresa O’Donnell
City Hall
It was interesting to meet with the City of Dallas. Firstly, we met with the director of the parks department, Paul Dyer, who wields much more power than you would initially think when considering the title he carries. His department is over the entire Dallas county parks, including white rock lake, all of the downtown parks and numerous other ones scattered throughout the city.
Eminent domain is one of the tools that he uses to construct new parks according to the master plan that they have invested in. There is a plan for the CBD and another for the city in general. A recent anomaly in the process is a park off of main street where the city has forced the sale of a parking site. The problem comes in where they have delayed the development to coincide with the planting season for the trees in the park. They have managed to gain $40k per month in revenues off the site in the mean time as it continues to operate. The city is not supposed to use eminent domain to raise funds so this is a source of concern for the prior owner.
If your property is too expensive for the city to afford, they will not be able to take it, an incentive to invest in more affluent areas if ever I heard one.
One project that has been launched to raise the value of the land adjacent to the parks is the new bridge park over Woodall Rodgers, a massive, one of a kind park that will span 6 acres of space, and include soil that is 4ft deep, allowing trees and larger plants to thrive. This will be a true park, the real impact of which will be to connect uptown and downtown into one larger area.
Mayor Tom Leppart was kind enough to pose for a photo with us after the time spent in the board room. He is very positive about Dallas's position in the nation with regards to growth, and green building standards. He also mentioned opportunities in the south of Dallas in areas that have traditionally been in the affordable housing price range.
Dallas is a changing city with the new trinity river project; a new bridge connecting the west side of Dallas with the CBD, the Calatrava Bridge; the University of North Texas building a new campus in the south, creating opportunity for a college town; and a growing population.
The Mayor is very progressive with these incentive and other development programs as he was the CEO of one of the larger building companies in the U.S. prior to his current office. He has an intimate understanding of the process and challenges that developers face day to day, and has taken steps to make the process easier and faster.
He was whisked away after his photo op, off to change the city for the better.
Teresa O'Donald, the director of sustainable development and construction came with many interesting ideas about the city's homeless, the economic future of the northern parts of Dallas and the contrast between responsible owners and irresponsible ones.
She mentioned the concept of "regional fair share" something which she feels the other cities' are lagging on. Many of the other cities solution to the homeless in their area is to send them to Dallas. This approach has been used recently in Hawaii with a controversial decision to provide one way air tickets to homeless people to Los Angeles. The cities around Dallas's approach to this is to limit low cost public transportation to their areas, thereby making it very hard for homeless to move around.
The future for Dallas is in redevelopment. The City has encouraged owners of vacant buildings to sell through a vigorous process of code enforcement, which typically carries a high cost. There are 40 vacant buildings downtown, 3 of which have sold under this policy. They hope to have these buildings redeveloped and offer numerous incentives.
These incentives include, Tax Increment Financing districts, Municipal Management Districts, Historic Tax Credits, Tax Abatement and others.
One innovative method of raising funds in the current economic climate is the introduction of EB-5 visa process. Traditionally this visa was one where an investor could invest $1m dollars and gain a green card. Requirements include creating 10 sustainable American jobs within 2 1/2 years. They now have reduced the investment rate to $500k per family, and have appointed a fund manager to expedite the process.
Karl Zavitkovsky is the director over this process and travels to Asia often seeking new investors for the program. The program pays back the $500k to the investor over 7 years, and is flexible in how the money is used, as equity, debt, secondary debt etc.
David Whitley is a city designer who is helping execute the new paradigm of "good design paves the way for the future." The City has shifted its focus toward design as an attraction to both commercial and residential owners and tenants in the CBD.
The City have a grand view of Dallas, and believe that we are the best city in the region, the most forward thinking in terms of green development and the best designed city. Holding 5 of the 10 top cites after the recession, this view is understandable.
Paul Dyer
David Whitley
Ms. Theresa O’Donnell
City Hall
CityCenter Project Houston
This project was presented to us by Brandon Houston, the 4th great grandson of Sam Houston.
Please click the link for photos of the site.
The project was developed by the midway company, he is a project manager for midway, a position of many responsibilities withing the company. The view is that they expect the project manager to lead a project from beginning through completion through, capital raising, architecture, leasing and construction. He has personally built many different project types. The only type he has not managed is hotel construction.
Midway, a company that started in Dallas has consolidated its operations to Houston, selling off assets in the height of the recent bubble. Their focus in now on development.
They act as general partner on behalf of investors, raise traditional capital from banks and pension funds among others, earn fees on the development, but take the lions share of the construction risk. They have a preferential return structure wherein the investors gain the first percentage of the upside before Midway earns.
He has noticed that it is usually the second generation of tenants that really begins to bring in the income for the investor, as the fist set are simply at pro forma levels.
Midway is not an emergent developer, they do not sell the assets that they have invested in, they build to hold and generate annual income. As such, they do not have an exit cap, but underwrite to a 10 year period.
Project
This master planned mixed use community is the first of its kind within the immediate area, is very large, spanning an apartment building, 2 office buildings, a hotel, and interspersed retail. The site was originally a mall, and came with 2 parking garages, a major boon to the development as the cost for creating this parking, around $10,000 per space was not carried by Midway. They instead designed around the existing parking structures.
Midway believes in pre-leasing a building before construction starts to lower the risk of the project. This extends the time-line for construction, but the trade off is worth it as the developer has managed to survive the recent down turn in the markets.
They have innovated with one of their tenants, Life time Athletic, a fitness facility. Midway asked them to create a new arm for their brand, one aimed at urban living instead of inserting the traditional brand, one that Midway feels is more aimed at the Sub-urban market. Life Time fitness agreed and renamed their brand to Lifetime Athletic, and changed the layout and mix of fitness equipment to more accurately reflect the market.
Another interesting innovation in the project is the usage of economies of scale in a way. The hotel and apartments share facilities with the conference space and athletic facility being shared. Hotel guests receive a day pass to Life Time Athletic when they check in.
Midway avoided the city as much as possible with regard to public money. They also decided to keep the street private to ensure that they had the ability to close the roads and host large scale events, that cover the entire 28 acres of development.
There is however a TIRZ (Tax Increment Reinvestment Zone) district that affects this site. They hope to join with another developer to lobby the city to create pedestrian linkages between the 2 sites.
The recession has a large impact on projects like this one. For instance their Debt Service Coverage Ratio (DSCR) will jump from 1.15 to 1.4 when their loan is renewed. They are confident that they can achieve this jump as leasing is going well. Their policy of pre-leasing also helps to cover this possibility.
Their market is driven by the energy corridor, with many executives from those companies staying in the hotel. Companies include: Exxon, Bp, Shell,and Haliburton.
Local executives live in the area where the average home price is $900k. This development is comparable to the Shops at Legacy or South Lake Town Center.
Occupancy is good with the offices 100% leased in one building, 70% in another both above the market rate, retail is 60% leased and residential is 72%. There are some co-tenancy clauses that are undermining the profitability of the project at the moment, but as the retail climbs above 70% occupancy, the cash-flow will be much better. They also have some rental concessions, 5 month free rent for instance. They seek a net effective base rent of $22 per square foot. They are willing to offer TI's but tend to charge this against the rent. For instance, the rent will increase if they expect to pay large TI's to a certain tenant.
This project is larger than a typical Midway project, which is in the $10m range. This project is in the $50m range. Individual investors contributed large portions of the equity. Their reputation is what he attributes their ability to raise capital too.
Sustainability
None of the buildings are LEED certified but are built to the same standards. They are a green builder but could not justify the cost from an operations saving perspective. They have found that tenants are happy to accept their word rather than a certification in most cases.
The bottom line is that this project is doing well, will in all likelihood be able to continue to meet debt service and has managed to lease up in a market where other spaces are not. This in my opinion is due to the synergistic effect of the mixed use environment working well for them. They are also able to lease above market rates as a result of this effect.
Please click the link for photos of the site.
The project was developed by the midway company, he is a project manager for midway, a position of many responsibilities withing the company. The view is that they expect the project manager to lead a project from beginning through completion through, capital raising, architecture, leasing and construction. He has personally built many different project types. The only type he has not managed is hotel construction.
Midway, a company that started in Dallas has consolidated its operations to Houston, selling off assets in the height of the recent bubble. Their focus in now on development.
They act as general partner on behalf of investors, raise traditional capital from banks and pension funds among others, earn fees on the development, but take the lions share of the construction risk. They have a preferential return structure wherein the investors gain the first percentage of the upside before Midway earns.
He has noticed that it is usually the second generation of tenants that really begins to bring in the income for the investor, as the fist set are simply at pro forma levels.
Midway is not an emergent developer, they do not sell the assets that they have invested in, they build to hold and generate annual income. As such, they do not have an exit cap, but underwrite to a 10 year period.
Project
This master planned mixed use community is the first of its kind within the immediate area, is very large, spanning an apartment building, 2 office buildings, a hotel, and interspersed retail. The site was originally a mall, and came with 2 parking garages, a major boon to the development as the cost for creating this parking, around $10,000 per space was not carried by Midway. They instead designed around the existing parking structures.
Midway believes in pre-leasing a building before construction starts to lower the risk of the project. This extends the time-line for construction, but the trade off is worth it as the developer has managed to survive the recent down turn in the markets.
They have innovated with one of their tenants, Life time Athletic, a fitness facility. Midway asked them to create a new arm for their brand, one aimed at urban living instead of inserting the traditional brand, one that Midway feels is more aimed at the Sub-urban market. Life Time fitness agreed and renamed their brand to Lifetime Athletic, and changed the layout and mix of fitness equipment to more accurately reflect the market.
Another interesting innovation in the project is the usage of economies of scale in a way. The hotel and apartments share facilities with the conference space and athletic facility being shared. Hotel guests receive a day pass to Life Time Athletic when they check in.
Midway avoided the city as much as possible with regard to public money. They also decided to keep the street private to ensure that they had the ability to close the roads and host large scale events, that cover the entire 28 acres of development.
There is however a TIRZ (Tax Increment Reinvestment Zone) district that affects this site. They hope to join with another developer to lobby the city to create pedestrian linkages between the 2 sites.
The recession has a large impact on projects like this one. For instance their Debt Service Coverage Ratio (DSCR) will jump from 1.15 to 1.4 when their loan is renewed. They are confident that they can achieve this jump as leasing is going well. Their policy of pre-leasing also helps to cover this possibility.
Their market is driven by the energy corridor, with many executives from those companies staying in the hotel. Companies include: Exxon, Bp, Shell,and Haliburton.
Local executives live in the area where the average home price is $900k. This development is comparable to the Shops at Legacy or South Lake Town Center.
Occupancy is good with the offices 100% leased in one building, 70% in another both above the market rate, retail is 60% leased and residential is 72%. There are some co-tenancy clauses that are undermining the profitability of the project at the moment, but as the retail climbs above 70% occupancy, the cash-flow will be much better. They also have some rental concessions, 5 month free rent for instance. They seek a net effective base rent of $22 per square foot. They are willing to offer TI's but tend to charge this against the rent. For instance, the rent will increase if they expect to pay large TI's to a certain tenant.
This project is larger than a typical Midway project, which is in the $10m range. This project is in the $50m range. Individual investors contributed large portions of the equity. Their reputation is what he attributes their ability to raise capital too.
Sustainability
None of the buildings are LEED certified but are built to the same standards. They are a green builder but could not justify the cost from an operations saving perspective. They have found that tenants are happy to accept their word rather than a certification in most cases.
The bottom line is that this project is doing well, will in all likelihood be able to continue to meet debt service and has managed to lease up in a market where other spaces are not. This in my opinion is due to the synergistic effect of the mixed use environment working well for them. They are also able to lease above market rates as a result of this effect.
Thursday, May 27, 2010
New Hope Housing Inc.
This not for profit organization provides permanent rental accommodation for rehabilitated homeless and destitute individuals. They do not have any debt on their properties, building in a certain robustness and immunity to market conditions, a key to their ability to provide their service in good times and bad.
Click the video to view images
Brays Crossing
The Project at Brays Crossing, owned and operated by New Hope is one such facility.
The site is located along a major highway, Gulf Freeway, and violates one of their rules. They typically look for cheap land, but in this case ended up paying more for it than they would have liked. The city asked them to rehabilitate the existing property that was in a state of disrepair and had passed its valuable economic life. However the owner ended up getting a better deal than they would have liked, but with some assistance from the city, it went ahead anyway.
The site was extremely dangerous with violent crime, drug abuse and trafficking occurring on the property.
Originally the property was used by NASA while the Johnson space center was being constructed. This private use, without handicap access has created some interesting changes to the different levels of the property. There where steps coming down from each room to a lower passage way, forcing New Hope to entertain a large cost to raise a new deck, essentially making the entire site one level.
Another challenge was the creation of a sound-wall to separate the property from the traffic on the freeway. This serves a dual function as a security control device as well. An artistic theme has also been applied to it for aesthetic purposes.
They have $6.1m in low income housing tax credits on the property. National equity fund syndicated the credits to Chase on behalf of New Hope. Many private donors have made up the shortfall in financing the rest of the $11m project.
Criminal Background Check
They do a criminal background check on everyone who comes to rent from the property, including, no arsonists, no drug trafficking, no sex offenders or violent ex-criminals are allowed to rent and live in the property.
Lease Terms
The average rental term is 27 months, with a 6 month initial agreement and monthly rates thereafter. Longer terms will be entertained if a tenant requests it. Their tenants typically do not give notice when they leave and New Hope has made the decision not to go after them for non payment as they feel it would not be worth the time spent. They have never kicked a tenant out for an inability to pay rent, but rather for other more serious reasons, of which an inability to pay rent is a symptom.
Hospice service are provided from an off site company.
CHDCO
The Community Housing Development Corp that they have is an entity registered with the Federal Government to accept funds from their home partnership investment program. This money is repaid with interest.
2821 Canal Street
This property is also under the New Hope umbrella, and has been operated for 5 years. Its design is more open, and was another redevelopment that they undertook. It has an award winning Japanese garden in the internal space that was donated to the project. Many of the decisions made regarding this site where done with regard to the future. For instance, the windows facing the neighboring property are fire glass, which was more expensive than simply building a wall between the properties, but Joy felt that there may be a chance to purchase that property in the future.
Joy, the manager of New Hope mentioned that they are currently doing around 3 project like these per year, depending on the availability of Federal financing and the turn around times of the projects. They have built 1200 housing units in Houston to date, and have plans to continue toward the 8000 units identified as necessary by a recent study.
Click the video to view images
Brays Crossing
The Project at Brays Crossing, owned and operated by New Hope is one such facility.
The site is located along a major highway, Gulf Freeway, and violates one of their rules. They typically look for cheap land, but in this case ended up paying more for it than they would have liked. The city asked them to rehabilitate the existing property that was in a state of disrepair and had passed its valuable economic life. However the owner ended up getting a better deal than they would have liked, but with some assistance from the city, it went ahead anyway.
The site was extremely dangerous with violent crime, drug abuse and trafficking occurring on the property.
Originally the property was used by NASA while the Johnson space center was being constructed. This private use, without handicap access has created some interesting changes to the different levels of the property. There where steps coming down from each room to a lower passage way, forcing New Hope to entertain a large cost to raise a new deck, essentially making the entire site one level.
Another challenge was the creation of a sound-wall to separate the property from the traffic on the freeway. This serves a dual function as a security control device as well. An artistic theme has also been applied to it for aesthetic purposes.
They have $6.1m in low income housing tax credits on the property. National equity fund syndicated the credits to Chase on behalf of New Hope. Many private donors have made up the shortfall in financing the rest of the $11m project.
Criminal Background Check
They do a criminal background check on everyone who comes to rent from the property, including, no arsonists, no drug trafficking, no sex offenders or violent ex-criminals are allowed to rent and live in the property.
Lease Terms
The average rental term is 27 months, with a 6 month initial agreement and monthly rates thereafter. Longer terms will be entertained if a tenant requests it. Their tenants typically do not give notice when they leave and New Hope has made the decision not to go after them for non payment as they feel it would not be worth the time spent. They have never kicked a tenant out for an inability to pay rent, but rather for other more serious reasons, of which an inability to pay rent is a symptom.
Hospice service are provided from an off site company.
CHDCO
The Community Housing Development Corp that they have is an entity registered with the Federal Government to accept funds from their home partnership investment program. This money is repaid with interest.
2821 Canal Street
This property is also under the New Hope umbrella, and has been operated for 5 years. Its design is more open, and was another redevelopment that they undertook. It has an award winning Japanese garden in the internal space that was donated to the project. Many of the decisions made regarding this site where done with regard to the future. For instance, the windows facing the neighboring property are fire glass, which was more expensive than simply building a wall between the properties, but Joy felt that there may be a chance to purchase that property in the future.
Joy, the manager of New Hope mentioned that they are currently doing around 3 project like these per year, depending on the availability of Federal financing and the turn around times of the projects. They have built 1200 housing units in Houston to date, and have plans to continue toward the 8000 units identified as necessary by a recent study.
The Core Apartments
Michael Morgan presented this apartment complex in Houston to us, along with Clark (Kent I had to wonder) and the leasing manager, Crissy.
Please click the video for project images.
The Core sits on a street that has a vibrant night life with many clubs and bars up and down the street. It meets a demographic of people who are just out of college and typically have not started families yet. This is not to say that there are no families in the complex, but the majority of the renters are younger, singles who appreciate the nightlife.
Personal story
He shared some of his personal story with us. His father was the only member of his family to survive the holocaust, and came to america with a 5th grade education, but still managed to build a large real estate portfolio for himself. His favorite quote is “there is no substitute for hard work and common sense.”
Michael started his first development when he was 32, with an 11 million dollar project, of which he had to front around $1 million in personal equity. Things have changed since then as he has built good relationships with his investors, a pension fund, Archstone Smith has contributed the lions share of equity for many of his deals. On this project he only had to contribute $170k for a $42m project. A good track record and reliable name is very key to Mr Morgan.
He has a view that the real estate market is cyclical, and will always be so. Thus a developer must be defensive, plan for the worst or suffer in the down cycle. Michael feels that many developers made just this mistake in the recent bust.
Vertical Integration
His company is vertically integrated which allows him some more room to exercise his considerable construction, management and leasing experience.
He takes a project all the way from construction, through initial leasing toward stabilization and into property management. His fees on the construction side and development are all set aside to cover the personal guarantees that exist on the property. This structure is carefully negotiated with the bank to risk only specific assets against the loan on the new one.
Partnership and financing structure
Michael uses a limited partnership to hold the assets that he develops. He offers a preferred return to his equity investors, above which they are 50/50 partners. this presents a balancing act for this project under the current market, as the appraised value is at break even to proved the pref return, but no upside for the developer. The asset will therefore be held and managed for a period longer, until it stabilizes and values increase to the point where a sale will generate some equity return for Michael.
Archstone Smith is only asking for 2% pref return on this project.
As a side note, it turns out that Lehman brothers bought Archstone Smith, paid 2008 level pricing for the assets in their portfolio and subsequently this deal of $22b contributed to Lehman’s downfall.
Leasing
Michael is a strong believer in getting the property in a position where drive-by traffic volumes are high. He does not invest in projects on side roads. This has helped him lease this project to its current level of occupancy at 98%.
The rooms are designed to lease, based on Michael’s experience in the market. He dictates what size rooms and how they should be laid out to his architects while leaving them some room in other areas to express creativity.
Brownfield
This site was a brownfield, and required some remediation. The clean bill of health was necessary to secure insurance for the project. The site has some wells on it that will need continued monitoring for the next decade to ensure the site does not become contaminated again. Insurance covers this unlikely event.
Market
Michael has noticed Cap rates starting to decline, a positive indicator for the market. This is only true of residential apartments, the best of class asset to have owned during the down cycle. As always, he recommends grabbing every penny you can out of your property as real estate according to his view, is flashy and sexy on the outside, but inside, every dollar of additional income counts.
Please click the video for project images.
The Core sits on a street that has a vibrant night life with many clubs and bars up and down the street. It meets a demographic of people who are just out of college and typically have not started families yet. This is not to say that there are no families in the complex, but the majority of the renters are younger, singles who appreciate the nightlife.
Personal story
He shared some of his personal story with us. His father was the only member of his family to survive the holocaust, and came to america with a 5th grade education, but still managed to build a large real estate portfolio for himself. His favorite quote is “there is no substitute for hard work and common sense.”
Michael started his first development when he was 32, with an 11 million dollar project, of which he had to front around $1 million in personal equity. Things have changed since then as he has built good relationships with his investors, a pension fund, Archstone Smith has contributed the lions share of equity for many of his deals. On this project he only had to contribute $170k for a $42m project. A good track record and reliable name is very key to Mr Morgan.
He has a view that the real estate market is cyclical, and will always be so. Thus a developer must be defensive, plan for the worst or suffer in the down cycle. Michael feels that many developers made just this mistake in the recent bust.
Vertical Integration
His company is vertically integrated which allows him some more room to exercise his considerable construction, management and leasing experience.
He takes a project all the way from construction, through initial leasing toward stabilization and into property management. His fees on the construction side and development are all set aside to cover the personal guarantees that exist on the property. This structure is carefully negotiated with the bank to risk only specific assets against the loan on the new one.
Partnership and financing structure
Michael uses a limited partnership to hold the assets that he develops. He offers a preferred return to his equity investors, above which they are 50/50 partners. this presents a balancing act for this project under the current market, as the appraised value is at break even to proved the pref return, but no upside for the developer. The asset will therefore be held and managed for a period longer, until it stabilizes and values increase to the point where a sale will generate some equity return for Michael.
Archstone Smith is only asking for 2% pref return on this project.
As a side note, it turns out that Lehman brothers bought Archstone Smith, paid 2008 level pricing for the assets in their portfolio and subsequently this deal of $22b contributed to Lehman’s downfall.
Leasing
Michael is a strong believer in getting the property in a position where drive-by traffic volumes are high. He does not invest in projects on side roads. This has helped him lease this project to its current level of occupancy at 98%.
The rooms are designed to lease, based on Michael’s experience in the market. He dictates what size rooms and how they should be laid out to his architects while leaving them some room in other areas to express creativity.
Brownfield
This site was a brownfield, and required some remediation. The clean bill of health was necessary to secure insurance for the project. The site has some wells on it that will need continued monitoring for the next decade to ensure the site does not become contaminated again. Insurance covers this unlikely event.
Market
Michael has noticed Cap rates starting to decline, a positive indicator for the market. This is only true of residential apartments, the best of class asset to have owned during the down cycle. As always, he recommends grabbing every penny you can out of your property as real estate according to his view, is flashy and sexy on the outside, but inside, every dollar of additional income counts.
West End
The Gables Development Group is behind this very large mixed use development in Houston, under Ben Peaceglock.
Please play the video for the photos of the project.
The project has a ground floor of retail; second floor flexible space, currently outfitted for retail and apartments above. The amenities include a rooftop pool, entertainment area, theater and fitness room. It is targeted toward young up and coming professionals with "adventurous shopping, distinctive dining and entertainment and luxury living"
There is quite a lot of art scattered through the property to give a sense of place as the site is simply so large. The developer made clever use of changing textures and colors to elevate this effect further.
The group managed to dodge the real estate crash with some fancy foot work. At the height of the boom, they had 15 unsolicited offers on their property. A bidding war ensued with IMG Clarion and Lehman coming out on top. They had equity from IMG and debt from Lehman. They where fortunate to sell off these assets before the crash.
There are 397 apartments with an average size of 1080 SQFT. The current market rental rate is $1.98 per square foot, making around $2138 rental income per room. They are 89% leased at the moment.
The retail is not faring so well, as they have a majority of restaurants interested but are also seeking soft good sellers for that area. The partners insisted on having a graduated risk view for the flexible space on the second floor. It goes as follows:
1) retail
2) restaurants
3) furniture stores
4) medical offices
5) offices
6) apartments
As they are unable to lease the space, they will slide down the scale from 1 to 6 until they end at apartments which he said was not desirable due to the permanent nature of the usage.
Please play the video for the photos of the project.
The project has a ground floor of retail; second floor flexible space, currently outfitted for retail and apartments above. The amenities include a rooftop pool, entertainment area, theater and fitness room. It is targeted toward young up and coming professionals with "adventurous shopping, distinctive dining and entertainment and luxury living"
There is quite a lot of art scattered through the property to give a sense of place as the site is simply so large. The developer made clever use of changing textures and colors to elevate this effect further.
The group managed to dodge the real estate crash with some fancy foot work. At the height of the boom, they had 15 unsolicited offers on their property. A bidding war ensued with IMG Clarion and Lehman coming out on top. They had equity from IMG and debt from Lehman. They where fortunate to sell off these assets before the crash.
There are 397 apartments with an average size of 1080 SQFT. The current market rental rate is $1.98 per square foot, making around $2138 rental income per room. They are 89% leased at the moment.
The retail is not faring so well, as they have a majority of restaurants interested but are also seeking soft good sellers for that area. The partners insisted on having a graduated risk view for the flexible space on the second floor. It goes as follows:
1) retail
2) restaurants
3) furniture stores
4) medical offices
5) offices
6) apartments
As they are unable to lease the space, they will slide down the scale from 1 to 6 until they end at apartments which he said was not desirable due to the permanent nature of the usage.
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