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The latest issue of Goodwin Procter’s REsource magazine has been released. Here are the articles in this issue:

Green Building: Now on Firm Footing
by Rachael Simonoff Wexler and Shahrzad Mostofi

Green building is no longer the passion of a few; it is the new standard for commercial and residential developments alike. Green design is an undisputed selling point, remarkably enhancing commercial and residential project value. Green building practices reduce the tremendous impact that building design, construction, and maintenance have on both people and nature. The concept of environmentally friendly real estate is so ubiquitous today that green can be used to describe building without concern that readers will think it refers to the color of a structure.

Negotiating in a See-Saw Market
by Andrew Kirsh

In today’s market, however, the number of real estate transactions that make economic sense is dwindling. Fewer buyers are able to obtain adequate financing due to the recent credit crunch. Thus, an imbalance between seller supply and buyer demand now exists in the real estate market. The negotiating pendulum long thought to be stuck at the top of the seller’s side is finally returning to an even position. The return of balance due to the changing market should allow buyers to negotiate more favorably certain hot button issues concerning due diligence, deposit, as-is and release provisions, representations and warranties, and seller remedies.

Turn Down Service: Key Aspects of Hotel Real Estate Due Diligence
by Christopher Barker and Benjamin Tschann

Investors know the importance of conducting thorough due diligence in the acquisition of real estate assets. Generally speaking, the due diligence tasks for completed and stabilized projects are the same regardless of the type of assets to be acquired. For those evaluating hotel assets, however, the due diligence tasks are greater, and these expanded investigations are crucial to understanding not only the real estate being acquired, but the business that comes with it. For hotel assets, apart from the due diligence associated with tax structuring issues that arise if tax-exempt entities or REITs are involved, there are four main categories of additional due diligence required to evaluate both the real estate and the business: (i) branding; (ii) hotel management; (iii) employment matters; and (iv) operating licenses and permits. Each area must be evaluated for financial as well as legal consequences.

Issues in Joint Venture Capitalization
by Dean Pappas and Hamilton Tran

As the allocation of global investment capital to real estate has increased in recent years, joint ventures between capital partners and developer partners have become commonplace in real estate transactions, making joint venture agreements familiar real estate documents. Familiar as they may be, however, many joint venture agreements overlook or do not adequately address critical issues that often arise during the joint venture relationship. One basic but significant provision found in joint venture agreements is capitalization – the funding of the venture by its partners. Capitalization will become even more significant in the current volatile real estate and credit markets as traditional debt financing becomes scarcer and the infusion of equity may be the only means to sustain joint ventures.

Real Difficult: Structuring Investments in Real Estate
by Christopher Price and Rishi Sehgal

The existence of publicly traded real estate investment trusts (REITs) and the proliferation of commingled real estate investment funds has made investing in institutional-quality real estate increasingly mainstream and available to a
wider class of investors. Fund sponsors in particular, through the use of creative structuring, have been able to access a diverse array of capital sources and have given real estate a prominent seat at the capital markets table. To attract capital from investors as diverse as governmental and corporate pension plans, U.S. and overseas insurance companies, university endowments, private foundations,
and sovereign wealth funds acting on behalf of foreign governments, fund sponsors typically use a variety of structures including “blocker entities” and private REITs to marry their capital with their investment strategy by accounting for investors’ tax and regulatory requirements. While the goal is to attract the greatest amount of capital into their funds, the tradeoffs sponsors face are less flexibility, greater complexity, and increased costs when actually making investments.

There is nice piece in next month’s Forbes on Kimco Realty Corporation and Milton Cooper: Beyond the Big Box.

“REITs have to follow certain rules in order to avoid most corporate income taxes. Chiefly, they must pay out 90% of their income to shareholders in dividends. Many REITs are content to own buildings and collect rent. Others, like Boston Properties, have also moved into developing their own buildings. But Cooper gets 45% of his earnings from sources like managing real estate for pension funds, lending to bankrupt retailers and buying distressed properties. Only a few other REITs, such as Developers Diversified and ProLogis, have branched out like this.”

“So in 1998 Cooper had a brainstorm: go into business with pension funds, developing and managing shopping centers for funds such as New York Common Retirement Fund and G.E. Pension Trust. Here was a bunch that was happy with returns as low as 6%, if the investments were safe. Many also were required to have some capital in real estate. Typical partnership deal: The pension funds contribute 85% of the project cost, Kimco the remainder. Once the center is built Kimco earns a fee for managing the properties, around 4% of rents.”

Arleen Jacobius of PIonline.com reports on institutional investors entering into joint ventures with REITs to as an alternative to direct real estate investments: Joint Ventures Emerging as New Vehicle for REITs.

The nice match of pension funds and REITs is that they are both used to dealing with the complexities of the tax code and other regulatory schemes that affect their investments in real estate. The rules for REITs on their income tests and asset tests are similar to the UBIT rules in compliance.

The pension funds get the benefit of a large professional REIT manging and operating the portfolio, but the additional control rights they would expect if they own the real estate outright. In exchange for the convenience of not having day-to-day management of the asset, they trade a piece of the upside on the real estate by giving the REIT a promote on the increase in value of the property.

I see that the article also quotes Steve Lyons of Reed Smith. Steve and I have worked together on a few REIT joint ventures.

According to this article in Retail Traffic Magazine, REIT Joint Ventures Unfazed By Credit Market Tumult.

I have done a fair amount of work with REITs acting as private equity managers, leveraging their portfolio with institutional investors rather than public equity.

As Andy Sucoff points out, the REIT typically puts up 15% or 20% of the equity plus a promote for beating a target IRR. They also use higher leverage ratios than they do in their portfolio to maximize the return.

I will speaking as part of the seminar: Real Estate Development From Beginning to End in Massachusetts in Dedham on November 16, 2007.

Agenda

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