Investment Funding for New Urbanists

Exerpts From New Urban News

Since the late 1990s, a number of people have tried to form investment pools that would provide money for new urbanist developments. It has not been easy going.

The Traditional Neighborhood Development Fund, started in 1997 by new urbanist developers Robert Chapman, Rob Dickson, and Lloyd Zuckerberg, obtained backing from the multi-billion-dollar Hillman Company and from a major shareholder in Goldman Sachs, but was never able to place any significant capital.

The Fund for New Urbanism, started in 2002 with Andres Duany, Sam Young, and businessman Wayne Huizenga as partners, hoped to finance several projects but is now limiting itself to just one — a 930-acre development near Edenton, North Carolina. Another pool, the Green Living Fund, which Kacey Fitzpatrick in the San Francisco Bay Area expected to have in operation by late 2006, has delayed its startup by at least several months.

Yet while some investment pools are being postponed or pared down, others are springing into existence. In January, the Denver-based Revival Fund Management of Dennis Fleming and Charlie Randall started its Urban Green Fund, which will invest in walkable, mixed-use developments within a half-mile of mass transit. Also importantly, philanthropies are coming forward. The New York-based FB Heron Foundation, for example, is investing in New Urbanism through funds such as the Bay Area Smart Growth Fund and the California Smart Growth Fund.

What seems to be under way is a sorting out of investment concepts and participants. In some instances, new urbanists tried to start funds before conditions were ripe. “We were way premature nine or 10 years ago,” says Chapman, who leads an established new urbanist development company, the North Carolina-based Traditional Neighborhood Development Partners. “I think the time is absolutely right now. We’ll make an announcement in midsummer about a new fund that will have a sustainability and green building aspect.”

Some funds have run into difficulty because they employed methods that diverged too much from the real estate field’s usual ways of doing business. DPZ’s Fund for New Urbanism, whose research and organizing were carried out primarily by Young and Demetri Baches, had what seemed an ingenious idea: The Fund would identify eight sites “ideally located for smart growth,” design plans and codes for them, secure entitlements so that construction could occur as-of-right, and transfer the approved plans to developers prepared to follow the plans.

There turned out to be at least two flaws in the Fund’s premise, according to sources consulted by New Urban News. First, developers resisted paying to obtain planned, entitled projects. “A developer doesn’t want to pay retail,” Chapman says. “He wants to pay wholesale.” Second, the Fund suffered from being seen as more a planning operation than a development organization. Baches acknowledges that DPZ did not want to devote time and energy to becoming a full-fledged developer itself. With a busy international planning practice, DPZ would have had a hard time managing several development projects. Thus the Fund settled upon carrying out the one project it had pushed the furthest — Sandy Point.


THE NEED FOR PATIENT CAPITAL
Analysts agree that there is clearly a need for pools of “patient capital.” Mainstream real estate financiers mostly have “a time horizon that is so compressed that you have to make [undesirable] compromises,” Chapman observes. A new urbanist development will surpass a conventional subdivision in value in the long run, he says, but first a great deal of money and time must be invested. It’s not uncommon for 15 years to be needed.

“We need to understand real estate as a 40-year asset class again,” says Fleming. Fleming expects to put money into a project for eight to nine years and to have a provision allowing the investment to be renewed twice. By comparison, conventional real estate funds usually “have a time horizon of five [years] plus two [extensions] or seven [years] plus two [extensions].”

Revival Fund Management expects its Urban Green Fund to amass $250 million and will invest it in approximately 20 to 30 projects in “progressive real estate markets” such as Denver, Seattle, Dallas-Fort Worth, Boston, Washington, and the Bay Area (except the purportedly overpriced city of San Francisco). Each project will get $7 million to $12 million from the Fund, says Fleming, the managing director. Properties will typically be “within a half-mile radius of frequent transit service” and will feature energy-efficient technologies, a fund statement says.

Once the first Urban Green Fund is established, a second fund would be started, and so on. Eventually Revival would like to establish a real estate investment trust (REIT) for properties that are new urbanist and “green.”

Criteria similar to Revival’s are already being used by the $100 million Rose Smart Growth Fund, which developer Jonathan Rose established about a year ago. After buying two buildings in downtown Seattle for $23 million last April, the Rose fund announced its second investment in November: half of the $38 million needed to convert the historic Clipper Mill buildings in northern Baltimore to 51,000 sq. ft. of arts and crafts studios, 62,000 sq. ft. of offices, 36 loft apartments, and other uses. The Rose Fund became a 50-50 partner with Struever Bros. Eccles & Rouse, which is developing the project, with Cho Benn Holback + Associates as architects. The property adjoins a light-rail stop in Jones Falls Valley.

A new urbanist investment of more limited duration is “mezzanine capital,” which Philip Blumberg’s American Ventures Realty in Coral Gables, Florida, supplied to projects such as market-based, moderate-income housing in the Little Havana section of Miami and the luxury-class Gold Avenue Lofts in downtown Albuquerque. Mezzanine financing — so called because it occupies a level between loans and long-term equity— generally is paid off after about 18 months. Blumberg says the investments made through his company’s South Florida Urban Initiatives Fund and New Mexico Urban Initiatives Fund, both of which are near being closed out, have performed well, delivering operating returns of 15 percent or better.

Blumberg says plans for a third urban initiatives fund, in New Jersey, fell through when Governor Jim McGreevey, with whom the fund organizers were working, unexpectedly resigned in November 2004 (after the governor admitted having an extramarital affair with a male state employee). “Given the current down cycle in residential real estate, we’re evaluating what would be the next form for a fund,” Blumberg says, noting that he remains “bullish” on this kind of investment.Chapman views better financial structures as a key to improving the quality of community development in America. When he rolls out a new fund later this year, many of his investors are expected to be “foundations, endowments, and other socially conscious organizations” comfortable with a long timeline.

A growing number of foundations are putting money from their endowments into environmentally and socially responsible real estate development. The Heron Foundation has placed $11 million (3.5 percent of its endowment) into the Bay Area and California Smart Growth Funds and the Canyon-Johnson Urban Fund, Genesis Workforce Housing Fund, and UrbanAmerica funds.

California has become a hotbed for smart growth funds, which often favor energy-efficient buildings along with urban locations near mass transit. The California Public Employees’ Retirement System (CalPERS) has invested in funds such as the Green Development Fund — which was begun with the Houston-based real estate firm Hines, for construction of LEED pre-certified office buildings — and the $676 million CIM Urban Real Estate Fund. Two of the fund management companies most active in California are Pacific Coast Capital Partners and Pacific Realty Group. Among the sponsors of such funds is the Bay Area Council, which in 2002 started the $66 million Bay Area Smart Growth Fund I for projects in or near neighborhoods of below-median income and which has since launched a second fund.

Baches is now managing partner of DPZ Pacific, a firm licensed by DPZ to produce plans, designs, and codes in Australia, New Zealand, China, and other parts of East Asia. “ He expects to start funds in that part of the world, where he thinks the prospects for New Urbanism are bright.

Inner City Retail

post from Marvin a.k.a. eMarv

I was just reading the "Welcome to Metropolis" article in Retail Traffic magazine. The article states that "MacFarlane already has 2.2 billion to invest. Meanwhile, DLC Management Corp. Has joined with G.L. Blackstone & Associates to form DLC UrbanCore LLC and is sitting on $100 million in capital." Imagine that! (I wish I had $100M to sit on!) I actually know of a couple of potential infill sites in Baltimore that could be ideal for redevelopment.

BTW, for those that are not convinced about inner city retail, here's an impressive stat from the retail traffic article: "In 2002, ...inner city shoppers went outside their neighborhoods to buy $42 billion in goods, or 25 percent of the total $122 billion retail demand of those consumers, according to a study for the Boston-based Initiative for Competitive Inner City by Boston Consulting Group Analytics with Claritas Inc."

Another benefit (according to executives in the know) is the good returns. G. Lamont Blackstone of UrbanCore states that they are exceeding 13 percent returns and Victor MacFarlane says "the return rate for an initial $50 million (of a total $3 billion) invested by the California Public Employees' Retirement System was 30 percent in 1996."

Still not convinced, here's another extract from the article:
Baldwin Hills-and other inner city successes like Harlem USA, and Gulfgate Center in Houston-are convincing a widening pool of players that investment in minority communities is a good bet. "It will increasingly become mainstream as retailers recognize that there are few other commercial real estate opportunities in this country of the magnitude these present," says Capri CEO and Chairman Quinton Primo, III.

So where are the big inner city players looking next? (I thought you'd never ask... :)
According to Retail Traffic, they are looking in Seattle, Phoenix, Tucson, Dallas, Denver, Fort Worth, Austin, Fort Lauderdale, Tampa, Miami and Jacksonville. While Pittsburgh, Philadelphia and Detroit are flat.

Analyzing Real Estate

by Clifford A. Hockley

Investing in real estate is a tricky business, and like the stock market, every investment will not be a great one. As a matter of fact, what makes a great real estate investment is keyed as much to timing and interest rates as it is to the true operating costs of a property.


I will grant you that every marketplace is different, and market conditions may force you into overpaying for a property you really want, but if return on investment is what you want, you cannot afford to overpay for real estate investments if you expect to retire on the income. Sure, there is a lot to be said for leverage and appreciation, but at the end of the day the cash flow is what counts.

So how does an investor assure himself that s/he is making the right decision and assembling an income and expense statement that is accurate?

1. Examine many similar properties at the same time.
It is helpful to examine similar pro formas at the same time. You will see what one owner or broker may include, and what another may leave out. Look at the market to see how long it is taking to find a new tenant. Talk to other real estate brokers, lenders and property managers in the market to establish a baseline.

2. Review operating numbers for the past three years.
Most financial analysis reports will exclude capital expenses. Bear in mind that you must reserve for capital expenses. The roof will leak, the HVAC will fail, and the main water line will break. I guarantee things will happen that you do not expect. Prepare financially for potential problems. Remember that real estate is an asset that wears out: doors need to be painted, carpets replaced, new faucets installed, etc. By reviewing three years of income and expenses, you will have a much better idea of vacancy rates as well as real expenses.

3. Obtain comparable rent income numbers.
Drive around the neighborhoods where your potential property is located. Call the brokers and the managers to find out what the rents are. Are there any concessions being given to rental units or lease space? Use this information to verify the figures you received for the property you wish to buy.

4. Examine the vacancy rate in the market place.
Each market and specific type of real estate investment has a vacancy rate. Some locations are better than others, and will perpetually have a higher occupancy rate. Look for concessions that have been offered. How will they affect your cash flow when you own the property? Why is your property full? Did the seller hastily rent to tenants from emergency aid shelters (yes, this has happened in weak markets). Banks will not loan on buildings with more than a 5% vacancy rate. They will, however, offer construction loans if you are renovating the building. This may give you some time to find tenants to fill a building, otherwise you will be forced to guarantee the rents, which means your hard-earned cash will not be at work making more money for you.

5. Talk to an appraiser regarding common incomes and expenses in the marketplace.
This seems like common sense, but no one seems to do it. The agent representing you is motivated to close a transaction. They may not be experienced, or may not provide all of the information you need. You need accurate information to make an informed decision.

6. Review the BOMA and IREM expense analysis books for the marketplace.
These books are updated every year and can give you an in depth look at how properties are operating.

7. Ask for schedule "E" tax return information for the property.
Many sellers will refuse to supply the schedule, but in my mind, the proof is in the pudding.
In my conservative opinion, cash flow is what the investor seeks. If your property has an 8% -10% positive cash flow after all of the adjustments discussed above, it should make sense. Many buyers also use CAP rates as an indicator of value; I find it to be a lagging indicator if you compare your property to others in the marketplace. Just because other investors are buying a 4% CAP property, does not mean you should. Maybe the market is overheated, perhaps there is more demand than supply, maybe you should look in a market with 8% - 11% CAP rates, or perhaps low interest rates give you the opportunity to buy something with a low CAP rate and still make money.

You should look at comparison indicators as you pursue your investment strategy:
CAP rate, cash-on-cash return, debt coverage ratios, price per unit (or price per square foot for comparable properties in the same marketplace), percentage of expenses (are they inline or understated). Don't forget to look at the financing and due diligence costs as part of your transaction.

All this analysis may mean that you will make lower offers than another investor. It may mean that you will not be willing to pay as much as a seller wants.
On the other hand, do you want to buy a property that will not appraise, or worse yet, not have a positive cash flow? I do not think so.

Top 10 RE Investor Financing Mistakes

Excerpt from: lassitermarketing

1. Quitting the Day Job Too Soon
Repeat after me: “Equity does not pay the bills.” I see it happen all the time. An investor gets a few rentals and decides to quit the day job to pursue investing full time. Big mistake. Don't quit the job until you have 12 months of living expenses saved up and/or monthly cash flow equal to what you were making at your day job.

2. Being Broke and Greedy
My mentor used to say, “You can't be broke AND greedy." In RE investor world it means that if you have no money to put into a deal you better be prepared to pay high rates or give up some equity to a partner.

3. Underestimating Holding Costs
If you're a flipper, in most areas today, your properties are taking a lot longer to move. Factor in ALL of your holding costs to the budget - loan payments, utilities, etc - so you don't lose all your profit.

4. Not Properly Setting Up Your Entity
If you list your occupation as real estate investor on a mortgage loan application, you are in for a tough road ahead with the underwriter. You may as well say you are a drug dealer. Same goes for naming your LLC. Try not to reference anything having to do with flipping or foreclosure help or anything like that. Stick to an easy name to deal with like Acme, LLC.

5. Paying Cash for a Property
Paying cash for a property is fine as long as you don't need the money back anytime soon. If you do, then you're trying to get an unseasoned cash out refinance and if you're lucky enough to find a lender to do the loan, you will pay through the nose for it.

6. Buying a Rental That Won't Cash Flow
WHY would you do that? Remember, equity does not pay the bills. This is the main reason why investors go broke.

7. Deeding the Property to an LLC Before It Is In Permanent Financing
Let's say you buy a property with private money and take title in your LLC. When you go to refinance it, the lender will either require you to deed it out of your LLC before closing or they will deny the loan outright. Risk mitigators are telling lenders that the loans that have the highest rate of default are usually in names of LLC's so many lenders won't touch them if they've EVER been titled in your LLC. Just take title in your name, get your financing set and THEN put it into your LLC for asset protection.

8. Using hard money That Doesn't Include Repairs
This is just dumb. Just use a 100% conventional loan at half the rate and ¼ the fees and have the seller pay closing costs since you're funding the repairs out of pocket anyway. Same goes for companies that will cross-collateralize equity in another property to fund repairs. Just get a HELOC yourself and pay ½ the interest rate.

9. Listing for Sale While In Short Term Financing
I have guys come to me all the time to try to refinance their short term hard money loan because the property they are flipping has not sold. Good luck. Why? Well, you have a vacant, unseasoned, rental property that has been listed on the MLS within the last 6 months. Even if we can get a lender to do the refinance you will have a prepay penalty that will make you cry.

10. Not Having Adequate Cash Reserves
You should not own a property and have no money in the bank or available credit on a line of credit. Something will come up and then you will be forced to make a bad decision. This is a business and every business needs cash reserves.