mcarristo

If the city’s Downtown Albuquerque plans coalesce as hoped, could the real and perceived barriers between the corridor and East Downtown melt away?

Last week, the city announced a slew of plans to revitalize Downtown. Those plans include an attempt to harness the momentum and opportunity already taking place with its EDo neighbors.

All the activity would have big implications for the city’s commercial real estate industry.

Perhaps the biggest opportunity for the city are the plans to transform the old First Baptist Church site at Central Avenue and Broadway Boulevard, which has sat vacant for years. Through a city partnership with UNM and others, the property is set to be purchased so that plans for Innovate ABQ can begin.

Innovate ABQ involves a lot of public-private entities, and its goal is to develop an Innovation District to spur new jobs and economic development. The site is across the railroad tracks, which puts it in the EDo corridor.

If the city can secure a $15 million TIGER (Transportation Investment Generating Economic Recovery) grant, with matching funds, to bring the adjacent pedestrian underpasses at 1st and Central Avenue above ground, it would create a connection point not only for Innovate ABQ, but the Alvarado Transportation Center, Albuquerque Convention Center, and points west to Civic Plaza, which connects with the 4th Street Mall at the core of Route 66 at Central and 4th.

A 4th Street Mall reconstruction is moving forward, too. The project is waiting for final construction-bid approvals, and city officials hope work will begin this summer.

In addition, a plot of city-owned land that was long a parking lot, at the northeast corner of 1st and Central, will soon see bids go out for what the city hopes is a future Entertainment District — another public-private partnership.

That would serve as a further connection and draw between the points between EDo and Downtown.
EDo has a lot going for it already. It has some of the city’s most popular restaurants, such as Farina Pizzeria, Holy Cow, the Artichoke Cafe and Standard Diner, to name a few. Furthermore, it has one of the city’s most unique boutique hotels in Hotel Parq Central, which has one of the best views of the city from the patio of its Apothecary Lounge.
Successful redevelopment has already taken place at the old Albuquerque High School, where lofts are at near capacity and some retail has sprouted. Stuart Rose, the founder of The BioScience Center, is opening his Fat Pipe technology incubator there. There are other amenities that has made EDo one of the more walkable neighborhoods in the city, with salons, barbershops, yoga studios and boutique retailers.
By: Damon Scott (Albuquerque Business First)
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Much has recently been made of the notion that the Chinese economy has enough serious structural problems that chances are good it will experience a “hard landing,” defined as economic growth quickly slowing from 7.5% today to the low single digits. This slowdown would weaken commodity prices, hurting developing nations, and reduce Chinese imports of high-quality finished goods from developed nations, also hurting the US, Europe and Japan. While the Chinese economy has problems, many are chronic and I believe the government has sufficient resources to manage the acute ones and avoid a hard landing.
The key problems the Chinese economy suffers from are threefold; a profound overreliance on large trade surpluses, massive government overinvestment in infrastructure and a weak financial system that has resulted in both bad loans made by irresponsible local and regional governments and a highly leveraged and lightly regulated shadow banking system (sound familiar?) that may well implode.
The first problem is fading away. After running trade surpluses in the $45 billion/year range through 2003, they skyrocketed to $400 billion/year by the end of 2008. However, that highpoint coincided with the Great Recession which resulted in a huge contraction in trade and simultaneously an effort by many nations to boost exports to help their domestic economies.  As a result, Chinese trade surpluses have averaged about $300 billion/year (about two-thirds of that with the US) since early 2009 and show no discernable upward trend. Moreover, as the Chinese economy is about twice as big today as it was in 2005, the economic impact of the now smaller trade surpluses on the overall economy is much smaller.
The second problem of roads to nowhere, massive over building of plant leading to ruinous excess capacity along with the construction of uninhabited ghost towns is being rectified. And rectified they can be, because these destructive outcomes are the direct result of policies pursued by the central government that are now being overhauled. GDP growth targets are being reduced, artificially low interest rates earned by savers are likely to rise in the near future and the currency, which has been profoundly undervalued, is slowly appreciating. Collectively these policies will curb wasteful overinvestment and slowly replace it with increased domestic consumption and reduced exports.
As for the substantial dodgy debt on the books of local and regional governments and shadow banks due to weakening housing prices and raw land values that act as collateral for many loans, here the problem is serious. That said China’s debt is about 25% of GDP, giving the central government ample room to borrow should it be necessary. Moreover, the central government is beginning to force local and regional governments to sell some of the $7 trillion in assets they own in an effort to shore up their financial condition.
Moreover, with $4 trillion in foreign reserves and the ability to weaken the Chinese currency at will to boost exports, China has tools other nations don’t have. Lastly, expect Beijing to re-stimulate sagging housing markets by relaxing home-purchase requirements, and local governments to augment this policy by giving residency benefits to out-of-towners to further boost demand. Combining the above with looser monetary policy makes me think that those making key policy decisions, the brightest minds in the nation, will see to it that China comes through this relatively unscathed.
By: Elliot Eisenberg, Ph.D. (GraphsandLaughs, LLC)
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Section 1031 exchanges are for deferral of state and federal taxes on sale of commercial real estate investment or business real estate. Check out this video and get a terrific, concise backgrounder on the history and concepts of 1031 exchanges from tax attorney Louis Rogers, CEO of Capital Square Holdings, who actually brings along his original 1984 research notebooks on the topic.  Great stuff!

While I do take issue with the idea presented that taxes are “gone forever” once paid — find me the commercial property that doesn’t benefit from its access to publicly financed infrastructure, after all — Mr. Rogers is a compelling presenter with a plain command of this topic and this clip is absolutely worth a look.

By: Wayne Grohl (The Source)
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Fitness centers, education facilities and specialty medical buildings that emerged as alternative net lease assets a few years ago are showing up in more property portfolios as investors hunt for yield in an increasingly crowded conventional net lease market.
Investors may not consider the properties part of the net lease mainstream yet, but the growing momentum suggests that perceptions could soon change: Non-traditional assets are starting to trade with more frequency and, subsequently, capitalization rates have started to compress, say net lease experts.
“Investors are moving away from the meat and potatoes: dollar stores, restaurants, auto parts stores and drugstores,” says Randy Blankstein, president of Northbrook, Ill.–based net lease brokerage Boulder Group. “That’s what happens when the meat and potatoes get thin, as they are now.”
Investors willing to take a bet on gyms, pre-schools, charter schools, medical facilities or other off-the-beaten-path net lease properties over the past few years have acquired properties with cap rates as high as 8.5 percent to 9.5 percent, say experts.
Increasing demand recently knocked those cap rates down 100 basis points or so for some alternative net-lease properties, but the yields are still more attractive when compared with retail net-lease properties. Single-tenant retail properties commanded an average 6.75 percent capitalization rate in the first quarter of 2014, a drop of 10 percentage points from the fourth quarter last year, according to a Boulder Group report.
That was the case even as the supply of net lease properties increased by 17 percent in the first quarter as owners of lesser buildings hoped to cash in on the lack of supply in the market, according to New York–based real estate researcher Real Capital Analytics. Net lease sales volume totaled $44 billion in 2013.
Conventional net lease buyers have had few qualms about aggressive pricing, with many drugstore deals trading at a capitalization rate of around 5 percent in the first quarter. In January, Blankstein represented Shamburg, Ill. –based Crossroads Development Partners in the sale of a Chicago Walgreens to a Massachusetts–based 1031 exchange buyer. The $13 million price tag reflected a capitalization rate of below 4.9 percent.
By comparison, Scottsdale, Ariz.–based Store Capital, a private real estate investment trust (REIT) that focuses on sale-leaseback transactions, recently acquired Wright Career College in Overland Park, Kan., for $13.1 million, according to Christopher Volk, CEO and founder of the three-year-old firm. While he declined to disclose the cap rate, he acknowledged that it was north of the 7.5 percent listed in marketing materials and typical of the cap rates associated with such properties.
Additionally, the Boulder Group first quarter review reported that an LA Fitness in Little Rock, Ark., traded for $11.9 million at a capitalization rate exceeding 7 percent in February.
“Alternative net-lease investments are very attractive right now, and it’s a strictly a yield play,” says Mac McCall, regional managing partner in the Atlanta office of real estate brokerage Franklin Street. “It has propelled the growth of transaction volume in that sector and away from your traditional single tenant retail deal.”
Increasing comfort level
Buying non-traditional net lease properties provides benefits beyond yield. Schools, gyms and medical facilities diversify portfolios and provide growth opportunities given that most operators are expanding, Blankstein says. More importantly, alternatives don’t face the same ecommerce threats that have diminished bookstores, office supply stores, electronics stores and other sellers of commoditized goods, he adds.
“I think people are trying to find investments that are less impacted by the Internet,” Blankstein says. “They still have that experience with box stores disappearing or developing smaller footprints fresh in their minds.”
Yet alternative net lease assets also come with risks. Charter schools, for example, may face challenges from teachers’ unions and political leaders, as illustrated by New York Mayor Bill de Blasio’s recent attempts to scale back the concept.
More broadly, the most significant challenge centers on the specialized character of alternative net lease properties—typically they’re designed for a specific niche. So finding a user could be tough if the existing tenant should go out of business or choose not to renew a lease, experts say.
“If you lose a fitness user, it’s going to be very hard to put another tenant in that space,” says Bradley Feller, a director with Tulsa, Okla.–based net-lease brokerage Stan Johnson Co. “Maybe you can convert it to offices, but you’re going to struggle. It’s the same with a school; there is a limited universe of users that are going to be able to backfill it.”
Unlike buying a stand-alone drugstore or fast food restaurant—when an investor’s due diligence would include an analysis of the location, demographics, tenant’s credit scores and nearby competition—purchasing an alternative net lease property requires a deeper understanding of the user’s industry and business model, adds Feller, who is in Stan Johnson’s Chicago office.
What’s more, users of non-traditional net lease properties typically do not have an investment grade credit rating, Feller and other observers say.
In the past, those risks kept many individuals and smaller investors on the sidelines. But the potential higher returns combined with track records and growing brand awareness among KinderCare, La Petite Academy, LA Fitness, Life Time Fitness and other operators have alleviated misgivings about investing in the assets, observers say.
“A lot of investors thought re-tenanting a more specialized property would be more intensive or complicated than a plain old vanilla deal for a drugstore,” Blankstein says. “That resistance has just disappeared.”
Medical moves
The same is true for medical facilities. Large investors that specialized in medical office buildings historically have been the primary buyers of the product. But with the relatively new advent of stand-alone assets that house single-purpose operators such as dental groups or oncology, outpatient surgery and dialysis providers, smaller net lease investors are pursuing deals.
Aging baby boomers and the growing practice of shifting health care delivery to satellite locations all but ensures that the asset base will expand, experts say.
“Medical uses are moving to a lot of retail-type locations, which essentially makes them retail deals,” McCall says. “It’s definitely a trend we’ve seen over the last few years.”
In February, McCall represented the owner of a 3,200-sq.-ft. Aspen Dental building in suburban Atlanta in a $1.5 million sale to a 1031 exchange buyer. The transaction featured a 10-year double net-lease, in which the tenant pays for taxes and insurance but not maintenance, and a 10 percent rent hike every five years.
However, the controversial rollout of Obamacare last year, along with the litany of unknowns surrounding its ultimate implementation, at best cloud the clarity of health care delivery going forward.
State laws also could have a bearing on the industry and an investor’s willingness to buy: Some states limit the number of medical facilities while others do not, points out Volk of Store Capital, which has amassed a roughly $2 billion portfolio of restaurants, education buildings, health clubs, medical facilities and other properties.
“If there’s one place where there is going to be a lot of change, it’s going to be in the delivery of health care,” Volk says. “So if you’re an investor in health care real estate, you have to have conviction as to what that business will do over the next several years.”
Learning curve
Investing in medical facilities may not pose as dicey a proposition as buying charter schools. Not only do charter school owners face potential political risks that could result in revoked charters, but in some cases they also must deal with lease terms as short as three years and hope that renewals occur, says Volk, whose firm to date has not acquired a charter school.
“I think, in general charter, schools are viewed as doing a good job versus not doing a good job,” he adds. “But it’s still an experiment being flushed out.”
The risks vary from state to state. But for those reasons, a small number of large investors like Kansas City, Mo.-based REIT Entertainment Properties Trust (EPT), which owns movie theaters, recreation real estate and education facilities, have been the primary players in the charter school arena. It’s a niche that continues to grow, however.
Entertainment Properties officials couldn’t be reached. But according to the comments of executives at the company’s most recent earnings call, charter school enrollment increased 13 percent to about 2.5 million students nationwide in 2013, and the number of schools grew by 7 percent to 6,500.
The company’s $538 million education portfolio includes 55 charter schools as well as a pre-school and a handful of private schools under construction, segments it recently added to its strategy. Including build-to-suit projects, Entertainment Properties invested $155 million in education assets in 2013, nearly double the amount in 2012. During the conference call, executives noted that build-to-suit education projects would reflect a cap rate of around 9 percent when completed.
Recently, net lease investments in for-profit post-secondary schools have also become susceptible to political risk, as the Obama Administration, federal lawmakers and some states have accused the industry of deceptive marketing practices. Regulators, state attorneys general and others have sued some colleges for allegedly pressuring students to take out high-interest loans, among other claims.
Store Capital has invested in a number of for-profit colleges, including South University in Columbia, S.C., and the Art Institute of Colorado in Denver, Volk says. In 2012, it acquired five Corinthian Colleges (COCO) campuses in Northern California in a $40 million sale-leaseback.
Volk acknowledges that the industry is under siege and that investing in it carries “headline risk.” But he maintains that demand from students looking for a career fast track and the availability of student loan funding ensure that the concept will continue to exist for the foreseeable future.
“Any college, whether for-profit or nonprofit, is going to rely heavily on student loan funding, and I expect that student loan funding will be around forever since its one of the only ways for people to go to college or get trained,” he said. “And you need trained people if you want to grow the economy.”
By: Joe Gose (NUWire Investor)
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