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Shopping Centers Today -> February 2004
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HIGH CENTER PRICES LEAD INVESTORS TO BUILD INSTEAD
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| Click image to view charts (900k PDF). |
Ackman-Ziff Chazen Realty Advisors, of Boston, is working with two institutional investors that have new programs to provide equity for shopping center development. And Commercial Net Lease Realty, an Orlando, Fla.-based REIT, claims a significant pickup in business through a joint venture development program.
There are clear advantages to getting in on a deal early. It can help REITs maintain a full development pipeline, and investors are able to get around the current price premium on existing properties.
There have always been specialized early-bird investors in shopping center development, but “now what we’re seeing is that individuals who have made money in other areas are approaching the private sector [of retail property developers],” notes Michael Pollack, president of Mesa, Ariz.-based Pollack Enterprises. Even as early as the preconstruction stage, investors are looking for seasoned, well-respected developers who can increase the value of their principle, he explains.
Ackman-Ziff is an intermediary, representing developers needing joint venture partners and their money. Institutional investors lay out the capital for predevelopment, which is typically between $1 million and $3 million, says Ed Chazen, president of Ackman-Ziff. Once a project goes forward, the investor provides 100 percent of the construction costs, usually somewhere between $15 million and $75 million, says Chazen.
Rather than using an intermediary like Ackman-Ziff, Commercial Net Lease seeks its own early-bird investment opportunities. The firm has been doing many more seed-money deals over the past year, says Peter Goffstein, vice president of business development. Those deals are part of the firm’s joint venture development program, which saw business grow from $38 million approved for development projects in 2001 to $52 million for 2003 (at press time), Goffstein says. The firm did not provide a more specific breakdown of the deals.
“We get involved when there is more risk, when the developer is either working through entitlements or tenant commitments,” said Goffstein whose company has increased the lead time to as long as 24 months before construction begins.
Goffstein attributes his firm’s increased business to the fact that more retail property developers are now discovering the program, which offers nonrecourse lending. But he stops short of calling seed-money financing a major trend.
In any case, there are also risks that could keep early-bird investors at bay, notes David Schwartz, president of Olympic Realty & Development Corp., a New York City-based retail developer. Construction permits, zoning approvals and even tenant commitments can fall through. And many communities are becoming increasingly litigious against new development; they may challenge a project in court simply to wear down the developer’s resolve, says Schwartz. But there is forward motion on the early-investor front regardless.
Increasingly, investors who want to come in on a project only after the seed-money stage may find themselves frozen out, it seems.
“There are not a lot of day-one investors, but more are emerging,” said Schwartz. “That [potentially] makes it even more difficult for players who want to step in late in the game.”
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