Vol. 11, Number 3 page 1
Currently Available Properties
We believe that investors who are considering making commitments in the United States real estate market today will find that real estate is relatively attractive compared to other asset classes. Most conservative, high quality properties can be acquired today to provide going-in yields of 8% to 9%. In addition, those investors who plan to leverage their investments will benefit from the fact that mortgage rates are at very attractive levels. A fixed-rate mortgage on an interest-only basis and with a five-year maturity could be obtained for many properties at an interest cost of about 6.5% to 6.75%. This would lead to returns in the 9% to 10% range on the investor’s equity with a high degree of safety.
In our view, many attractive properties are now available for purchase, and we will describe some of those properties below. The following are some of the properties that we are currently considering for our clients:
a. Headquarters Building—Phoenix, Arizona
b. Landmark Retail Property—Los Angeles, California
c. A+ Tenant—St. Louis, Missouri
d. Newly Constructed Office, AAA Tenant—Miami, Florida
e. Single-tenant Property—Suburban San Francisco, CA.
Headquarters Building — Phoenix, Arizona
This property is an attractive, suburban office building that is 100% leased to the largest private company in Arizona. The building is now under construction in Scottsdale and the tenant has signed a 22-year bondable net lease that will commence upon completion of construction. There are 10% rent increases every five years during the term of the lease. The base rent is absolutely net to the landlord since the tenant is responsible for all operating expenses, real estate taxes, and insurance, as well as maintenance of the roof, structure and parking area. The projected going-in capitalization rate is 8.5%, and we estimate that the net cash yield, after debt service, will be close to 10% for the initial five-year holding period.
We anticipate that this property can be bought at a price of $28,000,000, and that a $19,500,000 mortgage will be obtained. This will leave an equity requirement of $9,400,000, including estimated closing costs and fees. We anticipate an internal rate of return of approximately 12% for a five-year holding period.
Landmark Retail Property, Los Angeles, California
This property is located within a very desirable west-side residential neighborhood in Los Angeles, California, and is 100% occupied on long-term leases by four high quality tenants. Each of the four investment-grade tenants has signed a lease maturing in 15 to 25 years. All four leases provide for rental increases of from 10% to 15% every five years. This property offers a very advantageous combination of being newly renovated, in an attractive urban in-fill location and having an investment grade rent-roll. Tenants reimburse the landlord for almost 100% of all operating expenses.
We believe that this property can be purchased at a price of close to $70 million, equal to a 7.8% going-in capitalization rate. We estimate that a mortgage equal to 70% of the purchase price, or $49 million, can be obtained on an interest-only basis at an interest cost of approximately 6.75%. As a result, the equity requirement for this purchase would be about $23.5 million including fees, closing costs and pro-rations. The yield on equity is projected to grow from 8.2% in Year 1 to 11% in Year 5. In addition, we estimate that the Internal Rate of Return for a five-year holding period will be approximately 12%.
A+ Tenant, St. Louis, Missouri
This property was completed in September 2001 for Electronic Data Systems (EDS) which is rated A+ by Standard & Poor’s. EDS has signed a 10-year net lease that commenced on September 15, 2001. There is a 15% rent increase at the beginning of the sixth year. EDS is responsible for all operating expenses, real estate taxes and insurance. The 123,000 square-foot (11,400 square meter), three-story office building is situated on an 8.7-acre site.
The property is located in St. Louis, which is at the virtual center of the United States and has a metropolitan area population of 2.6 million people. The property has an existing $14,375,000 mortgage loan with Bank of America maturing on December 1, 2011. The annual fixed interest rate is 7.1% with amortization according to a 30-year amortization schedule. The loan is assumable but not pre-payable. The seller agrees to pay the lender’s assumption fee for the loan.
We anticipate that this property can be acquired at a price of $20.2 million, equal to a going-in capitalization rate of 8.7%. Taking into consideration the existing financing, as well as all closing costs and fees, we estimate that the amount of equity required to close the transaction would be $6.3 million. The yield on equity in Year 1 would be 8.5% after allowing for debt service, including principal amortization on the mortgage.
Newly Constructed Office, AAA Tenant, Miami, Florida
This is an 80,000 square foot, three-story office building that is now under construction in Miami, Florida. The building is expected to be completed and occupied by the tenant early in 2003. The property will be 100% occupied by a division of the U.S. Government. Currently, a ten-year lease has been executed between the Government and the developer, but negotiations are continuing as to the possibility of extending the lease to fifteen-years.
This property is located in a Class A business park comprising 900 acres of commercially zoned land. This business park is situated north-west of the Miami International Airport, and immediately adjacent to the Florida Turnpike. Because of its desirable location, other major office users such as Caterpillar Tractor, Ryder Systems and Union Planters Bank have located in this park.
Based upon the current ten-year lease, the net operating income in Year 1 would be approximately $1,636,800. We estimate that this property would trade at a price of $20.5 million, representing an 8% capitalization rate on the first year’s income. Based upon an anticipated mortgage of 70% of the purchase price, or $14 million, the equity requirement for this purchase would be about $7.4 million. This would include all fees, closing costs and pro-rations. We project that we could obtain an interest-only mortgage with an interest rate of 7%, and the resulting cash-on-cash yield on the equity investment would be 8.8%.
Single-tenant Property, Suburban San Francisco, California
This property is a high-quality, single-story office/research and development building located in the very desirable San Francisco Bay area suburb of Dublin, California, in Alameda County. The building, completed in 1998, consists of approximately 201,620 square feet (18,738 square meters) of net rentable area. Alameda County is one of the nine counties comprising the metropolitan San Francisco Bay area. It lies to the east of San Francisco Bay and is the fifth most populated county in California. There is an increasing number of tenants that have been relocating here from areas such as San Jose’s Silicon Valley because of much lower rents in Alameda County, more room for expansion and a well educated work force.
The tenant signed a new 20-year lease for the entire building three years ago, and there are now 17 years remaining. The lease is guaranteed by the tenant’s overseas parent, which is a very high quality company, and the rent increases by 13% at regular intervals throughout the term of the lease. This is an absolute, triple-net lease, in which the tenant will be responsible for all operating expenses, including utilities, common area maintenance, real estate taxes, property insurance (including earthquake insurance) and the repairs and maintenance of the roof and building.
We estimate that this property can be bought at a price of $36 million, representing a going-in capitalization rate of 8.2%. We anticipate being able to obtain a seven-year, first mortgage of $25.2 million on an interest-only basis at an interest rate of 6.75%. This would lead to a cash-on-cash yield of 9.5% during the first seven years of ownership. The equity requirement for this purchase would be just over $12 million.
Conclusion:
In periods of uncertainty, such as the present, it is frequently difficult for investors to find a way to invest their money that will provide both a high degree of security as well as an attractive current return. The U.S. stock market continues to suffer from the over-valuation of the 1990’s as well as a dramatic loss of confidence in corporate earnings reports. At the same time, yields in the bond markets have dropped to very unattractive levels. Taking into consideration the present situation in the U.S. real estate market, and the relative returns available from this type of investment, we conclude that U.S. real estate should be the asset of choice for most discriminating investors today.