Picking Right Realty Investment as Hard as ABC : Strategies: With special terminology and abbreviations, things can get pretty confusing when deciding where to put your money.
Real estate investors are in a quandary.
What they want to know is: “Where can I put my money and earn a favorable return?”
Needless to say, there isn’t one answer. But, for those seeking a less direct way to invest in real estate than just buying a property, a wide range of real estate securities are being offered.
Making sense of these options is no easy task. Today’s choices include REITs, REMICs, CMOs, RELPs, annuities, real estate company stocks and mutual funds. Understanding these requires a knowledge of PIGs, PALs, PACs, TACs, IOs, POs, not to mention FNMAs, GNMAs, FHLMCs, Z bonds, Ltds., roll-ups and LIBOR.
It’s a very confusing alphabet--even for the experts.
Once you’ve figured out what all these strange terms really mean, there is still the task of analyzing investment returns.
Real estate securities generally have not done well. Five out of the seven available real estate mutual funds, for example, posted negative returns in the second quarter of 1990, ended June 30.
Real Estate Investment Trusts (REITs), Master Limited Partnerships (MLPs) and other miscellaneous real estate stocks fared even worse.
According to Cohen & Steers Capital Management of New York, buyers of these securities lost 7.3% of their investments in the second quarter of this year, for a total loss since January of 10.07%.
VMS Mortgage Investors topped the list of troubled MLPs with an investment loss of 72% for the year that ended March 31. Other MLPs and REITs sponsored by Chicago-based syndicator VMS Realty Partners posted similarly sorry results.
The performance of real estate securities wasn’t all bad, though. About half a dozen REITs are returning more than 20% a year to investors, and several MLPs are doing the same. They are, however, more the exception than the rule.
Mortgage securities, such as REMICs and CMOs are currently quite a bit safer than most REITs and MLPs, say industry analysts.
These instruments--including Federal National Mortgage Assn.n (FNMA), Government National Mortgage Assn. (GNMA) and Federal Home Loan Mortgage Corp. (FHLMC) securities--are backed by mostly first and some second mortgages. Along with private Real Estate Mortgage Investment Conduits (REMICs) and Collateralized Mortgage Obligations (CMOs), they form the backbone of what’s known as the secondary mortgage market.
Investors can choose from zero-coupon bonds that just accrue interest (Z bonds) or from Interest Only (IO) and/or Principal Only (PO) payment options.
These very specialized CMO forms are very complicated and should only be invested in by those who understand the difference between Planned Amortization Classes (PACs) and Targeted Amortization Classes (TACs). Suffice it to say that different CMO mortgage pools (or tranches) can make a difference in how quickly the investor gets back his/her principal. REITs have been around for 30 years. There are today 169 different REITs--116 of which are publicly traded. So-called equity REITs posted a -5.6% rate of return for the first six months of this year, according to the National Assn. of Real Estate Investment Trusts in Washington, D.C. Mortgage REIT returns for the same period averaged -9.97%. Industry assets totaled $41.7 billion.
Qualified REIT investments include real property, other REITs, real estate stocks, participating mortgages, REMICs, CMOs and real estate joint ventures. Several MLPs and limited partnerships (Ltds.) are rolling-up into REITs to take advantage of more favorable tax and reporting regulations and to shed the onerous term of syndicator often associated with publicly-traded MLPs and privately-placed Ltds. Collectively, MLPs and Ltds. are known as RELPs--Real Estate Limited Partnerships.
Many other syndicators have folded within the last several years because of poor management, soft real estate markets and good old-fashioned greed. These crumbling partnerships have created plenty of business for lawyers too, and numerous investors have had to settle for a return of pennies on their investment dollars as properties have lost their value.
Relatively new to the financial scene is the real estate annuity--offered by insurance companies. Some have dubbed these vehicles a mutant investment species akin to the Individual Retirement Account (IRA).
Annuity investors who withdraw before age 59 1/2 face taxes on earnings plus 10% penalty. Investors are advised to look only at diversified annuities rather than those investing only in one or two insurance company-related properties.
For a detailed primer on real estate securities, what options are currently on the market, and an analysis of their investment returns, send a $2.50 check and a postage-stamped, self-addressed envelope to Ron Galperin c/o Real Estate News Group, 1505 E. 17th St., Suite 211, Santa Ana 92701. Make checks payable to Real Estate News Group. Do not send cash.
DEVELOPMENT: Shopping Center for Foothill Ranch Foothill Ranch Co., an affiliate of Hon Development, is joint venturing with Newport Beach-based Pacific Development Group on a 12-acre shopping center. The $20-million project will total 110,000 square feet of retail space within south Orange County’s master-planned Foothill Ranch.
Recently, Foothill also announced a trio of joint ventures in the first phase of its complex of commercial/industrial business parks in the area--eventually expected to total about 8.5 million square feet. The JV partners are Davis Developments of Newport Beach and Burke Commercial Development and Watt Business Properties, both of Irvine.
Altair Investments of Santa Monica paid $14.86 million to Upland Industrial Co. of Ontario for a trio of recently completed industrial buildings totaling 480,345 square feet in the 500-acre Vintage Industrial Park of Ontario.
Coldwell Banker Commercial Real Estate Services represented the seller, while Grubb & Ellis represented the buyer.
City Freeholds (USA) Inc. has completed a $35-million makeover at Sherman Oaks Fashion Square. After two years of construction work, the 28-year-old center has been enclosed and a second story has been added. Nearly 100 new stores are also set to open--connecting longtime anchors Bullock’s, I. Magnin and The Broadway.
Sydney, Australia-based City Freeholds bought the property in 1985. The company completed a similar expansion and enclosure at the Buena Park Mall in Orange County.
Also receiving a major face lift is the Shrine Civic Auditorium. An $11.5-million improvement plan includes mostly completed interior upgrades and a new multilevel parking garage slated for completion next June. In addition to its 6,300-seat theater, the Shrine houses the 54,000-square-foot Exposition Center, used for a variety of large functions and conventions.
SALES: Japanese Firm Buys Pasadena Building Tohshin International Corp. has purchased the 200 South Los Robles office building in Pasadena for $33 million from Santa Anita Realty Enterprises Inc. of Newport Beach and Halferty Development Co. of Pasadena.
The 124,000-square-foot building was completed in 1988 and is about 65% leased. Cushman & Wakefield of California represented both the buyer and sellers in the deal.
Tokyo-based Tohshin is a diversified investment company with local holdings that include two San Fernando Valley office buildings and one in downtown Los Angeles.
LEASES: Office Firm Moves to Rancho Dominguez Copierland/Cut Rate Office Furniture Inc. plans to occupy 195,000 square feet of industrial space as part of a 20-year, $23-million lease at Rancho Dominguez. Grubb & Ellis Commercial Real Estate Services represented both the lessee and owners, the Ratkovich Co. and Copley Real Estate Advisors.
The County of Los Angeles signed a $11.8-million lease for 16,000 square feet of office space at 3000 S. Robertson Blvd. in West Los Angeles. The space is being occupied by a variety of departments, including the District Attorney’s office and Municipal Court.
The 105,000-square-foot building is just under 50% leased, but new owner Goshen Rose Associates hopes to boost occupancy in the coming months. The building has been empty for the most part since being built several years ago. Coast Savings then took the building back from its owner/borrower and sold to Hong Kong-based Goshen.
Grubb & Ellis Co. represented the lessee, while Thind Commercial Brokerage of West Los Angeles represented the owner/lessor.
Consulting firm Putnam, Hayes & Bartlett Inc. has leased the entire 59th and 60th floors at First Interstate World Center in downtown Los Angeles. The 10-year lease is worth about $13 million and covers 33,600 square feet. Developer Maguire Thomas Partners-Library Square Ltd. represented itself in lease negotiations, while the tenant was handled by Julien J. Studley Inc.
Eisaman, Johns & Law Advertising Inc. is moving from Sunset Boulevard to 44,000 square feet of office space in the Wilshire Courtyard along the Miracle Mile. The tenant, represented by the Seeley Co., will pay $12.5 million over 10 years for space on the sixth floor at 5700 Wilshire Blvd.
The space is but part of 280,000 square feet of interior being offered for sublease by Coldwell Banker Commercial as representative for CalFed Inc., which committed itself several years ago for more than it could handle.
Meanwhile, developer Jerry Snyder has basically sold his interest in the 1-million-square-foot project to La Salle Partners through a convertible loan that allows the lender to turn buyer within a few years.
Proceeds from the loan/sale are being used by Snyder to finance his purchase and rehabilitation of CalFed’s former headquarters tower next door to the Courtyard. The building is expected to reopen next year and Snyder is busy attracting more tenants to the area.
One lease often leads to another. Law firm White & Case--which signed a $60-million lease for space it now occupies at First Interstate World Center--left behind 25,500 square feet at the Security Pacific National Bank building. That space has now been subleased for 12 years at $10 million to law firm Sheppard, Mullin, Richter & Hampton.
REAL ESTATE MUTUAL FUND SCOREBOARD
Fund Assets Total Reinvested Performance (%) (in millions 12 months ending Second Quarter ’90 of dollars) June 30, 1990 Evergreen Global RE $7.4 9.53 4.08 Templeton RE Trust 10.3 * 4.36 Fidelity RE 48.7 0.43 -0.21 National RE Stock 20.9 -9.32 -4.08 United Services RE 6.1 -12.61 -0.71 National RE Income 11.1 -17.64 -4.49 RE Securities (+) 19.1 -16.59 -4.78
+ closed-end fund
* Templeton RE Trust began operating in the fourth quarter of ’89.
Note: These 7 funds represent the total number of mutual funds invested primarily in real estate.
SOURCE: Lipper Analytical Services Inc., Summit, N.J.
