Wednesday, September 19, 2018

Ownership shuffle in Conshohocken as 2 office buildings sell

Natalie Kostelni Reporter Philadelphia Business Journal

Conshohocken is on the verge of seeing several large office buildings trade hands, shaking up the ownership of a little more than a million square feet of space in the submarket.

Equus Capital Partners of Newtown Square is buying Five Tower Bridge, an 8-story, 223,736-square-foot office building at 300 Barr Harbor Drive, according to sources close to the deal. The building is being sold by MIM-Hayden Real Estate Fund I, which is a partnership comprised of Hayden Real Estate Investments and Miller Investment Management that bought the building at the end of 2011 for around $70 million.

The Five Tower property also includes an adjacent developable site that could accommodate a new 220,782-square-foot office building that would front the Schuylkill River.

In another pending deal, American Real Estate Partners of Herndon, Va., is nearing an acquisition of Eight Tower Bridge, a 16-story, 345,000-square-foot building at 161 Washington St., according to a person with knowledge of this transaction. This would be the second office acquisition for American Real Estate in the region. The company bought 1600 Market St. in Center City earlier this year.

Full story:

Federal Opportunity Zones - New Tax Provisions Open Gates to $250 Billion in Property Investments

One of the least publicized provisions of the federal Tax Cuts and Jobs Act signed into law last December will be getting a lot more attention in coming weeks. The provision has the potential to stimulate a new round of investment in commercial real estate, mostly in struggling urban, suburban, and rural communities across the United States.

A provision of the law offers tax benefits to investments in so-called Opportunity Zones, economically distressed communities defined by state and federal officials. The Department of Treasury this summer officially designated more than 8,760 such zones eligible for the benefits based on recommendations from each state.

The flow of money coming into deals in those areas could be staggering. In its analysis of the tax law, the U.S. Joint Committee on Taxation implied $86 billion of investments in qualified opportunity zones. Real estate investors organizing funds to take advantage of the tax benefits estimate the total could hit $250 billion.

What's more, to take full advantage of the tax benefits that money would have to be deployed by the end of next year. That is a short time window to invest such hefty amounts. The window is growing ever tighter by the day, too, because the Internal Revenue Service and Office of Management & Budget have yet to issue final guidelines to investors for how the program will work.

"This is going to be a big part of my business over the next two years," said Rick Barnes, principal of Massachusetts-based CIC Realty.

The brokerage firm is seeking to list $200 million in qualifying properties to market to its national database of investors and fund managers. In the 138 zones in Massachusetts, Barnes said the most likely properties to benefit would be investment-ready opportunities in zones along Massachusetts' transit-oriented corridors going into Boston.

"For investors, this is a unique opportunity to capture a generous break on capital gains taxes, while investing in real estate that stands to benefit from a broader government mandate for growth," Barnes said.

The provision also stands to benefit under-served and oft-overlooked investment markets across the country.

"More sophisticated money is sorely needed in rural areas," said Robert Dunn, an industrial broker with The Stump Corp. in North Carolina. "In a rural market there is a finite amount of money available, and it tends to be controlling, not risk taking. The concept of sophisticated money seeking deals in opportunity zones has the potential of doing significant good in otherwise ignored places."

Barnes and Dunn are not alone in their instincts that the provision could be a game changer. Brokers across the country at the very least are revising listings to tag properties included in opportunity zones. Many are basing their entire pitch around the opportunity.

Opportunity zones are designed to spur economic development by allowing investors to defer tax on any prior gains through 2026, so long as the gain is reinvested in a "Qualified Opportunity Fund." In addition, if the investor holds the investment in an opportunity fund for at least 10 years, there would be no tax on any new gain from the investment in the opportunity fund.

States are starting to tack on additional incentives. Legislation proposed in Ohio would provide a 10 percent state tax credit on investments greater than $250,000 in qualified Ohio opportunity funds. In fact, a third of U.S. states are actively considering opportunity zone incentives.

[ Click here for details on the opportunity zone program. ]

Such tax benefit incentives have investment fund managers and equity funds poring through their pipeline of certified deals searching for properties in opportunity zones suitable for new opportunity funds, said James Hanson, president and chief executive of New Jersey-based Hampshire Real Estate Cos. Hanson oversees the operation and investment activities of the Hampshire companies and its funds. The firm is actively exploring the creation of qualified opportunity funds.

Under the law, funds could be set up as single-purpose entities or general funds to invest in several properties in several markets.

Hanson estimates Hampshire currently has a pipeline of potential of eligible deals with an all-in cost of about $250 million.

The deferral of a 15 percent capital tax is welcome, even better though, is the fact that there would be no tax on the new gain, Hanson said. However, the catch is that the deal has to make sense regardless of the tax benefit. History is littered with failed property deals undertaken primarily for a tax break, he said. If history repeats itself, the same could happen again in some of the deals that arising from the new opportunity.

Virtua Partners, a private-equity real estate investment firm based in Phoenix, was one of the first out of the gate this summer with a fund that seeks to take advantage of the newly created program. The investment firm is seeking to raise $200 million from investors.

"The first deals to get done will be those with the lowest risk, highest returns," said Derek Uldricks, president of Virtua Capital Management. "You don't make an investment just for the tax benefit. You have got to like the deal."

Virtua Partners is also one of the first out of the gate to undertake an opportunity zone fund project. It has completed a rezoning in Tempe, Arizona, for a 90-unit apartment project. Tempe City Council unanimously approved the 3.6-acre rezoning for multifamily development. The 16-month construction of the 90-unit apartment complex is scheduled to break ground in the first quarter of 2019.

That time frame also fits into another aspect of the tax law provision. As enacted, the law specifies the investment be used for a new development or, in the case of an existing property, the asset must be "substantially improved" within any 30-month period following acquisition of the property. To be treated as "substantially improved," the additions or improvements to the property must be equal to or greater than the acquisition cost.

The "substantially improved" provision is one of the many parts of the provision that have yet to be clearly defined. Unknowns of the program have firms such as Hampshire, Virtua and others still approaching the starting gate in what could be a sprint to the 2019 finish line. It also is currently holding back investors from signing over their money to such funds.

So while the first opportunity zone deals are starting to show up, the bulk of the flow will probably come in a surge starting late this year and peak throughout next year. If the estimates of how much money could be pumped into opportunity zones hold true, it would amount to anywhere from 16 percent to 46 percent more in commercial property sales than the $542 billion spent in 2017.

[Editor's Note: This the first of five parts on new Opportunity Zone tax benefits designed to boost investment in economically distressed communities. 
Part I, Investment Overview 
Part II, Potential Roadblocks 
Part III, Emerging Projects 
Part IV, Unintended Consequences 
Part V, A Successful Effort -- So Far]

Tuesday, September 18, 2018

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Foreign Investor Closes On Its Biggest U.S. Industrial Deal to Date Including Philadelphia Area

A Bahrain-based global investor with $22 billion in assets closed on its biggest U.S. industrial portfolio yet, giving the firm another 4.5 million square feet spanning 56 properties throughout seven major markets including Chicago and Dallas.

Investcorp, which now owns 14 million square feet of U.S. industrial properties, has been gobbling up industrial portfolios here, with this latest $300 million deal marking the ninth such acquisition in the last 36 months.

The purchase is a sign U.S. industrial properties have become the darling of the global investment world, with demand increasing for e-commerce facilities, warehouses and distribution hubs that deliver stable returns. Historically, overseas investors were lured by the U.S. office and hospitality markets.

Foreign investment in U.S. industrial real estate has already hit $6.6 billion in the first five months of 2018, surpassing the $5.8 billion spent for the entire year in 2017, according to Avison Young's 2018 Mid-Year Foreign Investment Spotlight report. Brokers say there is a significant amount of overseas capital on the sidelines seeking high-quality real estate, which is getting harder to find.

The Investcorp deal is the largest U.S. warehouse portfolio acquisition since the inception of the business, said Mohammed Alardhi, an executive chairman of Investcorp who is helping to oversee the firm's expansion in industrial real estate.

"This investment further reflects our commitment to growing Investcorp's footprint in the United States, which is a key driver of the firm's overall growth strategy and an area in which we will look to continue expanding as opportunities arise," Alardhi said in announcing the acquisition.

At the time of the deal, the portfolio of Class A and B warehouse, light manufacturing and flex properties was 90 percent leased to companies in the e-commerce, food services, wholesaling and manufacturing industries. The property addresses were not immediately disclosed, but the portfolio includes the following:

  • 16 multi-tenant Class B industrial building in the Dallas area.
  • 14 single- and multi-tenant Class B industrial buildings in Chicago.
  • Nine multi-tenant Class A and B warehouses in Minneapolis.
  • Nine multi-tenant Class A and B industrial buildings in the Philadelphia/Delaware area.
  • Five multi-tenant Class A and Class B industrial warehouse/manufacturing buildings in Phoenix.
  • Two multi-tenant Class B industrial buildings in Houston.
  • One multi-tenant Class B warehouse building in San Antonio.

About 60 percent of the portfolio is located in top-tier industrial markets.

The properties are also in supply-constrained infill areas needing proximity to major population centers to deliver "last mile" services in the supply chain, said Rishi Kapoor, Investcorp's co-chief executive officer.

Kapoor said the investment helps the firm's clients gain and increase exposure in the highly relevant industrial sector that will benefit from some of the trends shaping the retailing industry.

Along with U.S. industrial real estate, Investcorp's New York team is also shopping for existing office, retail, industrial, multifamily and hospitality properties in the 30 largest U.S. markets. The team is seeking to acquire mid-market core and core-plus investments to add to its holdings, which now total about 550 properties.