Jackie Buhn Attends Counselors of Real Estate Conference in Miami

Jackie Buhn, Principal of AthenianRazak, recently attended the Counselors of Real Estate Conference from October 14 – 17, 2012 in Miami.  While at the conference, she attended a session on Evolving Land Use in Cities., moderated by Patrick O. Mayberry of CRE and included presentations by Genevieve Cadwalader of the Bristol Group and Kenneth Browne of Urban Development Partners.  The session described two largely private projects under construction that have broader implications for urban re-development.

The first was an on-tarmac warehouse and hangar development at Miami International, spearheaded by the Bristol Group, a San Francisco-based private developer, on a 30-year land lease from the airport.  The project included demolition of an existing building, construction of a new 800,000 sf high-bay warehouse with 147,000 sf of refrigerated storage, new apron parking for eight airplanes on the runway side and truck docks on the other side.  Additionally, an adjacent 80 ft clear-height hangar was refurbished for aircraft servicing. Key factors in the development included:

  1. The developer, Bristol Group, had an interest in the Miami warehouse market because of Miami’s strong trade balance. It owned other smaller warehouse projects locally, was on the radar screen of brokers, and was familiar with the local subcontractor community.
  2. The airport wanted new warehouse facilities, particularly for perishables such as cut flowers, but did not want to capitalize the project with public funds and sought a private development proposal.
  3. The longest lease the airport was comfortable writing was 30 years, which was below the length that would allow for sale of the property.
  4. A strong local market of warehouse users existed, and Bristol arranged a build-to-suit deal with one for this site.  While logistics companies are difficult to underwrite, the developer was comfortable that the market was strong enough to replace the tenant if necessary, and constructed the property to be divisible.
  5. The team worked out a financial structure that included rents at a level that made sense for the tenant, presumably higher than off-tarmac sites, and provided sufficient returns for the investor.
  6. Construction funds were provided out-of-pocket by the developer, who will place financing on the completed project.

The structure meets the airport’s goal of providing more and better warehousing facilities to grow its trade position without encumbering its land forever, the developer’s goals of achieving an acceptable (10%) return by fully amortizing the capital costs over the life of the (co-terminus) lease, and the tenant’s goals of having a very efficient on-tarmac facility (thus avoiding one transfer of freight) at a cost offset by those savings. The project is currently under construction and almost complete.

Having the most efficient transfer and warehousing facilities possible at the airport helps Miami compete in the slim-margin freight world and thus brings jobs and commerce in, potentially begetting more similar facilities.  Doing it without public investment using leased public land is a reasonable solution, with land lease terms set to make amortization of improvements possible.

The second project was construction of an apartment tower at 309 5th Avenue in New York City.  Before the crash, a mid-block ‘sliver’ site had been purchased, permitted, and foundation was completed for a luxury condominium project.  However, funding and construction stopped with the market crash.  Urban Development Partners, a new developer, purchased the site on favorable terms and redesigned it for rental apartments, configured in a more efficient pattern than the condos, thus increasing yield.  The site was also the beneficiary of two “grandfathered” statuses due to its earlier foundation start: eligibility for a tax abatement program and avoidance of a later requirement to provide 20% affordable units.  Both of these give the project a competitive edge.  Capital for the project included some ‘patient’ pension fund investment as well private equity; the project is expected to return 7% on an unlevered basis.

The likely success of this project gives hope to projects stalled or abandoned during the downturn, a symptom particularly prevalent in New York City.  It also suggests that the buyer of a distressed property has a better shot at success than a developer working in a peak market – in other words, buy low and sell high.