Partnership Opportunities with US
Investors
T. Patrick Duncan, Senior Vice
President, Operations Susan Wallace, Vice President, Co-Investments
& Dispositions USAA Real Estate Company
With its wealth of real estate investment
opportunities, the United States is proving to be a powerful
magnet to more and more foreign investors for a large portion
of their commercial real estate investments. They are well
aware that this country is considered one of the world's
largest and most sophisticated financial markets. Its combination
of a large stable economy and a reliable government contributes
to the healthy economic environment these international
investors find reassuring.
Through the years, the US has experienced
consistent overall growth in its free marketplace. The principles
of free enterprise have nurtured business development, from
the large Fortune 500 corporations to the thousands of successful
small businesses that help sustain the economy. The nation
is currently enjoying its lowest unemployment in 30 years,
with an increasing employment base across the country. As
such, it remains a very viable investment alternative.
CO-INVESTMENT IN
THE US
Foreign investors often prefer not to "stand alone"
when investing beyond their own borders. Many seek out partners
who are thoroughly familiar with a country's marketplace
in general and local markets in particular. When investing
in the United States, foreign investors basically have three
choices:
- They can employ US-based personnel
to study, analyze and develop investment goals within
its various markets.
- They can hire domestic consultants
within the US to advise them.
- They can look for US partners to work
side by side with them.
If the partner alternative is selected,
most foreign investors prefer their US partner to contribute
significant equity. This helps to assure proper alignment
of investment objectives amongst all partners. The following
are other desirable traits to look for in a domestic investment
partner.
Structural Flexibility
To add increased value to a partnership, foreign investors
should look to US companies with the ability to provide
flexibility in investment structures. Flexibility can create
certain advantages for all parties. In many cases, foreign
countries may have beneficial treaties with the US in terms
of tax structures that lower or eliminate the US tax liability.
Utilizing the right investment structures often increases
the overall yield to the foreign investor, which makes investments
in the US real estate market even more appealing.
Effective and Efficient Operations
The foreign investor can benefit dramatically from a domestic
co-investor capable of providing operational services on
a national scale. A partner who is capable of handling all
investment details from property management to leasing,
from acquisitions to dispositions, from new development
to capital improvements, can produce enhanced investment
yields. A partner with such service capabilities can best
represent the foreign investor in a unified and full-service
manner.
Local Market Knowledge
When domestic partners are full-service real estate providers
and maintain a local presence at the asset level, several
benefits occur. These include enhanced market knowledge,
improved maintenance of properties owned, and a closer tenant
relationship. In addition, local market knowledge can position
the partnership to take advantage of the most expedient
times to buy and sell; again, enhancing the overall returns
to the investors. With their own dollars committed, the
full-service domestic partner is well motivated to make
recommendations based upon smart business decisions that
maximize investment success.
Diversification
In Risk Mitigation
Diversification is a tool to be used wisely in risk mitigation.
The combined capital of the US and foreign investor allows
all participants to spread their capital over more assets
and markets, helping to better diversify the portfolio.
As the economy in one market of the country may fluctuate,
other markets may remain stable, while yet another market
may be experiencing growth. Diversification can be enhanced
further by the use of leverage. Adding a modest level of
debt allows more dollars to be invested in more properties,
further diversifying the capital of all investors. Thus,
greater economies of scale can be achieved, spreading administrative
costs over a larger portfolio.
By adding more properties to a portfolio,
a larger roster of tenants is obtained which can also reduce
the overall risk profile. Another option to consider is
diversification in lease terms, such as staggering leases
so that the portfolio has no large turnovers at any one
given time.
Having taken full advantage of all appropriate risk mitigation
opportunities, the partnership can then produce a more consistent
and reliable return to all investors.
Value Creation Through Repositioning
When the US economy is in full swing during growth periods
such as the country is currently experiencing, there tends
to be a high level of investment capital flowing into the
real estate industry. This can reduce overall yields. It
then becomes imperative to look creatively beyond the average
investment profile for more diverse opportunities, such
as build-to-suit projects for investment grade and other
development opportunities that may become available to produce
higher returns.
Likewise, properties that are not well
leased or have a number of short-term leases can be repositioned
to increase their value if management is very "hands
on" and focused. This is another reason why the right
domestic partner, with significant capital at risk, is imperative.
Technology - A Necessity
The impact of the technological revolution upon our world's
economy cannot be overstated. It is therefore vital that
multi-national investment partners be able to interact quickly
and efficiently. The urgency goes beyond mere verbal and
electronic communications capabilities, necessitating direct
links between accounting and financial systems. When choosing
a US real estate partner, the foreign investor should be
assured that the stateside co-investor offers the technological
compatibility and flexibility to communicate results and
make decisions almost at the speed of light. If so, all
partners can more quickly respond to potential tenants,
complete timely market evaluations, and take opportunistic
action to enhance investment strategies.
Exit Strategies
Even though the greatest value creation for an asset is
upon acquisition, it is critical to have an exit plan in
place at that time. Exit strategies for individual properties
versus portfolio sales should be considered during the earliest
discussions regarding co-investment in any property.
A partnership that establishes a number
of viable options with which to exit an investment gives
the investor flexibility to maximize returns. Such exit
options may include:
- Selling individual assets one by one.
- Selling assets within a classification
group.
- Selling part or all of a portfolio
to a public or private REIT for shares or cash.
- Taking the vehicle public.
- Merging part or all of a portfolio
with another private entity, providing greater diversification
and exit strategies.
Partnership Decisions
As foreign investors look to the US real estate market for
profitable opportunities, they still want to retain significant
control over their capital.
Unquestionably, these investors can benefit
from a local partner with the real estate knowledge to implement
daily details and certain important decisions regarding
any chosen property. But decisions concerning acquisitions,
dispositions and financing should be made jointly and unanimously
by all major partners. These decisions can have a major
impact on the investment goals and returns of all partners.
Equal involvement in significant decisions fosters a level
of trust among the partners that can both profit and sustain
the relationship.
Long-Term Objectives
Wise foreign investors seek not only a rewarding relationship
with a co-investor, but a co-investor with whom a long-term
association is as promising as the initial rewards.
Successful and long-term partnerships are based on trust
and fair play. It is critical that the foreign investor
finds partners that strongly believe in these principles.
Long-term objectives can be achieved only if a strong and
very positive relationship exists.
USAA Real Estate
Company
As the fully integrated real estate investment arm of USAA,
a triple-A rated financial services and insurance organization,
USAA Real Estate Company is an equity investor in real estate,
often with foreign and domestic partners. It is actively
involved with property acquisitions and dispositions, build-to-suit
developments, co-investment programs and opportunistic public
REIT participation. A well established, relatively conservative
US-based real estate company, USAA is emerging as an aggressive
performer on the world stage. The company provides management,
leasing and other key services at the property level through
its wholly-owned subsidiary, USAA Realty Company, with 14
offices located throughout the US.
