FEATURE ARTICLE, OCTOBER 2005

FINANCIAL ALLIES IN HOUSTON
This case study illustrates how local offices bring financing to local projects.
Graydon Laguarta and Rick Harsch

A bird's eye view of Beltway 8 in southwest Houston reveals the tell-tale signs of a hot industrial development market: cranes going up, trucks going every which way, and giant new logos designed to make their mark even on motorists and truck drivers driving at speeds that most drivers might find intimidating.

That bird's eye view is no secret, and much like word once spread about the Dallas/Fort Worth industrial corridor, the development market in southwest Houston is no longer just a local game. Investors and developers recognize its potential, and Houston offices of national real estate firms have gotten blessings — and capital — from their home offices to move forward with transactions that surpass most local deals in both size and complexity.

You've Come A Long Way, Baby

Distribution deals, as recently as 5 years ago, might have played out with the developer securing control of the land; marketing the property and landing a tenant or two; and proceeding to apply for a construction loan, then permanent financing for the property in question. Today, that equation is, in many cases, a bit more complex. For example, if the ‘bird's eye view' of the Sam Houston Parkway (Beltway 8) were to focus on the intersection with South Gessner Road, the bird might see three building sites in various stages of construction — and a sign reading “Colony Crossing Business Park.”   Colony Crossing Business Park is under development by the McShane/MetLife industrial development alliance, a partnership between a Chicago-based developer with an established Houston office and

MetLife Real Estate, a division of a major pension fund. This partnership invests in key markets across the country — including Houston, Southern California and Chicago.   The capital provided by MetLife allows the privately held developer to move swiftly on critical land acquisitions, among other benefits, but it does not finance the project completely. In fact, the Houston office of the alliance turned to the Houston office of Cleveland-based KeyBank Real Estate Capital for construction financing. So rather than a simple developer/lender equation all taking place in the hallowed halls of Houston, the path to the groundbreakings for these buildings followed a more complicated course, one that included executives from New Jersey, Austin, Chicago, Cleveland and elsewhere. Colony Crossing is not the only example of this; in fact, Houston is not the only market experiencing this phenomenon. Austin is also currently seeing more interest from outside the local development community, and of course the Dallas/Fort Worth metropolitan area has long been on the radar screens of institutional investors like MetLife and national capital providers like KeyBank Real Estate Capital. For MetLife and other like-minded funds, these alliances deliver the investment opportunities beyond the current obvious choices, but because of their institutional nature, the opportunities must be carefully screened and positioned according to the macro-level diversification needs of the fund.

It's A Small World After All

In fact, in markets like Houston and Austin, developers are establishing partnerships of varying sizes and complexities that give them easier access to capital in the critical beginning phases of land acquisition and development. Capital providers then find themselves in a quandary that any lender (particularly in today's competitive market) is pleased to oblige: a closing day with additional constituents. As might be expected, representatives from the pension fund hold significant decision-making power in these investments, and are thus an important part of the financing process. This involvement from investors that traditionally haven't invested in real estate — much less industrial properties — represents a sign that real estate development is maturing and becoming more national in scope, and more focused on the economics of a deal, rather than the native cities of its participants.  

The needs of any borrower — but more so alliances that can bring with them complexities — are unique to each transaction, and to the local market. This is why it is important that the many constituents to any transaction have a well-established local presence — backed by the strength of institutional quality corporations.   In the case of Colony Crossing Business Park — the three buildings in various stages of construction on Beltway 8 — KeyBank Real Estate Capital was able to issue a relatively uncomplicated construction loan, thanks to the well-established nature of the McShane/MetLife industrial development alliance that is active in multiple markets across the country. Development alliances are formed with a common desire to efficiently invest capital — and to use every financial tool available to enhance the future sale price of the property. Therefore, it is more common than not these days for borrowers — private, public, or joint venture — to express interest in bundling services such as mezzanine finance, combination interim/permanent financing, interest rate locks and other financial products rather than seeking traditional construction finance. Sometimes those needs even involve procuring a revolving credit facility backed by securitizations.

Houston, Beltway 8

So what has all this local focus and national financial backing resulted in so far? With the roofs not yet topped off, showings have been very active, and interest in the area is strong. As the first phase of development (two of the three planned industrial facilities) is wrapped up, the second phase will begin.   Colony Crossing 1 is a 62,658-square-foot flex/ industrial facility divisible to 10,000 square feet and Colony Crossing 2 is an 87,077-square-foot warehouse/ distribution facility divisible to 15,000 square feet. To attract tenants and to enhance future sale value, both buildings feature a 24-foot clear height with 40-foot by 40-foot bays and are arranged in a side-by-side configuration with a common truck court.

Main Street Values, Wall Street Strength

Southwest Houston is benefiting from local offices providing deep market understanding backed by national organizations that recognize a good investment when they see one. This is a classic case of balancing Main Street values with Wall Street strength — strength that is only increased when the national organizations' investors include major pension funds.   In the end, not only do the users of the resulting quality facilities benefit, but the market and the region benefit as well.

Graydon Laguarta, vice president, is the executive in charge of the Houston and Austin development offices of McShane Corporation. Rick Harsch is senior vice president of KeyBank Real Estate Capital in the Houston office.

©2005 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.