CoStar Lead Street (Dec. 2-8): Wall Street Bails Out Homebuilders

In this week's issue of CoStar Lead Street, Morgan Stanley joint ventures with Lennar on $1.3 billion in residential land; the title insurance industry looks ahead to 2008 but not very excitedly; and Daniel DiLella, president and CEO of BPG Properties, goes back to Villanova to form a new real estate school. Plus, we tell you where corporations have decided to grow, including U.S. Steel's plans to invest $1 billion in Pittsburgh, and tell you of more than $2.1 billion of major properties under contract for sale or purchase.

Morgan Stanley Pays 50 Cents on the Dollar For Lennar's Land

Morgan Stanley Real Estate and Lennar Corp. formed a strategic land investment venture to acquire, develop, manage and sell residential real estate. Concurrent with its formation, the new investment venture acquired a diversified portfolio of land from Lennar.

The properties acquired by the new entity consist of approximately 11,000 homesites in 32 communities throughout the country. The land portfolio includes a mix of raw land as well as partially and fully developed homesites in active and future communities. The communities are in California, Colorado, Florida, Illinois, Maryland, Massachusetts, Nevada and New Jersey.

Lennar acquired a 20% ownership interest and 50% voting rights in the investment venture. As of Sept. 30, the acquired properties had a net book value of approximately $1.3 billion and the sales price was $525 million.

Lennar will manage the land investment venture's operations and will receive fees for its services. It will also receive disproportionate distributions to the extent the investment venture exceeds financial targets.

As a part of the transaction, Lennar entered into option agreements and rights of first offer providing Lennar the opportunity to purchase certain finished homesites at current market values at the time of exercise from the investment venture.

Citigroup Global Markets Realty Corp. acted as sole lead arranger for the non-recourse acquisition financing to the investment venture. Morgan Stanley acted as financial advisor to Morgan Stanley Real Estate.

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Title Insurance Industry Improvement at Least a Year Away

The fortunes of the title insurance industry remain tied to mortgage and real estate markets, both of with will continue to deteriorate in 2008, according to Fitch Ratings.

For the first three quarters of the year, pretax earnings for the six publicly traded title underwriters fell by two-thirds from 2006 to $295 million, or a very modest 2.3% of operating revenue.

According to Fitch, the expense initiatives the underwriters have undertaken this year are expected to gain traction during 2008, resulting in a slight improvement in operating margins. However, for the foreseeable future, margins will not approach levels seen in the favorable market of 2003-2005.

Mortgage originations fell by 15% in 2007 with both purchases and refinancings declining roughly in proportion. Refinancing activity still represents nearly half of all originations and is not likely to fall below 40% of originations during the next two years.

Although the median price of homes reported only a slight decline, sales of new and existing homes fell precipitously and the housing market has a greater than 10-month inventory glut. Consequently, the housing market will continue to suffer in 2008 and the concern is whether the entire U.S. economy will follow the real estate sector into recession, Fitch analysts said.

Title underwriters have taken reserve charges during the year as current estimates of losses for previous policy years are exceeding originally reported loss ratios. Average combined ratios for the six publicly traded underwriters worsened by 350 basis points to 101.8% as of Sept. 30. Only one underwriter out of the six reported improvement in expense ratios, and consequently, a better combined ratio relative to 2006.

Fitch does not expect prospects for the title insurance industry to show significant improvement until 2009 at the earliest. Fortunately, industry participants took advantage of prosperous years between 2002 and 2005 to strengthen balance sheets and should weather the current down cycle.

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BPG CEO DiLella Endowing New Real Estate School at Villanova

Daniel DiLella, president and CEO of BPG Properties Ltd., has funded the establishment of the Daniel M. DiLella Center for Real Estate at the Villanova School of Business (VSB).

DiLella earned his finance degree from Villanova in 1973 and is an active philanthropist in the Philadelphia community. The new Center for Real Estate marks DiLella's largest contribution ever.

The gift is setting a precedent for the growth of research centers at Villanova School of Business. Dean James Danko has made it a goal to ensure that each Villanova School of Business center is named, and is ultimately endowed at $5 million, to provide the resources needed to support high-level teaching and research.

DiLella, who financed his own college education by working and pursuing scholarships, explains that the new center represents his strong desire to give back to his alma mater.

"When I was a student, Villanova provided me with the knowledge and opportunities I needed to develop the career I have today," he said. "It is my hope that this new Center for Real Estate will provide young people who are interested in real estate, as I was, with the resources they need to pursue successful and rewarding careers in the field."

DiLella has a "pay-it-forward" philosophy of giving.

He hopes that the students who benefit from the center will, in turn, become community leaders and support future students. DiLella also intends for the center to support faculty research and curricular innovation, which will contribute to the real estate field both academically and professionally.

Shawn Howton, Villanova finance professor, has been named the Center director. Jim Vesey, senior director for capital markets for Cushman & Wakefield in Philadelphia, has been named the Center business fellow.

The center will celebrate its formal opening in April 2008. The introduction of a new real estate minor is planned for the fall 2008 semester.

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Facility Location/Expansion Decisions

U.S. Steel Corp. is considering a $1 billion capital investment program at its Clairton Plant coke-making operation near Pittsburgh, PA, that will enhance the company's environmental performance, help to ensure the long-term viability of its Mon Valley Works operations, and create more than 600 construction jobs. The program, which would take place over a period of years, involves the construction of two new technologically and environmentally advanced coke batteries and a cogeneration facility, along with environmentally focused rehabilitation of several existing coke batteries. U.S. Steel expects to file for environmental permits with the Allegheny County Health Department in early January 2008. The decision to proceed with the program will depend upon receipt of the necessary permits, approval of U. S. Steel's Board of Directors and business conditions.

Cycle Country Accessories Corp. closed a transaction with its founder, James Danbom and his wife, Janice Danbom in which Mrs. Danbom agreed to purchase Cycle Country's manufacturing plant at 2188 Highway 86, in Milford, IA, for all of her stock in the company (1.41 million shares). Cycle Country will lease 89.8% of the current available space (92,552 of 103,056 square feet) for $2/square foot, or $185,104/year). The term of the lease is three years. Cycle Country has the option to renew the lease on the same terms and conditions for two additional terms of one year each.

General Electric Co. (GE) selected Duke Realty to develop a 300,000-square-foot manufacturing and distribution facility just east of Batesville, MS. The facility will be utilized by GE Aviation, an operating unit of GE and a leading producer of jet engines for commercial and military aircraft, in the production of advanced composite components for jet engines. The facility is expected to employ approximately 100 people. As part of this project, Duke has purchased nearly 87 acres east of Batesville on U.S. Highway 6, approximately a quarter mile from I-55. Current plans call for 290,000 square feet of manufacturing space, 10,000 square feet of office area, and an option for significant future expansion. The facility is expected to be operational by September, 2008. Brent Woodruff, first vice president of CB Richard Ellis in Atlanta represented GE in this transaction.

Maxygen Inc. plans to consolidate all operations at its U.S. headquarters in Redwood City, CA. By the end of the second quarter of 2008, the company will cease operations of Maxygen ApS, its wholly owned subsidiary in Denmark. The company also plans to add approximately 25 employees at its Redwood City site.

Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, PC is signing a lease at the recently constructed two-building complex, Gateway at Torrey Hills in San Diego, CA. Mintz Levin will be the anchor tenant in one of the complex's two four-story buildings, leasing 40,000 square feet on the top two floors. Mintz Levin will assume an 11-year lease on the space and plans to move in April 2008. The developer of Gateway at Torrey Hills is San Diego-based Cisterra Partners LLC. Brokers are Studley Inc. and Grubb & Ellis/BRE Commercial.

Monterey Gourmet Foods Inc. signed a 10-year triple-net lease for approximately 93,000 square feet to be used for production, storage, warehousing, and office space. The leased facility is at 8010 South 228 St. in Kent, WA. The facility will be used to consolidate four facilities Monterey Gourmet Foods currently leases in the Seattle area and whose leases expire in 2008. The landlord is RREEF America REIT II. The initial term of the lease commences Jan. 1, 2008, with two five-year non-transferable options. The first year's annual rental is $403,000, increasing to $701,000 in the final year, and the total lease payments for the full 10 years are expected to be approximately $6 million.

Preferred Freezer Services signed a 450,000-square-foot lease at One Enterprise Avenue in Secaucus, NJ. One of the largest, privately held cold storage companies in the nation, Preferred Freezer was seeking to expand its ever-growing presence in New Jersey, where it already has facilities in Elizabeth, Newark, Jersey City and Perth Amboy. Owned by ProLogis, One Enterprise Avenue was about to be vacated due to the impending relocation of the existing tenant to a new facility out of state. HK Commercial Realty Advisors negotiated for Preferred Freezer.

Streamlight Inc., a manufacturer of high-performance flashlights, is adding 75,000 square feet of space to its Eagleville, PA, headquarters facility in response to growing demand for its products. The building addition is expected to be completed in May 2008, bringing the company's total plant size to 165,000 square feet. The new addition will add 55,000 square feet to the company's existing 70,000 square-foot manufacturing space, a 75% increase. At the same time, the company is doubling the size of its headquarters office and engineering facility with an additional 20,000 square-feet of office space.

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Under Contract

CBL & Associates formed a 50/50 joint venture with Teachers' Retirement System of The State of Illinois (TRS) to acquire a portfolio of retail and office buildings in North Carolina for $540.8 million from the Starmount Co. The major assets acquired include:
· The Friendly Center, a 1 million-square-foot mall in Greensboro. 94% occupied, its anchors include Belk, Macy's, Sears, a 16-screen Grande Cinema, Barnes & Noble and Old Navy. The mall produces $426-per square foot in sales and is currently undergoing a 20,000-square-foot expansion that will be complete spring 2008 with Apple as its main tenant.
· The Shops at Friendly Center, a 253,000-square-foot open-air center adjacent to the mall that at 88.9% occupancy includes Harris Teeter, REI, White House / Black Market, Sur La Table, Acorn, Ann Taylor, J. Crew, Brooks Brothers, P.F. Chang's and Fleming's Prime Steakhouse and Wine Bar. A 62,500-square-foot expansion is underway at The Shops, which will include ULTA and DSW at its completion next summer.
· Renaissance Center, a 355,000-square-foot power center on 21 acres in a major retail hub of Durham, NC. The center is anchored by REI, World Market and Linens N' Things and also has a PF Chang's and Ted's Montana Grill.
· Green Valley Office Park, an office building development adjacent to Friendly Center in Greensboro. The venture is acquiring six Class-A office buildings within the park totaling 168,271 square feet. Major tenants include First National Bank, First Citizens Bank, CitiFinancial, MetLife, Bank of America and Wachovia/BB&T.
The deal also involves CBL acquiring an 100% interest in a portfolio of eight community centers totaling 814,000 square feet from Starmount including:
· Westridge Square, a 215,000-square-foot center anchored by Harris Teeter in Greensboro.
· Oak Hollow Square, an 139,00-square-foot center anchored by Stein Mart in High Point.
· New Garden Crossing, an 110,000-square-foot center anchored by Office Depot in Greensboro.
· Northwest Centre, an 86,000-square-foot center anchored by TJ Maxx and Ross in Greensboro.
· Garden Square, a 24,000-square-foot center anchored by Blockbuster in Greensboro.
· Caldwell Court, a 14,000-square-foot unanchored center in Greensboro.
· Hunt Village, a 31,000-square-foot unanchored center in Greensboro.
· Brassfield Shopping Center, a 195,000-square-foot center anchored by Steinmart and Cinemark.
In addition, CBL is acquiring an 100% interest in a portfolio of 12 office buildings totaling 734,569 square feet from Starmount:
· Sun Trust Bank Building, a 106,968-square-foot building in Greensboro.
· Lake Point Office Building, an 88,088-square-foot building in Greensboro.
· 706 Green Valley Road, a 139,050-square-foot building in Greensboro.
· Oak Branch Business Center, and 32,963-square-foot building in Greensboro with Wells Fargo as a major tenant.
· Westridge Suites, an 11,187-square-foot building in Greensboro with Century 21 as a major tenant.
· 1500 Sunday Drive, a 61,227-square-foot building in Raleigh.
· One and Two Oyster Point, a 63,610-square-foot and 39,049-square-foot building in Newport News, VA.
· 840 and 850 Greenbriar Circle, a 48,756-square-foot and 81,318-square-foot building in Chesapeake, VA.
· Peninsula Business Center I and II, two buildings totaling 62,353 square feet in Newport News, VA.
CBL intends to market the wholly owned portfolio of community centers and office buildings for sale.

Paramount Group agreed to acquire the 30-story tower at 31 W. 52nd St. in New York, NY, from a partnership managed by Deutsche Bank. The contract price is being pegged at about $500 million, or $685 per square foot, according to reports in The New York Observer. The deal is expected to close next month.

Capella Healthcare agreed to purchase nine general acute care hospitals from Community Health Systems Inc. Funding for the $315 million deal will come from a combination of equity capital from Capella's partner GTCR Golder Rauner and debt financing led by Citigroup Global Markets Inc., Banc of America Securities LLC and Merrill Lynch Capital. Merrill Lynch acted as M&A advisor to Capella on this transaction. Combined, the nine hospitals being acquired by Capella have 1,070 beds and employ nearly 4,000 people. They include:
· Willamette Valley Medical Center in McMinnville, OR, an 80-bed hospital;
· Saint Mary's Regional Medical Center in Russellville, AR, a 170-bed facility;
· National Park Medical Center in Hot Springs, AR, a 166-bed facility;
· Mineral Area Regional Medical Center in Farmington, MO, a 135-bed facility;
· White County Community Hospital in Sparta, TN, a 60-bed facility;
· Parkway Medical Center in Decatur, AL, a 120-bed hospital;
· Woodland Medical Center in Cullman, AL, a 100-bed hospital;
· Hartselle Medical Center in Hartselle, AL, a 150-bed facility; and
· Jacksonville Medical Center in Jacksonville, AL, an 89-bed facility.

Hines-Sumisei U.S. Core Office Fund LP agreed to acquire Renaissance Square, which consists of two office buildings in the central business district of Phoenix, AZ. Renaissance Square was constructed between 1987 and 1989 and contains 965,508 square feet of rentable area that is approximately 95% leased. The contract purchase price is expected to be $272.9 million, exclusive of transaction costs, financing fees and working capital reserves.

Gaylord Entertainment Co. is buying Westin La Cantera Resort in San Antonio, TX, for $252.5 million. The sprawling, 691-acre property is being sold by USAA Real Estate Co. Westin La Cantera opened in 1999 and features 508 hotel rooms and two championship golf courses. Included in the purchase is an additional 90 acres of undeveloped land adjacent to the resort. In a statement, Gaylord said it would invest $250 million to expand the resort to more than 1,000 rooms and quadruple the amount of meeting space to 160,000 square feet. The expansion is expected to take three years.

Hull Storey Retail Group LLC agreed to sell an 11-property, 3.8 million-square-foot, enclosed mall portfolio in Alabama, Georgia, Tennessee, North and South Carolina to Hendon Properties for $214 million. The due diligence inspection has been completed and the transaction is expected to close in January of 2008. The properties include:
· Blue Ridge Mall in Hendersonville, NC;
· Columbia Mall in Columbia, TN;
· Dublin Mall in Dublin, GA;
· Greenwood Mall in Greenwood, SC;
· LaGrange Mall in LaGrange, GA;
· Milledgeville Mall in Milledgeville, GA;
· Twin Rivers Mall in New Bern, NC;
· Prince of Orange Mall in Orangeburg, SC;
· Regency Square Mall in Florence, AL;
· Statesboro Mall in Statesboro, GA; and
· Wilson Mall in Wilson, NC.

Behringer Harvard Opportunity OP I agreed to purchase Northborough Tower, an office building in Houston, TX, from Northborough Partners, LP. Northborough Tower is a 14-story office building containing approximately 206,500 rentable square feet, with a four-level attached parking garage, on approximately 5.4 acres, including an approximately 2.3-acre tract currently paved for surface parking. The contract purchase price is $32.9 million, excluding closing costs.

Breeze-Eastern Corp. agreed to sell its headquarters and plant at 700 Liberty Ave. in Union, NJ. The transaction is to close in the first quarter of next year. There is no financing contingency. The contracted sales price is $10.5 million and the sale agreement includes provision for Breeze-Eastern to lease the facility for up to two years after closing, pending the company's relocation to a new site, yet to be selected, that will be better suited to its current and expected needs.

athenahealth Inc. agreed to purchase a complex of buildings, including approximately 133,000 square feet of office space on 53 acres at 1 Hatley Road in Belfast, ME, for $6.1 million. The seller, Bracebridge Corp., is a wholly owned subsidiary of Bank of America, which will lease 11,125 square feet of the property after the purchase for use as a daycare center. The purchase is to close by Feb. 16, 2008.

Capital Properties Inc. agreed to purchase the property at the corner of Canal and Steeple streets in Providence, RI, from David L. Golden for $2.3 million. The closing for the purchase is to take place no later than Dec. 28.

Freshstart Properties Inc. has finalized negotiations on a purchase of an apartment building, at 627 North Anderson in Tacoma, WA.