Amid the gloom and doom of the U.S. commercial real estate market, an Israeli company that invested $3 million in July for a stake in a Gwinnett County office complex has already received its first dividend check, said Steve Berman, the Atlanta developer who orchestrated the deal.
Mr. Berman convinced Profimex (Israel) Ltd., a private equity real estate firm with $26 billion in assets worldwide, to put up half the money for the $6 million purchase of the 100,000-square-foot Northwoods Business Center off Peachtree Industrial Boulevard.
With an additional $700,000 from U.S. investors, Mr. Berman put together a down payment approaching 60 percent of the purchase price. Even with that huge down payment, it was difficult to find a lender to finance the remainder of the purchase price amid the current slump in commercial real estate, said Mr. Berman. The investors eventually found a loan through The Private Bank, he said.
Even though Northwoods has only a 60 percent occupancy rate, the large down payment and low purchase price means the project immediately had positive cash flow, Mr. Berman said. Investors received their first quarterly check last month, representing an annualized rate of return of 8 percent, he added.
Atlanta law firm Arnall Golden Gregory LLP introduced Mr. Berman and Brian Ganath, his partner at OA Development Inc., to Profimex.
Mr. Berman and Mr. Granath traveled to Israel in December to meet with Profimex, pitching commercial real estate in the U.S. as a bargain that could immediately produce a strong return.
When U.S. banks started severely restricting lending on commercial property in late 2008, it created opportunities for investors willing to make large down payments, said Mr. Berman.
Easy credit with low or no down payments had pushed the price of U.S. commercial property so high that it was difficult for rents to cover the mortgage costs, Mr. Berman said.
But with lower prices and higher down payments, the numbers work, he said.
Rent payments at Northwoods currently far exceed the mortgage payment, said Mr. Berman. So even if the occupancy rates drop by half, the Northwoods deal would still have a positive cash flow, he said.
As the U.S. economy improves and rents and occupancy rates increase, the return on investment will be even higher, he added. “It’s not a question of if the U.S. economy improves, it’s when,” said Mr. Berman.
Philip Skinner, an Arnall Golden Gregory partner who worked on the Northwoods deal, said U.S. commercial real estate is attracting increased attention from foreign investors.
“The purchase prices are low, the dollar is low,” said Mr. Skinner. “You can get more for your shekel [the Israeli currency] and cash investors can find good opportunities under these conditions."
In addition to Mr. Skinner, fellow partner Abe Schear and Shelly Rabinovitch, an Israeli attorney hired by their firm five years ago, worked on the Northwoods project and are currently working with other foreign investors as well.Israelis were more enthusiastic about the Northwoods deal than shell-shocked U.S. investors, Mr. Berman said. “It was easier raising $3 million in Israel than it was raising $700,000 in the U.S,” he said.
Mr. Berman is working on other real estate deals with foreign investors, but says bank lending for commercial real estate is tighter now even than it was last summer when the Northwoods deal was completed.
"The market is very, very bad right now," said Alan Ziobrowski, associate professor of real estate at Georgia State University's J. Mack Robinson College of Business. "It's getting uglier, not better."
Julian Diaz III, chair of Georgia State's real estate department, said that although he is not familiar with the Northwoods property, the deal appears to have strong upside potential, unless the U.S. economy takes another dive. "If they start to lose tenants because people are going out of business, then that return is under threat," he said.
Foreign investment can only help the U.S. commercial real estate market, Dr. Diaz added. "The big issue has been that people have been reluctant to put money into it," he said. "Any capital we can get is helpful."
Foreign investors may be more patient with commercial real estate than their U.S. counterparts , Dr. Diaz added. "A lot of foreign investors are interested in a safe harbor for their funds in the U.S. economy, or even hedging their own currencies," he said. "They are looking at what they see as the strength of the U.S. economy."
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