City Centre - Houston Day 6

Brandon Houston, the great, great, great, great nephew of Sam Houston, gave us the run down of the large-scale "City Centre" project in West Houston. He was the Director of Development and is heavily involved in the office development and leasing for "City Centere". "Midway" development started in Dallas, named after "Midway Rd." They started off in 1994 focused on master planned residential communities. They have always been the "General Partners" who would take all the construction risk, and draft a capital plan. This plan had to include how to raise money and pool capital from banks, insurance companies, and pension funds. They formed an LLC for every project they did, and the LP's financed the project. The LP's usually get a return in the high teens to mid-twenties. However, they always developed to own and generate their own annual income. In 2004, they developed a vision for "mixed-use" project.

City Centre was done with the realization that 2 Million people could get there in 20 minutes, and that the demographics were growing West. Basically, City Centre was a speculative buy where they bought the present mall off the market for 30 Million. They had 60 days to close. After acquiring the building, their first step was to kick off all (then) current tenants. They underwrote their project over a 10 year period. With a total of 38 acres, 28 having already been developed, their work was cut out for them. Fortunately, they planned wisely, and used what they could of what was already there. The garages, for instance, were already in ideal locations on the corners of the development. If they were to tear them down, it would have cost them 10- 15 thousand dollars each to build new.

In their financial structure, they did not apply for tax credits or government help, because they didn't want the city to own the streets. They also made a very smart move, and pre-leased 50% of the project before it was completed. At least right now, while they may not be able to pay off their equity partners, at least they are in a position to be able to pay off their debt service. They currently have 60% of retail leased, and 60% of office leased. They try to get away with low TI's and 7 yrs. average terms. Mr. Houston said that usually by the second generation of leases, you start to see returns.

Houston is in a good position because it's in the energy corridor where BP, Conoco, Exxon, Mobil, and Shell all have headquarters. Many of the tenants for their 7,ooo sq. ft. of office space is used by companies related to oil and gas, finance, or private businesses such as Regus.

How did they find the money?
- high net worth individuals
- Michigan State Teacher's fund gave them 60% of their equity
- several Million came from the Stanford Financial group
- 500 Million was the total all in cost
They put together road shows with their prospectus and their pro-forma. However, people will trust YOU more than the pro-forma, and if they trust you, they'll do subsequent deals with you.

In terms of "green" they have been "compliant", but at the time of building (in 2000) it wasn't feasible to be LEED "certified." Nevertheless, hotels and and residential didn't want to pay for any "green" issues.

What about market research? Expertise within the company told them residential drove retail. They knew the office environment was there because of the area. The only place they had to do extensive market research was on the hotel sector. They found that studies often gave a very clear picture of the past, but no clear prediction for the future. They found that hotels would also drive the restaurant business.

They don't use "Argus" but do give quarterly investor reports based on analysis, and use YARDI - a property management tool.

There are 425,000 sq. ft. of retail, 450,000 sq. ft. office, 244 rooms, and 22 condos. There are 525 units for rent @1.50 psf. Office goes for $22 psf., and retail goes for $35 psf.

One of the important lessons they learned was about being flexible. For example, one restaurant would not lease unless they had gotten more TI. City Centre could not afford more TI, so they offered to give the restaurant 20% cash in equity to buy the property. Mr. Houston said, "You have to be creative."