The bricks and mortar are still good, just not the current use.
That’s the mantra of the principals of LRC Opportunity Fund, a commercial real estate firm in Rye Brook that looks for mismanaged properties, undervalued assets, undercapitalized owners, distressed sellers and underserved markets, mostly outside of the New York area.
LRC says what it calls “disarray” in financial markets, as well as the credit crisis, and “imbalances” in real estate values give it the opportunity to buy real estate from distressed sellers at prices below replacement costs. That is the firm’s investment philosophy.
“We look at the demographics,” said Ed Kulik, a co-founder and principal, “at the potential of areas where the local economy has been hit hard. We do concentrate on the East Coast, on areas that are starting to turn around. Right now that is mostly outside of New York.”
Howard Lavitt is the other founder and principal. It was he who formed Lavitt Realty Corp. in 1997 and then LRC Opportunity Fund in 2009. “Some of the markets we’re in right now are Raleigh, N.C. (number two on the list of the Top 10 cities in which to live, work, and play by Kiplinger’s Personal Finance magazine in 2008, and ranked number one in Businessweek.com’s first Best Cities ranking in November), it has an educated labor force, and South Carolina and Florida are big as well. We have a deal in Tampa, at the University of South Florida, where an old hotel is being converted to student housing. The hotel market is soft in Tampa.”
Especially in Florida, said Kulik, there are condos all over that are being converted to rentals or university housing. Lavitt said the firm is in the process of buying the regional headquarters in Raleigh of what used to be Wachovia, bought by Wells Fargo in 2008. Two other new projects are also in North Carolina. One is the Brier Creek Medical Pavilion in Raleigh, a 51,000-square-foot medical building that is part of the Brier Creek community. The 2,000-acre development includes the Brier Creek Country Club, with a golf course designed by Arnold Palmer, as well as commercial space, 2 million square feet of retail space, and 10,000 residential units. The building is less than 20 percent occupied though, said Lavitt. “It was new construction, the loan was foreclosed, the bank didn’t want to put money into it for improvements. It was neglected.”
The other property is in Charlotte, called Tranquil Court, a 62,000-square-foot building in the upscale Meyers Park area of the city. It includes retail, professional and office space. It is fully occupied, with tenants including Petit Philippe and UPS.
“It was bought from a debt fund,” said Kulik, “we bought the portfolio of notes, they were nonperforming.” Lavitt said medical buildings present their own set of challenges these days. “It’s not just doctors we have to deal with, it’s managed practices, getting them involved in real estate decisions.”
Still, said Lavitt, North Carolina is an area with employment growth, especially in technology and energy.
“Progress Energy in Charlotte has nuclear initiatives. Boeing is coming to Charleston. The people who come with them will be engineers. And with Red Hat coming to Raleigh, that will bring more software companies.”
As for financing, Lavitt and Kulik said the firm benefits by going after smaller deals, in the $5 million to $50 million range. “If you go after the $100 million deals, you pay a premium. There is a lot of capital chasing larger deals.”
How has the credit crisis affected the firm? “Underwriting is a laborious business,” said Kulik. “These days they read what we put in front of them.”
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