40 acres and a mall.

Staking a claim in one of America's biggest gold mines--commercial real estate--requires know-how, connections and staying power

On his 29th Birthday, at an age when most people are still deciding whether to spring for a home mortgage, Charles A. Wallace II did something different. He closed on a $2 million hotel.

The proud new hotelier joins a growing cadre of African Americans prepared to enter the high-risk, but potentially high-yield world of commercial real estate. Whether you're sitting on acres of undeveloped land in the South (as Wallace's family does), living with an urban core undergoing redevelopment or have just always wanted to own a housing unit, hotel, strip mall, factory or office building, you could be looking at one of the best ways in America to reach millionaire status--a commercial real estate investment opportunity.

However, it isn't one of the easiest ways to get rich. "Commercial real estate investing is a very serious business," says Olusola Seriki, principal in Metroventures/USA Inc., a real estate development and management firm in Columbia, Maryland. "Because of the liabilities associated with it, it's extremely important to know the realities of what you're getting into."

First, investors should understand that investing in commercial real estate is not like playing the stock market, where assets are more liquid (easily convertible to cash). "You invest in commercial real estate for two reasons: income and appreciation," says Seriki. "The income can be healthy, but the appreciation is where you really enjoy the benefits. Therefore, you must be prepared to hold your ownership position long enough, maybe five years or more, to reach the point of profitability." People who can't hold the position may have to liquidate quickly, often at deep discounts to the price [of the property]. Such circumstances are better known as "fire sales."

Another issue is upkeep of the property. "The art of the deal is not in the buying or development of the property, but in the everyday protection of your assets," continues Seriki. "You can lose your shirt if you don't do that." Shopping centers are the best way to illustrate the importance of property management. "More so than in an office building, where people must come in order to work, shopping is a selective decision," Seriki explains.

"If the property doesn't meet certain standards of cleanliness or comfort, stores lose their customers, and you lose your leases. Before you know it, you're unable to meet your notes. Next step: fire sale or bankruptcy."

In short, you can't afford much of a learning curve when starting in commercial real estate. Mistakes can cost you big-time because, as Seriki says, "the property can eat you alive." But there are enough success stories out there to prove that it's a profitable game to play if you know what you're doing. According to Arthur Zabarkes, former director of the Real Estate Institute of New York University, commercial real estate is a $3 trillion revenue-producing industry, representing 35% of all investable wealth in America. In addition, those who own commercial property often decide which businesses are opened where, help influence efforts to revitalize their community and become key components of that community's economic power base.

For African Americans, the stakes are even higher. "Buildings are often left vacant in urban areas because many of the owners have no valuable connection to the area," says Claude Remy, president of Remy International, a commercial real estate management firm in Tacoma, Washington.

REAL ESTATE DEAL-MARKETING 101

The safest way to play in the game of big-time commercial real estate is to gain experience by closing deals for other people. Your strategy, therefore, should include obtaining a commercial real estate license, which also is a good basis for making all the right connections to opportunities, financing, partners and other resources. (See sidebar, "Preparing For Your First Deal.")

Even after getting your license, experience can be hard to come by. After 24 years as a commercial real estate broker, Paul Chiles, owner of Chiles & Co. in Seattle, says he still must pass a litmus test before he can close a deal. In 1974, at age 24, Chiles was the first African American to be hired by CB Commercial (then known as Coldwell Banker Commercial). He rose in the ranks to become vice president of investments before leaving to start his own real estate firm in 1990. "We haven't necessarily overcome the acceptance problem," Chiles says. "The paramount question is still: Could they [blacks] possibly know what they are doing?" This can be a big barrier, he says, to getting opportunities to "distinguish yourself as being able to close deals."

Still, experience counts. Just ask Harold A. Dawson Jr., president of Atlanta-based Harold A. Dawson Co. (HADCO), a family-owned real estate firm started by his father three decades ago. (See sidebar, "Two Plays By A Pro.")

UNDERSTANDING THE GAME

Seriki notes that the landscape has changed in terms of how deals are being financed today. "Ten years ago, institutional money for commercial acquisitions was mostly placed on the debt side, through mortgage brokers," he says. "Now real estate is taking advantage of the stock market through real estate investment trusts (REITs), where money is flowing [on the equity side] like water." REITs allow a legal entity to acquire property and distribute the income directly to stockholders through shares, with no fax liabilities. Shareholders can use their earnings to purchase more shares--meaning equity in additional property. Institutional investors have become the dominant players in the commercial real estate market, "which means a local guy, say, in Tallahassee, who spots an opportunity there, may have to compete with the broker working with a REIT out of Nevada that has the cash ready to close on the deal immediately," Seriki observes. This makes it tougher to grab opportunities, but if you know where to look, have you ducks lined up and know the game, you can move quickly and with sure footing.

Once you are licensed to buy and sell property, you should know how to spot a good opportunity, find capital to acquire, develop and manage the property and pull together a competent project team of investors, contractors and managers to make it all happen. First Union National Bank of Georgia's Reginald Davis says if you're aspiring to be a multimillion dollar developer, you'll need to build a good tram of experienced professionals who specialize in the commercial real estate business. Davis, the bank's COO, says a strong development team usually consists of an attorney, accountant, project manager, general or lead contractor--who hires the appropriate subcontractors--and a property manager. This team can mean the difference between success and failure.

Make sure you're investing in a particular property for the right reason, says Seriki. "For instance, black athletes always seem to want to invest in nightclubs--but clubs and restaurants just are not good real estate plays," he observes. "Their life cycles are too short. Look for properties with tenure, such as a medical office building or a distribution center for UPS. It may not be as glamorous as a theme restaurant, but if your objective is to make money, not to have bragging rights, then it's the smarter investment." As a general rule, avoid properties involving short-term, faddish or cyclical leases.

Occasionally, you'll see a "for sale" sign hanging on a building or run across a listing in the classifieds. Increasingly, though, the availability of valuable properties is quietly circulated through an "inside" business network of bankers, brokers and investors. Once you spot a property opportunity you think you want, begin the due diligence right away. This includes having the property inspected and doing a financial analysis (determining how the building is currently financed, as well as its income and operating costs.

Ask yourself if what you can do to bring greater value to the property--for instance, by finding ways to lower operating costs or generate more income. If you like the answers and want the property, bring in an experienced real estate attorney to help you tie down the deal. "If you have to move fast, try to get an option on the property from the current owner that's contingent upon finding the funding," advises Seriki. Without such a "lockdown," you can spend thousands in mortgage loan application fees, only to find later that the property has been sold to someone else. "Before you spend the fee," Seriki cautions, "you must know that the owner will sell to you at a fixed price." The option should include a reasonable time frame to complete detailed due diligence and secure financing--usually 60 days.

FINDING THE MONEY

Knowing who to contact for funding is a crucial step. "A lot of people start in the wrong places, so it becomes very discouraging," says banker Davis. "For example, it's recommended that you not contact the commercial lending department of a large or mid-size bank unless your loan request is for more than $1 million. Small investors, say someone purchasing a six-unit complex, should start by building a close relationship with the branch manager of a small community bank or the manager of the small business department of a larger lending institution. Purchasers at this level can also work through programs offered by state and federal agencies such as the U.S. Department of Housing and Urban Development (HUD).

"Larger developers should go in with the understanding that most banks are not going to fund seed capital or equity," Davis says. For best results, look for banks with a roster of clients who have access to investment capital. A good way to find which banks are doing deals in a particular area is simply drive around construction or rehabilitation sires and lake note of the signs on the property advertising where the financing is coming from. If all else fails, go to a mortgage broker.

Either way, make sure you're well prepared before approaching any lender. Torrie Johnson is president of Canfield Property Management, the only such firm in Baltimore owned by a black female. "We also help developers create premarketing plans (similar to a business plan), which outline the projected phases of the project. This is a document lenders and investors must see before deciding whether or not to back the purchase," she explains.

Your proposal or plan should be thorough and professionally prepared. Make sure it spells out the type of transaction you're attempting to finance. Is it a private, public/private or urban revitalization project? Your plan should also instill confidence in the lender that they have a more than reasonable chance of being repaid. The more details you can provide, the better. Describe all the people who will be involved in the project, from partners to construction and property management firms. Also, give a detailed financial analysis, showing costs, projected income and break-even points over the next two to five years.

If you've lined up tenants already, discuss them in demographic terms and show their prospects for stability and/or growth. Show why the area you've selected is attractive and what its long-term prospects for growth are. Make sure experience shows up prominently in your plan. "Whether it's your personal experience or comes from those you're surrounding yourself with, it's one of the first things any lender will look for," says Johnson.

TARGETING URBAN CORES

"Black people should pay dose attention to what's going on in urban centers--and pay attention quickly," urges developer Seriki, particularly in those areas the federal government has targeted for redevelopement, better know as Empowerment or Enterprise Zones. "We have metropolized to the outer edges of America," he notes. "Populations have shifted so far out that it borders on the unreasonable."

A return to urban cores means increased sales for franchisers who have saturated suburbia, a deep labor pool for industries seeking low-skill/low-wage workers, and easy access to shopping, public transportation, airports and other amenities of city living for professionals tired of two-hour commutes to work. There's a need for office buildings, multi-unit housing and stores, but don't think you can just spot a deal and grab it. "Again, you are competing with institutional players who are looking for investment opportunities all over the country," says Seriki. "They don't even have to have set foot in a particular city--they're buying just because the numbers look good."

Claude Remy, whose company owns and manages $6.6 million of income-producing real estate investments, feels that redeveloping enterprise zones, which are predominantly black communities, will be more successful if they are developed, owned and managed by African Americans. "We have a financial stake in seeing the success of the Empowerment Zones, because an increased quality in overall business activity works toward the success of our own individual businesses," says Remy, 40.

FOLLOWING YOUR HEAD AND YOUR HEART

Although a career in commercial real estate is the best way, it isn't the only way to invest in income-producing property. While multimillion dollar projects are not likely options for novice investors, if you do your research, have good support and a strong belief in what you're doing, you can succeed. Take the Omega Psi Phi Fraternity Inc., a black Greek service organization that pooled its money, secured additional funding and acquired an asset, and Charles Wallace II, who followed his head and his heart to hotel ownership (see sidebar, "A Novice Stakes His Claim").

Dorsey Miller, grand basileus of Omega Psi Phi, says the 86-year-old fraternity moved its headquarters from Washington, D.C., to a new and larger facility in Decatur, Georgia, in 1995 as a means of building its economic strength. The new site was meant to do more than just provide adequate space for the executive board to meet. It would also be a significant source of revenue for the organization. After considering sites in 12 cities, the Omegas put in a $2.5 million bid on an 82,000-sq.-ft. site on 5.1 acres of land in a suburb of Atlanta, signing HADCO as the developer.

The next step was to come up with funding to supplement the $700,000 they were investing in the deal with the Georgia Association of Educators. Finding a bank to fund the project wasn't easy, Miller recalls. Fraternity members first went to three black-owned banks for the loan, but the banks couldn't come up with the funds. Their next stop was NationsBank, which granted a loan for the balance, to be repaid by the fraternity through a members building fund drive and with $625,000 in a guaranteed certificate of deposit against the loan. The building, located on Snapfinger Parkway in Decatur, had its grand opening in December 1995.

The fraternity staff and members use only 16,000-sq.-ft. of the building. The remaining class-A space (prime commercial property), including an auditorium, is rented, generating an annual income dose to $500,000. The Georgia Association of Educators is the fraternity's primary tenant, with a five-year lease worth $1.1 million. Additionally, the 5.1 acres provide the fraternity with the ability to expand on-site. "We anticipate building a factory to manufacture fraternity and sorority paraphernalia. We've also been looking into building a hotel," Miller says.

Easy? No way. Worth looking into? Definitely. As Remy says, "The more involved we become in commercial real estate, the more we will understand the value of rebuilding our communities and managing them."

RELATED ARTICLE: Two Plays By A Pro

Harold A. Dawson Jr., president of Harold A. Dawson Co. Inc. (HADCO), a commercial realty business based in Atlanta, is a perfect example of how experience enhances one's deal-making capabilities. Dawson runs the company his father, Dawson Sr., started 30 years ago selling residential real estate before crossing over to the more lucrative sector of commercial real estate.

In 1996, Dawson and his father negotiated a deal with the city of Atlanta to construct a $15 million apartment complex known as City Plaza in the city's downtown area.

The mixed-use residential project, located in the south central business district near City Hall, contains 27,000-sq.-ft. of class-A retail space end is anchored by a 14,000-sq.-ft. Kroger supermarket and a 360-car parking garage. The building also includes the first Sylvia's soul food restaurant outside Harlem and a McDonald's.

This was a private/public project when the Dawsons not only invested $3 million of their own money in 400,000-sq.-ft. building, but also received a 50-year land lease from the city. They also negotiated a 15-year guaranteed income contract with the parking lot company. There were also county and city tax abatements and a tax credit for designating a portion of City Plaza as moderate-income set-aside units. This project generates more than $1.5 million a year in revenues for the Dawsons.

In another instance, the Dawsons were able to see opportunity where others saw urban ruin. HADCO built the new Kroger supermarket in Atlanta's West End. Located near the Atlanta University Center, the new store was built next to an older, smaller Kroger that had fallen into disrepair and was too small for a community burgeoning with some 300,000 mixed-income residents, ranging from lower to upper middle class.

In 1995, when Dawson learned that Kroger executives were planning to renovate the old store, he offered to develop the property for a fee if Kroger would finance project. HADCO also represented Kroger Corp. in its negotiations with the Neighborhood Planning Committee end the city on zoning variances. What was realized was an 80,000-sq.-ft. building on a site next to the old store, which includes 10,000-sq.-ft. of space for smaller retailers, such as a shoe repair shop, a barber shop, an art gallery and a bookstore. Today, more than 50,000 people visit the superstore each week.

HADCO saw still more opportunity to bring business to an area previously underserved by retailers. "What you had was the new store and the old store sitting empty," Dawson says. Once again, Dawson approached Kroger officials, this time to propose buying the entire site through a sale-lease back deal. HADCO invested $7 million to purchase the site, which included the two stores and a 25-year lease with the Kroger company. The older store now being developed into a multi-tenant retail center.

RELATED ARTICLE: A Novice Stakes His Claim

For the very upbeat Charles Wallace II, the most disheartening thing in buying his own hotel was that "I couldn't ask a black person how to do it. I thought about railing Peebles, but his scope was so much larger, that I didn't," says Wallace, referring to R. Donahue Peebles, who recently purchased a luxury hotel in Miami. Instead, Wallace relied on his instincts and extensive background in the hotel business to get his deal done.

Wallace, president and CEO of The III Group L.L.C., in Greenwood, South Carolina, bought a housekeeping business on the island of Kiawah, just off the Carolina roast, from his former employers when he was 21 years old and fresh out of The Citadel, college, the noted military college. The acquisition marked his entry into the hospitality business One year later, he sold the lousiness back to the original owners at profit and a took job at a local resort as director of housekeeping, and then front office manager. In 1995, he became general manager of Promus Hotel's Hampton Inn in the historic District in Charleston, and subsequently the area manager for all three Hampton Inns in the region. By 1997, his Charleston hotel was outperforming the rest of Promus' 600-plus Hampton Inns and had received the Winegarden Award for excellence.

While a flight to a hotel managers convention, Wallace and his wife, Paryn, spotted a small ad for a 48-room hotel for sale Greenwood, an area both were familiar with. "My wheels started turning," recalls Wallace. "If I could make millions for Promus, why not for myself?"

Wallace would need $200,000 for the down payment. He started by looking closely at the area's potential for industrial growth. "We have Fuji Film in the area, a Warner Lambert plant, Vickers and a few other corporations. Labor costs are cheap here, plus we're just two hours from Charlotte and Atlanta," he says.

It looked like a good bet. He took his plan to the commercial-lending branch of a bank that helped him package the deal. It went smoothly until the bank demanded additional collateral just two days before the scheduled closing.

Underterred, Wallace quickly raised $400,000 from property he owned and from his former business associates on Kiawah. Two days later, on his 29th birthday, he become the proud owner of Inn on the Square His next goal? To develop 300 acres of land his family owns in his native South Carolina into an income-procuring golf and tennis resort.

RELATED ARTICLE: Preparing For Your First Deal

You'll need determination and persistence make in the commercial real estate game, which has traditionally been dominated by white males and has lagged behind other industries in opening doors to minorities. The Commercial Investment Real Institute (CIREI), a branch of the National Association of Realtors, reports that only 1% of its 10,000 certified commercial investment members (CCIMs) African American. In comparison, Asian Americans and women make up 5% and 15%, respectively.

A real estate license can be earned at local real estate schools and institutions. Having four-year college is not required to become broker, but is recommended. Today more colleges and universities, such as Howard University and the Real Estate Institute at New York University, are offering degree concentrations in real investment.

There are several designations that brokers can earn, including including the CCIM, that certify them in specific areas of the industry. For example, the Institute of Real Estate Management confers the certified property manager (CPM), accredited residential manager (ARM) and accredited management organization (AMO) designations.

Last year, Herman E. Bulls, managing director of the Washington, D.C., office of LaSalle Partners Inc., and a small group of his African American Colleagues founded African American Real Estate Professionals (AAREP). This 85-member networking organization aim to create opportunities for blacks in commercial real estate through networking with professionals and on college campuses. "We need to start networking so people will know when there's an opportunity at a major firm," he says. The organization also mentors Howard University students seeking careers in commercial real estate.

Here is a list of organizations that can provide certification information, educational and business opportunities, networking contacts and other resource:

National Association of Real Estate Brokers 1629 K. St. NW, Suite 602 Washington, DC 20006 202-785-4477

African American Real Estate Professionals 1001 Pennsylvania Ave, NW, Box 28 Washington, DC 20004 202-46-AAREP www.reji.com/associations/aarep

Commercial Investment Real Estate Institute 430 N. Michigan Ave., 8th Floor Chicago, IL 60611-4090 800-621-7027 www.ccim.com

U.S. Department of Housing and Urban Development Contact your local HUD office or tap into www.hud.gov

Institute of Real Estate Management 430 N. Michigan Ave., 7th Floor Chicago, IL 60611-4090 312-329-6000 www.irem.org

Building Owners and Managers Association International 1201 New York Ave. NW, Suite 300 Washington, DC 20005 202-408-2662 www.boma.org