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Weak dollar opens door for foreign investors.

More and more US property owners are recapitalizing their real estate with passive equity from foreign capital partners, who are able to offer more attractive terms and lower capital costs than domestic sources thanks to the weakened US dollar.

This trend, which blossomed last year, is expected to continue well into 2005, according to prominent financial advisor Howard L. Michaels, Chairman of Carlton Advisory Services, who recently arranged the $1.7 billion recapitalization of the General Motors Building in New York with an infusion of foreign capital.

According to published reports, foreign investors committed $7.1 billion to property acquisitions in 2004, a 12% increase over 2003. US real estate assets managed on behalf of foreign clients now total approximately $22 billion as of the year ending June 30, 2004--an impressive 32% increase over 2003's total.

"US real estate has long been the focus of foreign investment, and for a number of reasons: diversification, the relative safety of US markets and higher returns compared to home markets, among others," states Mr. Michaels. "However, the continued weakening of the US dollar has been the most recent incentive."

Carlton works closely with German, Middle Eastern, Asian and other international investors who are actively seeking real estate investment opportunities in the United States. Because it is thoroughly conversant in the broad range of investment criteria these investors seek, it can immediately make the appropriate pairing for a recapitalization or acquisition. Often, says Michaels, these investors are willing to provide as much as 90% of the required equity capital, on terms significantly more favorable than those available from opportunity and value added funds.

According to Michaels, a window of opportunity today exists to use foreign capital for:

* Equity "Cash Outs"--Recapitalizing a property may achieve a number of goals simultaneously. By "cashing out" a significant portion of an investment via the introduction of new equity capital, an owner receives the benefit of recent increases in property value. The owner can also simultaneously lower total debt--or convert floating rate debt to fixed rate debt--and prepare itself for a potentially higher interest rate environment. It will thus reap the benefits of a partial sale, stabilize the asset's financial position in anticipation of the benefits associated with the next financial cycle and maintain control of the property (as well as the ability and incentive to increase value and economic upside).

* Replacing Expensive Equity Partners--Many of Carlton's clients have determined that it is much more efficient (and less expensive) to replace existing "high-octane" capital partners with "lower-temperature" equity. For many international investors, the most important requirements are preservation of capital and an achievable current return; they are satisfied to retain the majority of a transaction's residual value and upside economics. For example, many capital structures typically include an 8% preferred return with the majority of the cash flow and residual value going to the operator.

* Re-Proportioning Equity/Debt Ratios--Whether or not an owner is able to "cash out" of a deal, the introduction of new equity capital can still allow the owner to lower total debt (or convert floating rate debt to fixed rate debt) in anticipation of a potentially higher interest rate environment. Depending upon the property, a structure can be arranged to minimize debt service and provide flexibility to meet current pay requirements for new equity partners.

* New Acquisitions--Accessing the appropriate capital partner for future transactions can let an owner transact larger deals and a greater number of them. Partners and structures are tailored to the owner's objectives.
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Publication:Real Estate Weekly
Geographic Code:1USA
Date:Feb 9, 2005
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