The rise of preconstruction sales, or presales, is a sign of how overheated the commercial real-estate investment market has become, The Wall Street Journal reported. While such sales have become common in the residential market, they've been somewhat unusual on the commercial side. But as competition for commercial real-estate assets — and the prices investors are willing to pay for them — continues to escalate, some investors are trying to gain an edge by pursuing properties that are under construction or even those that haven't yet commenced construction.
For instance, even before Birtcher Development LLC broke ground on a 289,000-square-foot industrial building in Southern California, it had about half a dozen investors knocking on its door, interested in buying the building.
Birtcher signed a contract in July to sell the building, a few months before construction began.
The payoff for buyers can range from getting a better shot at acquiring an asset to getting a discount on the sale, particularly if the buyer assumes the responsibility of finding tenants for all or a portion of the property.
An affiliate of Korman Communities Inc. of Plymouth Meeting, Pa., which owns and manages apartments and corporate suites, purchased 201 of the 331 residential units at City Place. Bradley J. Korman, co-president of Korman, estimates that buying the units in a presale meant a 25 percent discount on the purchase price.
The presale "gave us the ability to buy at a slight discount" because fewer investors want to assume the task of leasing a property or bearing the risk of owning the property if construction is not completed on time, says Korman.
In fact, delays held up completion of the apartment units at City Place by about seven months. The presale deal also gave Korman's affiliate more time to line up financing, Korman adds.
Passco Real Estate Enterprises Inc. of Irvine, Calif., recently acquired a shopping mall in Orange, Calif., that underwent a substantial renovation expansion and a new retail center in Las Vegas, both in presale deals.
"It's difficult to buy in this market and we're willing to stretch more and be more creative to structure deals," says Bill Winn, chief operating officer of Passco, which buys properties on behalf of investors doing a so-called 1031 exchange transaction. (In a 1031 exchange, real-estate owners defer capital-gains taxes on the sale of property by purchasing a similar property of equal or greater value.)
Laguna Nigel, Calif.-based Birtcher agreed in July to sell the building in Corona, Calif., about 50 miles southeast of Los Angeles, to TA Associates Realty, an institutional real-estate advisory firm in Boston. The deal is slated to close in March, when the building is completed.
Birtcher has another presale deal in the works involving a project for which the company is still in the process of securing development approvals. Reza Etadali, president of Irvine-based Reza Investment Group, who is representing Birtcher in this presale, says the project has garnered interest from 10 prospective buyers so far. Buyers "want to lock in loans at today's historically low interest rates," he says.
