Tax write-offs lose, cash returns gain, in '80s investing climate

Forget the '70s. In terms of real estate investing, they are a thing of the past, a fond but fruitless memory. Inflation-powered price increases that made real estate an almost instant wealth-maker in the 1970s are gone. For the foreseeable future, real estate still looks like a strong choice, but not the genie in a brass lamp.

A powerful group of changes has altered the way investors look at real estate investments and therefore the kinds of products syndicators are offering. Tax-oriented, highly leveraged, long-term deals are out. Liquidity, cash, and current returns are in. Real estate investment trusts (covered elsewhere in this section), for example, are the current hot item in the stock markets.

One real estate syndicator terms it the ``Yuppie'' investment philosophy. ``Investors want the best of all possible worlds from real estate. Their attitude is: `I want to have cash returns now, not in seven years, and if I don't like the deal, I want to get out now,' '' he says. Lower inflation rates, anticipated changes in the tax law, and changing demographics have joined forces to cool the speculative ardor associated with real estate prices and investing.

``The public believes that inflation is under control,'' says Furhman Nettles, vice-president of Robert A. Stanger & Co., which publishes tax shelter newsletters. ``So investors are looking at the income-oriented products where you need relatively less protection against inflation. The lower the tax bracket you are in the better rate of return you get on an income-oriented product.''

``There has been a significant slowdown in capital raising for tax-oriented deals,'' says Edward Hess, senior vice-president and real estate manager at Boettcher & Co. in Denver; ``that is, the more risky, high-write-off, leveraged deals.''

Although the number of dollars going into real estate continues to rise, investors want current cash and liquidity, two items absent from the leveraged, limited partnerships that surged to popularity in the '70s.

For the opening months of 1985, dollars going into publicly registered partnerships shot ahead of the 1984 rate by 50.5 percent, according to Stanger & Co. Over the first two months, investors popped for $821.4 million, compared with $546.1 million in 1984.

Beneath the overall figures, however, lie ``some astounding changes within specific market segments,'' says a Stanger spokesman. The leveraged deals -- tax shelters -- are down; the liquid deals that provide a cash return are way up.

For the first two months of this year, compared with the same period last year, according to the Stanger Report:

Investing in leveraged public partnerships declined 4 percent. Hidden within this statistic is the fact that highly leveraged partnerships, those that borrow 80 percent and more for real estate purchases, are way down, while those with less leverage have become more popular.

Investing in unleveraged public partnerships surged 83 percent.

Participating mortgage partnerships surged almost 114 percent.

Self-liquidating real estate investment trusts rose more than 190 percent.

There are other important changes. The Sunbelt, for example, has lost much of its glow. Cities such as Dallas and Houston that once offered sizzling opportunities now bulge with surplus space in apartments, shopping centers, condominiums, and office buildings. Major Sunbelt developers are moving out of their home turf in favor of such unlikely places as New Jersey, Philadelphia, Boston, even Detroit.

``Three or four years ago we moved out of Dallas and Houston and moved into Chicago and Philadelphia and Detroit,'' says Alan Parisse, senior vice-president of California-based Consolidated Capital. ``Why move? You look at a city like Houston, and it's obvious that it's too crowded.

``You look at a city like Philly and see that it has made the transition from blue collar to white collar. There haven't been a lot of rent increases, but it is growing. So builders will have to build to meet demand, and when they build it will be expensive, which means rents will go up.

``We will already be there with existing, less expensive real estate. . . . Our philosophy has always been that you buy when the cost is less than building and you build when the cost is less than buying. You go into an area out a sense of the demand for space.

``Over the last 10 to 15 years, real estate has become viewed as a tax shelter and inflation hedge,'' he says. ``We've always viewed it as a business, and the rest of the market is coming around to that view. The most important things are supply, demand, rent, and the cost of the property.''

``In the 1970s,'' adds Boettcher's Mr. Hess, ``you could make mistakes in real estate investing and inflation would take care of them. You can't do that today.''

Syndicators also feel a squeeze in their profit margins as they lower front-end fees in the fierce competition for investor dollars. They are having to put more of investors' money into the ``ground'' instead of into commissions and management fees.

The Stanger Register of partnerships shows a trend toward putting 85 to 90 percent in the ground, compared with 75 to 80 percent figures in the 1970s. T. Rowe Price, a Baltimore-based investment banker/syndicator, has even launched a real estate program with no up-front fees.

The trend bodes well for investors, but at same time, management and marketing costs have increased. That means tighter profit margins for investment syndicators and tough times for the smaller firms.

Typical of the kinds of real estate products gaining among investors are three from Consolidated Capital.

Consolidated Capital Properties VI takes a minimum investment of $3,000 for a $50 million to $100 million pool and buys existing real estate with a bias toward apartments. The fund is moderately leveraged, putting about 35 percent down.

ConCap Institutional Properties is open only to tax-exempt accounts, such as individual retirement accounts (IRAs) and Keoghs, and makes participating mortgages to a ConCap ``entity'' that goes out and pays cash for the properties. Investors receive a 9 percent yield and 75 percent of any profits on the property.

Consolidated Capital Income Opportunity Trust. CCIOT, now in its second fund, is a self-liquidating real estate investment trust that now yields 8 percent. It uses investor money to make joint ventures on new construction and make participating mortgages to outside buyers of existing real estate. The first CCIOT closed out at $245 million, and Mr. Parisse says it's the most popular new product ConCap has marketed.

``Real estate is still very important,'' says Hess.

``If you look at how people have made money, it boils down to real estate, oil and gas, and entrepreneurial investments. Real estate is a good way to make money, but it's not pie in the sky.

``With the right ingredients, it is the most moderate-risk way to make money. You can physically study the investment. You can study the track record of the developer and the syndicator. How many other investments let you look that closely?

``Real estate is a way to build your net worth and perhaps double or triple your money. It still maintains a very good risk/reward ratio.'' Chart: Real estate yields and capitalization rates Real estate yield: Similar to bond yield to maturity. It is a combination of the present value of anticipated appreciation of annual cash flow plus the present value of a projected resale at the end of a medium-term holding period. Real estate capitalization rate: Similar to dividends on stock. The annual rate of return on market value (not a fixed rate). Source: Real Estate Research Corporation

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