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Companies International: Government's house in order
Financial Times
August 04, 2003
By: Lee Elman and David Wells
US federal, state, and local government agencies are facing budget crunches but Lee Elman says they make great tenants for his buildings.
Elman Investors, his New York City-based real estate investment firm, buys buildings that are occupied by the government or soon will be. His is an area of the real estate market many investors overlook because of the perception that the government is a tough client, Mr Elman says.
But he scoffs at this notion, saying the government has good credit, is less likely to vacate a properly than a small business and needs long leases.
The total value of his properties is about $300m and he is eyeing several more this year. "Not bad for two guys in a small office," says Mr Elman, who with his colleague John Moss operates from a space on Manhattan's Upper East Side.
When Mr Elman started his firm in 1979 he focused on multi-tenant buildings filled with small to medium-sized businesses. In 1982 he switched to single-tenant buildings occupied by creditworthy corporations and banks.
Following the strategy, he made his biggest transaction - the acquisition of the Marine Midland bank headquarters in Buffalo, New York, for $52m.
But in 1996, facing an onslaught of competition, he decided to tweak the plan and go after government clients. To test the market, he bought buildings in small towns and found it was easier to get the government into a long-term lease, a key factor for a single-tenant property because it helps avoid the worst pitfall an empty building.
Now Mr. E1man's sweet spot is a $10m-$20m acquisition price. The highest price he and his investors have paid for a building housing a government client is $37.7m for a 240,000 sq ft building in Tacoma, Washington.
He says his biggest worries are potential increases m maintenance costs and wondering whether clients will renew their leases but these are minor compared with the worries of multi-tenant buildings.
To woo government agencies to resign leases he offers to fix up buildings and reduce the rent, which he can afford because of the length of the lease: He makes cash distributions on a monthly basis to his investors.
His tenants include the US Bureau of Land Management and the Department of Defense. He is beginning to cluster his properties, which cuts his building management costs and helps him develop relationships with agencies.
Locations include the Washington, DC area; the metropolitan area of Dallas, Texas; and Seattle, Washington.
Last year in Dallas, he bought an empty building with government tenants next door, making an educated - and correct - guess that the Immigration and Naturalisation Service would sign a lease on the neighbouring building.
The three-year bear market in stocks and low interest rates have made it easier for him to gain the attention of investors looking for less risky investments. As Mr. Elman says: "You can't get better than the US government."
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