May 12, 2003

THE REAL DEAL: TAURUS DIVERSIFIES, SEEKS TO ASSEMBLE PIECES

What’s a nice bull like you, doing in a market like this? “Diversifying,” according to senior management at Taurus Investment Holdings in Boston.

The group has just raised $25 million in equity to launch a net lease business under the leadership of veteran real estate investment banker Scott Tully, head of Taurus Capital Markets.

Through its new net lease initiative, Taurus Capital Markets, a wholly owned subsidiary of Taurus Investment Holdings, the company expects to generate high current income for investors through diversifying its markets, tenants, property types and lease terms. Under the leadership of Tully, who joined Taurus after eight years with Boston-based AEW Capital Management, it has successfully penetrated the U.S. high-net-worth private placement market to establish a clientele of more than 25 prominent families.

Taurus is part of a recent wave of private equity funds to pursue the net lease market. “Any new business must be based on market demand, either present or perceived,” notes Taurus Chairman Lorenz Reibling, “ and a pricing model that generates value for customers as well as profits for the company. The net lease business does exactly that.”

The new initiative will focus on transactions in the $5 million to $15 million range. The average cap rate across the portfolio is expected to be between 10 percent and 10.5 percent, with a target credit rating of a melded BB. The average lease term is five to fifteen years.

According to Tully, the companies that will emerge from the current weak economy have already cut expenses as much as they can and are now scouring their balance sheets to identify assets they can monetize. Real estate is an obvious candidate. Tully feels that a net lease is a better alternative to bank financing because a company in the process of restructuring can cash out 100 percent of the asset with a sale leaseback transaction vs. obtaining only 50 percent loan to value from a bank.

Taurus Investment Holdings is a leading real estate advisor to wealthy European families. It owns and operates directly managed and joint-venture commercial real estate through subsidiaries in the United States, Canada and Europe. It has purchased and sold more than 10 million square feet of office, industrial, retail, residential and hotel assets since its inception in 1976. The company has approximately $1 billion in assets.

Land represents another diversification effort by Taurus. Under its Taurus of Texas subsidiary, the company and its partner, Triwest Enterprises, will purchase and sell sites for planned communities to national residential builders. The Dallas / Fort Worth market has been averaging about 35,000 housing starts per year. Taurus has done well by its investor base. The U.S. real estate market has offered high returns, with comparatively low financial and political risk. Unlike some competitors that derive revenue from management fees, the Taurus business model is based on the company’s profit participation in each transaction. While Reibling anticipates longer holding periods and higher interest rates to put pressure on future profits, he still expects returns on its core portfolio to be in the mid-teens for 2003.

Squaring Off

High return and low financial and political risk has attracted European investors to the U.S. real estate market in the recent past. However, litigation risk continues to be the bane of U.S. fund managers. As the European markets recover, this may make the U.S. somewhat less attractive. A classic example of the problem for Taurus is their Assembly Square Limited Partnership, a joint venture of Taurus New England Investments Corp. and Gravestar. The most recent plan is to build a new waterfront neighborhood along the Mystic River with 860 apartments, 2 million square feet of office space and a $36 million arts center in addition to a 173,435- square-foot Home Depot store, all at the site of the former Assembly Square Mall in Somerville. The project would include a new stop on the MBTA’s Orange Line. However, after innumerable meetings, court rulings and appeals, the project has been stalled by the efforts of the Mystic View Task Force, a grass roots organization that is against “big box” retail development for the area.

The current stalemate appears to boil down to an ideological clash between “big box, auto-oriented developers and a smart growth, new urbanism citizens’ group,” according to Steve Post, Somerville’s executive director of housing and community development. However, hope is in sight, as Massachusetts Institute of Technology’s Larry Suskind, one of the cofounders of the Harvard Negotiation Project, has been engaged to help the parties move forward. The city, the developers, the Mystic View Task Force and a group of “silent citizens” have agreed to undergo a mediation assessment by Suskind’s Consensus Building Institute.

Bill Sheldon, president of the Mystic View Task Force, identified one piece in the log jam that can be removed. The current plan has Home Depot moving from its current location in Assembly Square, a site owned by the Milstein family in New York, to the site owned by Assembly Square LP. “The land swap would leave the current building for another big box company to occupy,” notes Sheldon. However, Sheldon concedes that “it is conceivable that Home Depot might have another place in Assembly Square if the current location is replaced by high value, high-density development.” After a four-year delay and an estimated $8 million in combined legal expenditures and lost opportunity costs, moving the project to closure would not only be one of Taurus’ greatest achievements, it would also be a win for the Somerville community, creating 1,000 new jobs and millions of dollars in much needed tax revenue.

Bruce K. Cole is a principal with Cole Financial Services LLC, a Boston-based real estate investment and advisory firm. He can be reached at bcole@smartlandlord.com.

©2003 The Warren Group Inc. All rights reserved.