Christina Real Estate Investors 2, LLC Acquires Property in West Hollywood

June 2, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

Christina Real Estate Investors 2, LLC (“Christina 2”) announced today that it acquired Crescent Hill Lofts, a 19-unit multi-family project located at 1216 North Crescent Heights Boulevard in West Hollywood, California.

Crescent Hill Lofts is a courtyard style multi-story building situated on a large land parcel with secured subterranean parking.  The project was extensively renovated in 2016.  The landscaping, common areas and apartment interiors were re-designed by noted Los Angeles architect, Ramsey Daham, AIA.

Lawrence N. Taylor, President of Christina Development Corporation (the “Company”), shared “There is tremendous untapped value in this heart of West Hollywood location with new luxury condominiums currently being developed directly adjacent to the project.”

Company Information

The Company is a private real estate investment, development and property management company founded in 1977 and headquartered in Malibu, California.  Since its inception, the Company has specialized in acquiring, developing, redeveloping, and operating investment grade residential and commercial income producing properties in the prime sub-markets of West Los Angeles, California including Beverly Hills, Brentwood, Century City, Malibu, Santa Monica, Westwood, West Hollywood, and Venice/Silicon Beach.

On November 21, 2013, the Company launched Christina Real Estate Investors 1, LLC (“Christina 1”).  The investment objective of Christina 1 is to achieve superior tax advantaged returns by acquiring and operating a diversified mix of underperforming or undervalued properties in prime sub-markets of West Los Angeles, California.  The current portfolio consists of six investments.

On September 1, 2016, Christina launched Christina 2.  The current portfolio consists of three investments.  Christina 2 follows the same successful investment strategies as Christina 1 and is currently open for investment by accredited investors.

If you would like to participate in Christina 2, please contact investor relations at ir@christinadevelopment.com.



Christina Real Estate Investors 2, LLC Acquires Properties in Beverly Hills

February 01, 2017

Christina Real Estate Investors 2, LLC (“CREI 2”) announced today that it acquired two adjacent mixed-use retail/commercial properties, located at 328 & 332 South Beverly Drive in Beverly Hills, California, for $11.5 million.

328 South Beverly Drive is an 8,000 square feet two-story reinforced brick building constructed in 1946. The property features a large outdoor courtyard and covered parking. 332 South Beverly Drive is a 3,750 square feet single-story reinforced brick building erected in 1948 with on-site parking.

Lawrence N. Taylor, President of Christina Development Corporation (“Christina”), shared “We engaged Zoltan Pali, FAIA, as the project architect for these two architecturally notable buildings. Mr. Pali designed the adaptive re-use of the historic Beverly Hills Post Office, which was converted to the iconic Wallis Annenberg Center for the Performing Arts. We have a long-established relationship with Mr. Pali and his firm, and we look forward to working with the City of Beverly Hills to preserve, enhance and re-position our properties.”

Company Information

Christina is a private, family owned, integrated real estate investment, development and property management company founded in 1977 based in Malibu, California. Christina specializes in acquiring, developing, redeveloping, and operating investment grade properties in the prime sub-markets of West Los Angeles, California including Beverly Hills, Brentwood, Century City, Malibu, Santa Monica, Westwood, West Hollywood, and Venice/Silicon Beach.

In 2013, Christina launched Christina Real Estate Investors 1, LLC (“CREI 1”), a $26 million real estate private equity company, which currently owns one commercial property and five multi-family properties. On September 1, 2016, Christina launched CREI 2, a $75 million real estate private equity company. CREI 2 has already received over $16,500,000 in capital commitments to date. CREI 1 and CREI 2 follow the same investment methodology and strategies that have proven successful for the past 40 years in yielding excellent and consistent returns to investors.

For more information on Christina, CREI 1 or CREI 2, please e-mail us at ir@christinadevelopment.com.



Yield The Yield – The Dangers of Chasing Current Yield

“It’s not the return on my money I’m interested in, it’s return of my money.” – Mark Twain

Since 1977, we have invested our own capital in every project we have sponsored. As we enter each project, we keep Mark Twain’s quote in mind – and so far that’s paid off with annualized net returns of 20.36% at a net equity multiple of 2.35x since 1993.

The influence of the Twain quote came to mind the other day after I had an interesting meeting with a real estate investor who has over $1 Billion in commercial real estate (“CRE”) exposure on his client’s behalf. He told me, “My clients don’t care about where we invest as long as the yield from the asset we invest in is above 8% cash on cash.” Alarm bells started ringing in my head immediately! We understand that in a near-zero interest rate environment many investors are simply chasing yield and that with worries about rising interest rates, investors’ faith in most yielding bond portfolios is diminished…However to say that we are worried about this CRE investors clients would be an understatement!!

By only looking at short-term yield and not the long-term value of the asset, and not recognizing the importance of location when it comes to real estate, the CRE investor and any others like him are putting themselves at a high risk of losing big. Let me explain:

In the 38 years that Christina has invested in commercial real estate, we have seen five major real estate crises. Cycles are a fact of life, and its best to understand how to plan for them. In three of those cases, we saw average CRE prices fall greater than 35% across the United States. That’s no small price dip! However, during those same exact periods, the prices for investment grade CRE in the highest density urban core metropolitan cities – New York City, San Francisco, Los Angeles, Chicago, Boston and Houston, fell approximately under 20% on average. The prices in the Top three cities corrected less than 15%. Prices for the ultra prime sub-markets within those cities corrected even less. In addition, not only did these prime sub-markets show very little price volatility, these areas were also the earliest to recover, with prices approaching their former peaks inside of two years.

So now I ask my investor friend: does placing too much importance on 8% cap rates over a location that holds its value during a correction make sense? In the prime markets which corrected 20% it took a 25% gain to recover back to its peaks . In a market that is down 40%, it takes a 66% price rise to make it back to its peak. We all know which is easier! At 8% yields, it would take the same investor nearly eight years of compounded yields to just simply make back their loss of capital. I repeat, eight years to just break even!  In reality, until your principal has been returned fully to you, all you are getting is your principal in the guise of yield.

As you can see, the amount of your yield doesn’t matter much when your asset is worth a fraction of it’s original value, but I guess some would like to learn that lesson the hard way instead of heeding Mark Twain’s advice.



There Are No Bonus Points For Complicated Investments

I am often asked by my former colleagues and associates why I made the transition from investing in stocks, convertible bonds, warrants and private investments from my days on Wall Street to focusing on real estate in California over the last few years.  First of all, I moved to California after being fed up of New York winters.  More importantly however, the answer was that real estate is the simplest asset class I have ever invested in, and in the words of Warren Buffet, because “there are no bonus points for complicated investments”, especially given the incredible low interest cycle we are within.

However, like everything else, the statement I make above comes with quite a few caveats.  Not all real estate is simple, but the way we approach our investments in real estate at Christina Development is simple.  Its simple because we have gone out of our way to make it that way.  How you ask?  I have compiled a list of eight reasons which should shed some light.

  1. Only buy prime urban core markets: Prime urban core is pretty easily defined.  Any city in the world without which the GDP of the country would be dramatically affected, any city in the world where people from all over the world are looking to buy places, any city in the world where key institutions of education, finance, law, medicine, defense and other major service industries exist, any city where there’s a demographic dividend still and more folks would like to live in than move out of.  In the US, prime urban core in my mind consists of New York City, West Los Angeles, San Francisco, and for the purposes of real estate, certain pockets of Chicago, Boston, Miami.  In these markets, the price stability is greater, the corrections are shorter lived, recoveries are “V” Shaped, price appreciation in good times are greatest, occupancies are high and mostly predictable and rents are stable and growing.  If you like sleeping well while remaining fully invested through cycles, this is the only type of market where one should invest.  Our investments in ultra prime sub markets of West Los Angeles lets me sleep extremely well.
  2. Only buy at prices that make sense:You can lose money even when you invest in prime urban core assets if you invest at prices which are not justified.  Ask the Mitsubishi Estate Company of Tokyo who bought Rockefeller Center in 1989, the then crown jewel of New York City real estate, and still managed to lose nearly $2 billion on the transaction by 1996.  The tricky part about price discovery is that it’s more of an art than science, and predicated by a lot of factors (from final use of the asset, financing costs, operating costs, capital expenditure requirements, occupancies, amongst others).  Best to not get too cute, build in contingencies and look for opportunistic ways to acquire assets, off-market if possible, that transact as a result of some event on the part of the seller (deaths, divorces, bankruptcies, family feuds etc., and other liquidity needs) at prices that you can justify for your own money.  We ask ourselves if we would pay the price being asked if we were the ones buying it ourselves with house capital instead of with investors capital each time we look at an acquisition.
  3. Only use debt if a deal pencils without it: Debt can be your friend because when returns look good, they can enhance them.  Needing to add debt to get to a point where you can justify the returns is a bad idea.  One of the reasons real estate has been behind some of the largest collapses and led to some of our biggest economic recessions (S&L Crisis, RTC, Financial Crisis etc.) were simply because of the enormous amount of leverage that can be added to real estate.  90% financing was the norm in many residential transactions across the country prior to the 2008 collapse.  In stocks, portfolio margin allows a maximum 50% financing for example, and the asset is liquid!!  When we invest in real estate, the returns from a project when we underwrite them have to make sense on a standalone basis, without any debt.  Only once we are happy with our margin on unlevered returns do we even consider adding debt.  When you don’t have debt on a project, no one can take the project away from you and with time tides change!
  4. Only buy assets with multiple uses: It’s safer to buy assets which could have multiple uses than ones where there is only one use.  Can your asset be rented as a single family home?  Could it be turned into a duplex?  Would it be AirBnB eligible? Could you just sell it as a residential project? How about long term extended corporate housing? Can your commercial office become lofts with artists in residence?  Industrial building into creative office?  Underperforming motels into high demand student housing? In all our real estate investments, whether in our residential real estate funds or our commercial real estate funds the common theme is one of multiple uses on entry for each asset and multiple ways to exit them.  Options are good in all things in life, so why not keep the optionality in real estate?
  5. Only buy assets with multiple exit opportunities: This is a post cursor to having the ability to have multiple uses.  When you acquire assets with multiple uses, it gives you the opportunity to dispose of those assets when the right time shows up in multiple ways.  Is the condo market hot?  Well if you could covert your apartment building and get it entitled to be sold as condos you could take advantage of that hot market.  Are rental yields high?  Corporate housing rates strong? Student demand insatiable? Each cyclical turn for each product may provide an exit opportunity you wouldn’t have had if you bought assets with only one exit option.  The Reserve in Playa Vista used to be the Playa Vista Post Office, which was acquired for $46.5 million in 2011, and then converted into a creative office campus and incubator space (with $30 million in capital expenditure) and sold in January 2015 for $316 million.  As a Post Office, I doubt it would be much more that what it sold for in 2011.
  6. Time is your friend in core markets:Especially as it relates to prime urban core real estate, time is truly your good friend.  If you bought the right markets, through time, it almost didn’t matter when you bought the asset, or what you paid for it (unless you were just plain stupid) because over time, new peak prices would have been achieved.  New York City is well ahead of of the prices at the 2007 peaks, and the same applies for San Francisco, Los Angeles and the pockets of Chicago, Boston and Miami I would consider as core.  Buy & Hold as a strategy only works in these type of prime urban core markets.  In any other market, a Buy & Hold strategy typically means that someone bought at the wrong time and the wrong price and now has no other choice but to hold and hope!  Even when you buy in prime urban core markets, make sure the capital stack has a duration long enough to pass through cycles.  In our investment vehicles, we have a minimum 7 year investment life, and for some product types that stretches to as long as 30 years.  Time is indeed our friend.
  7. Depreciation is your other good friend:Investment real estate is one of the only asset class where investors buy it expecting prices to go up but where the Internal Revenue Service assumes the value is falling each year.  This assumed loss in value due to a ascribed fixed life of asset is also known as depreciation, which is a passive loss.  Even better, you can use these passive losses to offset the income from the asset up to the annual amount of loss.  Without these depreciation benefits, most savvy real estate investors would likely reduce their allocation to real estate by a substantial amount.  Like time, depreciation is your other good friend which makes generating returns in real estate as an asset class much simpler than most others I’ve invested in before.
  8. Value creation is as important as value acquisition:Being able to acquire an asset at a discount to current market prices is a good thing as it buffers you partially should the markets take a turn for the worse.  However, true wealth in real estate is formed by creating real value from the asset acquired.  Most anyone can dig up some off-market asset and time the cycle correctly with some luck.  Most can figure out how to put “lipstick on a pig”, and some of these folks may even figure out how to stabilize the rents within the realms of rent control and tenant friendly regulations, but very few can see beyond what exists or have the vision to replace that with what should be.  In urban core markets, most development involves acquiring existing improvements and then redeveloping those, whether by improving on the existing structure or by rebuilding or repurposing and all those are a lot tougher than a paint job.  To be able to make that leap requires faith in one’s team (architects, builders, contractors, project managers, building managers, leasing teams etc.), their ability to execute on a plan, the experience of that team and the knowledge base that they have.  I am extremely lucky to have a team around me with over 100 years of experience that I could ride on the coat tails of.

So, as I said earlier, real estate is the simplest asset class I have invested in.  It’s either financeable and can carry its own interest costs or not, its either occupied or not, its either in the right markets or not and you either paid the right price or not…but then again, it’s always simple when things are black and white, but the only problem is that reality lies somewhere in the areas in between!  So invest in real estate, carefully, cautiously and with an eye to protecting your wealth first and foremost, and you may find yourself accumulating wealth faster than you expected!!



Old is Gold – Adding New Value to Old Property

Compared to the lightning fast changes of the stock market, the glacial pace that the real estate/ property market lumbers at is about as thrilling to watch as moss growing on a tree. It takes decades for neighborhoods to shift and it can take years for tastes and styles to gradually have an effect on the market. Let’s face it – change happens slowly.

 

But those with a keen eye can see how the slow march of time can take once valuable assets, like high rent or high occupancy properties, and leave their rents to stagnate, their occupancies to dwindle, and their true value squandered. At Christina Development, we say “Old is Gold” – and it takes a certain skill to add value to a property. As experts in redeveloping and repositioning assets, we love situations like these.

 

Fact is, nearly 65% of housing stock in Los Angeles was built before 1959. That’s a lot of gold! Some of those buildings function perfectly fine but others, perhaps cool in their time, aren’t places we would want to live or work in anymore. But that doesn’t mean they don’t hold potential value. If you have a vision for change and aren’t afraid of a little hard work, properties like these offer huge opportunities to develop, enhance and, in turn, gain on. Once you find yourself in a great position like this you can take advantage of the arbitrages that exist in situations like Loss to Lease Improvements; Apartment vs. Condo Conversion Spreads; and Entitlements & TRIP Credits. An added bonus is that these actions create multiple desirable exit strategies for the sponsor. It’s a win-win.

 

Searching for gold isn’t for the weak of heart but if your prospects remain high the returns can be spectacular!



Why Relying On Cap Rate or Stocking Up On Magic Bullets Is Never The Way To Go

“Everybody is a genius. But if you judge a fish by its ability to climb a tree, it will live its whole life believing that it is stupid.”

–       Albert Einstein

Having a magic solution or a bulletproof valuation tool would really make our lives easier at Christina. We could just wave our wand or apply our magic solution to any prospective property acquisition, regardless of its own unique intricacies, spit out a 100% dead-accurate value, and be on the beach by noon.

 

But think of the definition of a magic bullet.  It’s a general shot you can fire at any prospective property acquisition.  As much as we’d like have our toes in the sand, we know that the use of a generic tool is not the method to determine the value of investment grade real estate.

 

One of those tools that is used often is “Cap Rate.”  A Cap Rate lets you estimate the value of a property based upon estimated or the actual net operating income generated by an income producing property. While this is a simple way to compare one asset to another, and to give one a relative understanding of value, using the Cap Rate as a generic valuation tool often prevents folks from buying what could be great assets.

 

What savvy real estate investors understand is that the Net Operating Income (“NOI”) of an income producing property can be either improved or made worse by a number of factors, including the quality of management. One great example of a successful, low Cap Rate investment made at Christina is the Story of Building A, which tells a perfect story about why relying solely upon Cap Rate as a valuation tool is a mistake.

 

“The Story of Building A”

 

We recently purchased a prime multi-family residential income property in the Beverly Hills area of West Los Angeles at a “4 Cap” in industry parlance. So let’s assume Building A cost us $10,000,000. That would mean that it was generating $400,000 in NOI.

 

At Building A, the rents were 30% below the market rates for comparable apartment units. In a situation like this, a savvy real estate investor would examine the potential for efficiently increasing the rents to market levels and at what cost. If the answer is “quickly and modest,” then you may decide to continue with the purchase, as we did. Not only did we understand that the rental prices could be dramatically improved (Cap Rate = NOI/Purchase Price; NOI = Gross Revenue – Operating Expenses) which improved the numerator, but we also understood that we could greatly improve the building operations and management, ultimately reducing the denominator and producing a magnified positive effect on the NOI.

 

When the NOI changes, either because of the nominator effect or denominator effect (increased rental revenues or decreased operating expenses or combination of both), so does the Cap Rate.

 

That’s why relying upon Cap Rate alone, or stocking up on nothing but magic bullets, is never the way to go. Instead, we ask one very important question:  Why is the Cap Rate low? Digging in deeper and figuring that out will probably have a negative effect on your tan and ours, but that’s a small price to pay for finding a true gem of an investment.

 



A Smarter Way For People To Invest In Real Estate

“Markets go up and down, but our mission remains the same: process-driven, profitable real estate investments for our partners.” – Lawrence Taylor

We recently took out some space in some various LA publications announcing our first closing of a series of partnerships. These partnerships will aim to purchase $1B of real estate in West Los Angeles over the next 5 years.

This is an incredible opportunity. To learn more about our partnerships and structuring, click here.

 

LA_Times_Business



We Think Differently About Real Estate

At Christina Development, we think differently about real estate, both from the perspective of an investor and a manager.

We have a very focused geographic investment niche, that being West Los Angeles.  There are very few groups that can challenge our connectivity and experience within this select geographic zone.  Overtime we hope that you will come to respect the level of insight we can provide concerning the real estate business within this market. If our comments and thinking reach beyond the borders of West Los Angeles, all the better.

This blog is intended to be a resource, a place to go when you are looking for insight about real estate and real estate investing.  Internally, we are excited to have a voice, and to share that with you.

All said, stand by and welcome, there is more to come.