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High returns bring foreign investors to Detroit real estate market

By KIRK PINHO November 29, 2015

Comparatively high rates of return on real estate investments in greater downtown and metro Detroit as a whole continue to drive foreign investors to the region in search of deals.

It's difficult to quantify exactly how much money from overseas has been spent on real estate investment sales in the past few years, but it's well into the several hundred millions of dollars, said Dennis Bernard, founder and president of Southfield-basedBernard Financial Group Inc.

The reason for the influx of international funds is simple: Compared with other hot markets, the payout in Detroit is greater.

Real estate investment returns are measured in capitalization rates, commonly called cap rates among industry experts. They are calculated by dividing the asset's total value into its net operating income.

In major markets like New York City, Los Angeles and Miami, investors can expect capitalization rates of 4.5 to 6 percent. Locally, they are between 6.75 and 7.75 percent, Bernard said, with the best investment-grade properties in prime locations having capitalization rates of 7 to 8.5 percent.

"That's why foreign money is coming here," he said.

The buyers are largely from Asia, the Middle East and Canada, said Mike Schick, director of Birmingham-based Q10 | Lutz Financial Services, which arranges debt financing on real estate acquisitions and development projects.

"These regions have more available capital to invest and fewer local investment opportunities," he said. "The U.S. becomes an economically and politically stable place to invest. Detroit is an area where the investment returns can make sense."


Most recently, a German investment group with its eyes set on more than a dozen multifamily conversion projects in the greater downtown area closed on its first purchase: The pre-Civil War era Charles Trombly House at 553 E. Jefferson Ave., which has 5,000 square feet that could be repurposed in a small apartment redevelopment. 

One of the brokers on the deal, Randall Book, executive vice president in the Southfield office ofColliers International Inc., said the investors have "no problem" putting between $400,000 and $600,000 into a conversion, putting the price tag at $80 to $120 per square foot. 

But that's just the beginning for the investors behind Optima Larned LLC, which purchased the Trombly House and lists a Toronto-based real estate developer, Thomas Yarmon, as an authorized agent on one of its filings with the state Department of Licensing and Regulatory Affairs

The group is also looking at Midtown properties and others throughout the 7.2 square miles of greater downtown, Book said. 

The investment comes on the heels of recent notable moves in foreign investment downtown, just one of which was Carlos Slim Helu's purchase of the 164,000-square-foot Marquette Building on West Congress Street downtown late last year. Helu, a Mexican telecommunications mogul who is one of the wealthiest men in the world, paid $5.8 million for the nearly vacant building near Cobo Center

But others are in the process of exiting the downtown market entirely, having seemingly reaped substantial returns on comparatively small investments. 

For example, DDI Group, a Shanghai-based group of investors, parted ways earlier this year with the David Stott Building and Clark Lofts building in Capitol Park, selling them to Dan Gilbert's Bedrock Real Estate Services LLC in May for a combined $18 million, nearly 50 percent more than the $12.05 million it spent two years ago buying them. 

Earlier this year, DDI also put the former Detroit Free Press headquarters building on West Lafayette Boulevard up for sale for $16 million, nearly four times what it paid for the building two years ago. The 302,000-square-foot building is the last remaining property in DDI's downtown portfolio. 

Some foreign investors, such as DDI, a few years ago were simply looking to park their money in Detroit real estate because the prices were so low and they knew they would only increase over time, Schick said. 

"That's worked for a number of people," he said. "What we are seeing now is the wave of people coming in and maybe they are paying a little bit higher prices, but they can pay more than what they would have (historically) and see that it's worthwhile to invest the money. 

"They seem to be building ties with the communities and be legitimate real estate owners in this market." 

Milan, Italy-based Akno Enterprises also struck a deal with Gilbert earlier this year, selling him nearly 500,000 square feet of space between the Book Tower, the attached Book Building and a nearby three-story community center building for a reported $30 million. 

Others, such as Packard Plant owner Fernando Palazuelo, a native of Spain who has been developing properties in Peru, are playing the long game on their initial investments. Palazuelo earlier this year anticipated his planned 10- to 15-year redevelopment of the 3.5 million-square-foot plant on the city's east side — for which he paid just $405,000 at a Wayne County tax foreclosure auction — would cost more than $400 million. 

It's not just downtown and other parts of the city where foreign money is making waves. In Southfield, a group of primarily Israeli investors purchased the 382-unit Solaire Active Adult Community on Providence Drive in March for $20 million. 

A Toronto-based company, Triple Properties Inc., owns the Pontiac Silverdome and is currently marketing its 127.5 acres and the stadium that sits on it for sale, with a massive redevelopment planned, possibly with 1.6 million square feet of space. 

And look for foreign investors to continue to scout the area for opportunities to get in on the action. 

"From an investment standpoint, Detroit still looks very good," Schick said. 
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New Detroit mortgage program offers big buyer incentives

By Matt Helms Detroit Free Press April 17, 2015

Potential homeowners who have been stymied by Detroit's low real-estate values have a new path to home ownership in a mortgage program that offers easier rules for eligibility, lower interest rates and the ability to include money to rehabilitate homes.

On Thursday, Detroit Mayor Mike Dugann unveiled details of the plan, which he said will address some of the biggest problems that stop people from getting loans on Detroit homes.

Among the details:
•Loans will be at below-market fixed rates in 15- or 30-year terms and will be offered only to people buying a home they plan to live in.
•Loans will have no down payment, closing costs or fees.
•Borrowers' credit scores will not be considered, but home buyers must be employed or have a steady income and be current for 12 months on existing bills. Those who aren't current are offered financial counseling to improve their payment histories.

The Neighborhood Assistance Corporation of America said a pool of loans funded by Bank of America will be available to Detroit purchasers who meet eligibility requirements, under better terms than buyers get in the traditional mortgage market.

NACA is a nonprofit group with bank funding that works in communities around the country to provide what founder and CEO Bruce Marks calls "character-based" mortgage lending, rather than mortgages based strictly on credit scores and other financial factors.

Marks said it makes no sense that people with stable employment histories but less-than-stellar credit who can and often do pay $700-$800 a month in rent — and regularly make those payments — can't be qualified for a mortgage that could cost $400-$500 a month.

Duggan said the program is available for any home purchase in the city but will be particularly helpful in financing purchases made in the Detroit Land Bank Authority auctions. Potential home buyers in the auction are often stymied when homes they intend to purchase don't appraise for the sale price.

NACA underwrites mortgages that may include rehabilitation money for up to 110% of a home's assessed value. For homes purchased through city land bank auctions, that loan-to-value ratio will be up to 150%, which Marks called unprecedented in the nation.

"This has never been done in the history of mortgage lending," Marks said at a news conference Thursday.

Marks said the group's mortgages have among the lowest default rates in the country because the group provides financial counseling and emergency assistance to keep buyers current on their mortgages. And under the program, buyers who, for example, bought a house at auction for $5,000 that needed $55,000 in repairs would qualify for a $60,000 mortgage, even if the home would appraise at only $40,000 after the upgrades were complete.

Under that scenario, which Duggan said happens regularly in the city, banks wouldn't write a mortgage. But purchasers of Detroit homes will be able to qualify for mortgages of up to $200,000 through NACA.

Duggan said the NACA program solves what he says is a temporary problem: real-estate values in Detroit that remain artificially low because of the extent of subprime mortgage foreclosures. Property values have rebounded in the suburbs, but not in Detroit, and that has the effect of forcing people who want to buy homes to do so outside Detroit, Duggan said.

"We think today we've solved a very significant problem," Duggan said. "These neighborhoods are coming back quickly, and now for the first time we're going to be able to solve the appraisal problem."

Duggan said that, with the new mortgages being offered, the city's land bank will be able to auction three houses a day starting in May, up from the current two per day.

Matt Elliott, Bank of America's Michigan market president, said its funding of the mortgages marks a commitment to Detroit's recovery.

"We can only be successful if Detroit is successful," he said. "Investments like this make good business sense, too."

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