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BERKO: Strip mall problems should make investors very wary


Dear Mr. Berko:

I’ve enclosed some information from a private-placement limited partnership that will own and manage a portfolio of strip-mall shopping centers. According to my broker, this investment will pay 7.2 percent, most of which will be tax-free. He also says that because the properties are being purchased at 25 to 30 percent below the high prices of 2009, the real estate has a good opportunity to increase in value. For every dollar invested, there will be only $1 of borrowed money, which will be loaned to the partnership by the general partner and secured by the underlying strip-mall shopping centers. Please tell me what you think.

F.O., Akron, Ohio

Dear F.O.:

I think that investment is a grand and wonderful way for the seller of the strip-mall shopping centers to make a bundle by unloading those properties on a bunch of stupids.

In some instances, the values of many strip-mall shopping centers have risen smartly from their lows of mid-2009 – up nearly 55 percent from their panic bottoms. Gutsy, wise investors took over failing strip malls at 40 to 50 cents on the dollar from gasping lenders with cash down payments of 10 percent. So when a strip mall increases 50 percent in value, the gutsy, wise investor makes a fivefold return on his or her investment. That’s when leverage really works well.

Most of these strip malls are still 25 to 30 percent below their 2007 peak prices, and those comparisons make the properties look attractive. Because these gutsy investors are also wise investors, they realize that it’s now time to take their enormous profits. The brokerage community was hired to find a designated patsy to buy these shopping centers. That designated patsy is the investing public.

One of the most important reasons that values have risen is not increased occupancy or higher rents but rather declining interest rates. The BankAmerica index of Triple B-rated corporates has declined from 8.7 percent in 2009 to 4 percent today. This caused real estate investment trust (REIT) valuations to rise and is reflected by a decline in the shopping-center REIT cap rates from more than 9 percent in 2009 to 6.25 percent today, which is comparable to 2006-2007 levels.

Though these valuations are supported by record-low interest rates, they are a false positive.

Today’s strip malls are a lower-income shopping experience, and they attract lower-income tenants who pay a lower-than-normal market rent. Many of these shopping malls are occupied by struggling mom-and-pop operations fighting a daily losing battle with online stores that suck revenues from their front doors. Additionally, these strip malls attract lower-income shoppers, making the tenants vulnerable to high unemployment and weak consumer sentiment.

Meanwhile, an initial 12 percent brokerage commission – plus annual management, marketing, advertising, legal, accounting and other expenses – mean killer costs.

I doubt that your general partner can maintain a 7.2 percent income stream, so I suspect that perhaps half of that 7.2 percent income may be paid from principal.

I’m enormously underwhelmed and hope that you keep your $70,000 in a safer place.

Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or email him at malber@adelphia.net. ©2011 Creators.com

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