Baby Steps By Donald Jay Korn, November 1, 2009


Financial Planning Magazine – Quotes J. David Lewis

“Many people believe – with good reason – that the current recession and the 2008-2009 stock market crash were caused largely by the bust of the housing market and the consequent crunch in home mortgages. On the commercial real estate side, the news hasn’t been much better.”



Buying distressed real estate debt requires specialized expertise. Some planners may prefer equity investments, which are more familiar to clients. Moreover, a successful investment in leveraged real estate may deliver superior long-term returns, compared with buying discounted loans.

If planners believe clients should be buying property now, they must decide whether to recommend syndicated programs (those that raise money from numerous investors in different areas) to their clients. J. David Lewis, president of Resource Advisory Services in Knoxville, Tenn., has decided not to go that route. “I’d rather invest locally because I know the market,” he says.

Six years ago, Lewis found a local developer with whom he thought his clients could invest. “It took a while, but the building eventually filled up,” he says. It’s an industrial property; the main tenant is a cable TV shopping network.

Lewis says that over the years, his clients have bought out some of the other investors, increasing their stake in the property. “They own over half the project now, so they can hire and fire the manager-that’s critical in a real estate investment. My clients are getting a substantial cash flow return.”

As the building reached full occupancy, Lewis’ clients were able to refinance the debt they had used to buy in, getting better terms. Originally they had to personally guarantee their loans; now the loans are nonrecourse (secured only by the real estate, not by his clients’ personal assets).

Not all local development ventures turn out so well, though. Lewis put clients into a subsequent project with the same developer-an office-hotel-retail complex that is also in the Knoxville area. “So far, the developer hasn’t raised enough capital and has not found enough tenants,” Lewis says. There have been capital calls for investors, so some of Lewis’ clients have had to put up more cash to maintain their stake in the project.

Nevertheless, Lewis still believes in this development, as do most of the other investors, who “include some people who are very knowledgeable about the local real estate market.” Lewis goes to shareholders’ meetings, so he can keep up with all that is happening.

Lewis admits that these ventures take up a lot of his time. Still, he’d rather invest in real estate this way, instead of putting clients into a deal that owns multiple properties around the country. “I have more control over how their money is invested, and my clients take pride in owning local property,” Lewis says. “This type of real estate investing is not for amateurs, though.”

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