Japanese Adopt a U.S. Approach to Investing : Unfamiliar Concept of Limited Partnerships Used to Acquire Real Estate in American Cities

When the Japanese travel abroad they like to do it in groups. Now they are taking a group approach to real estate investments in the United States.

Japanese investors are buying interests in a single U.S. property or a package of American real estate holdings through limited partnerships formed by U.S. and Japanese companies.

Trammell Crow Co., a diversified real estate and management firm headquartered in Dallas, for example, went overseas to sell a group of 16 industrial, retail and suburban office properties in Texas, California, Tennessee, Georgia and Virginia.

Two U.S. insurance companies, Equitable Life and Metropolitan Life, have done the same with a number of properties. Nomura Babcock & Brown raised funds to refinance one Manhattan building by selling a convertible mortgage to Japanese investors. Mitsui Real Estate Sales USA, a unit of Mitsui Fudosan of Tokyo, has spun off some of its suburban Los Angeles and Phoenix properties.

Buying properties through limited partnerships is entirely new to the Japanese and a marked departure from their traditional approach of one owner for one property. The syndicated properties also signal a diversification in types of properties that interest the Japanese. They are now looking beyond multimillion-dollar, prime commercial real estate in major U.S. cities to suburban or downtown properties in smaller cities.

In organizing limited partnerships, companies are typically taking existing properties they own and selling interests in them to Japanese investors, who, as limited partners, take no part in management of the properties and assume limited liability.

Firm Pioneered Approach

For U.S. companies, the partnerships offer a new way to tap Japanese money and to establish new business relationships. For Japanese investors, they provide the opportunity to diversify and learn about the U.S. real estate market with limited risk.

Trammell Crow was the first to take a U.S. real estate syndicate to Japan in 1986. “As far as we know, it was the first portfolio of properties sold in Japan,” said Bowen (Buzz) H. McCoy, managing director at Morgan Stanley’s Los Angeles office, which handled the $180-million offering of 16 properties--industrial, specialty retail and suburban offices--in Texas, California, Tennessee, Georgia and Virginia.

“Morgan Stanley had been doing a lot of sales of U.S. real estate to the Japanese in 1970s, most of those transactions were as a single building--a shopping center or a hotel--to a single institution,” McCoy said. He said the Trammell Crow limited partnership was “done to test the market for portfolio sales against individual property sales.”

Metropolitan Life, which completed the sale of $225 million, or 95%, of its limited partnerships to Japanese investors in January, had another reason. “One of our goals was to find Japanese companies or institutions that we felt were compatible with the long-term philosophy of investing that Metropolitan has,” explained Rip Berger, vice president in the real estate services at Metropolitan Life in New York.

The idea, he said, was to build a small number of relationships for future business. “We ended up with five Japanese life insurance companies, one casualty insurer, one equipment leasing company and a land company related to a major Japanese bank.”

Selling the partnerships, however, has not been easy. It was a major educational effort for the U.S. companies because the Japanese are not familiar with the concept and practice of partnership, which has not existed in Japan.

Those partnerships sold in Japan have been formed under U.S. laws. “One of the difficult aspects to explain was what a partnership was,” said McCoy at Morgan Stanley, which also handled the $256-million offering by Equitable Life.

“It was a new way to sell real estate,” said Berger. “It is very common in this market . . . but new to the Japanese.” As a result, the U.S. firms had to hold extensive meetings with Japanese institutions.

The Trammell Crow partnership of industrial and retail properties took a little more effort because Japanese institutions typically prefer to invest in office and hotel properties.

Japanese real estate buys overall are expected to continue in 1988. Landauer Associates Inc., a real estate consulting firm, is estimating that real estate expenditures by the Japanese this year will rise 10% to 15%. Estimates for Japanese real estate buys in 1987 range between $6.8 billion and $7.5 billion.

Richard S. Stanson, senior vice president at the Los Angeles office of Landauer, said the investment pattern is moving beyond New York and Los Angeles into other areas in the Midwest and South where Japanese plants are beginning to spring up.

“As trophy buildings become available they will buy them for corporate prestige for the long-term hold,” he said. “As other properties become available they will be syndicated. They (the Japanese) are consistently great learners.”

Since the Japanese hold onto properties at least twice as long as Americans, it is unclear what impact their purchases might have on U.S. real estate market. “There used to be cycles to the market; that will disappear,” Stanson said, “There are properties sold that will never come onto the marketplace in my lifetime again.”

Others such as Berger believe that the Japanese approach is not much different from Americans who typically hold commercial buildings for at least 10 years, he said.

INVESTING IN THE U.S.

A sampling of major Japanese purchases of U.S. properties

JAPANESE PROPERTY/ INTEREST INVESTOR LOCATION ($ millions) YEAR Nomura Babcock & Brown 919 Third Ave. 325 1987 Manhattan Equitable Pacific* 15 properties 256 1987 Various suburban Met. Life Insurance.* 6 office bldgs. 225 1987 Various cities Trammell Crow Int’l Partners* 16 properties 180 1986 Various suburban Gainey Drive Associates Hyatt Regency 100 1987 Scotsdale, Ariz. Mitsui-SBD American Fund 87-1 3 properties 30 1987 So. Cal. Mitsui-SBD American Fund 87-2 3 properties 30 1987 L.A., Phoenix

* Limited Partnership

Source: Salomon Bros. Inc.