Real Estate Perspectives
3305 Northland Drive, Suite 301
Austin, TX 78731
Phone: (512) 459-7100 Fax: (512) 451-4008
Ross M. Cummings
hen I joined Cummings-Baccus it was obvious to me
PH: 512-459-7100 Ext 101 that they were a dynamic real estate investment
Daniel T. Cooper company. Cummings Baccus has a tremendous track
M. Buckner Baccus Partner & Editor
General Partner record over the past ten plus years, acquiring over four
firstname.lastname@example.org million square feet of commercial real estate.
PH: 512-459-7100 Ext 102
Jay Legg Much of the company's success has come with little fanfare. That's been by design. It has
Partner always been the practice of the founding principals, Ross Cummings and M. Buckner
Baccus, to let their actions speak louder than their words.
PH: 512-459-7100 Ext 103
Daniel T. Cooper In its quiet yet extremely effective way, Cummings-Baccus has established a powerful
Partner presence in the commercial real estate arena, especially in the Southwest United States.
PH: 512-459-7100 Ext 104 We focus on larger deals with unconventional components — deals that institutional
buyers perceive as too risky and private investors find too large. Our success is the result
Office Administrator of a strong philosophy complemented by excellent execution.
PH: 512-459-7100 Ext 100 Over the past year, I have been working on finding new ways to tell the Cummings-
Andrew Chasteen Baccus story — from our Web site at www.cummingsbaccus.com to press releases and
Systems Administrator now this publication.
PH: 512-459-7100 Ext 106 Our success is fueled as well by affiliations with top-notch talent and industry-leading
companies. Many of these companies are featured throughout this magazine. Should you
need any of the services they provide — whether equity, title, legal, brokerage or
insurance services — these companies come highly recommended.
The future looks ever brighter for Cummings-Baccus. We are poised to acquire more than
$250 million in real estate, and we look forward to a great year. It's a story everyone at
Cummings-Baccus is proud to share with you.
Daniel T. Cooper
About the cover…
Unisource Energy Tower:
232,000 sf, class “A” office in the
CBD of Tucson Arizona.
In this Edition…
Big Opportunities do Come
Vision of Value . . . . . . . . . . . . 4 in Smaller Markets . . . . . . 23
Electricity Deregulation Commercial Lenders
and Commercial Real are Still Playing, But the
Real Estate Perspectives is published by QuestCorp
Estate in Texas . . . . . . . . . . . . Rules are Changing . . . . . . 29
Publishing Group, Inc., 17822 Davenport Rd, Ste B,
Oil Industry Graces
Dallas, TX 75252. Phone 972.447.0910 or 888.860.2442, Fax
972.447.0911. QuestCorp specializes in publishing cor-
porate magazines for businesses.
Many of Artist's Works . . . 16
Propels Cummings-Baccus Into Its Second Decade
C hange is never easy for
any business. But remaining
true to a firm's founding
values can be even harder.
While the last
the real estate investment
delivered plenty of change at
company's entrepreneurial spirit
and dedication to value are as solid as ever.
Ten years ago, Cummings-Baccus' creators
could only dream of the commanding size,
purchasing power, geographic focus and wide
access to capital the company enjoys today.
Since those early days, Cummings-Baccus
Baccus. quot;We have the luxury of
operating within a broad range of
A recent acquisition in Midland,
Texas, sharpens the distinction
between Cummings-Baccus and
other competitors. In most cases,
acquiring 600,000 square feet of office space
would only be an institutional play. But the
smaller Midland market is unlikely to meet
the requirements of many institutional
investors. Cummings-Baccus, however,
combined its financial power and investment
freedom, to add 600,000 square feet of class A
Midland office property to its portfolio.
Co-founder Ross Cummings
Cummings-Baccus may have another edge in
uncertain financial times: the energy industry.
The industry tends to do well during a
troubled economy, and Cummings-Baccus
has a high number of energy-related tenants in
markets from Houston to Tulsa. That gives
property revenues a soothing shot of stability.
has acquired 45 commercial real estate
properties with more than 4 million square
feet of space in 29 markets. A free range and entrepreneurial energy would
Despite the successful transformation,
mean little without capital. Cummings-Baccus'
yesterday's management would still be right at smart sense and sterling investment record
home with today's consistent investment
philosophy: Find, acquire and create value. have kept capital flowing and growing.
Since its inception in 1992, Cummings- A free range and entrepreneurial energy When the economy does come roaring back,
Baccus has focused on buying and operating would mean little without capital. Cummings- Cummings-Baccus is ready to ride it to even
office buildings across the Southwest. The Baccus' smart sense and sterling investment greater heights. Management wants to do four
formula may seem familiar to anyone who record have kept capital flowing and growing. times as much business in the next five years
knows publicly-traded real estate investment quot;We have very strong long-term capital as Cummings-Baccus delivered in its first
trusts (REITs) or large institutional investors. relationships that give us the ability to move decade. To make that happen, the real estate
But a unique twist to the old equation sets quickly and take on market risk,quot; Cummings investment firm is targeting five major
Cummings-Baccus apart: The privately held says. Cummings-Baccus has equity Southwest markets, with particular emphasis
real estate investment firm combines the relationships that stretch back to the on the office sector. The vigorous campaign
buying power of an institutional player with company's beginning. will put Cummings-Baccus in even more
the flexibility of an agile entrepreneur. competition with the REITs, particularly for
With the economy cooling, another capital class A and class B office properties.
Cummings-Baccus has the financial capacity source, the debt market is retrenching.
to handle properties requiring institutional Lenders with newly conservative approaches Despite all the promised change, one constant
size, with most of its investments ranging may be steering clear of particular market will likely remain. quot;Whether we're buying a
from $5 million to $50 million. What sets it sectors or sizes to protect themselves. vacant retail center in Austin or a class A
apart from institutional competitors, is a sharp office building in Tucson,quot; Cummings
eye for overlooked value and a willingness to But tighter debt markets won't necessarily concludes, quot;our philosophy will always be to
embrace investments that don't quite fit slow Cummings-Baccus. quot;We're at our best buy value.quot; x
institutional investors' more restrictive molds. when there's a lack of liquidity,quot; Cummings
explains. quot;We're buying when nobody else
quot;We don't have a box,quot; says Ross M. may be.quot;
Cummings, General Partner at Cummings-
Electricity Deregulation and
Commercial Real Estate in Texas Pat Ennis, Priority Power Management
ntroduction consist of three segments. The first will
be an unregulated or competitive generation
companies. It is recommended that when
accessing the benefits of this type aggregation,
Beginning January 1, 2002
segment that may sometimes be referred to the building owner understands that the
competitive forces will be introduced
as the GenCo. Next, a regulated segment aggregator will be joining similar loads
into the Texas retail electricity
will exist to handle the transmission and together and not loads that have differing
market. Then Governor George Bush
distribution of the electric power. The time-power profiles or requirements. The most
signed Texas Senate Bill 7 (SB7) into
nickname for this portion of the new model is important benefit of this type of aggregation
law launching a competitive market
the WiresCo. The last segment of the new is allowing power customers to go the
in June 1999. SB7 begins a process of
model is the unregulated Retail Electric negotiating table with much larger loads than
unbundling or separating the utilities’ Provider or REP. While each segment could
functions into three distinct areas - they would have had if they had gone it alone.
be an entirely new, independent entity, many Wal-Mart has been able to demand the best
generation, transmission and distribution will be subsidiaries or affiliates under a
and REPs (Retail Electric Providers). SB7 prices from its vendors because they purchase
corporate umbrella. in large quantities using their buying leverage.
will bring profound changes in the way
This will hold true when buying power. The
we purchase power for commercial and Load Aggregation larger you are, the better prices, terms,
residential uses. Deregulation will bring Building owners with numerous accounts
choice. This choice brings added responsibility, conditions and levels of customer service you
with loads less than 1000 kW will need to
which lies flatly on the shoulders of the will command from the REP’s.
assess and possibly access the benefits of
owners of real estate. aggregation. Two types of aggregation are
possible. The first type of aggregation is to
New Industry Structure bring together all the power loads within a
The utility company model that has existed up specific company and present these individual
to this point has been a vertically integrated loads to a REP as one load. These can be loads
one. That is one company was responsible for from numerous utilities.
the generation, transmission, distribution and
retail sales of the electricity used by its The second form of aggregation is for building
customers. Under SB7 rules, this model will owners to join a purchasing cooperative or
be “de-integrated”. The new model will combine their loads with loads from other
between 40%-60% 4) accounts with load factors greater than 60% and
5) accounts that have IDRs (Interval Data Recorders).
Regardless of how a customer actually uses power, the customer will be
“deemed” to have used power in the forced profile pattern they have
been assigned to. Improving your load shape or load factor through
various techniques will not necessarily translate into immediate power
cost reductions. The change in profile assignment must be submitted by
the TDSP and then the account profile must be updated by ERCOT-ISO.
Demand Side Management
During the 1980’s and 1990’s many utility companies spent millions of
dollars on various Demand Side Management (DSM) Programs, with
less than stellar results. These mandated programs used regulatory push
to encourage the consumer to use energy wisely. Wise use consisted of
consumers using less energy or shifting their usage to off-peak periods.
Now with rising oil and gas prices and market pull (i.e. deregulation)
interest in conservation and energy management is back. Pulled by
choice of supplier, time-of-use pricing and real time price volatility,
customers will work to develop power cost reduction strategies.
Electric industry restructuring promises both opportunities and challenges.
Those building owners and companies that develop the best strategies and
The Pioneer; 102,295 sf, class “B” CBS, Tucson Arizona anticipate market trends and changes will be the big winners. x
Load Profiling/Load Factor Pat Ennis of Priority Power may be reached at email@example.com
When pricing power REPs focus on two issues – load factor and load
profile. Load factor is the relationship between the size of the electric
power demand and the number of hours that load operates. Power is
measured using kilowatts (kW) or demand and kilowatt-hours (kWh) or
energy. Demand is a function of how much power is required by a
customer at one time, or how fast the customer was using power (i.e.
speedometer). Energy, or kWh, is a function of how much power was
used over a specified period of time or billing period (i.e. odometer). A
quot;goodquot; load factor indicates that the customer used power steadily
without great swings between maximum and minimum demand. A
quot;badquot; load factor is indicative of significant swings in demand.
Load profiling is a representation of a customer's energy usage, showing
the demand variation on an hourly or sub-hourly basis. For example, a
typical office building has a “top hat” or bell shape profile during the
summer months. The office load, which is weather and time sensitive,
increases steadily throughout the day reaching a peak in the late afternoon
then decreasing to a minimum in the late night and early morning hours.
The ERCOT retail market requires a fifteen (15) minute settlement
interval, yet the vast majority of customers do not have the metering
necessary to measure their consumption at this level. Because the actual
load shape for customer without special metering is unknown a guess
has to be made in order to settle the bill. That guess is the “deemed”
load shape or “force fit profile”, established by ERCOT-ISO
(Independent System Operator).
Based on the load factor of the particular account, the TDSP shall be
responsible for assigning each electric account with standard kW and
watt-hour metering for a “force-fit generic profile”. The profile
assignment is based on the accounts past 12-month usage data (load
factor) that is “deemed” to represent a customer’s usage pattern. There
are basically five assignments: 1) non-demand metered accounts 2)
accounts with a load factor less than 40% 3) accounts with load factors
3305 Northland Drive, Suite 301
Austin, Texas 78731
Tel (512) 459-7100 Fax (512) 451-4008
Jennings spent some of his growing-up “His studio was an hour drive from where I may think that a lot of things man does is
time drawing. quot;Apparently, I liked to draw a grew up. He was sort of a local hero. I used to environmental disaster waiting to happen. It's
lot,quot; said Jennings, who studied architecture go to the museum just about every weekend always interesting to me to go see a working
at Texas Tech and holds a bachelor and and look at his paintings that were on rig, and after the well comes in and is
masters degree from the University of display.quot; pumping, the same mesquite and sage are
Houston and the University of Dallas. growing there. You can hardly tell there was a
Not all of Jennings' work features the oil field, rig there. It's a very complex operation that's
quot;Of course, in New Mexico, there wasn't but the subject is a special passion of his. done very efficiently.quot; x
much to do,quot; he remarked drily.
quot;The whole Permian Basin exploration Richard Jennings may be reached at 512-327-1650
Exposure to artist Peter Hurd also had a was a terrific enterprise,quot; said Jennings, or firstname.lastname@example.org
lasting effect on Jennings who as an adult noting he finds the quot;nitty gritty work of
studied watercolor painting with Frank Webb the oil businessquot; of particular interest. quot;A
and Tony van Hasselt. lot of people went out and risked everything
they had for the chance to make good,
“Peter Hurd fascinated me,” Jennings said. to make something of themselves in my day
“He knew my father, so I met him when I was and I've always admired that.”
fairly young, and he was someone I
admired greatly. quot;I think a lot of people, artists in particular,
By Daniel T. Cooper
Come in Smaller Markets
A lender I was speaking with
recently had an interesting
response to an inquiry about
investing in a secondary market.
quot;I cannot lend there because my
hands are tied,quot; he confessed to
me, quot;but I will personally invest with you,
because it sounds like a great deal.quot;
Pure Resources Building; 182,062 sf, class “A” CBD, Midland, Texas
That lender's response is one that comes up
again and again in commercial real estate
investment. When the question of investing in
secondary or tertiary markets is posed, the
answer for many real estate investment trusts
(REITs), large private investors and lenders is
often a firm quot;no.quot;
Why doesn’t everybody take advantage of the
big opportunities in smaller markets? The
answer is simple: They can’t — thanks to
thinking that keeps many investors locked
within a self-imposed box.
Those boxes can limit investors in several
ways. For example, they may decide that real
estate investments must be in cities with large
metropolitan areas. Larger players are often
We've all heard the old adage,
“Location, location, location.”
But the last time I checked,
the true purpose of real estate
investment hasn't changed:
quot;Return, return, return.”
searching for safety in numbers, whether in the 24-hour city
or in cities that hit the top-10 lists for highest rents and
absorption rates. Most, if not all, funds stay within those
boxes. Consequently, they have redlined almost all secondary
Thinking Beyond the Redlines
I believe much of what is presented in the media and in
economic forecasts is yesterday’s news. You're almost
guaranteed to find yourself behind the investment curve if
you listen to popular media. Instead, you must do your own
research and evaluate every deal on its own merits. Those
include location, employment growth, demographic trends
and condition; but most importantly, they include net
There are always trade-offs in any deal, and weighing an
investment in a smaller market against one in a big market is
no exception. By their very nature, secondary cities usually
lack diversification and a large workforce. Consequently, they
do not grow as quickly as cities such as Los Angeles, Boston,
New York or San Francisco. But smart investors must also
read between the lines. One of the primary reasons Wells Fargo Building; 205,000 sf, Lubbock Texas
institutional buyers don't invest in smaller markets isn't a lack
of potential — it's economies of scale. It's often not efficient
for them to hold less than a few million square feet in a marketplace, so
by default they pass over potentially great returns.
Tertiary markets, too, have benefits that the Big 20 don't have. A
commonly overlooked aspect of the smaller market is the lack of new
construction. Many of these cities are stable and have slower growth,
which translates into a market with a leaning toward demand. Quite
frequently, you will see a few trophy properties in a market with little or
no competition; although the demand does not justify development, it
does allow for incremental rent increases.
The key ingredient to seizing these opportunities is capital, namely debt.
Much like the REITs, the large lenders will not lend money in these
smaller markets. As a result, many of the capable players who depend
on Wall Street money remove themselves from the investment game.
This situation opens a big opportunity for us and for other buyers who
have the freedom to work with local and regional banks.
Although there is a move by larger manufacturing and distribution firms
to settle in more efficient hubs, there are many mid-sized companies that
are seeking more affordable environments with lower costs of living and
less expensive workforces. For those companies, a well-positioned
smaller city can be a winning choice. Secondary markets offer a lower
price per square foot, controlled growth and a lack of competition.
When combined, those factors translate into higher returns.
We've all heard the old adage, “Location, location, location.” But the
last time I checked, the true purpose of real estate investment hasn't
changed: quot;Return, return, return.” Look outside the self-imposed boxes,
and you'll see secondary markets are a great way to achieve that
mortgage-backed securities issuers, and commercial real estate finance during the bond investments.quot;
government sponsored entities. remainder of 2001.
Still, the CMBS arena is not without its
Commercial Banks Pension Funds concerns. quot;Disciplined originations are now
and Savings Associations Many funds are increasing their mortgage the name of the game,quot; Grabell says. quot;CMBS
Commercial banks held $610 billion in investing, but they are participating mainly on investors are more selective, which is forcing
outstanding loans, or 39.3 percent of the the equity side. Pension funds control less than originators to be selective in the loans that are
institutional debt market, as of September 3 percent of commercial real estate debt in the originated. If real estate weakens, the
2000, compared with $518.5 billion in fourth- United States. The pension funds' primary debt borrower's credit becomes more of an issue.
quarter 1999, according to the Lend Lease Real activity will be in CMBS as they become more However, there are certainly no signs of a mass
Estate Investments Emerging Trends 2000 mainstream, fixed-income investments. exodus from the CMBS market.quot;
report. Savings associations held $139.8 billion
in mortgage assets, or 9 percent of the While pension funds are expected to be With declining overall interest rates, demand
institutional debt market. Combined, these two somewhat active in the debt market, most for adjustable-rate mortgages has subsided
institutional categories hold nearly half of all borrowers will have more access to other debt from the first two quarters of 2000. For now,
outstanding U .S. commercial real estate debt. providers such as the conduits. GMBS issuers should continue to be the most
competitive on permanent, fixed-rate debt.
In late March, the Federal Reserve Board Wall Street CMBS Issuers
released a supplemental survey on bank Wall Street conduits held about 14 percent of Government-Sponsored Entities
lending practices. The survey polled 54 large total outstanding commercial real estate debt as The Federal National Mortgage Association,
domestic commercial banks and 22 U.S. of mid-September 2000. However, CMBS known as Fannie Mae, the Federal Home
based branches of foreign banks. The results issuance has strengthened so far in 2001. Mortgage Corp., or Freddie Mac, and the
indicate that half of the domestic banks Through mid-April, issuances were up 33 Federal Housing Administration often are
reported slightly stricter lending standards to percent to $13.6 billion from $12.1 billion in considered to be the premier lending sources
commercial loan applicants. Further, no banks first quarter 2000. for quality multifamily properties.
reported that they had eased lending standards
during the first two months of 2001. Better
than 50 percent of the domestic banks indicated
Supply and demand should continue to keep
that a less favorable economic outlook was an property segments in most markets in check, and a
important factor in tightening lending terms.
severe downturn or massive overbuilding is unlikely.
If the banks' actions earlier this year are any
indication, commercial real estate borrowers CMBS issuance volume totaled $60.9 billion Rates generally are higher than those of GMBS
can expect banks to continue to tighten their in 2000 compared with $67.9 billion in 1999 and commercial banks for long-term loans.
and $78.3 billion in 1998. As a result of Fannie Mae and Freddie Mac both offer LTVs
underwriting criteria and loan terms if the up to 80 percent with terms as far out as 30
economy continues to stall. declining originations, no single conduit has
enough product to bring to market, and many
However, prospects for financial institutions in conduits will continue to pool loans. Thus, if Fannie Mae's delegated underwriting and
general remain strong, according to Lary B. CMBS demand outpaces the supply that servicing (DUS) program has been a successful
Cowart, Chair of Real Estate Studies at investment banks can bring to the market, origination program. However, only 25 lenders
Morehead State University in Morehead, Ky. investors arguably would drive spreads down, in the nation are approved DUS lenders. Fannie
quot;With the decline in interest rates, new resulting in lower overall rates. Mae is the largest investor in the multifamily
originations at the financial institutions will sector with more than $55 billion in
definitely be generated, but because of A number of CMBS offerings in the market
investments compared with Freddie Mac's $25
prepayment penalties, it will not come at the were scheduled to close by the end of second-
billion. Both programs have a national
expense of the banks' existing portfolios,quot; he quarter 2001. Depending on how the issuance
presence, offer competitive terms, and always
explains. is received, borrowers can expect lenders to
are in the market, meaning they do not exit at
adjust their underwriting criteria accordingly.
the first sign of trouble. The downside is that
Life Insurance Companies For instance, should the issuances be well
these government-sponsored programs are
Despite maintaining an important market received by the market, borrowers will see an
strictly for multifamily properties.
position, 13.7 percent of total debt, life easing of spreads, while the opposite could
companies are trending toward less real estate hold true as well. Looking Ahead
ownership but continue to be active mortgage Most lenders view the balance of 2001
investors. They still focus primarily on higher- Peter Graben, senior vice president of Mill
with cautious optimism. The Fed's multiple
end properties, and commercial real estate Valley, Ca1if.-based conduit Bridger
reduction in interest rates has spurred
borrowers can expect life companies to remain Commercial Funding, remains bullish on the
new interest in refinancing. Underwriting
in the market with rates at their current levels. CMBS market. quot;The rate environment has
fundamentals remain relatively strong, and the
been very favorable for the past three or four
influence of the public market intends to keep
Life companies will continue to be more months, and CMBS spreads remain stable as
it that way.
conservative than other types of traditional wellquot; Graben comments. quot;Spreads are
lenders, often maxing out at a 75 percent LTV; widening slightly because of the amount of Supply and demand should continue to keep
however, life company players still may offer product coming to market, but there is clearly property segments in most markets in check,
better rates than the conduits. Borrowers can still an appetite for the CMBS product because and a severe downturn or massive overbuilding
expect to see life companies very active with it is a very attractive alternative to traditional is unlikely.
The capital markets are watching over lenders' shoulders; therefore,
most lenders are driven to make prudent real estate loans that will be
well received in the public markets. With few exceptions, borrowers
likely can expect underwriting criteria to become more rigid if the
economy continues to slow.
The future of commercial real estate financing for the remainder of 2001
is positive. quot;The volatility of the stock market should increase the flow
of funds, on both the debt and equity side, to the more stable real estate
sector,quot; Cowart says. quot;The recent decline in interest rates has lowered the
required rate of return on the debt side, but probably will not result in a
decline in overall cap rates.”
quot;Consequently, yields to the equity side of the equation should increase
to balance the math. Of course, this additional equity yield is not a
windfall; it is simply just compensation for the additional risk that real
estate equity is now facing with the prospects of a slower economy. For
now, real estate appears to be the safer harbor.quot;
Lending within the commercial real estate industry is changing. While
the real estate market remains relatively strong, sound deals are harder to
come by for many lenders.
As a result, lenders are fighting over the same transactions, which
benefits the borrower. Both long-term and short-term money is cheap by
historical standards, and borrowers can still cash in on good financing
deals today. x
The Resource Center (7026 Old Katy Road)
Four Sugar Grove (4800 Sugar Grove) Woodlake Park (2500 Tanglewilde)
is pleased to support
Cummings Baccus Interests
550 Westcott 720 N. Post Oak Road 5757 Woodway
Real Estate Perspectives
in recognition of our successful
Past & Present
in Houston totalling in excess of
850,000 Square feet
Your Real Estate Partner of Choice
The Lafayette Building (701 N. Post Oak Road)
Navigating Clients Financial Needs
Savoy at The Resource Unisource
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324 Units 280,000 SF - Office 230,000 SF - Office
$18,000,000 $15,100,000 $20,655,000
Pasadena Office Fasken Center Pebble Walk
Portfolio Midland, TX Apartments
Pasadena, CA 600,000 SF - Office Houston, TX
264,795 SF $16,640,000 228 Units
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86,000 SF - Retail 240,000 SF - Industrial 26,250 SF - Retail
$1,800,000 $9,645,000 $3,300,000
L. J. Melody & Company
A CB Richard Ellis Company
5847 San Felipe • Suite 4400 • Houston, Texas 77057
3305 Northland Drive, Suite 301
Austin, TX 78731