Cooper Realty sends ATRS a $3.4 million capital call

Arkansas Business, Sept 23, 2002 by Gwen Mortiz

THE LOSS OF SEVERAL LARGE tenants in Two Financial Centre in west Little Rock has forced Cooper Realty Investments Inc. of Bella Vista to ask its investment part net Arkansas Teacher Retirement System, for a $400 000 infusion of capital, CRI President Dewitt Smith III said last week.

CRI also asked ATRS its majority partner in several 8020 joint real estate ventures for an additional $3 million in capital for two Memphis office buildings Crescent Center and Forum I The reason that capital call Smith said was "almost entirety that we didn't identify all of the remedial funds that were needed" when CRI and ATRS paid $55.06 million for the buildings in May 2001.

Neither investment will make a cash disbursement to ATRS this year, he said.

Smith said his company "erred on the other side" in estimating reserve needs for an office complex in Nashville, Tenn., that CRI and ATRS bought for $71 million in December 2000. CRI informed ATRS that it would be receiving an $800,000 disbursement from that investment,--half from excess working capital and half from excess capital reserves.

The requests for additional capital were delivered to ATRS on Sept. 16, the day the pension fund's investment committee held its regular monthly meeting. Smith said the timing was coincidental, but members of the committee clearly were surprised to learn that they were being asked to ante up again.

"We're surprised that they are surprised," Smith said. He said both Two Financial Centre and the Memphis Properties are very sound long-term investments that will produce an annualized return of better than 10 percent when the buildings are eventually sold.

"The harvesting time for these properties is not during this [economic] downturn," he said.

Committee chair Paul Vondran indicated that Smith would be invited o address the capital calls at the committee's Oct.21 meeting--despite the Sept. 27 deadline specified in the letters from CRI's chief financial officer, Tony Oxford.

The returns paid by the Cooper joint ventures have been the subject of some disagreement. Arkansas Business reported in May that the joint ventures with Cooper were per forming' worse than average for ATRS real estate investments, finding that Smith disputed.

Three months ago, Smith assured ATRS trustees that the investments had generated appropriate returns in 2001. According to CRI the Memphis properties produced a combined annual return on investment of 6.67 percent in 2001, and Two Financial Centre achieved an 11.1 percent return on investment last year.

ATRS has received no. cash disbursements from the Memphis properties or TWO Financial Centre since the third quarter of 2001, according to Tom Ferstl, ATRS' read estate manager. State Bank Commissioner Frank White, a member of the investment committee, pointed out that CRI, had been receiving monthly management fees--4 percent of the rent paid by tenants.

ATRS and CRI purchased Two Financial Centre for $9.75 million in May 2000 At that time, Smith said, Cooper realized that the FBI would be vacating office space in the building. But the departure of a couple of other major tenants, including Acxiom Corp., pushed the vacancy rate up to about 50 percent.

ICE Inc. Consulting Engineers, has a lease for 10,000 SF in Two Financial Centre, bringing the vacancy rate down to about 40 percent. But Smith said build-out expenses and leasing commissions including; those paid to agents representing the, tenants will require an additional investment of $500,000 80 percent of which must come from ATRS.

Despite a very soft office market in Memphis Smith said CRI had improved tenancy in Crescent Center and Forum I.

"But we did it at a price," he said, thus' the need for $3.75 million in additional capital, $3 million of" it from ATRS as the 80 percent partner.

The joint venture had to spend about $600,000 more than expected on HVAC renovations and had to make "aggressive" renovation allotments order to lure in long-term tenants.