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Trust or bust in Parramore?



The $150 million investment that Al French has staked to the Parramore Heritage on downtown Orlando's west side won't be enough to create an upscale retail renaissance. So within a few weeks his Carolina-Florida Property will, French says, announce an updated plan fueled by small investors.

"We have to be real careful with securities laws," French, who is president of Carolina-Florida, says. "In two-to-three weeks we'll be making our announcement. Prior to that, I don't know what to say. We're just trying to put together a fabulous development where everybody wins."

French hopes to buy a real estate investment trust (REIT) -- a public company traded on the stock market -- and sell his Parramore land purchases to it.

REITs have been a hot investment on Wall Street for the past few years, outperforming the overheated stock market. But experts say REIT investors should know the real estate underlying them, and the skill of the real-estate managers, before plunking down their money. And there is evidence the market may be cooling.

French says he has paid about $30 million for 60 parcels of land west of downtown during the past year -- 10 and 20 times the going rate for the property. The purchases have been made with cash, and many have not been recorded in county records. French has proposed to build a hotel, "galleria" with upscale shops, and a multiplex movie theater in the 90-acre zone. But so far he has only cleared land and re-opened the Bryan Hotel (for which he paid $900,000) as a $5-per-night flophouse; detailed plans have been a "few weeks" in coming for about 10 months now.

City officials are worried that French's company may be speculating rather than planning real development. Mayor Glenda Hood also has expressed concern for the neighborhood's residents, who are mostly poor and presumably would be pushed out by Carolina-Florida's redevelopment plans.

French says such downtown revitalization is all the rage in other Southern cities, citing as one example his investors' home base of Charlotte.

Not everyone is cheering that development.

"If I had any advice for the people there," says Barbara Moore, a community organizer with the Charlotte Organizing Project, "it's don't wait too long for them to admit what they're going to do."

Nations Bank has been deeply involved in downtown development in Charlotte, including efforts to build a movie theater and restaurants next to a $150 million basketball arena for the Charlotte Hornets. The bank also built its headquarters next to a run-down area, and is adding a condominium building next door. According to Moore, the bank tore down 417 units of low-income housing and has so far displaced 100 families. "The people were not involved until after the plan was drawn up," Moore says. "Then they had the meetings to make it look like they had input."

French's first order of business is convincing city officials of his plan's merit.

The REIT offering, which may be a year away, could provide $200 million. The REIT structure pays no corporate income tax; REIT managers take the big lump of money they get from selling shares on the market, and invest that in land and buildings. The rents and other associated income -- 95 percent of it -- must be turned back to the shareholders as dividends.

A few years ago, such investments were staggeringly popular on Wall Street. But American Banker magazine says the market for REIT initial public offerings has gone soft, with a glut of deals chasing increasingly wary investors. This has reduced the initial lump sum payment in recent deals and held many REIT stock prices down.

If handled deftly, however, the initial public offering of the REIT could provide a cash windfall for French's company while taking over the risk from his small group of Carolina-based investors.

REITs have failed spectacularly in the past. After the 1973 Arab oil embargo, REITs lost two-thirds of their value in 18 months. There were similar losses in the mid 1980s. Angry investors invariably charge REIT managers with fraud when they discover the managers' fees, which are usually based on the dollar value of the portfolio.

A California-based shopping mall and warehouse REIT called Sierra paid three firms controlled by the trustee more than $50 million between 1987 and 1990, and then collapsed. Last year a California REIT called Redwood Trust lost half its value in a stock sell-off.

French says his company is for real. "Do we want to rape a REIT in order to get our money back? It's absolutely ludicrous," to suggest such a thing, he says. "Eighty percent of real estate transactions in the country are financed through REITs now, so we're just doing what everybody else does."

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