Memphis: A Hotbed for Developers
By Graham Summers
September 17, 2007

"We've put about $7.5 million into rehab work. Because of our reputation, we've already got buyers approaching. We'll double our money."

Dragan Kocic is walking me around a 338-unit multi-family complex in Memphis, Tennessee. The apartments are cozy and tasteful. Someone with deep pockets could buy the whole bunch and live off the rents for the rest of their life. But Dragan and his company aren't income players.

Dragan is the director of operations for GGF Holdings, a development firm out of New York. Over the last three and a half years, GGF has invested more than $45 million in Memphis real estate. The mere fact that a NY firm is stationed in Memphis speaks volumes about the U.S. real estate market.

"We actually came here by chance," comments Dragan. "One of our girlfriends kept describing the real estate opportunities here. Finally we came down to check it out... And we've doubled our money in 18 months' time on several of our projects."

If you think Memphis is a sleepy southern town, you're mistaken. The city has the busiest air cargo airport in the world. Busier than Hong Kong even. One hundred and fifty companies from more than 22 countries are headquartered here. Over 20,000 new jobs were created in the city in 2006. Twelve thousand have been created so far this year.

However, Memphis is not without its woes. The city was ranked third-most dangerous city with a population of 500,000 or higher in the U.S. by Morgan Quitno (my hometown of Baltimore was second). Median household income in 2006 was $32,000, well below the national average of $48,000.

If Memphis were a stock, I'd describe it as distressed. But it's staging a rapid turnaround. The city is investing $3.1 billion – a record high – in downtown development. There is $1.7 billion in projects currently under construction, including 200 new single-family homes, 4,000 condos, and more than $2 billion in new medical and bioscience facilities.

And as any contrarian investor will tell you, fortunes are made by getting in early. Dragan and other out-of-state developers were drawn to Memphis thanks to its "payment in lieu of taxes" (PILOT) program. In its simplest form, property taxes for a given development are frozen at predevelopment levels for 10 years. So as you put money into the property, increasing its value, your taxes stay where they were.

To be eligible for a PILOT, a developer must put 50% of his total project's capital into rehab, site improvements, or new construction. For instance, let's say a developer buys a $1 million parcel of land. Provided he puts $500,000 into construction on the land, his property taxes will stay the same.

Memphis is the only city in the U.S. offering PILOTs right now. It's a hotbed for developers who can handle entire communities, though there are definitely opportunities for small outfits here as well. If you're a developer, this is a market you need to see. The government is extremely pro-development. Between the PILOT program and other incentives, I wouldn't be at all surprised if Memphis became a happening cosmopolitan metropolis in five years. But right now, properties are cheap. Very cheap.

I've now been on the road for close to a week. And I've found there are pockets of value everywhere I go. The U.S. real estate market contains vastly different regional markets. And within each market, there are specific investments to focus on. Next essay, I'll explain the three best ways to invest in Austin real estate. Until then...

Good trading,

Graham

P.S. If you're interested in learning more about real estate or development in Memphis, contact Dragan at kocic@unityventures.com. You won't find a more knowledgeable, friendly, or courteous man in this market.