Cobalt REIT II.

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Funded by seven institutional investors, REIT II holds enoughpromise for Cobalt to tap about $80 million of equity and leverageit to $250 million to $300 million for the development of roughlyfive million sf of light-industrial in the next three years,according to Lewis D. Friedland, managing partner of theDallas-based investment group. Leading the development push is DirkP.D. Mosis III, the REIT's San Antonio-based managing director,with Aaron Reynolds, senior associate in the headquarters office asthe program's financial analyst.

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The first ground-ups are the 348,460-sf, five-building FreeportNinety in Stafford, TX, a 25-acre development with Avera CapitalPartners of Houston as its partner; 238,112-sf Shiloh 400 BusinessCenter in Alpharetta, GA, a three-building project on 18 acres withCharlotte, NC-based Crescent Resources LLC as the partner; and a54,000-sf building on 5.3 acres at Diamond Lake in Rogers, MN, withCobalt in a one-off development role. The spec buildings will comeon line in the fourth quarter.

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"The trend around the county almost everywhere are big boxes,but if you look at the lease volume in 2007, 95% were 50,000 sf andbelow," Friedland points out. "That means a vast majority ofconstruction targets a small percentage of lease transactions." Hesays research also shows that the 350,000 sf and up category hashad zero rent growth while the under 300,000-sf crowd has picked up15% in two years.

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In some cases, the development dirt will be extra land thataccompanied an acquisition as is the case in Minnesota, whereCobalt bought a 70,100-sf building on 10.1 acres and is nowplanting a new building on the site. In other cases, the developer"either owns the land or has the land tied up," Mosis says. And,the closer the developer is to breaking ground when the deal goeson the table, the better it is for the REIT. "We want to be in theground in as few months as possible," he stresses.

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After the project is stabilized, Mosis says the developmentpartner is paid a "success fee" for its vested interest and REIT IIthen becomes the sole owner. The motivation is two-fold: REIT IIhad new buildings and tenants have room to expand.

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Because Cobalt's two REITs own more than 20 million sf,Friedland says there is always an expansion requirement in motion."This is a way for us to provide expansion opportunities," hesays.

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Cobalt is using its long-time relationships to seed thedevelopment pipeline. "Everything we do, we know someone in thedeal," Mosis says. "We've got to have guys out there that we knowwe can trust."

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As the first three projects push out of the ground, Mosis hasmore deals in the works in Dallas, Denver, Seattle, Washington, DCand a second round brewing in Atlanta and Houston. Essentially allof Cobalt's core markets hold development promise--Chicago, NewJersey and Philadelphia as well as Dallas, Houston and Atlanta."Most likely those will be markets we continue to expand in throughour development program," Friedland says. "We will end updeveloping in five to seven markets that have the right mix of landavailable and rent versus land costs to generate the kind ofreturns to make this work."

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