It’s great to be in a growth cycle. Just ask Robert James. James was piped aboard pioneer REIT Kimco Realty Corp. in 2000 (he came from Newmark Retail Financial Advisors), soon after the REIT Modernization Act was passed, giving trusts new and broader room to grow. Kimco took full advantage of the legislated elbow room, rolling out no fewer than three new operating units that have propelled the firm to report a 2003 FFO of $353 million. James, as director of real estate, heads the Kimco Exchange Place, trafficking primarily in the 1031-exchange market. In a recent exclusive interview, James, who is headquartered in Manhattan, told about the long-term affects of the modernization act on the venerable REIT and how 1031s are immune to such forces as rising interest rates and presidential whim. A little background first. How soon after the passage of the REIT Modernization Act did Kimco roll out its new units?

James: They were all launched within a year. Spell them out for me.

James: There’s Preferred Equity, which takes equity positions in shopping-center assets we would gladly own. It’s structured so our partners’ equity is subordinate to ours, giving us a preferred return with IRR look-backs and other benefits. It also enables us to get a fair amount of capital into shopping-center assets we would like to own.Then there’s Retail Property Services, which has a large bankruptcy component. We have in the past acquired designation rights to retailers’ fee and leasehold assets. We did it most recently with Kmart, but we’ve also done it with Montgomery Ward and others. We continue to look for opportunistic investments within the realm of retail bankruptcy and asset-based lending. We’ll also do sale/leasebacks.Finally there’s my group, the Kimco Exchange Place, which was established as a vehicle for selling Kimco-owned assets into the 1031-exchange market, with the rationale that the 1031-exchange buyer is motivated by both tax deferrals and time pressures. As a result they are less yield-sensitive than traditional investors. So we’ve created a niche business that focuses on supplying properties to those buyers. Retail is hot. Will it continue?

James: Rising interest rates will be pushing up cap rates. For a REIT like Kimco, which buys a lot of assets all-cash, that’ll simply enable us to buy some shopping centers on an all-cash basis and at a higher cap rate. Will people looking to cash-in before rates rise create a flurry of activity for your unit?

James: What I’ve seen is that there is so much demand for deals under $3 million that it offsets higher interest rates as far as caps are concerned. Deals over $3 million and certainly over $10 million are much more affected, and demand continues to increase for passive real estate income such as triple-net-leased investments, especially on the smaller dollar spectrum, and that demand will continue to keep cap rates low and possibly push them down more. John Kerry says that if he’s elected, he’ll change the capital gains. You don’t see an impact?

James: I don’t think it’ll make much difference. We’ve seen capital gains reduced before. It didn’t affect the 1031-exchange market. People don’t want to pay tax, no matter what it is. Where does the Exchange stand now in terms of size?

James: We’ve sold just under $400 million in real estate into the exchange market. We’re now offering not only Kimco-owned property but also third-party properties and are becoming a national resource for replacement assets. We’re becoming an exclusive third-party broker. Currently we have about 85 properties for sale throughout the US representing about $250 million of available inventory. We recently put some new portfolios on the market, including 23 Sonic restaurants, two very large shopping centers in Phoenix and distribution centers for Wal-Mart and Home Depot. By selling into the 1031 market we’ve shown we can get higher prices on a sale. By how much?

James: On larger deals it’s probably 30 to 40 basis points. On smaller deals it can be up to 75 basis points. So the outlook is positive.

James: Very positive for the foreseeable future. And nothing could derail growth?

James: The most significant risk would be getting rid of the 1031 exchange provision in the tax code. We don’t think it’s going to happen anytime soon. But there would still be plenty of demand for our unleveraged shopping centers and triple-net investments. The market would still be there.

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