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DALLAS-With M&A handoffs wreaking havoc in many CBDs, Dallas is stacking up as one of the hardest hit in the fast-paced buying, divvying and flipping craze that’s become an inevitable part of Wall Street’s high-priced trades.

More than $80 billion of market cap or enterprise value has been lost in the past two years to privatizations, liquidations or mergers, according to a Deloitte & Touche USA LLP panel that analyzed the mayhem that’s beset the industry. “There does not appear to be any cooling off in the near term for REIT M&As as there has been no drop-off in investment demand for the commercial mortgage-backed securities that are used to finance most REIT acquisitions,” says Mark Diamond, a partner in Atlanta for the New York City-based Deloitte.

As the number of deals climb so does the price. Chicago-based Trizec Properties Inc. set yet another record with an $8.9-billion sale to the New York City-headquartered Blackstone Group LP, which has inked three of the seven priciest closings this year. The takeover closed as a “club deal,” another M&A trend that mixes private players like Blackstone and public ones like New York City-based Brookfield Properties Corp., and sets up immediate flips to private investment buyers for instant rewards to shareholders.

Deloitte’s research shows $35 billion of M&As had closed by the end of the second quarter. “’06 certainly looks like it’s going to be a banner year,” Diamond says. “A lot of the excitement is here in the US.” In this year’s Top 10 deals, four were office versus last year’s activity when the leader was the residential sector.

Due to this year’s M&A activity, Dallas is pushing its record trading period of 1996-98 when “almost every single office building changed hands,” says John Alvarado, senior vice president for Dallas-based Trammell Crow Co. “I think this year will likely be the most active year we’ve ever had.”

Dallas has been in this year’s fallout from Trizec, Prentiss Properties Inc., CarrAmerica Realty Corp. and portfolio deals like the Los Angeles-based Younan Properties Inc. “What is happening locally is that part of the REIT portfolios are being broken up and acquired in smaller pieces by private investors,” Alvarado says.

As REITs break up, would-be buyers are standing three deep on the sidelines for cast-offs from the Blackstones of the world. “For us, there are great markets that have been abandoned by certain REITs that present great opportunities for us while they’re either preparing for or a result of an M&A activity that they will be a part of,” says Jason Mattox, executive vice president for locally based Behringer Harvard Funds. “As we look at and consider geographical market shifts, M&As are certainly part of that.”

When the decision’s made to flip, existing relationships are what counts to eliminate drawn-out open-market engagements. “Once a board wants to get out of a market, they want to do it quickly,” Mattox says. “No REIT wants to be part of a fire sale, but there’s every reason to expect that they want to meet the expectations that the board has set.”

Guy Langford, a Deloitte principal in New York City, says the UPREIT structure is proving to be a valuable tool for M&A buying and selling. “It’s all about liquidity and tax deferral,” he explains. “You can defer your day of reckoning.”

The industry can blame Sarbanes-Oxley Act for the incentive for REITs to break up. The marketplace has provided the out: increased institutional real estate allocations, higher leverage options available for private buyers and improved fundamentals.

“I would say overall that it’s a positive,” Alvarado tells GlobeSt.com. “REITs, especially after Sarbanes-Oxley, are saddled with such huge costs that for the investor who owns REIT shares it becomes almost inefficient for them.”

In fortifying the breakup plan, Jim Sowell, a Deloitte principal in Washington, DC, has a word of warning about due diligence, particularly with state and local taxes. “It’s different in every deal,” he says, “and it varies greatly from state to state.”

The Deloitte executives say some deals might not get done due to the anticipation of higher cap rates. But for now, the market’s racking up record prices on the M&A itself and near-record prices on flips to private buyers.

“I don’t think it’s undermining the real estate market because there’s so much equity being put into the deals,” says Ben Loughry, managing partner in Fort Worth for New York City-based Integra Realty Resources Inc. “What we’re seeing is more real estate being held by fewer entities. They’re finding opportunities in undervalued real estate.”

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