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HOUSTON-Following projects in Austin and San Antonio, Oaks Development Group is eyeing Greater Houston as its next stop for development of medical office projects. Specializing in ground-up developments and upgrades ranging from 20,000 sf to 60,000 sf, the company is examining sites in the Woodlands and Sugar Land.

“We’re a middle-market developer,” explains Kerry Angus, principal with Oaks Development Group. “We don’t look for 200,000-sf buildings on hospital campuses. Our specialty is the smaller suburban office buildings and sites.” He adds that Oaks Development could be moving on Houston projects by midyear 2008.

Angus says Oaks Development provides spec product, with physicians ultimately signing 10-year leases. He says 50% of the ownership is allocated to tenants from Day One. “There’s no capital outlay required,” he says. “We simply ask them to sign a long-term lease with us, and in exchange, they acquire tenant ownership in the building.” Ownership percentage is based on the amount of space that the tenant occupies. Tenants may acquire additional ownership through an equity investment in the building, but Angus says it’s not necessary for them to do so.

In return, tenants receive distribution of operating profits and equity funds due to any refinancing of the building. Oaks Development assumes management of all developed buildings. Angus says rents are near the high end of market rates, but not exorbitant.

While the advantage in such a situation may seem to be on the tenants’ side, Angus says that’s not necessarily true although he acknowledges it’s somewhat unusual for developers to give away equity in a deal. He says the model has worked well in other markets for the company, with Oaks Development able to quickly lease up its product and move on to other developments.

“Once the partners are in place, we have long-term tenants,” Angus says. “Our operating costs over the long haul go down and we don’t have to re-tenant. The cash flow becomes very consistent over the long term.”

Angus targets areas with recent population growths for development or value-add deals. He says it’s a benefit if the building or site is near a hospital campus, but adds it’s not a deal-breaker. “What we look for is locations that have appropriate parking ratios and good accessibility,” he says. “On the building side, we want product that’s quality product that we can upgrade.”

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