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DALLAS-Cobalt Capital Partners has opened the development door for the first time, tapping a 20% reserve earmarked for the initiative in its $410-million Cobalt REIT II. The first projects are under way in Georgia, Minnesota and Texas.

Funded by seven institutional investors, REIT II holds enough promise for Cobalt to tap about $80 million of equity and leverage it to $250 million to $300 million for the development of roughly five million sf of light-industrial in the next three years, according to Lewis D. Friedland, managing partner of the Dallas-based investment group. Leading the development push is Dirk P.D. Mosis III, the REIT’s San Antonio-based managing director, with Aaron Reynolds, senior associate in the headquarters office as the program’s financial analyst.

The first ground-ups are the 348,460-sf, five-building Freeport Ninety in Stafford, TX, a 25-acre development with Avera Capital Partners of Houston as its partner; 238,112-sf Shiloh 400 Business Center in Alpharetta, GA, a three-building project on 18 acres with Charlotte, NC-based Crescent Resources LLC as the partner; and a 54,000-sf building on 5.3 acres at Diamond Lake in Rogers, MN, with Cobalt in a one-off development role. The spec buildings will come on line in the fourth quarter.

“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 and below,” Friedland points out. “That means a vast majority of construction targets a small percentage of lease transactions.” He says research also shows that the 350,000 sf and up category has had zero rent growth while the under 300,000-sf crowd has picked up 15% in two years.

In some cases, the development dirt will be extra land that accompanied an acquisition as is the case in Minnesota, where Cobalt bought a 70,100-sf building on 10.1 acres and is now planting 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 goes on the table, the better it is for the REIT. “We want to be in the ground in as few months as possible,” he stresses.

After the project is stabilized, Mosis says the development partner is paid a “success fee” for its vested interest and REIT II then becomes the sole owner. The motivation is two-fold: REIT II had new buildings and tenants have room to expand.

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,” he says.

Cobalt is using its long-time relationships to seed the development pipeline. “Everything we do, we know someone in the deal,” Mosis says. “We’ve got to have guys out there that we know we can trust.”

As the first three projects push out of the ground, Mosis has more deals in the works in Dallas, Denver, Seattle, Washington, DC and a second round brewing in Atlanta and Houston. Essentially all of Cobalt’s core markets hold development promise–Chicago, New Jersey and Philadelphia as well as Dallas, Houston and Atlanta. “Most likely those will be markets we continue to expand in through our development program,” Friedland says. “We will end up developing in five to seven markets that have the right mix of land available and rent versus land costs to generate the kind of returns to make this work.”

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