by Leslie Braunstein
As the nation’s commercial real estate markets begin to recover from the effects of the Great Recession and debt financing has become more difficult to find, private equity has assumed a more prominent position in the capital stack. But accessing it is more complicated than simply walking into the local bank.
“Equity is always an essential part of doing a deal, filling the gap between debt and acquisition cost, but [it] is now more important than ever because debt sources are underwriting more conservatively than they did before the downturn, resulting in lower proceeds,” explained Kevin H. Smith of Centerline Capital Group’s mortgage banking group in Vienna, Virginia. “For smaller sponsors, it can be difficult to secure institutional equity without assistance.”
Many real estate owners and developers take the first step into private equity financing by obtaining funds from traditional sources such as friends and family, high-net-worth individuals, and personal resources. But as their horizons expand, they may begin looking toward institutional sources such as family offices, commingled dedicated real estate equity funds, pension funds and endowments, sovereign wealth funds, life insurance companies, and corporate investors, among others.
A recent ULI workshop held in Washington, D.C., helped participants gain an understanding of the real estate private equity universe, including the investment strategies and vehicles used by private equity. Participants also had the opportunity to hear about current strategies from the invited capital providers. From the panel discussion, it became clear that sponsors need to do their homework before approaching private equity providers.
“You really have to sell yourself,” advised Doug Wilberding of CenterCap Group. “Tell us how you are going to execute the business plan and why you are better than the next guy.”
“Come up with three takeaways that you present to capital providers,” counseled Ashleigh Simpson of MetLife Real Estate Investment in Washington, D.C. “Remember that you are not the only one asking for money. Your expertise should align with what you are trying to do.” He added that MetLife is looking for core office and multifamily investment opportunities, primarily on the East Coast or in the Midwest. “It’s all about the sponsor and choosing the right asset and investment strategy.”
James Riordan of Baltimore-based Lupert-Adler Partners said: “Although we are a large fund, we do a lot of small deals; we start below $5 million, but our sweet spot is the $5 [million] to $15 million equity outlay. We are most focused on distressed multifamily housing; we don’t buy open-air retail centers unless we can tear them down and build something else.” Riordan pointed out the “burden of capital,” including extensive governance and reporting requirements.
“We invest for four funds, doing ground-up development through buying core assets,” noted H. James Darcey of ASB Real Estate Investments, based in Bethesda, Maryland. “Our primary focus is on major gateway cities. Urban-oriented retail is a focus in the best markets. The deal size is from $10 [million] to $100 million in equity; we are conservative, with 40 to 50 percent leverage.”
Thad Paul of the Washington, D.C.–based Carlyle Group remarked that his organization is looking at apartments, hotels, seniors’ housing, and distressed office and retail properties. His firm typically holds properties for three to five years, and will leverage up to 95 percent in some cases.
Taking a different tack was Michael Schonbraun of New York City-based Cerberus Real Estate Capital Management, who said: “We are not scared of residential land or single-family home product in select markets where there are value-add components; our capital is flexible.”
Philadelphia-based Grosvenor Investment Management also is focused on for-sale residential property as well as apartment development, and health care–related assets such as medical office space and senior care facilities, said managing director David Reiner in an interview.
The capital providers agreed that local sponsors play a critical role in the success or failure of their investments. They rely on local operators, for example, to obtain entitlements for development projects and resolve any environmental issues. Smaller owners and developers with unique, in-depth market knowledge can make or break investments of just about any size.