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EisnerAmper Blog

Building Success: An EisnerAmper Real Estate Blog

The Evolution of a Business Plan: Investors Share Value-Add Success Stories

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A version of this article was first published by Real Estate Weekly Online on June 28. 

When The RADCO Companies CEO Norman Radow was in the workout business, his company foreclosed on $8 billion worth of real estate over 2 years. The owners varied: some were undercapitalized developers, while others couldn’t handle their projects. Today, some of them are even spending time in Club Fed. But they all had a common denominator, Radow pointed out: They would not change their business plan when the market told them to.

EisnerAmper tax partner Lisa Knee, who moderated the “Economics of Real Deals” panel during IMN’s 17th Annual U.S. Real Estate Opportunity and Private Funds Investing Forum, encouraged the speakers—which included Radow—to share how their business plans evolved in wake of changing market trends and their resulting successes.

After the workout business, Radow transitioned into buying multifamily, “because Fannie Mae and Freddie Mac were there, and it had liquidity.” But he quickly learned he couldn’t compete for shiny new apartments against the Behringer Harvards of the world, which could close in 30 days. That’s when he discovered the Class-B value-add space.

“Eighteen months later, something profound was going on,” he recalled of the year 2013. “There was the most dramatic demographic change since the end of World War II … and we were seeing it in reverse. The market was moving faster than we could catch it.”

Since then, rents have grown each year—in Atlanta, as much as 10% or more. “This isn’t an inning,” he said of the market. “This is a whole new season.” His firm just closed on a multifamily deal in which tax credits are expiring, and with them, subsidized rents. RADCO is paying under-market rents, and he expects to be able to mark-to-market “and leave the cap rate in the dust.”

RADCO also had a project in Colorado “that was a manager’s special with all of my favorite flavors: lead paint, asbestos, aluminum wiring, and single-pane windows,” Radow said. After rectifying the problems, recladding the building, and taking down the mansards, RADCO made the building look brand new and hip for Millennials. “We’re 25% net growth in year one, and will refi in July with 120% repayment in equity,” he noted.

“Since we’re talking about multifamily opportunity, everyone talks about repositioning for Millennials,” Knee pointed out. “But what about the empty nesters?”

Post Brothers president Matt Pestronk noted that Millennials are all about immediate gratification—they want to walk to, not drive, and get what they need in 5 minutes. And for the most part, Baby Boomers are looking for the same thing—but living in 4 times the size of the units of Millennials.

Post Brothers has responded by building multi-generational properties, like the large-scale gut renovation of an iconic Philadelphia apartment complex that was originally built for World War II servicemen in the ‘40s. The developer purchased the property for $84 million, and the project, called Presidential City, will cost over $240 million, he said. Each tower will have its own identity; large units as per the Boomers and smaller units as per the Millennials, with shared amenities. Another project—“an interesting sociological experiment,” he said—will have 38 condos on the top half of the building, with units 4 times the size of the 151 rental apartments in the lower half of the building.

“Larger urban spaces for people selling houses is a totally underserved niche in the Northeast,” Pestronk continued. But with construction prices extremely high, most of Post Brothers’ projects are rehabilitations, which means it’s hard to prove out the projects’ values during the capital-raising phase. “But when you achieve your projections everyone says, ‘I should have thought of that,’” he said.

“And what about Gen Z?” Knee asked, quickly noting that the alphabet is running out of letters.

That’s where Vie Management CEO Ari Rosenblum is playing in the student housing space. Five years ago, he said, his firm noticed a large number of buildings getting stranded, primarily those far away from campus. Years ago, a lot of capital had come into the space and the sector got frothy, and investors who were non-student housing operators were buying.

“But over time, if the buildings were not properly capitalized or not owned by a dedicated student housing owner and operator, they got stranded,” he noted. “There was no clear path for the owner to get them to profitability.”

Vie Management stepped in with a physical and management revitalization plan for the properties, and discovered that even if a property were 2.5 miles away from campus, you can attract some of the better students through creating a destination project that felt like a “spa hotel experience.” That meant property management treating students as guests and not acting like a warden; as well as conducting physical upgrades like ripping out carpet, putting in stainless steel appliances, upgrading fitness centers, and repainting and re-landscaping. You can’t forget technology: Many of its buildings have Wi-Fi boosters, Nest thermostats, and door locks students can open with a smartphone.

“Our management has seen dramatic rent increases by looking at peers of the same vintage but just running tighter,” he said, pointing to projects like East Carolina University’s The Landing, where Vie invested 5% to 10% of its purchase price, raised rents 11%, and then left 18 months later with a big IRR.

On the office side, CenterSquare Investment Management senior vice president Chad Burkhardt spoke about Fossil’s previous corporate headquarters in North Dallas, a 200,000-square-foot building connected to a manufacturing building, both which sat vacant for 3 years. The company that had developed Fossil’s new build-to-suit held on to the old property and was trying to find a “unicorn,” a tenant that wanted 200,000 square feet of office.

“We all know that’s not a real thing,” Burkhardt laughed. “They hung out there for a really long time, and the pricing went down. We thought we could buy the office for $100 per square foot vacant and the manufacturing building for free.”

Its strategy after purchasing the property with a creative partner was converting the manufacturing building to covered parking, therefore increasing the parking ratio, an important amenity for Dallas. “If you don’t have an edge on parking, we won’t even touch it,” he said. Within 6 months, the building had a lease with a Fortune 50 company for 12 years

Argosy Real Estate Partners managing partner David Butler also found an off-market deal in Dallas’ West End district that was owned by an orphan fund.  It had a 10-year CMBS loan maturity this October, and the firm bought it for the long term. Argosy replenished the reserves, put a small amount of money in it, and re-tenanted it. In a little under a year, Uber signed on to be a ground-floor tenant, turning it into a creative tech building.

 “When we underwrote the building, we planned on waiting for loan maturity, rebalancing the loan, and putting new equity in it,” he said. “When we finished the business plan, we asked, ‘Why don’t we test the market?’ It was purchased by a big technology real estate farm, and we made 6 times our money in a little over a year and a half. It wasn’t planned or underwritten that way—we had planned to hold it for at least 5 years.”

Knee then asked about failures investors experienced that turned into a success, because they were able to rethink their plans.

Rosenblum recalled a project in which Vie was halfway through in Texas. It then discovered, from a capital perspective, it wouldn’t have the draw it thought it would. “Capex was cut 40% from where we budgeted, so we had to pare back and figure out what our best ROI items were in units,” he said. “We had to think on our feet. We didn’t do our flooring program throughout the units; pared back on the pool redo, and revised the fitness center. We got the rents we pro formaed anyway—it showed we actually had been overspending, and it was a good lesson.”

Lisa Knee July Panel

MetaProp NYC Creates the Global Real Estate Tech Confidence Index

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July 7, 2016

By Morgan Piscitelli

MetaProp NYC, the first real estate tech accelerator, recently released their findings from an index they created called the Global Real Estate Tech Confidence Index. The initial results of the index, designed together with the Real Estate Board of New York, were positive. MetaProp NYC’s Global Real Estate Tech Confidence Index measures the health of the real estate technology market, according to the views of investors and startup founders worldwide. The index is based on responses to 4 questions, with a response range from 0 to 10. 

To create this new index, MetaProp NYC polled real estate tech investors and founders, asking about company growth and their thoughts on the future conditions of the market. The results showed that the investors were more confident about the real estate tech market than entrepreneurs. MetaProp NYC found that “90% of investors intend to make either the same amount of investments as last year or more,” according to co-founder and managing director Aaron Block. The index also reported that many expect the real estate tech market will grow more competitive during this year.

Another expectation of the 2016 real estate tech market reported by the Index was that customer growth would be moderate. Although most startups are expecting to double 2015 revenue, some are not expecting to bring in any revenue at all. However, despite this expectation, many startups reported having aggressive hiring plans for 2016.

“As opposed to other industries such as advertising or finance, the real estate industry is just beginning to embrace innovation and technology,” said EisnerAmper LLP Partner Steven Kreit. “This index is a great tool to see how investors and entrepreneurs see the short term and long term prospects for the industry.”

The data collected from MetaProp NYC’s Global Real Estate Tech Confidence Index shows that in 2016, many real estate investors seem more inclined to lean into real estate tech trends, while entrepreneurs remain more skeptical.

The Money Game: The Strategies Large Funds Are Using in the Wake of Global Uncertainty

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June 29, 2016

A version of this article was first published by Real Estate Weekly Online on June 22.   

ken-weissenberg-panel-16Panelists and attendees of IMN’s 17th Annual U.S. Real Estate Opportunity and Private Funds Investing Forum likely had more cash on hand than most small countries. But how are macro-economic trends impacting how that capital is being deployed? 

Kenneth Weissenberg, partner-in-charge of EisnerAmper’s real estate group, joined some of the real estate industry’s largest funds for a plenary session to discuss how they’re approaching the market today—and their strategies were as varied as their companies. 

Angelo, Gordon & Co managing director Dana Roffman reported her firm is taking the same stance as it always has—looking for value-add situations where there are opportunities to reposition. It continues to approach the market via joint ventures with local operating partners, she said. 

Almanac Realty Investors also continues to take the path most familiar, noted partner Pike Aloian: investing in companies with smart-growth business plans and putting capital in the hands of entrepreneurs who know how to invest it across various markets. 

The single-family home market, which sprung up during the economic crisis, has experienced dwindling opportunities, said Starwood Capital Group senior vice president Brendan Bogan. However, you can still grab 5.5% to 6% net yields on the Multiple Listing Service, with margins just as good as multifamily. In those investments, Starwood is focusing on Sunbelt markets with better tax regimes, growing population, and job increases. 

The winds have shifted for NorthStar Asset Management Group, which today is a net seller of owned real estate, noted managing director Sujan Patel.

“We took advantage of four to five years of buying, and now our focus is on monetizing these investments and raising cash for more opportunity coming,” he said, predicting better acquisitions on the horizon.

The sole reason for all of the regulations in the financial sector is to make sure the over-exuberance that caused the global financial crisis doesn’t happen again, said Mack Real Estate Credit Strategies CIO and managing member Peter Sotoloff. 

Despite this, Mack’s average loan today is over $100 million, he continued, with a pipeline that’s “off the charts.” The trick: being thoughtful, understanding the markets Mack is in, and knowing who the company is dealing with. Even in a negative-to-zero interest rate environment, “we still see a good basis, good sponsors, and good lending opportunities.” 

“Is there any market you’re not looking at?" Weissenberg asked, to which the panelists offered sectors like high-end condos and various pockets of lodging on a market-by-market basis. 

“The last 3 or 4 years, it was a lot easier for all of us, as the wind was at our backs,” Patel pointed out. “Today, there is opportunity in every market, but it’s back to the street corner you’re investing on and the quality of asset you’re investing in.” 

Roffman added that it’s about having a conservative eye, and Angelo Gordon is looking for deals in which it could find situations, like when it was able to recap a CMBS loan of a 2006-2007 vintage maturing in San Francisco. 

“We’ve been able to capitalize on some really great opportunities,” she said. “It’s hard to red-line markets for being overpriced, because a lot of times, there are great situations within them and you have to seek them out.” 

Brogan said Starwood is focused on cash flow and de-risking its residual through significant cash-on-cash yields—and because of that, the firm is spending most of its time in the apartment sector, which offers north of double digits on those cash-on-cash yields. It also has an operation in Europe, where there’s a different set of opportunities, particularly on distressed assets. 

“That said, it seems that Europe seems to be the place to put risk capital,” Weissenberg noted, asking the panelists about their overseas strategies.

NorthStar’s European strategy is basic: focusing on core office in the U.K.,France, Germany, and a few other major markets, Patel said. Three years ago, it took advantage of portfolio acquisitions to scale quickly vs. single-asset trades, then spun out a European office REIT. 

“It’s an interesting opportunity depending on the type of capital you have, as it’s a little more yield-oriented,” he added. 

Sotoloff expressed concerns about banks still over-lending and mispricing capital for key clients in Europe. From an alternative lender standpoint, there’s still better relative value in the U.S., he noted. “It’s much better than Europe, which flip flops and switches.” 

Angelo Gordon, which has been in Europe for over 5 years, has just raised a fund shy of $600 million dedicated for Europe. Roffman said the firm is taking its strategy of joint venturing with local experts there, focusing on distress, value-add, and core-plus opportunities. 

“How about the volatility today, from banking regulations to terrorism around the globe?” Weissenberg asked. “Are you changing your investment strategy?

“We’re all in the business of raising capital to make good investments in commercial real estate,” Patel responded. “The volatility is a good thing for our business. The key is having capital on hand during those times to invest. Taking advantage of opportunities that present themselves in this volatility is the driving factor behind why we’re selling some of our assets.” 

Brogan said that Starwood is thinking “long and hard” about certain markets, especially since there’s a threat of overbuilding in the apartment space. Instead, it shifted its interest to the suburbs, because rents were affordable and there was undersupply stemming from the financial crisis. On the office side, it started looking at secondary cities like Nashville, Raleigh, Portland, and Charlotte, “where there’s a lot of wind at their backs and undersupply.” These markets are now heating up, he noted, “and we’ll be in and out of there.” 

“So what inning is commercial real estate in?” Weissenberg asked. 

Sotoloff said while we’re deep in the investment cycle, it’s been different from past cycles, given the negative-to-zero interest rate environment, problems globally, and pension funds readying for a world of hurt. However, he doesn’t expect a massive crash on the horizon. 

“There’s $252 billion of private equity sitting on the sidelines waiting to be deployed at a moment’s notice when things blow up,” he pointed out. 

Aloian ventured the market is in the fifth or sixth inning. Most property types he’s following seem to be performing well, fundamentals are good, the economy is bubbling along with some growth, and interest rates are benign, creating attractive investment opportunities, he said. 

At EisnerAmper’s recent West Coast Private Equity Summit, Weissenberg noted that the term “FOMO”—fear of missing out—is now being replaced by “FOOP,” or fear of overpaying. What about valuations? 

Brogan said they’re beginning to creep up in certain markets, and Starwood is tracking discount-to-replacement costs, which keep getting tighter and forcing the firm to be more careful in asset selection. But that’s not what’s concerns him the most. Instead, it’s situations like Brexit and how it might impact investment in Europe. 

“Global externalities will be keeping us up at night,” he said.

“There’s no shortage of things to worry about, for sure,” Aloian added. “We have global terrorism and a scary political environment in our country. What we try to do is invest in good companies, keep leverage ratios low, generate recurring cash flow, and set ourselves up to grab opportunities when we see them.”

Patel predicted there will be a major world event that will be a shock to the system, “but I don’t spend too much time worrying because we don’t know when and where it will happen.” Instead, it’s about staying ahead of the changes, whether it’s financial regulation, tax reform, fiscal policies, or the technology that’s reshaping the industry and how we live, work, and play. 

“Be conservative and optimistic at the same time,” concluded Roffman.

EisnerAmper is an independent member of Allinial Global.
EisnerAmper is an independent member of EisnerAmper Global.