For those in the real estate industry who lived through 2008, the pressure to produce positive investment results in today’s market can be enormous.
That can be challenging, given that the market is still in a state of recovery.
But with the credit flow not at even at half strength, over-leveraged equity holders, or those simply with low tolerance, have been forced to execute early exit strategies on their property holdings, leaving those remaining stakeholders to live with some time unrealistic demands from new groups of investors seeking faster returns.
“So much of the intuitional capital is focused on control, ego, loan-to-own. Those are not very friendly firms to be doing business with,” said Ronald Dickerman, president of Madison International Realty, an institutionally backed commercial real estate investment firm.
“If you make one little slip up, odds are that, at a place like that, they are not going to be forgiving.”
That can turn out to be a real headache for ownership and management alike.
Industry professionals like Dickerman advise those seeking private capital to focus on the demands that the new relationship will place on management and other equity holders before you agree to a deal. The key, he says, is to make sure that there is a commitment to fiduciary duty on both sides, it makes things run much smoother.
“We don’t have a gun to the sponsors head saying they must sell the building as of a certain date,” he said. “There are sponsors that we do business with that are generational holders of buildings that might want to own it for 50 years, and that’s fine with us. What we want to do is create a partnership. That creates a win-win for both of us.”
Another thing to watch out for, are private equity fund managers doing last minute shopping before their access to capital expires. Because of deadline pressure, these tend to be hasty decisions that turn out to be trouble for everyone involved.
Investments by private equity funds should always be done way before any fund deadlines are approaching.
“Our funds have all been invested well before their statutory investment period is over,” he said.
Finally, Dickerman says, property owners should expect that fund managers will scrutinize the judgment calls, even from five years ago. Those owners who dug themselves in a hole may have to get creative in generating cash flow or expect to endure a little bit longer.
“Some people who got a little bit over their skis in 2006-2007, buying buildings at premiums or paying prices that they shouldn’t, have done do so well,” Dickerman said. “The people who exercised [good] judgment at that time probably did better. It comes back to roost when you look at how these properties perform through these different business cycles.
“That’s one of the things that is going on now, that investors are scrutinizing the track record of managers, and figuring out who used good judgment back in those times when things seemed frothy and maybe it wasn’t the right time to be paying premiums.”
“The business has gotten very professional, very institutional and very capital intensive. You have your private equity firms that now raise hundreds of millions of dollars if not billions of dollars, if you want to compete in the real estate business you have to align yourself in kind of a similar fashion. You have to have a niche and an angle.
“We look for partners that would be good fiduciary’s to their underlying investors, that will provide transparency, that will be responsive to investors inputs and that really separates, in our opinion, the quality operators from those that are just driven by ego and it’s their way or the highway.
“We’ve got about $2 billion in capital commitment’s, with regard to our business, and we can write relatively large checks. We bought a 49 percent interest in all of Forest City Ratner’s New York City retail assets. We wrote them a $180 million equity check.”
