JOINT VENTURE To radically change its balance sheet, Tarragon needed to do more than chop off some assets. It needed capital. After negotiating with a number of suitors, in late March, the firm announced a $2 billion joint venture with Newton, Mass.-based Northland Investment Corp. that would entail giving up about 8,000 units. The deal doubles Northland’s multifamily portfolio, adding 7,433 multifamily units in Florida, where Northland is making a contrarian play, and New England, which has high barriers to entry. These new additions satisfy two of Northland’s three core target markets (the other is tech markets).
“There was good overlap with our portfolio,” says Lawrence R. Gottesdiener, Northland’s chairman. “It gave us growth in two core business areas, good scale, and access to capital and opportunities.”
Northland will hold a 77.5 percent controlling interest in the joint venture, called Northland Properties, and Tarragon will hold a 22.5 percent interest. The joint venture also creates a new management firm, Northland Properties Management, that will provide property, asset, and construction management services to the portfolio. “We believe that together we will do better,” Gottesdiener says. “We will lower our cost of insurance, lower the cost of training, work through best practices, and have the scale to get a good Web-based computer system. There was a strategic fit between the two companies that will make us each stronger.”
As part of the deal, Northland is providing capital-starved Tarragon with a $50 million loan commitment. If drawn down by Tarragon, the loan would be a senior secured two-year loan. The proceeds of the loan, in conjunction with additional cash provided by Tarragon, would be used to purchase a portion of Tarragon’s subordinated debt at a discount. Tarragon’s minority interest in the joint venture will secure the loan. “The joint venture helps a lot,” St. Juste says. “It reduces a good chunk of the debt on their balance sheet.”
As part of the joint venture, Northland will put the properties purchased from Tarragon back in the joint venture. “In effect, we’re acquiring an interest in the properties that we sold,” Friedman says. “Instead of owning the properties, we’re getting an interest in the joint venture, which owns $300 million of properties and about $750 million of properties that Northland is contributing. We’re generating a significant amount of cash from the asset sales and having a lot of our debt paid back.”
