FIELD TESTED As financially driven as Berkshire is, it remains a real estate company, not an investment firm, with considerable local expertise in its markets. Regional executives know countless details about current holdings and potential acquisitions, from past ownership to rent comps. They tell the story of a significant deal as if it were a favorite family anecdote. They follow market-making (and market-breaking) news, even interviewing newsmakers and influential land-use figures in their market studies and presentations to Berkshire’s investment committee.
“We’ll turn over every rock that’s available to us,” says Holmes, whose team talked with the general overseeing the federal military base realignment for one market report. That information helped Berkshire make the decision to purchase a Maryland property whose interior and exterior renovations and resulting rent growth of $200 per unit have made it the example of choice for Berkshire’s “deep rehab” strategy.
“A typical Berkshire property is one in need of capital in a B or B-plus location,” Shuler says when asked for a description. “It’s more of a closer-in asset [relative to the city]. It’s a 1980s asset, although we have some 1970s properties.”
Depressingly dark cabinets, a permanently grimy bathtub, aging kitchen appliances, and no in-unit washer/dryer all qualify as opportunities to Berkshire, which typically spends between $10,000 to $15,000 per unit to update and upgrade its apartments.
The company decides what investments to make at a property during due diligence, when acquisition, operations, and redevelopment staffers all visit the site—sometimes repeatedly—to learn everything they can about the property and its operations before Berkshire makes an offer. “We’ve gotten very good at getting everyone together and making a decision, because time really is at a premium for everybody,” Holmes says.
Sometimes the decision on a particular property is a no, but when it’s a yes, that level of research brings accuracy and credibility to Berkshire’s bid, often allowing it to pay slightly less for the property in exchange for offering a sure close on the deal. “We bring all the facts to the table early in the process,” Olney says. “Ninety-five percent of the time, the price we bring will be the price.”
It also enables Berkshire to move quickly once the papers are signed. “We own the timeline,” Shuler says. Contractors and in-house construction staff get to work nearly immediately. Property management begins working with on-site operations. And the returns start climbing, even before rents do. “What we’ve done is developed a way to develop yield in a time frame standpoint,” Olney says. “We have a very aggressive execution plan to get those incremental dollars.”
GROWTH PLANS Berkshire plans to grow its portfolio right along with those incremental dollars. By year’s end, the company expects to own 28,700 apartments, with projected revenues of $174 million in 2007. That’s up from just over 20,000 units and $139 million in revenue in 2006. By 2008, Berkshire wants to scale up to 40,000 units.
It’s an ambitious plan, but investors aren’t worried. “Success is being prepared, and Berkshire established its infrastructure long before launching its first private equity fund,” says Sklar of WestLB.
Neither is Donovan. He points to Berkshire corporate history, which has included not only multifamily, of course, but also the mortgage company and even a successful healthcare business in the 1990s. “When you see that happen three or four times, you know it just can’t be luck,” he says.
A lucky penny, perhaps.