MLP’s process is simple to describe but time-consuming to execute: Go through the meetings with the cities and residents, listen to their issues, compromise, and then work with the zoning and planning committees. “On the development side, we go through a lot of brain damage,” says Ho. “The way we get projects approved is not typical of most developers. We will have neighborhood meetings. We do the up-front process. We meet with the neighbors and city to put things together in that manner.”
Lisa Nordstrom, vice president of The Timberland Group in Purchase, N.Y., which is one of the company’s equity partners, thinks MLP’s commitment to the process separates it from bigger developers. Bigger developers, she says, may have so much going on that they won’t devote the time or effort to working with a city to develop an infill location. But, since MLP is smaller and has fewer deals going on, it will stay around and work through these problems. “They put their heart into it,” she says.
Porta agrees. “We would rather work on a great location for two years than find one that’s easily zoned and may have a lot of competition,” he says.
Once MLP completes construction, it owns a valuable piece of real estate. The company figures a three-year holding period lets it get the most out of that value. “This limits our lease-up risk,” Ho says. “We can’t maximize a return until things are stabilized. Then we can sell to REITs and private investors who don’t want the lease-up risk [of buying something brand-new].”
MLP would like to continue developing garden-style and infill apartments, though it may start zeroing in on even more valuable pieces of land. Still, it wants to stay conservative and look for land that has not gotten multifamily zoning yet because the company’s ability to go through the rezoning process is what gives its properties their value.
Managing the Expansion While Timochenko isn’t fighting to get properties in prized urban infill areas or hot Southern California, his challenges in building MMG are similar to the ones MBK and MLP face. With larger regional players entering his home market of Reading to buy properties, costs have risen to the point where Timochenko doesn’t see the financial viability of many of the deals that cross his desk. This isn’t a good sign for an apartment owner who wants to build his portfolio from the current 1,300 units to 4,000 units by 2009.
But Timochenko isn’t discouraged by this competition. He even sees positive aspects to it. When bigger players come in and buy properties at exorbitant amounts, they will have to raise their rents to justify the price they paid, he says. And that means he can raise his rents.
But the rising costs of properties in the Reading area and Timochenko’s desire to expand (though he cautions that he won’t expand at “all costs”) have forced him to alter his apartment acquisition strategy from the one he used when he started the company of 50 employees in 1986. Instead of just buying and repositioning class B and C properties in the Reading area, he has started developing new apartments. In 2000 and 2004, he opened two properties, totaling 252 units. Though there are no concrete plans for more units in the future, he says he will be developing more.
