Property Types For some institutions, the first property they invest in will be a bigger one, which means the developer must have already built up a track record through smaller deals. New companies usually start with a 20- or 30-unit deal, Mozer says. “That’s not really an institutional level. You need $15 million deals before you attract institutional guys.”
But for other institutions, the first deal may be a smaller property with fewer units. If it works out, the institution might well go back to a partner, as Charlesbank does. “We like to put our capital per relationship at $20 million to $25 million. If you leverage up small apartments, you will have to do five or six [deals] to meet that need.”
Heitman LLC, a real estate investment management firm in Chicago, also asks that its partners do a series of deals. “They need to be able to provide a consistent deal flow,” says Jim Bachner, executive vice president of Heitman. “We do joint ventures with groups where we can do follow-up deals because there’s a lot of work and costs involved in getting a program started. For instance, you have to negotiate and draft a partnership agreement, which takes a lot more effort than most people realize.”
Institutions may ask for other things, as well. Charlesbank wants partners to co-invest to “get their skin in the game,” or assume some of the risk. Heitman does this to encourage developers to focus on the ultimate profitability of the investment, rather than just development fees.
It’s Their Money Even if a developer puts money into the partnership, it must remember the institution is supplying the bulk of the capital. So, the lines of communication must be kept open. “We try to prepare them with any potentially adverse news as early as possible,” Gruendl says. Portfolio managers and asset managers typically have hefty reporting requirements, he adds, and pension fund investors are updated at least monthly. “It is both the adviser’s and investor’s habit and practice to estimate the worst-case costs or risk-exposure scenario each month.”
Developers need to deliver what they promise, and if something changes, be honest. “Returns are important, but you have to work on communication and integrity,” Williams says. “You don’t want to over-promise and under-perform. If you get a bunch of doubles with an occasional home run, you are OK. But don’t tell them you are getting a 12 percent return and give them 6 percent.”
Some institutions help this process along. Charlesbank, for instance, has a senior-level manager and two support people on each deal. “This makes communication almost natural,” Wu says.
As a result, the company has weathered a number of storms with its partners. “When there’s bad news, we are never shocked,” says Wu. “Many times, way before an event ever happens, we are discussing how to prepare ourselves.”
