Stringent Requirements Since CalSTRS gives its partners a lot of latitude in making deals, it only works with companies that have a track record in the niche and region it targets, share similar goals, and have a loyal, committed group of employees. “We want to partner with leaders in the multifamily industry,” Hurley says. “We like to see companies with well-compensated employees and low turnover. We want alignment of the two companies and alignment of everyone involved. So, when everyone gets up in the morning, their first job is to make money for CalSTRS and the general partner.”
The personal stake in each deal motivates the partners to do more than work for a management fee. “We are looking for good deals, where we can see a return on our investment dollars,” says David Schwartz, managing member of Waterton Associates. “It puts us in CalSTRS’ position. When we sell a property, we are looking at how much money we will make, not the loss of management fees,” which would be the case with a typical manager for a pension fund.
The pension fund makes a point of paying market rates for management fees. “Because of our size, we could push their fees lower,” Hurley says. “But since we want the best operators, we want our prices to be competitive.” CalSTRS gives partners a performance incentive: Returns above the low teens (depending on each agreement) on a property earn them a bonus.
Spaces and Places CalSTRS knows the region and product types it wants to focus on for each partnership. For instance, when the pension fund sought to build affordable housing with a transit emphasis in California, it targeted and eventually partnered with Fairfield, which had good experience in that niche. When it wanted to do class B apartments, a mortgage banker pointed it to Waterton, which was accomplished in that area.
Though CalSTRS generally prefers to buy in Southern California, the Mid-Atlantic, south Florida, and the Pacific Northwest, the partners also invest outside of these areas. Case in point: a 700-unit property that Waterton bought in Dallas. Despite the fact that the property was in an underperforming market, CalSTRS and Waterton bought it for below-market value and spent $1 million to upgrade the amenities. Hurley expects the property, which is well located in Dallas, will benefit when that market recovers. He also thinks the capital program will improve both occupancy and rents.
CalSTRS saw a need for student housing, so it pursued a partnership in that arena. Eventually it joined up with the student housing section of AIMCO, one of the largest real estate investment trusts (REIT) in the country, which put up one-third of the money. “They had the resources and were committed to student housing,” Hurley says. “They were interested in putting up more of their capital, while smaller firms don’t have these resources.”
As CalSTRS looks into future partnerships, demographics will play a big role. Hurley is well aware of the growing number of immigrants, echo boomers, and baby boomers hitting the market in coming years, and the fund will invest in product to meet the needs of these groups. It already is evaluating possible partners in the senior housing market and hopes to sign an agreement in the next nine to 12 months. “Over the next 20 years, [the country] will add 20 million new seniors,” he says. “The senior market will be twice as big as the echo boom market. We are looking at the areas of the market that may require specialized expertise, like student and senior housing.” CalSTRS already is working with Fairfield to produce housing in underserved urban areas of California. “This is very timely, given what’s happening in California with housing shortages and housing affordability at record lows,” Brand says. “Through this program, we have already created some affordable housing.”
