When GE Commercial Real Estate and Greystar Real Estate Partners announced a new joint venture in June targeting $500 million in multifamily acquisitions and developments nationwide, it was the culmination of months of work for the two firms. Of course, the lawyers had worked hard to ensure the two partners' interests were aligned. But beyond codified agreements and triplicate contracts, GE managing director Greg Bates and Greystar CEO Bob Faith racked up plenty of frequent flyer miles, noshed lots of late-night meals, and hit more than a few golf balls making sure they were a good fit for each other.
"We spend an awful lot of time getting to know our operating partners to make sure we look at investments the same way," says Bates. "The last thing you want to do is enter into something that could someday become a rocky marriage."
So far, the firms are still enjoying the honeymoon, highlighted by the announcement of their first joint deal, a $20 million acquisition and redevelopment of the Club at Desert Pines, a 409-unit Class B property in Las Vegas. Together, the firms plan to give the community a major facelift, including a $1.8 million renovation. The project underscores the partners' strategy to acquire underserved properties and add value utilizing each of their core strengths: financing from GE and operating expertise from Greystar.
Obviously, the firms' extensive premarital courting paid off.
"We couldn't be happier with our decision to partner with Greystar, because they've already shown that they can deliver results in these types of assets," Bates says. Greystar CEO Faith is happy, too. "We knew we needed a partner who could move quickly and aggressively with financing, because the best deals happen fast," Faith says. "GE does that."
Of course, GE and Greystar aren't alone when it comes to joint ventures in the multifamily apartment sector today. According to Real Capital Analytics, a market research firm based in New York, joint ventures between capital financiers and operating partners are enjoying renewed prevalence.
In fact, for acquisition deals of $5 million or more, the dollar amount of joint ventures has nearly tripled in the last four years. Activity has surged from 120 deals totaling $2.4 billion in 2001 to 205 deals valued at $6.8 billion in 2004, according to RCA. This year is producing another bumper crop of JVs: RCA counted 127 deals worth $5.7 billion through the first six months of 2005 alone.
What's driving the trend? As the stock market has middled its way into the new millennium, investors have flooded the multifamily sector with capital, and they need local operating partners who can put it to work. "The money's there," says Dan Fasulo, director of market analysis at RCA. "REITs and the institutions are flush with cash right now that they have to get out the door. A quick way to do that is to joint venture with a local player who knows the market to spread the cash around."
There's a big upside for on-the-ground operators, too. For instance, in a typical deal, a capital partner might finance 70 percent to 95 percent of the deal's equity, with an operating partner funding the rest.
Then, once predetermined triggers are met– such as a 7 percent to 10 percent return on equity for the partners– an operator's interest in the project might be "promoted" so that they receive 25 to 50 percent of any residual profits. In addition, operating partners often earn management fees. Typical ownership time frames range from three to five years.
"The benefit is that it spreads risk, enables you to do more and bigger deals, and limits the amount of capital that you need to commit to any one deal," says Mark Sanders, CEO of Fifteen Group, an apartment developer and operator in Miami Beach, Fla.
But just because everybody's doing it doesn't mean everybody's doing it right. Industry veterans stress that taking the time to know your partner beforehand and agreeing on key factors such as promoted interest levels, ownership time frame, and exit strategies are crucial to a successful JV.
"What we need is someone who shoots straight," says Sanders. "There are more and different sources of capital that are less expensive today than they were yesterday. But we need a partner who's going to do what they say they're going to. Even if it means paying a little bit more for their money than the new guy on the block, I'm more comfortable with that relationship."
And of course, don't be afraid to go it alone if that's the right choice for a particular deal. "When we look at deals that require operating expertise that we don't have in-house, those are good candidates for us to partner," says GE's Bates, who oversees $800 million in multifamily JV assets with firms such as Greystar, JPI, CWS Apartment Homes, and Julian LeCraw & Co. "But if there's a transaction that GE has the in-house capabilities to do, we'll do those ourselves."
In the rapidly expanding world of multifamily JVs, though, what it ultimately comes down to is who's sitting at the table with you. "It's easy to be a good partner when things go well," says Greystar's Faith. "What you've got to be sure of is that they'll be a good partner if things get rough. That's the litmus test for me."
–Joe Bousquin is a freelance writer in Newcastle, Calif.