For the past 15 years, Chicago-based Waterton Residential has followed its business plan pretty much true to form. As conceived by co-founders and managing members David Schwartz and Peter Vilim in late 1994 over a box of Pop-Tarts in Schwartz’s office at Equity Residential, Waterton has raised and deployed 10 successive discretionary real estate funds into multifamily, all of which paired a small percentage of skin-in-the-game personal capital with an equity stack from an evolving roster of single-sponsor investors beginning with Chicago’s high-net-worth Pritzker family and ending with the California State Teachers’ Retirement System (CalSTRS) pension fund.
After tours of duty on the executive roster at Chicago-based AMLI Residential in the ’80s, Schwartz and Vilim found themselves in the mid-’90s as acquisition point men for Equity Residential and Berkshire Realty Co., respectively, when Schwartz approached Vilim with the Waterton proposition. “He called me up and said, ‘I have an idea; let’s meet for dinner.’ So I met him at his office, and he pulled out this box of strawberry Pop-Tarts,” Vilim, now 55, recalls. “Luckily his idea was a lot better than the dinner.”
The idea was also fortuitously in synch with Vilim’s take on a real estate market dominated by the Resolution Trust Corporation (RTC) liquidation of apartment assets coming out of the savings and loan collapse. “In the ’90s, creative people would go out and buy these RTC deals, fix them up, establish a new rent threshold, and then sell them to REIT investors like us,” Vilim says. “From a dealmaker’s perspective, they were making all the money and having all the fun.”
The launch of Waterton in 1995 aimed to bring Vilim and Schwartz out of their REIT offices and into a newly-minted entrepreneurial real estate sector earning opportunistic returns on a concept known today as multi-family value-add. Based loosely on the AMLI model, Waterton was conceived as a private real estate company seeded with the partners’ investment capital and augmented with high-net-worth investor contributions to create discretionary funds for buying, improving, and reselling distressed real estate. “We saw the smaller guys in the RTC-era buying assets and fixing them up with cosmetic rehab, which was kind of a new phenomenon in the ’90s,” explains Schwartz, age 46, of the emerging value-add profit model. “I was at Equity, and we were regularly buying properties from these guys. They would buy the RTC, put the lipstick on the pig, and sell the property to the REITs.”