After almost a decade with one of the industry’s leading mezzanine firms, Dave Valger is branching out.
The former partner of RCG Longview has started his own, New York–based investment firm called DVO Real Estate. The company will invest preferred equity and, in some cases, JV equity structures, in the $3 million to $10 million range in many major markets across the country.
DVO is targeting garden and mid-rise properties in the B-minus to A-minus spectrum, a market that’s often underserved by institutional investors but that represents the bulk of the multifamily industry.
“There’s a ton of capital in the Class A space, and there’s a lot of money for distress, but the majority of multifamily real estate is garden and mid-rise, B assets,” says Valger. “And the 40 percent or more of Americans who live in multifamily housing will continue to live in multifamily housing. And a lot of those deals will need some fresh equity to get refinanced.”
The wave of debt scheduled to mature in the next few years presents a big opportunity for preferred-equity and equity providers. There’s about $840 billion in multifamily mortgage debt outstanding, according to the Mortgage Bankers Association. Assuming average deal durations of seven years, about $120 billion a year will need to be refinanced annually.
Many owners have done all the right things but will still find themselves with a funding shortfall when their debt matures. Someone who borrowed $20 million five years ago may only be able to get a $16 million mortgage today—and options are limited in terms of filling that gap.
The demand for preferred equity, as well as the market itself, has evolved since the height of the last boom period.
“Five years ago, there wasn’t a need to get additional equity to recapitalize transactions—lenders were chomping at the bit to give you more money at very efficient spreads,” says Valger. “Preferred equity used to be what people called their investment when they wanted to disguise a mezzanine slug, so the senior lender wouldn’t notice. Today, it’s a completely different part of the capital stack, and it’s a lot more transparent.”
Initially, the firm will focus on metros such as Boston; Washington, D.C.; Chicago; Salt Lake City; New York; and Denver, as well as major markets in Texas and California. But it’s not just the nation’s tightest markets—DVO will also consider opportunities in Phoenix and Las Vegas.
Valger starts his firm with a wealth of background in the industry. He was responsible for RCG Longview’s long-standing partnership with Fannie Mae, which began in 2004 with the launch of the DUS Plus product line. That relationship deepened when Fannie introduced the Community Investment Mezz-Mod Rehab program in 2006, again naming RCG as its exclusive mezz provider.
While he looks back fondly on his days at RCG Longview, Valger is excited to make his mark through DVO. “There comes a time in every person’s life when you want something of your own,” he says. “And my strategy is almost complementary to RCG’s because a lot of the business they won’t do—either because it’s riskier or higher leverage—is the business that I want to pursue, so I hope to be doing business with RCG for a long time to come.”