In 2012, Steven DeFrancis found himself buying last-minute plane tickets to send his EVP of construction, Clayton Landers, on a wild goose chase across China to track down an order of cabinets. Cortland Partners had recently switched to sourcing building materials from Asia to keep a lid on development costs and hired an importer to help out. For the first few orders, it worked just fine—until it didn’t.
Unfortunately, that wasn’t the only time Landers had to go to Asia to meet with manufacturers and hunt down cabinets or light fixtures or hardware. After it happened five or six times, DeFrancis, Cortland’s CEO, started to wonder why his company was relying on this intermediary to place the orders.
For DeFrancis, though, the answer wasn’t just to hire yet another importer. He wanted to cut out the importer altogether. He didn’t want the company to be stifled by partners who couldn’t grow with it. Fortunately, the strategy also controlled escalating building costs by cutting out the profit margins of third-party contractors and designers.
Eliminating the importer wasn’t quite as crazy as it sounds. Cortland had already developed two new arms of business—a construction management team and an in-house design studio—to give the firm independence and the power to grow. It hired Landers to start the company’s construction arm and find ways to keep costs contained, which is why Cortland turned to sourcing materials from overseas. The company also brought on Darla Dillon as vice president of interior design to customize every project to local tastes without breaking the bank.
The more trips Landers took to China to find where his products were, the more direct connections with manufacturers he gained. With Landers’ contacts and Dillon’s customized design, DeFrancis begged the question: Instead of buying products the designers chose from a limited selection, why not design and manufacture the products themselves?
Room for Growth
As the multifamily sector gained speed in the aftermath of the recession, DeFrancis was focused on refining his products and positioning Cortland Partners for the growth the industry could experience.
DeFrancis knew the company couldn’t compete with larger developers that had more funding to build new luxury Class A buildings. Instead, he wanted to apply the developer mentality to the acquisition business strategy in a value-add approach. Instead of doing simple in-and-out renovations, DeFrancis took on more-holistic interior and exterior upgrades that completely repositioned older buildings into a higher-end market.
Developing an internal construction management team cut out the fees of a third-party general contractor and also brought Cortland Partners’ team closer to the product than ever before.
It also presented a lot of new problems and questions the team at Cortland hadn’t encountered before, such as from whom they were obtaining their materials. When they looked at cutting more costs, the team recognized sourcing products internationally would be the best route, which is eventually how Landers ended up in China tracking down cabinets again, and again, and again.
Bringing interior designers into the business was done partly to cut out the designers’ fees, but it was also about controlling the design and quality of the buildings Cortland Partners renovated. DeFrancis recognized consumers were becoming increasingly attracted to personalized products and services.
“We had a recognition that our business was going to become much more client-sensitive than it probably had been in past cycles. That created a lot of opportunity to separate one from another with this new clientele being a very noncommoditized type of customer,” says DeFrancis. “Of course, it also meant you had to come up with a way to differentiate your properties from those around you.”
The design team quickly became integral to the workflow at Cortland. In fact, the company currently has an interior design professional based in every regional office, along with the investment and operations team, to make sure design is a central part of the business plan. While the design team isn’t exactly given “carte blanche, they do kind of run the show,” says DeFrancis.
“Usually, once you get to the budgetary process of the program, a lot of what the interior designer thought was important gets left on the floor because of a company’s budget constraints,” DeFrancis says. “At Cortland, we really encourage our teams to go as far out on the edge as it relates to interior design. It’s such a big piece of placemaking.”
Dillon dedicated herself to bringing a localized, luxury look to every project to personalize it to the local markets and set it up to receive the highest returns.
“We liked [the high-end] look because you weren’t getting that at other renovated communities, or even new ones, for that matter,” she says, noting that the renovations Cortland Partners takes on are much more comprehensive than the average face-lift.
Fine-tuning the Details
As Dillon looked for new ways to keep the design unique and fresh, it was only natural for her to work with the construction management team to source products. And once Cortland Partners took the plunge to start manufacturing products for itself, Dillon became responsible for every detail in the unit, down to the type of wood in the cabinets, the type of metal in the cabinetry hardware, and the type of protective coating inside the faucets.
At first, the design team made basic drawings depicting the products they wanted to incorporate in their projects. The materials procurement team had to then work with a manufacturer to develop the specifications and technical requirements so the manufacturer had detailed plans from which to create the product. However, that process took quite some time and locked Cortland into working with a specific manufacturer.
So the firm in-sourced the technical documents, too, says Mike Altman, chief investment officer for Cortland. Now, its designers send out their drawings and the procurement team is able to translate them into CAD files with the technical specs the manufacturers need.
“Internalizing the shop-drawing and pre-manufacturing process allowed us to really push pricing even lower, because now it was like an executable auction for each one of these groups,” says Altman. “We were going further into the supply chain to figure out how we [could] get a better product at a better cost.”
Designing the products, as opposed to just choosing them, also gave the interior design team more creative freedom, says Dillon. Anything became possible as long as it worked for the budget. And since Cortland Partners was doing it all in-house, more high-end options became financially feasible, such as an apron-front sink or a touchless faucet, both of which are usually priced out of the average renovation budget.
Setting up operations in a country that is halfway across the world, whose people don’t speak English, and is governed by a Communist regime sets up a lot of difficulties.
For the past three years, Cortland Partners has been sending its team members to China on 30-day visas to meet with a translator who could help them source vendors, work with the manufacturers, and check on the progress and quality of the materials they created.
The construction management team also spent a lot of time finding out how to get their products from China to their projects in the U.S. in the most efficient and cost-effective way. They’ve gone through a few different vendors for ground transportation from the manufacturing facility to the port in China, but have continued to use the large shipping company Kuehne + Nagel to get their products from China to the States.
Cortland Partners currently operates in Southeastern U.S. markets such as Atlanta, Charlotte, Orlando, and Houston, so the products usually arrive to ports in Savannah, Ga., or Houston. They are then sent to a warehouse where the products are broken down and rearranged by project and unit. Since Cortland Partners completes its interior unit renovations in between leases, it follows a tight construction schedule. Organizing the products to go out by unit saves workers from waiting on each product to arrive.
Understanding the significant amount of responsibility they were taking on by getting into manufacturing, the materials procurement managers held rigorous standards for the quality of work. From the start, DeFrancis says Cortland Partners has invested in third-party testing of its materials, such as formaldehyde in flooring products and the safety of electrical componentry.
“In a way, we probably have more visibility now over the quality of our products,” says Altman. “Our procurement guys knew from the beginning that they were taking on a lot of personal risk importing stuff that didn’t work or wasn’t right. They’ve been extremely disciplined.”
In early 2014, Cortland Partners applied to China for a designation as a WOFE—a wholly owned foreign entity—which would allow them to set up a regional office in China and hire Chinese workers. The WOFE was approved by the Chinese government nearly a year later and Cortland Partners transferred one of its Atlanta employees to lead its operations and bring the Cortland culture to the team.
Reaping the Rewards
Over the past few years, Cortland Partners has grown this strategy to keep pace with the volume of deals it’s made. Since 2010, DeFrancis estimates the company has acquired roughly 40,000 units and completed, on average, a $15,000 renovation on each unit. Cortland Partners also showed up on the NMHC 50 Managers list for the first time this year, at No. 41, with 32,241 units. (If you couldn’t guess, Cortland Partners manages all of its own properties, too.)
“The reason we’ve been successful as a relatively previously unknown firm is we’ve been able to pair what is a development-type return profile with a core-plus acquisition risk profile,” says DeFrancis. “Everything we’re buying is 95% occupied the day we buy it, yet we’re still going through the course of 18 months to two years and doing a complete renovation and repositioning of the asset.”
Today, the company employs 21 people on its interior design team and 200 people on its construction management team, with five people based in Shanghai. It also now manufactures roughly 80% of its own building materials, from cabinets and countertops to lighting and plumbing fixtures.
As Cortland Partners has dug deeper into the supply chain, its savings have been crucial to its ability to grow. DeFrancis and Altman estimate this strategy is saving them approximately 30% to 40% across all the products they make, compared with buying from a U.S. bulk provider, and since DeFrancis chose to roll a good portion of the savings into purchasing better materials for higher-grade products, the savings is probably even more.
While traditionally the company only manufactured the amount of products it needed for various projects, DeFrancis recently discovered he could produce even more, opening the door for some third-party sales opportunities. At the start of this year, Cortland Partners created Cask Industries, a subsidiary firm from which it can sell the products its team designs.
Cortland is bringing to market communities that are 10% to 30% behind a new Class A development in the same submarket, with typically a similar finished profile. And with most renters getting pushed out of high-end price ranges of late, the cost-efficient and intensive value-add strategy is looking better and better.
“[Renters] are more budget conscious today than they were before,” says DeFrancis. “They’re looking for something that’s now an option that’s more affordable than the brand-new product. We start to stand out amongst the crowd there because of our ability to price much more efficiently.”