When Multifamily Executive profiled William Friedman and his company, Tarragon Realty Investors (now Tarragon Corp.), in February 2000, the company built almost exclusively for-rent projects. Just five percent of its work was for-sale, with 95 percent of the New York firm's buildings devoted to the rental market.
Today, five years later, Friedman and his management have flipped that ratio upside down. The crew actually laid the groundwork for this move in 2000. "It takes a long time to get it [the for-sale business] started," Friedman says. "By 2000, we actually were spending a lot of time and energy working on for-sale projects that had not yet taken shape. But, in terms of revenue, it wasn't showing up yet."
Smart Decision
While it would be easy for Friedman to say this shift into condos was simply an example of amazing foresight, the Tarragon chairman and CEO says the decision to go condo was more of a logical business response to a weakening apartment market.
"We were looking for things that used the same skills we used in developing new rental apartments," Friedman explains. "Building condos is similar. It involves using political and planning skill for approval. It involves having good, attractive sites that appeal to people. It involves coordinating architects, engineers, and contractors to get a cost-effective product in a timely way."
It proved a smart decision. "His timing was excellent with moving into for-sale housing," says Glenn Eubanks, a longtime friend and lender to Friedman, who now serves as head of Wachovia Real Estate Financial Services in Charlotte, N.C. "And with his commitment to move into the urban setting, I think he's ahead of the curve."
But even Friedman couldn't have planned how well this transformation would turn out. Thanks to the condo boom, Tarragon went from "next to nothing to over $100 million in profit," according to Friedman. Revenue jumped as well, going from $73 million in 1999 to $311 million in 2004, according to the firm's financial filings.
Structural Changes
Other moves made by Tarragon also have also boosted its for-sale business, from changes in its financial structure to shifts in its organizational chart. It decided to dump its REIT status while remaining a public company.
While this meant Tarragon could no longer pass through dividends without corporate tax, the decision brought greater benefits in the for-sale arena. "If you have to follow REIT rules, it limits the amount of capital you can use for those activities," Friedman explains.
So far, analysts and others have reacted positively to the change, especially since for-sale represented the bulk of Tarragon's investments and earnings. "Given Tarragon was a mixed business [with both rental and for-sale housing], it didn't really have a peer group in the public markets," says Alan Riffkin, a director at New York financial advisory firm Lazard. "I think that was probably difficult for other analysts."
On the organizational side, Friedman brought longtime joint venture partner Robert C. Rohdie into the company, bringing Rohdhouse Development's land and entitlement prowess to Tarragon. Friedman also added Robert P. Rothenberg and APA Management, an addition designed to help Tarragon market its for-sale efforts. Overall, these expansions have resulted in the creation of a much more experienced and faster-moving organization.
"We can seize opportunities that we couldn't five or six years ago because we have expertise," Rohdie says. "We hired people at large general contractors who now can represent us dealing with contractors. If a decision has to be made on the job site, we have people capable of making those decisions."
As Tarragon recreates itself as an "urban home builder," it still owns vestiges of its apartment past—an 18,000-unit portfolio, in fact. But not for long. In March, the company announced it would sell those apartments, transferring the ownership to partners (while retaining an interest), condo converters, and, for properties Tarragon converts itself, condo buyers.
