Diverse Expertise Ideal for Value-Add Investments

By Don Ankeny

When a real estate market gets heated, easy deals dry up fast. To find value, investors need to use a wide lens when evaluating a property.

The nimblest investors in today’s market have a very diverse team. This was certainly the case for our recent Orange, Calif., deal, in which a surface-parked office property in an infill location did not come close to maximizing its value potential. The multiple tasks necessary to transform a single office building into three parts—office building, parking structure and multifamily housing—far exceeded what we encounter in a traditional value-add play.

Each component of this kind of complex deal requires its own business plan and team of experts. For the Orange deal, our diverse team included experts in land planning, architecture, parking garage development, construction management, entitlement, leasing and multifamily development.

After entitling half the site for residential use, we were able to sell it to Toll Brothers and let them manage the multifamily construction and development. A new parking structure is being built to replace the lost surface parking, and the office tenant’s lease was extended for 10 additional years.

Rather than thinking ‘can we do this?’, think ‘how do we do this?’

This philosophy guided our decision to also take on The Delta Portfolio, named for the Delta region of Sacramento, where many of the properties were situated. The statistics of the portfolio were daunting: 11.1 million square feet of space, 125 buildings, 300 tenants and four different markets.

The biggest market, Sacramento, made a lot of sense to us. After the financial crisis, Sacramento didn’t bounce back as quickly as other California markets, leaving room to build value as the market recovered, which it was starting to do.

Despite never working in the Sacramento market, we saw the challenge as an opportunity to bring on a permanent team. This team became the lead in improving and leasing the vast amount of space we acquired.

In so doing, we brought the portfolio’s occupancy from 71 percent at the time of purchase to 95 percent at the time of sale. Generating an IRR of 18.5 percent over five years was done with the help of a very aggressive and creative marketing plan.

When entering a new market, quickly creating strong bonds with the brokerage community must also be a top priority. Our market program included open houses, baseball game outings, incentive trips and a lottery drawing for closed leases.

It was a brokerage contact, Mark Demetre of Colliers, who encouraged us to consider The Delta Portfolio opportunity in the first place.

Producing high-yield deals is certainly more complex in this market, but don’t be afraid to let the complexity of your plan match the complexity of the deal. Just make sure you have the multi-layered expertise to pull it off.