With real estate financing still an issue as part of the lingering impact of the Great Recession, some developers are turning to other options to get shovel ready.
Enter investment funds.
The funds have attracted billions, often from investors who are snubbing the stock market in search of returns as high as 15 percent, well above the standard 7 percent or 8 percent. It all comes down to dollars and sense.
“What the investors look for is returns, they are spoiled,” said Carl Verstandig, a Pikesville developer who has access to more than $500 million in investment fund capital that comes from as far away as Israel and as local as a cell phone network provider in Bethesda for his Class B and C commercial property acquisitions.
Experts say the funds offer stability compared to the roller coaster stock market, speedier closings on projects and out-of-town investment without having to embark on due diligence.
“We can get access to the real estate markets as a diversifier, and they bring about a consistent income stream,” said Peter Maller, founder of Maller Wealth Advisors in Hunt Valley, who has invested millions in real estate funds for clients.
Gilbert Trout, a real estate investor at Trout Daniel & Associates in Timonium, said the investment funds for Baltimore properties are attractive to New Yorkers and investors from Washington, D.C.
Trout says he has seen investors jump into funds thanks to the advent of the Google Earth, which has allowed cash to flow into Baltimore and other cities because they can log on and visualize properties with a few clicks. Another newfangled form of investing is crowd sourcing for real estate projects in search of financing on sites like CityVest Capital.
“They appeal to those who don’t necessarily want to put their foot in the door,” he said, of the funds. “It’s also in general a good hedge against inflation.”
Below are stories of how real estate investment funds are making a mark on Greater Baltimore’s real estate landscape.
After interviews with 35 developers in the mid-Atlantic, the Owings Mills real estate firm was selected by an investment fund fueled by the pension money of California teachers.
When the deal was inked in 2012, Greenberg Gibbons had access to well over $800 million and projects took off, said CEO Brian Gibbons.
“It’s almost like being a public company without the constraints of a public company,” he said. “As long as the project can make economic sense, it has no restraints. It makes us nimble.”
Some of the local projects the California State Teachers Retirement System, or CalSTRS, have helped get out of the ground include a redevelopment of The Shoppes at Kenilworth, the Hunt Valley Towne Centre and Foundry Row.
The investment fund also turned out to be the spark of the $350 million Towson Row development after Caves Valley Partners sought a partner to fund the project. The five-acre site had been cleared in the Baltimore County seat before work stalled for more than a year and a half.
CalSTRS investment fund’s only requirement: A $43 million incentive package that was pledged in November by Baltimore County Executive Kevin Kamenetz and passed weeks later the County Council. Ground breaking is expected by mid-year.
“These funds are so diversified,” Gibbons said. “For them, if they can partner with a reputable developer they can get the upside of the value we create. And they get a better return. That’s why a lot of these pensions look at high quality real estate as income cash flow.”
He added that the payoff for real estate investors has been flush — and fast. It has even prompted a little humor: “Bonds have been paying so little and interest rates had been so low that the joke was to call them ‘fixed no-income.’”
Scott Dorsey, CEO of Merritt Properties, has seen the company grow over his 46-year tenure.
But Merritt’s continued rise in the coming year or two could triple with the backing of $400 million in funds from Almanac Realty Investors.
The New York real estate investment firm inked a partnership with Woodlawn-based Merritt, setting the stage for the company to expand into several new states like North Carolina, Georgia and Tennessee.
“We can spend $600 million to $700 million in development by leveraging that capital,” Dorsey said. “We’re going to evaluate certain markets with strong potential for population growth and job growth. We are trying to find markets where we can have a more value added approach.”
Merritt first partnered with Almanac Realty Investors in 1997. At the time, the investment fund offered $75 million and those funds were used to expand its portfolio from about 10 million square feet to 16 million square feet.
“We were building 500,000 square feet of building space a year,” Dorsey said.
Almanac Realty Investors was founded in 1981 as Rothschild Realty. Including Merritt, it has committed more than $4.8 billion for real estate investments to 39 companies.
For Merritt, which just celebrated its 50th year, “the fund has helped us grow,” Dorsey said. He lauded the investment partner almost like an insurance policy to continue that surge.
“We had our 50th anniversary four months ago and the focus was on what we’re going to accomplish,” Dorsey said of the company founded by the late Leroy Merritt.
“One of the things that differentiates us from others is we think in terms of having a perpetual company, to have opportunities for all people that work here for decades. That’s our goal and a big reason why we did the fund.”
Verstandig, who owns Class B and C shopping centers in several states, has been using at least four investment funds for the past year.
As founder and CEO of America’s Realty in Pikesville, Verstandig said the funds have allowed him to make cash purchases of retail centers drawing from a well that totals close to $500 million.
His centers are located in Maryland, Ohio, Florida, Georgia, Tennessee, West Virginia and Louisiana, to name a few states. All told, he owns 336 shopping centers in 45 states. And, strangely, the investment fund leverage allows him to buy what he calls “Amazon-proof” developments where customers are still faithful shoppers of grocery stores, dollar stores, discount department stores and the like.
“The last 25 years, we’ve been able to produce return rates of about 10 to 30 percent on cash sales and we can show that as investments are more secure, and the tenant mix we have is recession proof, and somewhat Amazon-proof thus far,” Verstandig said.
Last year, America’s Realty purchased 1.6 million square feet of retail and commercial space totaling $68 million, much of it with investment funds fueled by foreign and domestic capital. In December, Verstandig gained access to a $4 billion real estate investment fund based in Israel.
“I’m going to go completely haywire, completely ballistic with that money,” he said.
Why does he think investors prefer real estate investment funds nowadays?
“The stock market is like driving a car without brakes,” he said. “It’s hot and then if something bad happens politically or out of your hands, it can go down just as quick as it’s gone up.”
The Greenbelt-based residential developer last year created its own investment fund in part to help finance Alta 47, a group of market-rate townhomes in Locust Point in partnership with War Horse Cities.
Called BHI Investors I, a Securities and Exchange Commission filing last March reported it had raised $20 million, a sum that was capable of funding about $120 million in development in the Baltimore and Washington corridor, Bozzuto President Tom Baum said at the time.
The fund was designed to fund a majority of Bozzuto’s smaller-scale housing developments with 100 units or less. Those projects were hit with a need to provide higher than usual equity up front, Baum told the Washington Business Journal last year, and the BHI Investors I was formed to help get projects out of the ground faster with less lending red tape.
“Homebuilding equity has not exactly been the most prevalent thing in the market for the past few years because of the post-2008 dynamics,” said Toby Bozzuto, CEO of the Bozzuto Group, in an interview with the Washington Business Journal. “We created a vehicle to complement our own equity so we can do more projects.”
Bozzuto this month declined to be interviewed about any updates on the BHI Investors I fund — even as the completed Alta 47 development was being marketed.