Multi Housing News July 2012 : Page 20
IT’S DIGITAL! SUBSCRIBE TODAY! Don’t miss an issue of the most widely read publication in the multi-housing industry available online (continued from page 19) ment development and/or investments today? Ward: It remains very diffi cult in today’s equity markets to raise large discretionary “blind pools” of equity—even the best and most sophisticated operators have had trouble executing this type of equity raise. The more common equity transaction to-day seems to be a “strategic relationship” structure where equity capital invests with a qualifi ed operating partner on a program-matic basis, but retains approval rights over each transaction. In addition, many equity capital providers have modifi ed their strategies. Prior to the 2009 market correc-tion, the prevailing business model seemed to be geared more towards an “asset allo-cator” model where the equity capital took a passive role in the day-to-day execution of the investment with its operator. Today, many if not most equity capital providers are taking a very active role in the day-to-day operations of the investment—not just major decisions. Another trend in today’s equity markets is known as the “local knowledge” require-ment. In the past, equity investors were more willing to invest capital with opera-tors that were buying multifamily assets all around the country. However, when the 2009 market correction hit, both lenders and investors found that the bulk of their losses and troubled assets were from op-erators that were traveling more than an hour or two to manage their investments. Today, both lenders and investors want their operators close by, and a Los Angeles operator attempting to make an investment in Miami is going to have a tough time rais-ing debt and equity without an established presence on the ground in the Southeast. Equity investors are requiring their op-erators to have real “skin in the game.” The days of little or no co-investment from the operator are generally gone. The question of “skin in the game” depends upon many factors such as the fi nancial strength of the operator, the size and location of the in-vestment, underwritten investment period, amount of senior debt leverage, etc. As a general rule, an operator should expect to www.multi-housingnews.com invest cash in the range of 10 percent to 25 percent of required equity for a joint ven-ture equity structure and at least 10 percent of total capitalization for a preferred equity structure. Using “attributed land/ hard as-set value” to meet an operator’s co-invest-ment requirement is challenging—most eq-uity capital is reluctant to credit an operator this value unless they have owned the land/ hard asset for a long time; even then, equity capital is generally unwilling to accept a full market value for the attributed land/hard asset when considering the co-investment requirement. For land/hard assets that are being contributed by an operator to meet its co-investment, it is safest to assume the attributed value will closely match the actu-al cash consideration paid by the operator. Fees remain a major sensitivity for eq-uity capital. Up to 2009, the equity capi-tal markets were generally willing to allow operators to take acquisition fees, asset management fees and, in some instanc-es, asset disposition fees. While fees are still allowed, the amount and manner var-ies signifi cantly upon the nature of the in-vestment and operator. Generally, equity capital is tolerant of a reasonable asset management fee but more reluctant to pay acquisition and disposition fees, the excep-tion being an operator that has sourced an “off-market” investment opportunity. MHN: What are some of the challenges? Ward: The primary challenge in today’s market is fi nding multifamily investment opportunities that can be prudently under-written to meet the required returns of the equity capital markets. With average cap rates on Class A assets back to near his-torically low levels, it is almost impossible to achieve the returns required by equity investors unless they have a very low cost of capital and a long investment horizon. There remains opportunity in the Class B and C multifamily markets, but there are fewer of those properties trading right now. The equity capital markets strongly prefer off-market multifamily investment opportu-nities that have not been fully marketed by the brokerage community. It’s Digital! Start your free digital subscription now! 20 July 2012 | Multi-Housing News
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