Equity investors jockey for spots in commercial real estate joint ventures
Competition is heating up among investors looking to capitalize on real estate investments through joint ventures. And they’re willing to write some big checks to get a foot in the door with top sponsors.
Hetman, Toll Brothers Apartment Living and Kennedy Wilson are some of the real estate companies that have announced deals in recent weeks that will bring in capital to fund new investment opportunities. For example, Kennedy Wilson recently announced a $300 million permanent preferred equity investment from Toronto-based Fairfax Financial Holdings Ltd. Kennedy Wilson expects to use the proceeds for its development pipeline and real estate investments, as well as pay off its unsecured bank lending in full. With the equity investment, Fairfax has raised its first mortgage target within Kennedy Wilson’s debt investment platform from $3 billion to $5 billion.
“The ability to partner with like-minded institutions to execute our strategies around joint ventures and real estate is a part of our DNA,” says Matt Windish, executive vice president at Kennedy Wilson. Founded in the late 1970s, Kennedy Wilson has used joint venture capital in all aspects of its business, whether it is buying existing assets, developing assets or, in the most recent example, partnering with Fairfax for its To help fund the debt investment platform. “It’s allowed us to really transact what we might otherwise be doing given the size of our balance sheet, which has really opened up investment opportunities,” Windish says.
The recent announcements are part of a growing wave of joint ventures. Activity that slowed in 2020 began in the second quarter of 2021 and has been “gangbusters” since July, said Paul M., a partner at Duval & Stachenfeld LLP in New York City. Schwartz notes. Part of that activity is due to a decrease in demand and the fact that there is still a lot of dry powder to be deployed. Private equity funds in particular have a timeline in which they need to deploy the capital they have raised, and JVs provide an attractive solution for holding large dollar amounts, he adds.
demand exceeds supply
Another major theme in the commercial property market is that there is a higher demand for equity partners than the deals available. That imbalance is putting sponsors and developers in the driver’s seat, especially for high-demand property types such as industrial and multifamily. “It’s definitely on the developer’s side these days,” says Paul Ducey, managing director and co-head of CP Capital, a New York City-based real estate investment manager. Best-in-class sponsors are in a strong position to set terms, including partner rights and profit-sharing splits for the partnership.
CP Capital has been conducting joint venture deals in multifamily development in the US since the mid-1990s with equity capital derived from ultra-high-net-worth individuals and family offices in Germany. Investors are typically investing money in a private equity fund managed by CP Capital, and the fund invests as a joint venture partner in a number of projects to create a diversified pool of assets for its clients. CP Capital generally puts in between 5 to 25 per cent of the equity share of 75 to 95 per cent with the GP partner. For example, the firm announced a joint venture with Crescent Communities in January to develop a 315-unit multifamily community in Covington, Ga.
There is a lot of equity in the real estate market for all types of real estate transactions and from all sources of capital from institutions, pension funds and endowments to family offices and HNWIs, agrees Duane Morris co-president Chester P. Lee. Real Estate Practice Group. Unless those groups are real estate owners or developers, they do not want to directly manage those properties. They are looking for an operating partner or sponsor, and quality sponsors have the greater advantage of picking and choosing the limited partners (LPs) they want. “Some LPs are initially agreeing to give some of them indemnity and bank guarantees, which is an indication of how strong the sponsors are in being able to drive the deal structure.”
programmatic partnership
The abundant capital chasing joint venture partners is driving greater interest in programmatic joint ventures versus single-asset deals. “These are all potential capital partners. So, how do I differentiate myself from everyone else if I’m a money partner?” says Schwartz. One way is to create programmatic relationships where a sponsor or general partner will make multiple deals with their limited partner.
Programmatic partnerships offer benefits on both sides of the table, including a level of certainty for both the sponsor and the equity partner. Developers can spend less time and resources finding those joint venture partners and more time finding deals, while investors benefit from a stable pipeline of deals that allows them to capitalize. Plus, there’s added efficiency in not spending time scrutinizing partners on each new deal and negotiating terms and rights.
Kennedy Wilson’s traditional strategy was to find a deal and then pursue capital, notes Windish. “We have definitely shifted and we are now more focused on setting up these big platforms,” he says. For example, over the past decade, Kennedy Wilson has partnered with Fairfax Financial with $8 billion in total acquisitions, including nearly $5 billion in real estate-related debt investments. Fairfax is also a major shareholder of Kennedy Wilson. “We still do one-time transactions from time to time, but most of what we do, and what we try to do, is where these big platforms are installed,” he says.
finding a good partner
For both programmatic and single-asset joint ventures, the key to a successful joint venture is finding a good partner. Joint ventures are often compared to marriage, and the general consensus on both sides of the table is that once you find a good partner, you don’t want to let them go. “It’s a lot of work to be involved in a joint venture for the first time and build that partnership,” notes Ducey. “The competition is such that if you have established relationships with developers, there is a tendency on their part to continue those relationships.” Over the past 25-plus years, CP Capital has developers that it has done four or five deals or in some cases 30 to 40. Being a consistent player in the market is an advantage.
One way that JV partners can get a foot in the door with developers is by bringing something to the table other than money, such as experience or expertise in a particular property type or geographic market, Ducey says. For example, CP Capital has been active in the multifamily development sector for almost 30 years and has its own manufacturing people as well. That experience is important in development, because things don’t always go as planned, he says. Having an LP that has understanding and flexibility, especially in the current market where there is inflation, supply chain disruption and rapidly rising construction costs, can be very valuable to a developer partner, he says.
“Certainly capital is an important part of it, but when you get into partnerships, it’s a long-term commitment, and you want to make sure you’re thinking about investing in the same way,” agrees Windish. Any investment begins with a business plan, but things don’t always run in a straight line. There are circumstances that force you to move. Therefore, having a partner who is flexible and ready to change with the times is extremely important, he says.
