Developers Not Waiting For Cavalry

CINCINNATI, OH - Some local real estate developers are refusing to let stingy lenders rain on their growth parade. Neyer Properties Inc. and Ackermann Group are both circulating private-placement offerings to raise $40 million in equity. The developers hope to use that capital to acquire $150 million in distressed assets in retail, office, industrial and multifamily housing. Dayton-based Miller-Valentine Group is exploring an offering of unspecified size, while Cincinnati's Phillips Edison & Co. declined to reveal particulars of an additional offering that it's now trying to close.

The offerings come as the nation's capital markets remain mostly closed to commercial developers. Banks and insurance companies, which once fueled real estate development by making direct loans and investing in mortgage-backed securities, are trying to rid their portfolios of risk. Small community banks and private investors are finding it difficult to pick up the slack. Washington's remedies have so far proved fruitless.

"I'm not sure how long it'll take for the economy to recover, so we're putting in place a process that would allow us to continue purchasing assets for the next five years," said Dan Neyer, Neyer Properties founder and president. Neyer Properties Acquisition Fund I aims to raise $25 million in equity to acquire $100 million in local properties. The fund will seek retail, office and industrial properties where values are declining as they approach loan maturity.

Evanston-based Neyer, best known for green office complex Keystone Parke, said he has several properties in mind for the initial round of capital, but he declined to identify them. If it all works as planned, Neyer would raise followup pools that double or triple the first fund's buying power. "Our fastest growth period was during the last recession," he said. "We grew 400 percent in asset value from 2001 to 2003."

Norwood-based Ackermann Group is raising $15 million in its first private placement. It would be used as equity to acquire up to $70 million in apartment properties within a 200-mile radius of Cincinnati.

"We're bullish about the multifamily market. People need a place to live," said John Wendt, CFO for the retail and residential developer. The Ackermann offering has a minimum share price of $200,000, but fractional shares are available. Wendt declined to detail terms of the offering but said the company has "quite a few people going through the process" of buying shares.

Neyer reports a "positive reaction" from investors briefed on the proposal, but no money has been raised to date. Neyer will kick-start the fund by contributing two properties worth approximately $5 million. Individual investors are being asked to buy into the fund with a minimum cash investment of $250,000.

Neyer has been working on the offering for nine months with Bailey Capital Partners Inc., a downtown firm that specializes in financing real estate transactions.

"The market's getting very soft, and the banks are going to start taking a lot of these properties back," said Brian Brockhoff, a Bailey principal who plans to invest in the Neyer offering. "Dan has the ability to take these 'C-plus' properties and turn them into 'A' properties."

The offering, Brockhoff said, is structured to yield an 8 percent return over seven years. Neyer would acquire and manage the properties, then sell or refinance them at the end of the term. "If the market is strong, we'll sell the assets," Brockhoff said. "If not, we have the ability to extend the fund in two, two-year terms."

Capital markets for commercial real estate development locked up last summer as one of the industry's major financing options evaporated overnight. Commercial Mortgage Backed Securities (CMBS) are bond issues in which investors purchase bundles of mortgages on commercial real estate. Monthly CMBS issues averaged $18 billion a month in the two years ended November 2007. Volume dropped to $3 billion a month in the seven months after that. There hasn't been a CMBS issue since June 2008, according to data from the industry newsletter Commercial Mortgage Alert.

"Life insurance companies got very conservative, and the banking market got very restrictive, as well," said Brockhoff. "So a lot of developers are looking for outside capital to fuel their growth."

Local real estate attorney Richard Tranter said many developers have turned to community banks and private investors to fund projects.

"There definitely is a feeling amongst real estate veterans that there are opportunities in this market, and they're trying to position themselves to take advantage of it," he said. "Any and all ways to raise capital are being explored by creative developers right now."

Miller-Valentine could hit the streets with a private placement offering by this summer, said Jack Goodwin, president of Miller-Valentine Commercial Development.

"Doing real estate today takes substantially more equity than it did before," said Goodwin, who predicts investors will favor "those who have the best track record and the best program available."

Phillips Edison & Co. has raised more than $600 million through private placements to individual and institutional investors over 15 years. The company specializes in retail strip centers anchored by grocery stores, and it has an inventory of 227 properties in 37 states, said Sigrid Campbell, vice president of Phillips Edison's fundraising arm, PECO Capital. Campbell said investors will favor companies with a solid operating history and strong relationships with lenders.

"You've got to have a lot going for you to get people to give you their money, especially now," said Campbell. "Most people are keeping their cash pretty close."