Preferred Equity Investments - Income Structure Offering Attractive Returns
In evaluating real estate opportunities, the core tenants of evaluation do not change even as markets boom and recede. Your appetite for alpha and risk may change but solid investments in real estate can and do in most cases weather the storms.
We interviewed Francis Greenberger, the renowned founder of TIME EQUITIES INC (“TEI”), to get his perspective on how he looks at the real estate investment selection process and why he is taking a unique approach by providing high-quality projects directly to investors.
Typically in the past, these types of high profile, alpha, and income-generating multi-use mega real estate projects have not been available to investors directly. Capacity in these opportunities has been typically filled by intermediary funds. TEI has recently launched its latest development project, a 72 story, 656,000 sq ft luxury residential condo/rental tower in downtown Chicago called 1000 South Michigan Avenue (“1000M”).
The 4 Tenants of Real Estate Investments for Multi-Family
When reviewing opportunities there are several core salient guidelines identified and built over a lifetime of investing. Francis walks us through his top 4 selection parameters and how his 1000M development primarily fits within each parameter.
1. For investors, the value must be clear. Overall the asset has the possibility to be developed and deliver above-average returns for investors.
A location that fully captures upside potential, purchased with strong value and opportunity.
Well thought out investment/product offering that maximizes returns, meanwhile protecting the downside and isolating risk.
Significant alignment of interest provided by the developer.
Location: TEI’s network sources off-market deals that offer low land basis and attractive investment characteristics.
Investment structure offering:
Direct to investor - no middle man receiving management or performance fees.
Flexible - uniquely devised, proven business strategy to offer durable returns and timely liquidity for investors.
Risk-Adjusted - added sponsor/developer significant co-invest.
Product offering: 1000M can be structured to take full advantage of the sales market but has the downside protection of converting to a mixed sales/rental property in case there is a slump in sales due to market changes. Proactive structure with the flexibility to adjust based on condo sales and rental markets, offsetting factors that are attractive to investors- successfully used by TEI in other construction projects.
TEI is aligned with their investors and invests in every deal they do, backed by a strong balance sheet to support every deal they undertake. For 1000M, alignment of interest with TEI’s $65 million investment (junior to Preferred Equity); TEI’s 75% guarantee on Goldman Sachs construction loan (72.5% of the Total Project Cost, estimated to be $343 million) and TEI’s 100% guarantee on project completion.
2. The product has to be attractive and compelling to owners/tenants.
In the 1000M project, what owners and tenants find compelling are location, value, and quality product.
A+ Location on Michigan Ave, Chicago - less than 1 mile south of Magnificent Mile.
1000M priced 10% lower on direct comps at $950 sq/ft; the market is selling at $1050 sp/ft and up; directly related to off-market land purchase deals.
Iconic structure and distinctive architectural design by “star architect”, Helmut Jahn. Unobstructed 360-degree views of the downtown Chicago skyline, historic Grant Park, and Lake Michigan. Innovative amenities, diverse floor plan offerings, and on-site parking. For example, micro-units for lower price points.
3. The market is advantageous and supply and demand are aligned.
Luxury residential projects like “1000M” are less elastic, offering more protection during market fluctuations.
Market is advantageous
The growing market of highly skilled workers looking for luxury residential to buy or rent.
Gentrification remains a strong trend fueling luxury residential real estate.
Millennials and empty nesters want to be in the city.
Consistency in positive multi-family real estate trends, reinforced by two other sites being developed into multi-family at a high level on Michigan Ave.
Higher-end multi-family is more recession-proof over middle markets.
Less Risk- There is typically less disruption with luxury multi-family, it fluctuates less, and there is more certainty specific to absorption.
Multi-family owners and renters have more reserves, economic resources to weather recessionary periods.
Supply and demand are aligned
Chicago is undersupplied and TEI is building units into the market with a pipeline that is undersupplied that can easily be absorbed.
Researched comparable projects to qualify opportunity- 1800 units delivered next 5 years, after pre-sold 1400 units available (net inventory with a suppressed sales rate in Chicago).
The market viability is demonstrated through the presale program with 22% pre-sold prior to groundbreaking which occurred November 2019.
Offering both condos for investors and rentals to accommodate consumer behavior.
4. The sponsor/developer is able to execute.
The sponsor/developer has experience in the local market, a repeatable process that they have successfully executed in the past in various market conditions, and has multi-capabilities from development to property management.
Experience in the local market.
A repeatable process that they have successfully executed in the past in various market conditions.
Multi-capabilities.
TEI has been active in the Chicago market since 1985. 1000M acquired land from a bank having financial difficulties - off-market deal.
TEI has over 50 years of global real estate and development experience.
As a top-tier residential developer, TEI has renovated and converted over 100 buildings with more than 10,000 condominium units. Over the last decade, TEI has developed and sold-out/leased-up several significant new-construction projects. There is a team in place to manage the supply chain to meet deadlines for TEI projects with on-site inspectors for quality control.
Preferred Equity Investment: Offers Better Return and Less Risk
The Real Estate Capital Stack: The composition of debt and equity in real estate is as follows:
Senior Debt: Senior debt holders have the highest priority of repayment, lowest yield, and first claim of the property in the case of default. Senior debt holders have the least risk.
Preferred Equity: Preferred equity can be classified as either hard preferred equity or soft preferred equity. The former having fixed payments akin to mezzanine debt and the latter having more upside benefits akin to common equity. Second-tier of capital.
Common Equity: Equity holders are the least senior but can gain from the upside. Common equity holders in the capital stack also get a claim from the sale of the property.
Preferred equity is part of the real estate capital stack, second tier of capital with less risk than equity. Preferred equity is subordinate to debt, but senior to all common (or JV) equity. Preferred equity offers investors a hybrid risk/return profile that historically has been more secure, less risky than common equity.
It’s a type of financing a developer such as TEI will employ as part of the aggregate capital raise for a specific real estate project. For 1000M, there is a preferred equity return of 10.5% non-compounded cumulative per annum return. The preferred equity will then be liquidated through the use of condo sales proceeds and an “inventory loan” on the rented units minimizing principal risk.
Special Thanks to Our Contributor
Alexander Anderson
Director, Time Equities Inc.
55 Fifth Avenue | 15th Floor | New York, NY 10003
O: (212) 206-6176 | M: (717) 940 - 3667
aanderson@timeequities.com
Time Equities has acquired a diverse real estate portfolio with guiding principles that have remained the same for decades: a dedication to long-term ownership and opportunistic buying. TEI’s keen focus is to maximize returns to investors and deliver excellent service to clients and tenants.
Since 1966, TEI has expanded into multiple markets, both large and small, leveraging its portfolio into diverse asset classes both nationally and internationally. Along the way, TEI has built an equity base by co-investing with individual investors, institutions, and a growing network of strategic partners, as well as offering private placement funds and custom 1031 exchange opportunities through Time Equities Securities (TES), its wholly own Broker-Dealer.