Backed by capital from high net worth investors, foundations and endowments, the fund has a long-term investment outlook, and typically buys properties in the $10-million to $40-million range, or co-invests in opportunities above that figure, on top of making anywhere between $3 million and $6 million on improvements.

The Rose Smart Growth Fund has made six investments so far--most recently paying $26.5 million for a 198-unit affordable housing community with 4,500 square feet of ground-floor retail at 107-145 W. 135th St. in New York City's Harlem. The project's Section 8 contract was about the expire, but the firm worked with the US Department of Housing and Urban Development to obtain an interim renewal and is working on securing a new 20-year contract to preserve the community's affordability, in addition to greening it.

Recently, Gwen Rowden, who just joined the New York City-based firm as managing director of the investment practice, director of acquisitions Nathan Taft and Paul Frietag, director of real estate development for Jonathan Rose Cos., spoke with GlobeSt.com about the current market, the smart growth fund and the firm's strategy. Rowden sums it up as, "Our mission is greening, but it's also to make money. Those goals are not mutually exclusive."

Because the vehicle was still in the process of raising capital, the executives were in a quiet period and therefore couldn't discuss specifics such as how much equity they're trying to raise and what their yield expectations are. However, says Taft, "I will say we have dry powder and are looking to be active this time in the cycle. We've been patient throughout the past couple of years, really sticking to our underwriting criteria, which has left us in a good position to take advantage of the value-add opportunities out there." And with three deals closed in December alone, it's clear that the firm is poised to act decisively and quickly.

GlobeSt.com: How'd the firm come up with the idea of the Rose Smart Growth Investment Fund I?

Rowden: The purpose of the fund is to invest in primarily existing buildings that are economically viable and present value-add opportunities. When we look to see what kinds of enhancements we can make to those properties, greening is clearly at the top of the list. We also look to see whether we can reposition the properties through leasing strategies, capital improvements, etc.--the kinds of things a normal, savvy owner would do--and produce positive cash flow for investors.

Taft: We were one of the first initiatives out there to really focus on existing buildings. While we have minor allocations for developments, but the primary focus is on existing buildings. When you look at the built environment, with buildings accounting for 43% of greenhouse gases. When you're only building 1% or 2% of your building stock every year, you need to focus on the existing 99% of buildings to really make strides against climate change. But it's an economically based strategy.

Rowden: The greening is done through practical, proven technology. They're all things that are cost-effective and are, frankly, things that any smart building owner should do on its own. It's not some very fancy technology. It produces tangible, immediate results for the properties.

Taft: An example of the kinds of strategies we use is an office building we bought in Downtown Seattle. Though it's not multifamily, many of the same things can be done. It was an historic building located next to a future light rail stop in the CBD. With modeling and analysis, we determined some basic green strategies to transform it. We seek third-party verification, so we were working with the LEED Existing Buildings standard at that point. We came up with a strategy to keep the wood windows that were in place, refurbish them, weatherstrip them, restore their operability and then [teach the tenants how to use them properly]. We also came up with a tenant improvement specification that was green and then successively remodeled each of the tenant spaces, and continue to do so today when people come into the building. Rather than chopped up offices, we push open plans and use recycled materials. That, and other improvements, gave the building a whole new feeling for people experiencing it, and I think it also helped us retain some tenants.

Rowden: On the multifamily side, we're going to do similar things to the 135th Street property, which is 198 units. We know that in greening, there's a lot we can do to improve people's quality of life. So our plan is to improve the circulation and vent system so occupants can get fresh air and breathe better. And we use low-VOC paints and materials. [A healthier atmosphere] would be a good thing for the community. We're also looking at the energy use in the building. The operating expenses are high and we think we can make the building more efficient in addition to making it healthier for the tenants.

GlobeSt.com: Is this the first multifamily product the fund has acquired?

Frietag: This is the first existing apartment property we acquired. We did invest in a development at West 124th Street and Second Avenue, which closed in November. With 185 units, it's a very interesting project. It's still under construction--it has an 18-month construction period and hopefully a six-month stabilization. It's a fully rental project, and $50/$30/$20--market rate, mixed income and low-income families. By doing it through a public/private partnership, we were able to significantly increase the number of affordable and mixed-income units than the city would have been able to build their own lot separately. In our tried-and-true greening strategy, we focus very much on three different components--the envelope of the building, the mechanical systems and the selection of green and healthy materials so we make sure we're generating the highest quality and healthiest environment possible. When you're in a green building, you really do have a sense of the environment being healthier.

GlobeSt.com: Do you typically do your improvements yourself, or work with third parties?

Frietag: Our project managers are very knowledgeable about green. In fact, almost all of them are LEED accredited. So while we work with third-party green and LEED consultants from a verification point of view, a great deal of our success comes from our in-house expertise.

GlobeSt.com: For the Harlem purchase, you financed the deal with a loan from the New York City Acquisition Fund, a quasi-public entity. Do you use public financing or investment often?

Taft: We're typically invested in urban areas, where we have a long track record of public-private partnerships. We're usually eligible to work with banks through their CRA commitments. That's an important piece for us. The NYC Acquisition Fund provided a terrific vehicle because it's short-term financing, two years. It enabled us to preserve the affordability of this project, which had an expiring Section 8 contract. We needed to act quick. That's why we used the NYCAF. We're now working with a number of sources to find a long-term refinancing strategy. We've already obtained a commitment from HUD for a Housing Assistant Payment contract. We have a commitment for a long-term contract and we tend to finance this for the long term. But we needed to be nimble. So I'd say it's typical that we evaluate all sources of financing on the acquisition side to determine what would be the easiest way to get a deal done in a timely fashion.

GlobeSt.com: What percentage of the fund have you allocated toward multifamily?

Rowden: First we look at markets. Our goal is to look at markets where there are opportunities in smart growth areas, adjacent to mass transit. We like areas where there's a lot of density and people can get to work easily. We look at the underlying fundamentals, the economics of that particular area. We've been looking at areas from Boston, down the eastern seaboard, to Washington, DC, as well as the West Coast from Portland and Seattle down to Los Angeles. Then we look at the specific opportunities-- be it multifamily, commercial or mixed-use, based on the economics of the project. Do the economics of the deal work? Does it pencil out? Will it provide current cash flow for our investors? Does it make sense? Then we look at what the greening opportunities are, and whether we can make those improvements in a cost-effective way. We have a very open mind.

Taft: We did have a target of at least 25% multifamily in the portfolio, but what takes precedence is a deal-by-deal analysis and the ability of that deal to contribute current cash flow to our investors and the opportunity for long-term value.

GlobeSt.com: How has the downturn affected your business strategy or activity? And do you see more opportunities down the pike as a result of the proposed stimulus plan?

Rowden: Properties that we've seen before that initially didn't meet our underwriting criteria, are somehow becoming available again at much more reasonable prices. I would add that in this market, particularly with the Obama administration and the push for affordable housing, there are certainly many opportunities. This company has a long history of affordable housing, and we are uniquely situated to take advantage of that opportunity, particularly within the context of green and affordable housing. And there is financing for those deals, unlike other deals right now where there seems to be no financing.

Instant Insights /

Jonathan Rose Cos.' Gwen Rowden, Nathan Taft and Paul Frietag

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