Multifamily JV Targets Inland Empire

Griffin Investments of Los Angeles and Portland, OR-based private-equity firm ScanlanKemperBard Cos. have formed a joint venture to acquire as much as $500 million of multifamily assets in and around western Riverside and San Bernardino counties over the next 12 to 18 months. The plan is to compile a portfolio of quality, two-story apartment properties; improve their performance; and, in three years or so, sell it to an institutional investor for significantly more than they invested. The ultimate buyer of the portfolio could be a state pension fund looking to balance its portfolio or an offshore investor looking to gain a foothold in the market. Regardless, the more important result is a weighted average IRR in the upper teens over a three-to-five year hold.

The booming Inland Empire is no secret; there will be much competition for product, including heavily capitalized institutional investors trying to build portfolios on their own. Says SKB principal and founder Robert Scanlan: "One of the ways you get properties is by having a reputation for doing what you say you are going to do."

The JV is closing this month on its third property, the 628-unit Waterstone community in Corona, for $98 million. The complex was developed in 1988 as condominiums, but the recession overtook that strategy, and they were rented as apartments. Griffin and SKB plan to flip the buildings to condo converters one at a time over the next few years, which means it won't be part of any back-end portfolio sale but should provide for higher than average returns.

"While we are leaving some money on the table by not converting it ourselves, we are taking all the risk off the table," says Rabin. "Condo converters have to suffer through homeowner lawsuits."

At the end of February, the JV paid $23 million for Harbor Grand, which at 192 units is the largest apartment complex in Lake Elsinore, one of the fastest growing cities in Riverside County. The 20-year-old property is one of only a handful of apartment complexes citywide and is within walking distance of the water. There will be new product built, acknowledges Rabin, but it will be further out toward the I-15 corridor, and it will be more expensive. Typical upgrades are planned, such as landscaping, security fencing and unit interiors as tenants roll.

The JV's inaugural acquisition occurred late last year, when it paid $36.5 million for the 296-unit Copper Canyon Apartments and excess land located a few blocks from the rapidly growing University of California at Riverside, one of the few campuses in the system that has room to expand. One piece of the plan is to stabilize income by increasing the percentage of non-students in the complex. The other pieces include maximizing revenue from things like parking and storage; pushing rents by generally upgrading the property, including unit interiors; and letting the market do some of the work.

"Rents are going up on average 7% a year in these areas," adds Rabin. "When you have the wind at your back, you have to buy at the right price and be a good sailor, but you don't have to work as hard."

Scanlan and Rabin have known each other since they were at Coldwell Banker together in the 1970s. Rabin, then CB's director of research, left in the early 1980s to co-found TCW Realty Advisors, which he and fellow CB executive Vincent Martin Jr. turned into one of the more respected real estate advisory firms devoted to pension funds. By 1992, TCW's clients included the nation's three largest pension funds, and its portfolio of managed properties was valued at more than $4 billion.

Scanlan left CB in 1993 to form SKB, which currently invests on behalf of about 450 high-net-worth individuals, families and trusts. Over the past 13 years, it has produced a historic weighted average IRR of just under 25%. The company had its best year in 2006 with more than $1 billion in portfolio activity, and earlier this year launched its first fund. The fund is expected to close with $125 million of equity--$75 million from wealthy individuals and the remainder from institutions--that will be used to acquire upward of $400 million of office, industrial and retail real estate over the next couple of years.

Rabin and Martin sold TCW about four years back. Rabin formed Griffin investments shortly thereafter and ever since has been studying the residential markets of Southern California, especially the Riverside and San Bernardino areas. "It's the growth pole for the state because it's one of the lowest cost places to live and do business in Southern California," he says.

Indeed, of the 963,000 jobs created in Southern California over the past 15 years, nearly half of them went to the Inland Empire, according to the California Employment Development Department. As for general population growth, the Inland Empire is forecasted to grow by 1.76 million people between 2000 and 2020, according to the US Bureau of Census; if the Inland Empire were a state, those numbers would make it the seventh fastest growing state in the nation. More important for the multifamily market, well under 20% of those new residents will be able to afford a home, according to the California Association of Realtors.

It's that type of data that has hundreds of millions of dollars in capital chasing a variety of property types in the Inland Empire, with multifamily considered one of the least risky property types and, therefore, quite popular among institutions. Sean Deasy, whose Ontario, CA-based multifamily investment brokerage team sold 5,000 units in 2005, says he just completed two Inland Empire multifamily deals totaling $150 million, and "there was institutional money all over it; we're beginning to see institutions come in and just take over markets."

Both Scanlan and Rabin seem comfortable with the competition. "There's no place you go in the world without competition," says Rabin. "The idea is to work faster and smarter and know the territory. The Inland Empire is a very large area with multiple nodes, and it's not easy to understand the markets; most corporate and international buyers can't take the time."