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SAN FRANCISCO-AGI Capital and TMG Partners, two locally based developers, have formed a joint venture with the California Public Employees Retirement System to invest slightly more than $100 million of equity in urban-infill housing throughout California. With approximately 75% leverage, the joint venture, Avant Housing LLC, plans to invest $400 million over the next two or three years and completely liquidate the JV in no more than six or seven years, TMG Partners chairman/CEO Michael Covarrubias tells GlobeSt.com.

The goal is to produce a mid-teens IRR for CalPERS over the life of the joint venture. Covarrubias says the JV’s investments will include buying land and existing properties. It might buy entitled land for apartment or condominium developments, which it would have built and then sell off. It might just buy raw land, entitle it and then sell it to another developer. It might buy run-down apartment properties for repositioning or conversion to condominiums.

The relationship is unusual in that CalPERS typically invests its money through pension fund advisors rather than directly with developers. Covarrubias says CalPERS decided to work directly with TMG, in part because it was a known quantity, having been around a longtime and having worked with CalPERS advisors on a number of transactions. The other benefit for CalPERS is that with AGI Capital, a younger company owned by a woman, Alexis Wong, the JV helps it meet its diversity requirements.

The defined mix of the JV’s investments call for 60% of the equity to be put toward work force housing, be it in the form of apartments or entry-level condominiums. Another 20% to 25% of the equity would be invested in higher-end product.

CalPERS is putting up $100 million of equity for the JV to invest, and TMG and AGI will put up “co-invests” that Covarrubias declined to specify, citing confidentiality agreements. The total equity in the deal will be “a little over $100 million,” he says.

To arrange the $300 million in financing that will be paired with the $100-plus million of equity, Covarrubias says the JV plans to put together a small consortium, or club, of banks to create a credit facility. The JV would then go to the consortium every time it wants to draw down funds to make an acquisition. It likely will be floating-rate debt and, in order to maintain exit flexibility, will not become CMBS, he says.

“Our intent is to be able to respond quickly to the market,” says Covarrubias, adding that while its primary objective is to develop new multifamily some of those opportunities may result from the slowdown in the homebuilding industry. “We’re hearing and seeing about a few situations where we could come in and bail someone out or provide expertise; as markets mature you always see those.”

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