Late last year the management of Charlotte, NC-based developer Crosland LLC announced that it was teaming up with Northwestern Mutual to spend $225 million on land buys. The purchases made in the newly formed Southeastern Land Fund will primarily go toward mixed-use projects that could total $1.5 billion. The partners are looking at sites in urban infill areas and growth corridors. The deal comes as Crosland has a number of developments underway. With the Canyon-Johnson Urban fund, the company is working on a $65-million mixed-use project in Nashville’s Gulch area. Crosland is also planning a mixed-use development in Charlotte with 109 residential units and 62,000 sf of commercial space. Jamie Dunn, Crosland’s VP of investments, recently spoke with GSR about the Southeastern Land Fund and his firm’s development trends. How did the Northwestern Mutual deal come about?

Dunn: We had considered this type of investment vehicle for about a year now. At the beginning of 2007, we went through a process of going to a handful of selected, potential capital partners with the proposed structure, which is what this investment fund became. There were a handful of seriously interested parties who we went through a lot of back and forth discussions with. We had done a number of one-off deals with Northwestern in the past, so we had a comfort level with them as a partner. And in the end, we got the most favorable terms with them. How was the dollar figure decided?

Dunn: In the beginning that was a question we debated quite a bit internally. We are inherently fairly conservative. So the overriding concept with the amount was that we preferred to take less with the certainty that we would be able to invest in the agreed-upon time period. We went through some analysis and tried to think what would be an appropriate amount. We could have gotten quite a bit more, and in the end, there’s a good chance we will be out doing another such fund. We’ll have all of this committed faster than we need to per the agreement. But we wanted to make sure that we were conservative with this one and not under any pressure to make investments that aren’t outstanding. I’m familiar with groups that have stretched the envelope on how much they took, and in the end, felt obliged because you really need to invest what you get a commitment on. Otherwise the partners hold that capital out for you, and if you don’t invest it, it’s never put to work. I have known groups that have felt under the gun and made sub-optimal investments. What is the attraction to mixed-use as opposed to single-use projects?

Dunn: The fund is not only doing mixed, or multi-use, sites. We could do, if it was of a significant size, a huge power center. We just believe that we can extract the most value from a piece of land by bringing to bear our diverse capabilities internally. As an example, we have made land purchases before where the first phase was maybe single-family residential, which was followed by retail, and the retail was worth more because the residential was there. Then it was followed by apartments which were worth more because of the retail. But it doesn’t mean that if we find an attractive site that is purely a regional center, we wouldn’t or couldn’t do that. (However,) we’d prefer to see multi-use sites. That’s where development is heading, and people like those communities. Has the subprime issue impacted your outlook on residential?

Dunn: We’re in a fortunate position because when we first contemplated the structure there were no these problems in the residential markets. We had a great strategy in place to find great land pieces a few years out earlier in the timeline than we would typically acquire land and then get it ready and go into development. The subprime issue has just added a new dimension to what we will have the ability to invest in. We’ll be able to take advantage of situations where we can get land at better prices. The last few years it’s just been so competitive for land. Now we have dry powder, there are a lot of people looking for liquidity, and we can exploit those two factors as they meet together. Having said that, our markets are fairly high growth. The hardest hit are Central Florida; we are not in South Florida, which is currently the least desirable. Orlando and Tampa are extremely soft, but they have incredible demographic projections. Our other markets are soft, but there was never really a crazy run up in prices there like there was in other parts of the country. They will come back fast. We’re going to be doing mixed-use sites that have significant residential components, but we’ll certainly be more judicious and cautious in light of what’s going on right now. What is the regional scope of the fund? Have you put specific borders on it?

Dunn: We’re focused on the areas where we have deep knowledge and operations in place. In the end, the fund could make investments anywhere. But the real focus is on Central Florida; the Carolinas; Nashville; and Richmond, Norfolk and Virginia Beach. Those are the markets where we have done many developments and know intimately. That’s not to say if there was an outstanding deal in a different market we wouldn’t entertain it. Is there a lot of competition to find sites in these areas?

Dunn: Over the last few years, it has been incredibly tough. There is just so much capital, cap rates were doing down and it was hard to lose. You would have a lot of undercapitalized firms bidding land up. I don’t think these have been overlooked. Going forward, a lot of those people that were smaller or less capitalized are just not going to be able to participate any more. That should play to our advantage since we’ve got this large capital pool to execute with. What types of retailers do you see going into these projects?

Dunn: It could be anything. One example I can give you is a project we have in South Charlotte called Blakeney. It’s at a huge intersection, and we own all four corners. At one corner is a residential neighborhood. On two of the corners is a large retail component that is anchored by Target and Harris Teeter. Then there is a lot of service, a few upscale restaurants and several-hundred-thousand square feet of retail. Sharing one of those corners with the retail is a number of mid-rise office buildings. On the other corner is a large apartment complex. Another project could have much less retail and be more service oriented. What is the biggest challenge you will have in fulfilling the fund?

Dunn: One is getting our arms around where the credit and residential markets are going. There is a lot of data to suggest that the bottom should happen in 2008, you should see some stabilization, and then its back to growth in 2009.There are others that have great data and are very smart who suggest that it may take longer than that.

Number two is the credit markets. Until they settle down, debt financing is not going to be as easy to come by as it has been. We think that we’ll have much greater clarity on both of those issues into 2008, but we just don’t know yet. Those are issues that everyone is struggling with now.

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