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In today’s downtown commercial market, it seems as if everyone is assembling a real estate fund to capitalize on the profusion of real estate opportunities. The number of funds that are projected to hit the market over the next 12 to 24 months coupled with the unrealistic expectations of returns is a formula for failure. Only funds that are sponsored by seasoned, equity-rich developers will succeed, making it all the more vital to back the right fund.

These ‘opportunity funds’ are simply assemblages of capital, amassed by approaching both multiple high net-worth individuals and equity institutions with money to place in order to earn the returns promised to clients. Once you raise the target amounts, the fund is closed and the developer is required to pursue acquisitions.

There is a distinction between ‘vulture funds’ and opportunity funds; the former typically pursue distressed properties exclusively, while opportunity funds will go after both distressed property as well as other healthy assets that show potential.

At present, vulture funds will likely be dealing with residential condominiums because that is where the market distress is most pronounced, whereas opportunity funds span a larger spectrum of the real estate market because they look at opportunity regardless of type. An opportunity fund, therefore, becomes more appealing because the commercial sector has yet to see any real downturn (I predict it will begin to turn within the next 6 to 12 months).

The implications of a fund purchasing properties in this market are great. The fund sponsors need to understand the market conditions with respect to the specific niche in which they are operating. Not every distressed property is going to be a good buy; therefore, the fund needs to be very selective in the properties it acquires.

Using retail property as an example, you need to conduct a thorough analysis of how the tenants will fare in a recessionary period. A building that sold for $13 million last year and is now selling for $7 million may look like a bargain. But if you know it won’t be worth anything in the future, there is no return to be had. The price tag, then, is not always the best indicator of value.

Anyone considering investing in an opportunity fund must examine the track record of the team sponsoring the fund. A reputable fund will have its own sponsors contribute. For example, Sky Development is putting $10 million of its own capital in the $300 million SkyVest fund as a show of faith to investors.

Understanding market conditions will help you weed out fly-by-night outfits. The investment community is expecting between 20% and 50% returns over three to five years, but there is just not enough room to achieve those figures. The market still needs time to rebound. A target return of 25% to 35% is more feasible. Regardless of what is promised on paper, the market can only withstand so much profit.

Opportunity funds have greater access to deal flow, capital and lender financing than individual investors. Often banks want to rid themselves of property so buyers need to act fast. However, an investor needs to show they have the funds in hand, so access to funds is imperative in order to capitalize on the opportunity.

The market is now prime for real estate investments, despite the fact that many people believe it is not the right time to buy. Since this down cycle will continue to spiral downward for the next couple of years, you should partner up with experts who will be ready to pull the trigger on deals within the next couple of years. Be selective with your investments and let the experts work for you.

The views expressed here are those of the author and not of Real Estate Media or its publications.

Gavin Susman is COO of Aventura-based Sky Development Inc., a company that owns, manages and develops commercial and residential property. Susman can be reached at [email protected]

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