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[IMGCAP(1)]LOS ANGELES-Principals Mory Barak and Jeff Weller, formerly of Buchanan Street Partners and CB Richard Ellis respectively, have formed a new Los Angeles-based investment firm called Lion Real Estate Group to specialize in acquiring apartments in West Los Angeles. Lion has already closed two deals, and the partners tell GlobeSt.com that their long-range business plan calls for building a portfolio of approximately 1,000 Westside apartment units over the next five years by placing about $100 million of equity over that time.<p.One of the properties that Lion bought was a vacant complex that was built as for-sale townhomes, which Lion has since filled with tenants and is operating as an apartment complex. The other is a property that was fully occupied but at below-market rents.

Barak tells GlobeSt.com that in addition to acquiring apartment complexes outright, Lion Real Estate will consider partnering with operators on joint venture deals, buying distressed loans and investing in broken condo deals, but only with a view toward operating them as apartments. “Our focus is on apartments,” he emphasizes.

[IMGCAP(2)]Weller explains that the partners see an opportunity, especially in the current credit crunch, to operate “in the space that’s below institutional money and above individual money.” Their company is looking for deals of about $5 million to $30 million and is “very comfortable in the range of $7 million to $10 million,” he says.

Since the partners want to stick with West Los Angeles apartment buildings that offer a chance for a value-added play, Weller says, “There are not a lot of properties in that area for sale, so it’s a lot of hard work to find them and to find the ones that makes sense that we can add value to.” Many if not most of the properties the Weller and Barak look at are off-market deals, often in the hands of sellers who are high-net-worth individuals or families that have owned them for many years.

The partners are focusing on West Los Angeles for a number of reasons: They know the market, their handful of high-net-worth individual investors know and are comfortable with the market, and they see West L.A. as a market with very strong fundamentals.

Barak explains that although prices remain high and cap rates low in West L.A., the employment base in West Los Angeles is pretty diverse, there hasn’t been much job loss, demand is strong, supply is constrained, the development process is extremely cumbersome and time-consuming, the vacancy is less than 4% and home ownership is much more expensive than renting. In addition, Barak says, because Lion Real Estate has the flexibility and liquidity to close on an all-cash basis, “We can come in and be pretty aggressive on terms to get deals done.”

Weller adds that because of the credit crunch, Lion is finding opportunities that did not exist a few years ago. “Two years ago, you had a lot of players that were buying for condo conversions, and they were buying at almost a non-existent cap rate, something like a one cap or a two cap that would never make sense on an apartment valuation,” he says. That group of buyers has been washed out of the market for the most part, Weller explains, so valuations “have become more realistic now.”

Barak explains that a case in point on the changing valuations was the townhome deal they bought, a seven-unit property 417-421 Ocean Park Blvd. in Santa Monica. Lion acquired the complex as an empty building for slightly more than the value of the loans before converting it to apartments and filling it with a couple of corporate tenants as well as traditional tenants.

Weller and Barak hope to create a strong West L.A. portfolio of properties that’s not rent controlled that their firm will rehab and add value to over the next five years. They estimate that the $100 million of equity they plan to place will translate to a portfolio valued at about $300 million that they will either refinance and hold for the long term or sell on a portfolio basis.

Everything that Lion buys will be for at least a three-year hold, unless there is a compelling reason to sell sooner, and for the most part the company’s holding period will be from five to 10 years. “That’s where we can get really competitive because we look at deals more on a long-term basis. We have a handful of investors who are very familiar with the area, and this is a diversification of their funds, so they understand what we are buying and they can be very flexible about the holding period,” Weller explains.

The amount of leverage that Lion will place on a property will vary on a case-by-case basis, according to Barak. He says that thus far the leverage they are being offered from lenders is in the range of 60% to 70% because Lion is looking at deals that don’t necessarily have strong cash flow going in, although the properties will show strong cash flow when they are stabilized. “If we could get higher leverage and feel comfortable with it on a deal, we would take it on,” he says.

Barak, who formerly worked in the principal investments group at Orange County-based Buchanan Street Partners, was part of an investment team that originated, structured and closed joint venture investments on behalf of the firm’s discretionary opportunity funds. Before Buchanan, he was with Lazard Freres Real Estate Investors, the real estate opportunity fund of the investment bank Lazard Freres.

Weller, who is an adviser to Monarch Estates (McMonigle Group Co.) and Constellation Property Co., has represented such major institutional clients as Lincoln Property Co., Nestle USA, Charles Schwab, Accenture, Herman Miller, KPMG, and Acosta Sales & Marketing. Before joining CB Richard Ellis, he was a vice president with the Staubach Co. in Los Angeles for three years and before that he was an analyst and associate with Cushman Realty Corp./Cushman Wakefield for four years.

The Lion partners are looking for properties that they can add value to through rent increases, improved management, renovations and repositioning, Barak says. “Or,” he says, “They can be distressed in the sense that the there is a lot of hair on them that a lot of other investors won’t touch.”

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