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SUNNYVALE, CA-Making its first investment since securing a $200-million equity commitment in late 2007, Raintree Partners has acquired the 204-unit Trellis Square Apartment Homes here from an affiliate of Northwestern Mutual for $38.3 million using Fannie Mae financing. The upscale development opened in 1990 on East El Camino Real and was developed and managed by Prometheus Real Estate Group in partnership with the seller. The asset is currently 95% leased.

Laguna Nigel, CA-based Raintree is owned by Jeffrey B. Allen. Allen previously founded J.B. Allen Realty Inc., a private real estate development company formed in 1999 that developed several mixed-use and multifamily residential projects in Southern California with institutional partners and continues to own legacy assets.

Allen tells GlobeSt.com he founded Raintree in late 2007 to partner with a “major institutional investor,” which in December of that year made the aforementioned equity commitment. The investor is Evergreen Real Estate Partners, a real estate private equity fund capitalized with equity commitments in excess of $2 billion. The fund is managed by Evergreen Investment Advisors. Allen declined to confirm the information, citing client request, but a web search quickly turns up reference to the deal on the website of Chicago-based M3 Capital Partners, which formed Evergeeen Investment Advisors in 2005 expressly for managing the fund.

“I was approached in 2007 by an institutional investment advisor about forming a partnership that would be a platform for development and investment in apartment properties on the West Coast,” Allen says. “Raintree is the successor to the [otherwise uncommitted] business interests of J.B. Allen Realty”

Raintree is focused on long-term multifamily investments (7-to-10-year holds) that offer attractive cash yields and risk-adjusted returns. Initially the focus was on development deals but has now shifted to the acquisition of existing properties. The IRR on its investments is expected to be in the 15- to 20% range on a leveraged basis at the property level for acquisitions and 20- to 25% on development deals.

In the current economic environment the opportunities to acquire existing assets are more attractive. At 75% leverage, Raintree’s $200 million of equity could acquire $800 million of existing assets.

“We spent the last year underwriting a lot of properties, and we made a lot of offers, initially on development projects and more recently on existing projects” he says. “We have curtailed the development initiative for the time being [because] it is nearly impossible to make development deals pencil in today’s environment and, from our perspective, we can now buy existing product at a significant discount to the cost of new construction.

“However, if we find [development] sites in great locations at attractive enough prices, we would consider acquiring and entitling those sites with the idea of coming out of the ground a year or two from now. In most of our markets it’s just very difficult right now to justify and finance new construction. At some point that situation will change and we will be back doing more development deals. “

Trellis Square Apartment Homes offers one- and two-bedroom units, a fitness center, spa and swimming pool. Raintree acquired the asset for $187,500 per unit. Allen says one of the factors in his decision to buy was that the overall cost to develop the same product on the same piece of dirt would be “well north of $300,000 per unit.”

The fact that the property was in a high-barrier-to-entry market like the heart of Silicon Valley, had been well maintained and had some recently renovated units also were factors in Raintree’s decision to purchase, he says. The remainder of the units will not be renovated at this time, Allen says, because the additional rent needed to offset the upgrades cannot currently be achieved. Ultimately, he says, the market will improve and the future value-add proposition will make economic sense for the property. For now, though, given job losses, he’s underwriting declines in NOI over the next 12- to 24 months, not growth.

Raintree expects to deploy the partnership’s $200-million of equity over the course of the next three- to four years. “It may be faster than that if we find the right deals,” he says. “But there’s no pressure to put the money out other than to do so in an intelligent fashion.”

Given the economy Allen says there should be some “very attractive” acquisition opportunities in the near future. There will be merchant builders who need to be recapitalized and institutional investors shedding real estate in order to raise cash. Right now, however, most owners who want to sell haven’t been willing to make the same pricing assumptions would-be buyers are making, though that is beginning to change.

“We’ve looked at a hundred properties over the last year,” he says. “Until recently, the spread between the seller’s asking price and the buyer’s offering price has been too great. Sellers are now beginning to come to grips with the new reality of the market.”

William Huberty and Matthew J. Holmes of CB Richard Ellis’ San Francisco office represented the seller in the Trellis Square transaction. Raintree was represented by Aaron Hancock, its director of acquisitions. Fannie Mae financing for the acquisition was sourced through Troy Tegeler and Bethany Bailey of CBRE Capital Markets.

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