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Capital Investment Roundup: Adapting to the Challenges of Success


Third Quarter - 2014

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As we reach the close of the year, real estate investors are adapting to the predictable consequences of real estate’s success. The days of simply turning around an office building are vanishing. Opportunistic funds, facing a shortage of deal flow, accept as a matter of course that deals worth doing are likely to have some complexity—a seller with a complicated set of tax concerns that need to be factored in, or a partner that needs to be bought out. In the hunt for good returns, some funds are forgoing the usual route of partnering with an operator and simply doing the acquisition themselves, hiring a manager for the day-to-day responsibilities.

On the value added front, funds and limited partners have adjusted to the realities of lower returns. Larger funds with solid track records are entering deals backed by a single investor. The sector continues to be a popular target of new funds. Those who leave a larger fund, with their wealth of connections intact to start a new fund, are able to get off the ground fairly easily; others find it tougher going. The difficulty many new funds have in simultaneously fundraising and trying to close on transactions without a seasoned infrastructure to support them has caused many to set their sights on a lower raise of $25 million or so to get a deal done in order to speed up the process of establishing a track record.

Regardless of the scope of the fund, managers are finding that the bar has definitely been raised in terms of what investors are expecting regarding both reporting and transparency. While the almost cataclysmic contraction of 2008 is well in our rearview mirror and capital is once again flowing, the lessons of thorough due diligence have remained.

One issue that looms on the horizon is the prospect of reallocation by institutional investors. As market values continue to rise, some investors will be looking to other asset classes to ensure a well-rounded portfolio—or might simply feel prices are too high for their liking. Some of those who could be counted on for a sure $100 million for funds I, II, and III may be sitting on the sidelines for IV, V and VI.

While this may cause some reshuffling in the pool of limited partners, the fundamentals of the industry suggest that the general trajectory of the real estate sector will continue for some time. The ascendant millennial generation, after all, is not going to decide that that the apartment block from a generation ago is where they want to call home.

Contact

For more information, please contact Ron Kaplan, partner, at ron.kaplan@cohnreznick.com or 646-834-4179.

Visit the Commercial Real Estate Industry Practice webpage to learn about our services.


This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

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