ULI San Francisco Blog

Capital Markets – Middle Market Investment Spotlight: $15M-50M

Emerging Developers, construction boom

On June 13th, Sedgwick hosted roughly 60 real estate professionals for a moderated panel on the topic of middle market debt and equity. The panel was led by Chris Moritz, Managing Director in the Debt & Structured Finance Group at Newmark Cornish & Carey and included Brian Esquivel, Senior Director of CRE Equity at RealtyShares, Isaac Abid, Principal at HP Investors, Kirby Sack, CEO of Sack Properties and Sam Isaacson, Managing Director at JCR Capital. This event, which was the first of a 2-part debt/equity series hosted every year by the ULI SF Capital Markets Committee, has historically focused on the large institutional equity markets but, due to popular demand, shifted focus this year to capital for projects with costs between $15MM and $50MM.

RealtyShares is an online syndicate platform based in San Francisco that allows accredited investors to invest in specific projects nationally or in their small commingled fund. Brian Esquivel indicated that the majority of their raises are in the $2-3M range for projects ranging from $10-$15M in total costs. The platform currently has around 40,000 investors, with roughly 1500 being added every month. Each sponsor is thoroughly vetted internally and needs to have $25M+ of AUM and have had 2 deals gone full cycle to qualify. Typical deals are either preferred equity or straight 90%/10% JV equity for existing value-add acquisitions in mostly noncoastal market (Texas, southeast, etc.) with projected 5 year holds and ~15% leveraged IRR’s.

JCR Capital, based in Denver, CO is an alternative investment manager that provides capital solutions to middle market commercial real estate sponsors. Typical check size for their bridge debt and value-add equity programs is around $7-8M, but can go as low as $2-3M and as high as $25M. Sam Isaacson sees the middle market space as an opportunity for higher returns than the larger institutional market, especially with the coming wave of assets being transferred by the baby boomers. Sam indicated that they have flexibility regarding deal terms and little appetite for fees but are really focused on the sponsor’s strength, skin in the game, passion for the project, and aligned interests.

Kirby Sack has run Sack Properties since 1958 as a vertically-integrated, private real estate company that focuses on the acquisition, management, and disposition of a broad range of multifamily properties through the San Francisco Bay Area, and Southern California. Based in San Francisco, the firm is an emerging manager for the California Public Employees Retirement System but also invests high net worth friends and family money. The high net worth clients typically have longer investment horizons and don’t want the tax and reinvestment issues associated with quick flips. Institutions like Calpers want to see strong returns quarterly, have higher transaction and reporting costs, and are subject to employee turnover and continuity issues. Kirby checks all the references of any new investors and focuses on aligning the right investor with the right deal.

HP Investors, whose Oakland office Isaac Abid operates, is an investment & management company focused on long-term urban and infill real estate investment opportunities along the west coast. Their capital is sourced from both institutions and private syndications. Given the widespread late cycle perception and low yields in the coastal markets they operate, they typically look for deals with longer term potential which can be harder for the intuitions which value more immediate results.

All agreed that it is important to make sure that the deal matches the objectives of the investors. High net worth investors and family offices can be difficult to court initially but exude more flexibility on hold periods, check size, and reporting requirements. Institutional capital is more plentiful, especially for seasoned operators, but can also be more demanding. They also indicated that it is currently very difficult to raise construction debt and equity due to increased regulation and investor sentiment of it being late in the cycle. Aspiring developers and operators should turn to friends and family funds first to establish a track record, then tap the more sophisticated investors for later deals.

By Sean Whitfield

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