Real Estate Ownership can take many forms
The motivations for real estate investors are varied, and so are the ownership vehicles available to them. Real estate investment can range from direct acquisition and ownership of assets (an active structure), to partnering with like minded purchasers, to acquiring units in a Real Estate Investment Trust, (a more passive structure). Real Estate Syndication is a popular option as well.
To explore this further, we are joined today by Alan Whitten, founder, President and CEO of Huntington Properties, an Ottawa based full service property acquisition, management, leasing, and development firm.
YPLP: Alan, how and when did HP begin?
AW: 1996, When we acquired a small office building in Kanata South, that was available by Power of Sale. The investment proved to be successful and provided a model to continue to acquire other, well located commercial properties.
YPLP: What was your acquisition and financing strategy then, and how has it evolved?
AW: The strategy was then, and continues to be to utilize moderate levels of mortgage financing, which, even then, was available at a cost significantly less than the unleveraged cap rate, thereby providing attractive rates of return on Equity.
Real Estate Syndication provide investors with benefits
YPLP: HP has had an admirable track record of success. How can an individual investor participate?
AW: An individual, whether as a person or Holding Company for an individual or family, can participate in amounts that are generally not possible in other large scale projects, which can be beyond the reach of most individuals.
Limited Partnerships are a proven investment vehicle
YPLP: What are the benefits for an individual investor? Are there different ownership and participation structures for different types of investments?
AW: Individual investors can participate in high quality real estate ownership through syndicated vehicles such as Limited Partnerships (LP’s). An LP General Partner (GP) generally has the expertise, market knowledge and personnel to evaluate, acquire, finance, lease, and manage larger commercial properties that individual investors do not.
YPLP: Can an investor not achieve similar real estate returns investing directly?
AW: Generally not. Smaller acquisitions that may fit an individual’s financial capability are priced or valued at higher prices since they compete with a larger pool of investors or smaller Companies looking for owner-occupied buildings. Higher prices, along with limited expertise and resources, usually result in lower returns, along with greater risk.
How Decisions are made
YPLP: How are property/asset management decisions made, when there is fragmented ownership?
AW: Management by Committee is normally a dangerous thing. Groups take longer to make decisions, and often consider their own individual circumstances when making decisions. A professional LP/GP structure clearly defines powers and duties of the GP, who make day-to-day decisions, leaving major decisions, such as a sale, to an LP vote.
YPLP: Your investors provide equity, but I presume HP has “skin in the game” as well?
AW: Yes, HP retains an interest in the LP, both by receiving a portions of it’s compensation in units of ownership, as well as contracting for a share of future profits after a threshold of performance has been reached. This pays LP’s a strong return prior to that performance threshold being reached. HP Principals and related parties also general acquire units in its projects.
YPLP: Do you use traditional debt financing i.e. commercial mortgages? If so, are individual investors obligated to guarantee the debt proportionally?
AW: The guarantee by individual LP’s is not practical, therefore in Huntington LP’s, we normally provide the guarantees required by commercial mortgage lenders.
The investor exit strategy
YPLP: What is the exit strategy for an investor in a typical HP participation?
AW: Depending on the type of property, the exist strategy is generally to sell the property, or alternatively, re-finance the mortgage, at between 5 & 8 years after acquisition. This allows time for the property to experience some natural market growth. It also allows the GP to operate the property efficiently and to negotiate favorable lease renewals with tenants. This leads to increased income and value.
YPLP: What should an “equity investor” be looking for when considering participation with a deal sponsor? I presume experience is key? What else?
AW: Experience is definitely the most important factor. The ability to handle various aspects of commercial investing, such as construction, to improve and maximize the tenant experience, is also important. The tenant needs to receive the right leasehold improvements on time and on budget. Market knowledge is also a huge determinant of returns, since buying at the right price is critical, as is negotiating the best terms on a future sale.
YPLP: Thank you for sharing your insights Alan, and continued success.