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Related Companies Closes $825M Distressed Fund

Related Companies Closes $825M Distressed Fund

Related Companies reached a milestone with the final closing of the Related Real Estate Recovery Fund with equity commitments of $825 million.

The fund will now ramp up its acquisitions activity as its three-year investment period gets underway. It will target distressed loans that were originated for new development, property conversion and renovation, as well as equity positions in properties that require significant repositioning. The fund will focus on U.S. assets in markets where Related already has a presence, including New York, San Francisco, Los Angeles, Chicago, Boston and Miami.

To date, the fund has acquired several assets, including 111 West Wacker Drive in Chicago, 511-541 West 25th Street, 225 Rector Place and One Madison Park in New York City and Oasis in Fort Myers, Fla. It also has completed a fund portfolio recapitalization.

“The assets we will end up owning—whether through debt or equity positions—will be properties that got stuck, where we can add our real estate expertise to add value,” says Justin Metz, managing principal of Related Fund Management LLC, the fund management platform of Related. “So what we are tending to do is bring in new capital, reset the basis of the property and then upgrade the assets. … We want to take broken, non cash-flowing assets and turn them into core assets as quickly as possible to sell into a healthy real estate marketplace.”

In the case of 111 West Wacker, the site was slated to host a 90-story Shangri La hotel with condominiums. The developer built 26 stories before running out of money and was unable to line up additional financing. The uncompleted tower sat abandoned for several years. But the fund was able to strike a deal with the asset’s lien-holders and is now constructing a scaled-down 53-story building on the site. And, instead of being hotels and condos, it will contain 500 rental apartments.

The fund will target deals where it can invest between $25 million and $75 million in equity, but individual deal sizes will be larger as it will leverage some deals or make investments with joint venture partners. The fund has a hard cap of 65 percent leverage, but it is much lower leveraged than that today.

It is relying largely on Related’s existing presence in markets to source deals. “We have people on the ground in all the cities we’re looking to invest,” Metz says. “We do extensive mapping of each city and find projects through that mapping and go to the owner—whether that’s the equity or debt position—and see if there’s an opportunity to move forward. … We’re not buying wholesale and then selling retail or making big bets on portfolios. A lot of this will be asset and market specific.”

The fund is set up to have a seven-year term, although there are extension options, and it has targeted leveraged returns in excess of 20 percent. Related had originally aimed to raise $750 million, but ended up increasing the fund’s size due to high investor interest and strong investment deal flow. Included in the roster of limited partners are sovereign wealth funds, public pension plans, multi-managers, endowments and family offices.

Related decided to build a private equity real estate fund business several years ago in order to offer its institutional partners investment opportunities capitalizing on the recent property market distress that the organization was seeing in the U.S. markets. The company launched the fund management platform by hiring Metz, formerly of Goldman Sachs, in 2009 to build out a team. Related Fund Management is staffed by 20 professionals and currently manages approximately $1.5 billion of equity capital.

“The team includes a number of people who are former development personnel who spent time at Related, as well as some professionals with finance experience,” Metz says. “A lot of the work we’ll be doing is using that development expertise to convert projects that have failed or stalled into finished products.”

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