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Legacy Partners: New name in multifamily business

Legacy Partners Residential could be one of the most mature, accomplished new names in multifamily real estate.

The company was formed from the residential and commercial divisions of the Western region of Lincoln Property Co. in October 1998. The split from Lincoln was an adaptation to the nationalization trend in real estate service firms. The relatively autonomous Western region entity found itself increasingly drawn from its Western territory to serve the needs of its own national tenants and industrial and office clients. Instead of contending with a structure that limits opportunities for both groups, the two offices agreed to sever ties and operate, grow and, eventually, compete independently.

But for now, the name is the most noticeable difference between the old and new organizations. Dean Henry, a 23-year veteran of Lincoln Property Co. and president of the newly formed Legacy Partners Residential Inc., puts the split with Lincoln in perspective. "As Legacy Partners Residential, the team and structure will be much the same as in the past, as will the culture, for the most part," explains Henry. "Under the new structure, we are doing some things that we were not accomplishing before, such as profit sharing for key non-partners."

The seasoned Legacy Partners team has continued to expand its reach across the Western states by applying its multifamily expertise to the management, development and ownership of one of the multifamily industry's largest regional portfolios. Legacy developed more than 51,000 apartment homes during the last 30 years, and currently holds ownership interests in more than 14,000 units, while managing more than 16,000 units throughout the West.

Legacy has alternately bought, sold and developed properties in order to realize multifamily gains in the markets where it does business. With most multifamily REITs sidelined with bruised share prices, private companies like Legacy saw an increase in acquisition opportunities in 1998.

Last year, Legacy closed on nearly $150 million in multifamily acquisitions. The bulk of the buys came with a $105 million portfolio of properties in Colorado purchased in a joint venture with Donaldson, Lufkin & Jenrette Real Estate Capital Partners early in the year. The portfolio consisted of three properties totaling 1,576 units in Colorado Springs, Thornton and Lakewood.

The Legacy team, then under the guise of the Lincoln Property Co., also made the largest single residential transaction in its history in the form of a $302 million disposition sale to Equity Residential Properties Trust. Various investment partners of Legacy received cash in the transaction, while Legacy obtained operating partnership units of Equity Residential.

At the time of that sale, Henry felt the transaction was well-timed with the strong housing markets in the West, the availability of acquisitive capital from Wall Street, and his firm's objective of reinvesting capital into new projects. Despite the recently poor performance of multifamily REIT shares, Henry remains positive about this transaction, which effectively swaps property for operating partnership units that can be exchanged for Equity Residential stock.

True to its heritage, Legacy Partners turned to one of its specialties in 1998 - building multifamily properties. By the end of the year, Legacy had developed 1,924 multifamily units worth more than $230 million. According to Henry, development, not acquisitions, will remain the primary focus of its investment activity in the near term. "We are going to be building this year more than buying," he says. "The returns on development are just better."

The company plans a significant increase in its development activities during 1999 with construction starting on 3,236 units at a cost of approximately $380 million.

Construction has begun in Denver, Los Angeles, Santa Monica, and San Jose, with San Francisco and Seattle high on the list for future projects. Most of Legacy's development activity is concentrated on luxury urban in-fill projects. "The economics of this type of project support the tearing down of older apartments or, in some cases, office buildings to build higher density properties," says Henry. "The convergence of some affluent tenants desire to come in from the suburbs, rising land values in the closer in areas, and demand for more amenities has resulted in this expensive trend in multifamily development. In a renter-by-choice market, this is where people want to live."

Legacy has finished development of an urban in-fill project in Marina del Rey, and continues similar projects in Warner Center and Wilshire Boulevard in the Los Angeles area, as well as the upscale Cherry Creek submarket in Denver. One of Legacy's most recent luxury projects is in Santa Monica, where it is one of the first development projects in that area in years.

While Legacy has become known in the industry for its luxury apartments, the projects undertaken in the present environment vary from market to market depending on the local needs. "We are building product for the needs of the tenant - the end user - versus building for the capital markets," says Henry.

A good example of this strategy can be seen in Legacy's approach to developing in the Denver multifamily market. Not only has Denver seen a sizable amount of new multifamily construction in the past two years (and some analysts predict a 40% rise in completions in 1999), but a disproportionate amount of the new space has been high-end, luxury product. "There has been a herd mentality among developers with respect to the luxury product," Henry says.

The money market turbulence of last year may count as a risk for some firms, but Henry remains optimistic about Legacy's access to capital and its relationship with Wall Street.

"The capital market turmoil of last year was a wake-up call, but it was a short one. Spreads are a little higher as a result, and lenders are getting a little more conservative. In our case, a partner may want us to provide 15% versus 10% before. I believe that capital will always find its way to good real estate."

Legacy is also comfortable working with REITs to execute its business plan. Many of its larger development deals were pre-sale deals where Legacy would assume the development risks and the REIT would provide either the capital or the balance sheet to secure financing. The REIT would also acquire the properties following lease-up. Legacy has done deals with Essex Properties, BRE Properties and Equity Residential, the largest multifamily REIT.

However, with slumping REIT share prices, Legacy will look to the private market for future deals. "Nearly 50% of our properties under construction last year, worth around $110 million, involved REITs," Henry says. "In 1999, we will do far less than half of our construction with them, doing the remainder through joint ventures with various institutional and private sources."

The majority of Legacy's planned REIT joint venture development deals will be with Equity Residential, which remains high on the relationship. Don MacKenzie, Equity Residential Properties senior vice president of development for the Western region, says, "We view Legacy as one of the top developers in the region. We have been discussing joint ventures for a year now, and we are really excited about doing business with them."

Legacy's interaction with the REITs may have firmed the company's resolve to remain a private company. "We like being independent from Wall Street analysts," Henry says. "We see the grief some of our friends have in predicting and meeting quarterly earnings as public companies. We just don't need to be public in order to access the capital needed to satisfy our business plans."

So when will Legacy expand beyond its Western stronghold? "With respect to moving outside the Western states, we will be very selective and take a deal-by-deal approach," Henry says. "When we do so, our strategy will likely involve joint venturing with local developers, or perhaps acquiring development or management firms in the areas of interest to us."

Plans to move eastward will likely be over the long term. Henry states, "Generally speaking, we like the Western apartment markets better than any others in the nation. There are certainly some strong areas in New England and the Midwest - Minneapolis and Chicago - but we feel we are sitting in the best market in the nation."

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