A number of trends are prevalent in the current real estate cycle, particularly in our home market of South Florida. These trends include a massive influx of foreign capital, an evolving capital structure that uses buyer deposits to develop new residential product, a growing view of South Florida as an institutional-quality market and a conservative (but easing) lending environment that rewards experienced developers.
One of the more subtle but equally important strategies to emerge on the sponsor side has been the concept of ‘allied capital’—partnerships among competing investment and development firms.
This approach to completing complex transactions was born out of necessity during the last cycle, as firms found it all but impossible to assemble capital for viable investments against the backdrop of frozen financial markets.
As the economy began to rebound and capital returned from the sidelines, the reliance on collaboration could have dissipated. However, years into a robust recovery, this method of aligning capital still remains a preferred route for astute investors and developers.
An early example of this “allied capital” approach occurred in June of 2011, when our firm was mired in a bidding war against another local firm, Miami-based Key International. At the time, we were competing to acquire a partially completed condominium tower in North Miami Beach that had been foreclosed upon. Through our diligence process we learned that our firm shared a very similar investment philosophy with Key and determined that our core competencies were complimentary.
We quickly realized that the old adage held true—the whole is greater than the sum of its parts—and joined forces to purchase the now-completed and sold-out 98-unit building, Eden House.
Our firms have since partnered in the acquisition and development of numerous transactions, including the luxury condominium projects 400 Sunny Isles and 1010 Brickell. In addition to Key, we continue to close transactions with other high quality Sponsor partners, including Miami-based Related Group, as the real estate cycle evolves.
The list of benefits stemming from the “allied capital” model is extensive:
- The inclusion of multiple experienced minds in the room provides new perspectives on design, development, sales, leasing and financing—and often lead to better results.
- Additional depth and diversity of relationships helps to secure financing and tap into new pools of capital.
- The dilution of risk. Because this approach involves multiple partners who marry their capital, there generally is less debt and equity exposure per party. This leads to increased portfolio-level diversification as well.
- The creation of a natural pipeline of future investment opportunities, as co-investors and co-developers who enjoy success with one another are likely to join forces again.
Of course, every partnership and transaction brings a set of nuances and challenges that must be overcome if the model is going to prove effective. Fortunately, we have identified some key success factors that should be considered when contemplating the “allied capital” approach.
To start, the parties involved should share a similar vision for the asset or development—from conception through exit. Second, partnerships work best when the companies are able to offer complementary services or market expertise. In an ideal partnership both firms are contributing across all aspects, but accountability must be maintained which is typically best accomplished through a clear delineation of roles.
When partnering with Key International and Related Group on our latest acquisition—a luxury condominium development site on the water in Hollywood Beach, Florida—responsibilities were clearly defined prior to closing. In all cases, the partners should establish reasonable expectations and hold each other accountable for the aspects of the project within their purview. Egos must be left at the door.
In today’s complex real estate market, collaboration is becoming an increasingly important factor in identifying lucrative opportunities, accessing capital, completing deals, and generating risk-adverse returns. The savviest investment firms are quickly learning that competitors often make the best partners.
Daryl A. Shevin, CFA, is a principal and the CFO of 13th Floor Investments, a Miami-based real estate investment and development firm. He has more than 15 years of experience in the real estate, hedge fund and private equity sectors.