Betting on the house
Developers TMG, AGI team with CalPERS for $400M housing play
San Francisco Business Times
Written by J.K. Dineen
November 10, 2006
Well-established Bay Area developers AGI Capital and TMG Partners are entering into an unusual $400 million joint venture with CalPERS to build urban-infill housing throughout the Bay Area.
The joint venture, a separate entity to be called Avant Housing Partners, will be started with a $100 million equity investment from the California Public Employees' Retirement System. Avant will leverage that capital for another $300 million of debt, which will enable it to aggressively develop a range of housing properties throughout California, with a focus on the nine Bay Area counties.
The new company grew out of an existing partnership between AGI Capital and TMG Partners at the SoMa Grand, a pioneering luxury condo tower under construction at Seventh and Mission streets in San Francisco, according to Michael Covarrubias, chairman and CEO of TMG Partners.
Covarrubias said he first broached the idea with CalPERS former senior real estate investment officer Michael McCook. After meeting with Covarrubias and Alexis Wong, head of AGI Capital, McCook encouraged the two companies to form a new company and submit an application for a directed investment from CalPERS.
"This infusion of capital and partnership with CalPERS provides us with many new opportunities to develop strategically in the Bay Area and throughout California," said Wong.
New move for CalPERS
CalPERS currently invests 8 percent of its $215 billion fund in commercial and residential real estate. Brad Pacheco, spokesman for CalPERS, said the pension fund has committed $3 billion to urban real estate in California.
"It's been one of the better performing programs within our portfolio," he said.
But the structure of the Avant deal is unusual. CalPERS usually invests through a financial advisor, rather than giving money directly to developers. In this case, the CalPERS board "felt this was a good relationship," said Pacheco.
"We think the two firms will work well together," he said.
By having a standing discretionary fund, Avant will be able to pounce on projects quickly without having to go out and raise capital for each individual development.
"Both AGI and TMG have good networks and have been able to source deals on our own," said Covarrubias. "What is fun and unique about this is we will still have the sourcing ability, but we will have the capital as well."
The ability to act quickly may also become increasingly important at a time when a slowing housing market has put some developments in jeopardy, said Covarrubias.
"I think one of the more interesting things from an opportunistic standpoint is that the housing market is getting a little soft," said Covarrubias. "There may be some broken deals out there that we can help out."
The target investment for the new venture will be to create a variety of housing, including for sale, for rent, rehabs and ground up properties with a focus on moderate market-rate housing. The projects will range from $25 to $100 million and could include apartments or condos.
Wong and Covarrubias said the investments would focus on "transitional areas" similar to the Mid-Market site of the SoMa Grand, an area that has long struggled with blight.
"We like transit-oriented. We like infill. We like rehab. We like those areas that are hard to do," said Covarrubias. "We're looking for opportunities to provide good yields to (CalPERS) on a variety of projects."
Covarrubias and Wong will be Co-CEOs of the new venture. Eric Tao, AGI executive vice president and investment officer, and Cathy Greenwold, executive vice president and director of development of TMG, will be board members. Jim Gunderson will be acting chief operating officer.
The initial $100 million will likely just be the beginning of the relationship, according to AGI's Wong.
"The intent is to start a relationship," said Wong. "(CalPERS) doesn't want to spend six to nine months underwriting a company merely for a single $100 million investment."
Assuming Avant is sucessful, there should be more investment from CalPERS, Pacheco said.
"Our board likes to see the money put to work first and establish a track record before extending that commitment," he said.
Both AGI and TMG have received money from CalPERS through financial advisors. But getting the money directly from the pension fund would "create efficiencies and would increase our competitiveness in this marketplace," Wong said.
With 1.1 million square feet under development, TMG Partners is the Bay Area's most active commercial developer according to the San Francisco Business Times 2006 Book of Lists.