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Kipling Partners'
Bill Langelier
By Melissa Kress
August 6, 2004

It is probably safe to say that Bill Langelier has seen almost everything in his three decades in
commercial real estate--with changes in the investment side of the business prime among them.
Since 2001, Langelier and his colleagues at Mill Valley, CA-based Kipling Partners, LLC have
been co-investing with their clients in income-producing properties mainly in the Western US. And
now with the re-emergence of high-net worth investors, the firm has rolled out a new program,
Kipling Horizon Equity/Program One, to help those investors build tailored investment portfolios.
Langelier, co-managing member of Kipling, spoke exclusively with about the ever-
changing investment landscape and what he sees for the future. Are institutions cashing out?

Langelier: Some institutions do tend to cash out and those are the opportunity funds. In the past
10 to 15 years, there has been a proliferation of opportunity funds, which have to hit certain IRR
targets for them to participate in the profits. The institution puts $10 million into this opportunity
fund and gets the first 12% to 15 % IRR on a sale. After that, the opportunity gets to participate. It
can be 50/50, 25/75; it depends on the way they structured it. But the only way they make money
is if they hit those targets and then, once they hit them, the motivation is to sell--sometimes for
the wrong reasons. They are short-term players; two- to five-year money is very common among
opportunity funds. They were the only game in town for a long time. So opportunity funds drove the trading of properties?

Langelier: The opportunity funds have provisions in their agreements with local partners to
provide all the equity but also control the sale process. In two years you might have a local
partner who wants to continue to own the asset but he's got this opportunity-fund partner that has
the right to press a button that says sell. That often times is a misalignment of interests. Can't that local partner go out and get another investor?

Langelier: Up until recently the only other game in town was another opportunity fund. Now we
have a program that provides for individual high-net worth money coming in that’s driven by cash
flow over long-term hold periods. You have more of an alignment of interests with high-net worth
investors who are looking out on the horizon and saying I'm going to retire in 10 to 15 years and I
want to build a stable portfolio of income. The motivation for the substitute money isn’t IRR
motivation; its much more cash-flow motivation. What kind of assets are we talking about?

Langelier: The one area that probably becomes most attractive to investors is stable properties
as opposed to new development where the property hasn’t been stabilized, hasn’t been built and
there's construction and lease-up risk. I prefer to put investors into an asset that’s producing cash
flow, is stabilized and provides a 10-year horizon. We also co-invest our own money. New
construction can be attractive and can produce very good returns but it is a little riskier. Are syndicates still a popular investment avenue?
Langelier: In the '70s and the '80s they were extremely popular as tax-shelter vehicles. The
primary goal for a lot of these investors was to generate paper losses. Investors could then take
those losses and apply it against their ordinary income. In 1986 Congress passed a law that said
you can't use those losses against your ordinary income because your ordinary income is
unrelated to real estate. All of that tax-shelter stuff went away, sort of, with the huge downturn of
the real estate market in the late '80s and early '90s. What was driving these investors was not
necessarily underlying fundamentals in real estate. All of that created a huge negative public
relations problem for high-net worth investors going into real estate. There was a void because
there was no place for people to finance equity in real estate until Wall Street came along and
invented opportunity funds. Now has that publicity problem diminished?

Langelier: It took almost a decade and a half before high-net real estate investors came back
into the market. It wasn't lost on smart high-net investors that these opportunity funds were
making money and they were doing it now on the basis of strong underlying fundamentals.
Instead of being attracted to real estate for the wrong reasons they are attracted for the right
reasons: it's in a good location, the rents potentially are going to go up, the cash flow potentially is
going to go up and you are potentially going to have a capital gain after a long-holding period
where you enjoy cash flow. Can you profile the typical high-net investor?

Langelier: They were the same ilk of investor as we found in syndicates but probably not the
same people. But generally we are dealing primarily with people in their 50s who have a solid
stock portfolio and are probably executives in Fortune 500 companies, entrepreneurs who look
out on the horizon and see retirement. That’s driving a lot of this. Will opportunity funds become more preferable and high-net worth
investors back away?

Langelier: I think there will be a healthy sharing of the pie with opportunity funds and high-net
worth investors. The opportunity funds are, by and large, shorter-term players while the high-net
worth investors are five- to 10-year players. It will depend on the mentality of the local partner. If
the local partner wants to get in and out fast then opportunity funds are the answer. If the local
partner wants to build a portfolio and hold onto an asset on a longer-term basis then the
opportunity funds would be less attractive to him then high-net worth investors.

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