When Jerry Reinsdorf, Robert Judelson and Thomas Meador opened the investment firm Michigan Avenue Real Estate Group in Chicago five years ago, they were in a sense returning to their roots.

In the 1970s, Reinsdorf and Judelson's Balcor Company became the largest owner of apartments in the U.S., with assets of more than $7 billion. Meador joined the firm later, and stayed on after its acquisition by American Express in 1982. He directed Balcor's disposition for American Express, finalized in 1998, and then ran the company's global real estate for ten years.

Reinsdorf went on to become chairman of the Chicago Bulls and Chicago White Sox sports franchises, and Judelson to various real estate development activities.

Leveraging the principals' deep real estate experience, and staffed by seasoned professionals, including colleagues from the Balcor days, Michigan Avenue specializes in all areas of real estate investing and acquisitions. Its business plan, Meador says, is to accumulate high-net-worth capital and place it into opportunistic real estate investments.

It also consults for small community banks, mainly in the Chicago area, and national banks on how to manage their real estate portfolio problems. Many smaller institutions are encumbered with underperforming loans and real estate assets and often lack the staff, capacity or expertise to deal with them. Michigan Avenue also has a land development program.

Judelson serves as the firm's chairman, and Meador as president and chief executive. Reinsdorf is an inactive principal, but his son Jonathan is actively involved in the business.

Investment Process
Michigan Avenue has two fund products. Michigan Avenue Real Estate Investors LP invests in primarily residential bank portfolios-abortive condominiums and apartment projects.

"We have high-net-worth individuals who are savvy investors, who understand the market and understand what we're doing, and then we have product with the bank portfolios," he says.

Michigan Avenue culls bank portfolios and buys what Meador calls "good real estate"-assets with excellent location and design that have been mismanaged in some way. They may have been poorly timed or overleveraged, for example. These assets are not necessarily cheap, he says. "We try to buy it cheap, but cheap doesn't make it good," he says. And although the firm's focus is on banks, it has bought real estate from a private owner who decided to monetize his assets.

The firm's geographic focus is Chicago and its suburbs, Milwaukee and Indianapolis. It also has a presence in Denver and Atlanta, but it has not yet aggressively pursued these markets "because we've just had enough on our plate here in Chicago," Meador says. The firm has about 30 assets in its portfolio. The term of each project is five to seven years.

Michigan Avenue's approach is hands-on. "Our core strength in everything we do is that we're asset managers," says Jonathan Reinsdorf, a senior vice president who is responsible for investor and investment solicitation and deal analysis.

"It's not a pretty business," Meador says, "but we'll negotiate real estate taxes, extend leases, do construction, beat down vendors. It's not just working the capital. We can do that. We understand the capital markets as well as the next guy. But if that's your focus, you have a smaller chance of winning and a greater chance of losing."

The firm recently bought an abortive-or "busted," to use Reinsdorf's term-condominium in a Chicago suburb from a local bank. The 135-unit complex had a $10 million loan, a $6 million mezzanine loan and $4 million of equity. The developers had completely emptied the property and sold about 30 units before running into trouble and now faced bank foreclosure.

Michigan Avenue did the underwriting, bought the note, which the bank financed, executed the foreclosure and then took control. "We became both asset managers and property managers," says Meador. The firm renegotiated the real estate tax bill, immediately saving $200,000. It renegotiated vendor contracts, put in new employees and repositioned the marketing. It also renegotiated the loan with the bank, getting a five-year extension. Starting with 75 to 80 empty units, it had the property fully leased and occupied in six months.

Then there was the angry homeowners' association that had to be placated. "We had to go and make peace," says Meador. "The first meeting was ugly; they wanted to lynch us when we showed them what we wanted to do. Then, we performed, and in one of our recent meetings, we had a standing ovation," he says.

Michigan Avenue's other fund product is run by affiliate FFB Equity Partners and was predicated on providing working capital for premier builders through sale-leaseback financing of their model home inventories. The firm, however, has halted financing in this area due to the nation's housing crisis.

Experience Tells
Michigan Avenue's visibility in the Chicago markets, through its vast real estate experience and Jerry Reinsdorf's sports teams, helps generate many investment ideas, according to the firm's principals. "Our reputation in the market creates a lot of opportunities," Meador says. "At the same time, we don't have anybody in the office. They're out working with banks all the time, whether it's advising, consulting or talking to them about their portfolios.

"We take time to shop markets, getting into excruciating detail about contracts," he says. "We'll have studies done if we're not sure. Also, we avoid properties we're not comfortable with, like hotels and office buildings."

Reinsdorf speaks about idea generation from the perspective of Michigan Avenue's experience: "Bob and Tom and my dad have been through six recessions. Nothing is happening that hasn't happened in some format before. It's really about understanding existing market conditions and knowing what works when those are the conditions." For example, he says that with financing drying up, it makes sense to revisit the idea of a participating loan program. "We started this under similar circumstances in the 1970s," he says.

Current Opportunities
Michigan Avenue's chief opportunities at present are to buy assets from banks' troubled portfolios. When it started this program two years ago, the banks were just being exposed to their own problems and some were liquidating assets. But once the banks saw how bad their portfolios were, they closed their doors and buying opportunities diminished.

"It's a terrible conundrum," Meador says. "They had poor-earning assets that were depleting their earnings, but they couldn't afford to take the loss." As a result, Michigan Avenue was in slow acquisition mode for much of 2010.

This is now changing, he says. "We're hearing in our conversations with banks that the government is telling them to start moving those assets or risk being taken over by another bank. The banks now are opening their doors, so the opportunities are increasing," he says.

Meador sees another opportunity in the home sale/leaseback program, though this is still a couple of years away. "The banks are going to be more aggressive than ever with the builders about not letting them keep homes on their balance sheet. We help the builders take assets off their balance sheet by buying them and leasing them back."

He does not expect any near-term global events to destabilize the firm's existing portfolio. "The real estate we've got has been seasoned. It's not development and it doesn't have lease-up experience. We expect to see an acceleration of the banks trying to delever their balance sheets, which gives us more opportunities to look at."

Investors
Meador also expects to see wary investors come off the sidelines as they become comfortable with the real estate market and as the firm continues to tell its story. What risks might investors assume through exposure in the Michigan Avenue Real Estate Investors LP?

There's principal risk, "though we think we've bought so well that that's not an issue," Meador says. There's also yield risk, but he expects the internal rate of return (IRR) on one project to be in the high 20s and on another in the low 20s. But the risk is that the investor will get an IRR of 10% or 15%. The third risk is that the firm might delay its exit in order to maximize the IRR. Instead of getting out in year five, the investor might not get out until year six or seven.

Investors in the fund are high-net-worth individuals in Chicago, Milwaukee, Los Angeles, New York City and Canada who come in through word-of-mouth or after hearing about "the rebirth of Balcor" from Jonathan Reinsdorf directly or through their advisors. He says the firm will close fund-raising on December 31 after having brought in about $20 million to $25 million.