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.