"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.