Buy, Sell, Profit

By Dick Hughes  

MARCH 6, 2010 10:18 a.m. (0)

With banks holding back financing and real estate at bargain prices, private investors are pooling their money to fill voids in residential and commercial markets.

In the Upstate, two newly created funds, Serrus Real Estate Fund I and Falls Park Capital, are raising money to buy and rehab properties depressed in the down cycle to sell or hold as rentals as the economy moves upward.

Serrus, which has acquired 27 residential properties, plans to acquire $20 million in houses in selected neighborhoods, primarily in Greenville, Spartanburg, Anderson and Pickens counties, and spend $4 million over the next two years fixing them up to sell or rent.

The group’s typical target is median-priced three-bedroom homes from “distressed owners, not necessarily distressed properties.”

Falls Park, which expects to acquire its first commercial property this spring, anticipates buying $30 million in “office, industrial, retail, land, residential and multi-family” properties to improve and resell or hold and manage as rentals. It also has some residential.

For the most part, both funds use cash for acquisitions.

The products are the cents-on-a-dollar properties in foreclosure, bankruptcy and direct sales, as well as those on bankers’ books as “nonperforming assets,” the euphemism for bad loans.

“It’s pretty simple,” said Brad Halter, president of Coldwell Banker Commercial Caine of Greenville, who takes a historical view of nearly eight decades of family experience with real estate ups and downs – from his grandfather, his father and his own 30 years in the business.

“If you have the money that is patient and look at the opportunities that present themselves because of the climate, the upside is to buy something, maintain it, manage it and bring it back out.”

Sitting in a conference room at Caine’s office near Falls Park, Cain and Bryan Blackwood, principals in Falls Park, and Stephen Mudge and Leighton Cubbage, principals, along with their wives, in Serrus, explained the place private equity funds can play in filling a void caused by bankers’ lending skittishness.

“The premise of both of the funds is to be able to do business in an environment where finance doesn’t allow business to get done on a traditional basis,” said Mudge. “We believe that’s going to be the vehicle for a large majority of deals to get done for the next two or three years.”

The big players nationally are Real Estate Investment Trusts, which differ from private equity funds in that they are structured as securities in which blind pools of assets are acquired and shares are bought and sold on regulated exchanges.

Blackwood said the REITS “raised a tremendous amount of money last year … and see opportunities coming.” The Wall Street Journal reported that REITS raised $24 billion in anticipation of “picking up high-quality real estate at bargain prices.”

“We’re definitely trying to go after that sweet spot,” said Mudge. “Most of the bigger guys buy portfolios. We have the ability to be very selective and not to take a mixed bag. We get to go after individual assets we like.”

As an example of what Serrus is doing on the residential side, Mudge and Cubbage cite a home on Easley Road in Greenville they bought for $35,000. After spending $40,000-45,000 in improvements, the house was appraised at $130,000.

A Boiling Springs house they bought for $80,000 and spent $5,000 “in cleaning it up” was appraised at $125,000.

Acquisitions of commercial properties lag behind residential because fewer commercial defaults are available. The unique character of commercial property in this recession is that it is burdened not by too much building but rather by too much debt, Halter and Blackwood said.

Commercial foreclosures also came later than the residential collapse because businesses were able to hang on longer, and banks, anxious to keep their best customers, reworked loans and exercised patience in the hope they could wait out the devaluation.

“This is one of the first times ever that over development wasn’t the problem on the commercial side,” Blackwood said. “It was a lot of financial engineering that created a lot of over-leverage.”

Once unemployment eases and consumers begin to spend more, he said, “recovery on the commercial side will be pretty quick because you don’t have to absorb an over-hang.”

Falls Park is targeting commercial properties between $2 million and $6 million, a “range larger than most individuals can purchase yet smaller than the Real Estate Investment Trusts would look at.”

Leighton and Tammy Cubbage and Amanda and Stephen Mudge are principals of Serrus Capital Partners, the sponsoring entity and administrator of the real estate fund.

Cubbage and Mudge also are partners in Falls Park, along with Halter, Blackwood and Nick Sardone of Coldwell Banker Commercial Caine.

The funds, which require minimum investments and a fixed time commitment, are incorporated as limited liability corporations with the South Carolina Secretary of State. They are distinctly separate entities, though there are interconnections.

Creating the real estate fund came out of meeting Cubbage and Mudge, former Clemson football teammates, had in January 2009 to brainstorm investment opportunities.

Shortly before, Mudge had left Marriott International where he had been executive vice-president for mixed-use development, and Cubbage, whose Serrus Capital provided funding to start New South and NuVox, was looking for a new venture.

“Most of the enterprises I’m involved in are under strain and asking for more capital, not to pay me more capital,” Cubbage recalled telling Mudge. “So I went through what wasn’t working and said we’ve got one thing that is working.”

It was his wife Tammy’s real estate venture in which she used cash to buy medium-priced homes in distressed sales, fix them and sell them.

“It was almost like a ministry for her in the people she was putting in there … great, great good feelings.”

But, he said, “We were running out of skating room. We can only buy what we have cash for.”

The board of Serrus Real Estate also includes C. Dan Joyner, president of C. Dan Joyner Presidential; Paul “Bo” Aughtry, president, Windsor Aughtry Co.; Mark Cothran, president, Cothran Properties; Chad Carson, president, Blue Ride Home Buyers; Bob Mundy, president, Estates Inc.; Terry Farris, Clemson professor of Master’s of Real Estate, and Jim Ness of Sunny Slope Farms of Gaffney.