Opportunity fund executives, eager to spend the billions coming their way from institutional investors, are going after deals they wouldn't have done 18 months ago.
While these funds are known for investing in projects that core or core-plus real estate managers would not touch, some of the most recent deals are even more creative than in the past, consultants say. And despite the added risks, fund officials and consultants are warning investors not to expect as high returns as they have gotten in the past.
Among the non-traditional real estate deals done recently by opportunistic real estate fund managers:
• Lubert-Adler Real Estate Funds, Philadelphia, joined with hedge fund Cerberus Capital Management LP and private equity firm Sun Capital Partners Inc. to buy the Mervyn's LLC department store chain and its credit card receivables unit for $1.65 billion from Target Corp.
• Colony Capital LLC, Los Angeles, bought four casinos for $1.24 billion from Harrah's Entertainment Inc. and agreed to invest $127 million in a deal that merged Paris-based hotel operator Accor's casino business with that of Groupe Lucien Barriere. The firm also bought a French winery, Chateau-Lascombes Margaux, and might buy a railroad business in Japan this year.
• Canyon Capital Realty Advisors LLC, Beverly Hills, Calif., invested in sound stages during the past few months.
• Apollo Real Estate Advisors, New York, joined with Pacific Theatres Corp. to launch an operator of multiplex theaters in Poland.
• Starwood Capital Global Group LLC, Greenwich, Conn., is using funding from Starwood's Fund VI to finance a joint venture with St. Andrew's Management Services, a senior housing developer, to build retirement communities in Colorado, Missouri, Indiana, Texas, Florida and Illinois.
• Phoenix Realty Group, New York, is raising a $90 million San Diego Smart Growth Fund and already has the Genesis Workforce Housing Fund to finance "work force housing" — condominiums, lofts or town houses built in urban and often blighted areas for sale to first-time, lower-income home buyers.
Other opportunity fund managers are building hotels, converting office buildings into residences and investing in urban multi-use developments. One enterprising fund is buying a mall and turning it into a college dormitory.