The Interview - Randy Black, LandBaron Investments: "Our track record shows we have transitioned well from opportunistic to distressed and vice versa"

Randy Black, a principal with LandBaron Investments, says the firm's newly-launched Western States Distressed Land Fund aims to capitalise on an unprecedented opportunity to accumulate prime assets with minimal competition before the floodgates open for sideline money that will result in a surge in prices.

HW: What is the background to your company and fund?

RB: My partner Michael Chernine and I have been in the real estate industry since 1988 and were introduced to one another while working at Nevada Title Company in the title and escrow departments, where we obtained experience in the fundamental elements of real estate transactions. In 1990 we ventured into real estate brokerage and shortly thereafter began syndicating capital from family and friends to acquire strategic parcels in Las Vegas.

We have acquired and disposed of over USD1bn since 2000 and currently manage private and institutional funds in a portfolio valued at USD500m in five western states of the US. Our average annual returns since 1993 have been minimum double digits, including 30.75 per cent in 2007 and 28.62 per cent in 2008. We have orchestrated transactions with private individuals, publicly-traded companies, local municipalities, state agencies and the US federal government.

Launched in April this year, the Western States Distressed Land Fund targets finished and partially finished residential and commercial lots being disposed of by public homebuilders and financial institutions at price points below replacement cost, identifying specific markets where there is still substantial sales velocity and viable long term growth.

Our company has an established team and the infrastructure in place to identify opportunities, conduct due diligence, complete acquisition, manage or create value and dispose of assets to capture gains. Our deal flow comes from long-term relationship forged with homebuilders, banks, private lenders, attorneys, brokers, municipalities and title companies providing us with 'first shot' at the prime distressed assets.

HW: Who are your service providers?

RB: The fund is administered by Vistra and audited by Deloitte & Touche, and receives legal services from Howard Law in Jersey and Black & Lobello Law in the US. Cash management and underwriting services are provided by First American Title Company and escrow and title services by Nevada Title Company, while London-based IGS Group acts as placement agent.

HW: How and where do you distribute the fund? What are the advantages of this fund for European investors?

RB: The fund is distributed to European family offices, private banks, pension funds and funds of funds. It has been structured to maximise net earnings by using a Jersey domicile and Delaware corporation to provide a tax-efficient structure for European investors

HW: What is the investment premise of the fund?

RB: Due to the massive depreciation in property values, financial institutions, developers and homebuilders are forced to liquidate and write down real estate assets. This provides opportunities for the fund to acquire properties with residual land value of zero and a substantial discount on the hard costs of completed physical improvements.

Homebuilders are struggling to liquidate projects with high bases that are no longer economically feasible and lenders are divesting themselves of non-performing assets that can no longer be held on their balance sheets to conform with banking regulations.

The fund will benefit from a lack of liquidity in the market to acquire these properties in an expeditious manner. The fund will sell to healthy homebuilders and developers at a new basis that can compete with existing resale product in the market. Our market research shows which sub-markets are close to reaching equilibrium in absorption of product.

HW: What are the advantages of acquiring zoned building land as opposed to developments that are already built?

RB: Recent communication with homebuilders reveals that they will be out of inventory and will commence purchasing of finished lots to begin new production by 2010. You will not see companies land-banking in the near future, but cautiously purchasing smaller counts of fully improved residential lots of standard size, allowing them to be able to build in product volumes that can be absorbed quickly.

HW: How do you make investments for the fund?

RB: We have made a conscious effort to have a completely transparent fund. Investors monies are transferred from the Jersey administrator directly to First American Title Company, where distributions are made through an escrow account to fund only the amount needed to acquire a specific property held in a special purpose entity.

HW: What is your approach to managing risk?

RB: Management's investment experience and relationships with industry-leading consultants provide the fund with a stringent underwriting process for identifying and vetting each asset's ability to meet our investment criteria. Properties will be purchased without leverage at between 10 and 35 per cent of peak values.

Location is still the cornerstone of property investing, and there has never been such an opportunity to accumulate prime assets with minimal competition. The fund's investment policy provides for limitations on exposure to any one project and requires us to ensure a reasonable level of portfolio diversity within the boundaries of the asset set. This will ensure that the fund will not be adversely impacted by non-core exposures.

HW: What opportunities are you currently looking at?

RB: LandBaron has spent the past 18 months cataloguing the inventory of lots to delineate between those of smaller, unconventional size in sub-standard locations and those of well-positioned and standard-sized lots. We have opened up negotiations with the owners and in some cases contracted for product we believe with be the first to be absorbed.

We have previewed a few portfolios held by national financial institutions, homebuilders, and bankruptcy court consisting of multiple projects in several sub-markets where the fund can immediately divest each individual subdivision to a ready homebuilder at a profit. These subdivisions comprise 'bite-sized' unit counts that can be safely acquired to build as you sell.

HW: What developments do you expect to see in the real estate sector in the western US states and across the country as a whole over the year ahead, and in other political and economic areas that may impact it?

RB: We see continued devaluation, although slight in residential and considerable in commercial until employment and capital market stabilization. We will continue to commission studies in the western states markets to monitor indications of bottoming out. We have many indicators in Las Vegas that equilibrium is imminent and Phoenix is not far behind, based on homebuilders and not just investors vying for this product.

We believe that the floodgates of sideline money awaiting the declaration of a bottom will, as in all previous cycles, result in an immediate float in pricing. In the event of a U- or W-shaped recovery, we will acquire 'Main and Main' locations at appropriate pricing as a safer strategy than waiting until full market upswing to deploy capital on the leftovers.

HW: How will these developments affect your portfolio?

RB: Positively. We will own or have under contract the majority of our targeted assets prior to the mass influx of sideline capital.

HW: What differentiates you from other managers in your sector?

RB: We have experience through bear and bull markets, and our track record of returns shows that we have transitioned well from opportunistic to distressed and vice versa. This is a natural evolution for our company.

Funds targeted for cherry-picking physical property are just beginning to surface. The other funds that have recently launched have strategies aimed at bulks of non-performing debt or actually going vertical in construction of homes.

HW: Do you have any plans for further product launches in the near future?

RB: We may launch a US investor-based fund to co-invest with the Western States Distressed Land Fund.


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