Savanna Investment Wields $1B of Buying Power

April 20, 2011
By Barbra Murray, Contributing Editor

Savanna Investment Management L.L.C. underestimated real estate investors’ eagerness to have a stake its new fund. The firm just completed the final closing of its second real estate private equity fund, Savanna Real Estate Fund II L.P., with approximately $550 million of total equity commitments, marking a significant premium over the $400 million target. Typically, Savanna leverages a maximum of 65 percent of all in capitalization, which leaves Fund II with about $1 billion of buying power.

Mortgages are the primary focus of Fund II, which is run by Savanna co-managing partners Nicholas Bienstock and Christopher Schlank. “The greatest opportunity we have seen in the current market has been to acquire defaulted first mortgage positions at a discount from financial institutions,” Bienstock told CPE. “Thereafter, we have often worked out a deal with the borrowers to either take the fee ownership of the property or entered into a new joint venture structure that transfers majority ownership and control of the asset to Savanna.”

The deals frequently involve what Bienstock describes as “zombie” buildings, buildings that–in cases where Savanna takes over ownership–are recapitalized and then presented anew to the marketplace in a format that allows for the facilitation of new leases at current market rental rates. “So we are taking ‘zombie’ buildings and bringing them back to life,” he explained. Fund II’s target markets are major cities and their environs in the northeastern U.S. However, one metro area is of particular interest. “We see tremendous opportunities in New York City right now.”

Park Hill Real Estate Group L.L.C. served as Savanna’s placement agent for Fund II, and a wide range of investors wanted in on the opportunity. Private and public pension funds, foundations, fund of funds and wealth management companies made commitments. And the investment vehicle garnered a great deal of interest beyond U.S. borders; a substantial number of its investors are based in Europe and Asia. Fund II is a powerful magnet that provides a few coveted benefits.

“Savanna is a private equity fund that is also a direct owner/operator of real estate, so any investors find the combination compelling, since we typically buy, own and operate our deals ourselves, rather than investing through operating partners that then must be paid fees and a promote for running deals,” Bienstock said. “Many investors have come to the conclusion that these double layers of fees and promotes that are inherent in the allocator fund model will reduce their returns over time.”

And Savanna provides additional benefits. “I would suggest that the combination fund/operator structure has given us a buying advantage in the present environment,” he added. “We can sit opposite of financial institution sellers and show a balance sheet that allows us to take down deals without financing. While large allocator funds have a balance sheet, they don’t typically have a business model that allows them to underwrite and close a complex, value-added repositioning deal without an operating partner. Simultaneously, the operating partners that may have the expertise to execute that deal do not typically have the balance sheet to buy it. So by having both the balance sheet and the expertise and execution ability under one roof, we have come to the table with all the components that we need to efficiently buy in the market. This combination was compelling to investors and so far, we have been able to deliver on the opportunity that we described to our investors.”

Fund II’s first closing was in August 2010, and it has since made a few notable Manhattan acquisitions, including the purchase of the 513,400-square-foot office building at 1375 Broadway for $135 million and the 328,000-square-foot 5 Hanover Square, which was picked up for $51.5 million. Fund II also acquired the mezzanine loan on the 510,000-square-foot property at 100 Wall St. and the first mortgage loan on 80 Broad St., a 410,000-square-foot office tower. There is ample time for more deals, as the fund has a three-year investment period that commenced with the first closing last year.