Investments and Acquisitions
Lakeside Capital Partners was formed in 1998 as Lakeside Realty Advisors, (“Lakeside”) to be a new source of capital for the residential land development and homebuilding industry. This was a time when there was inadequate capital servicing this investment segment and with disciplined underwriting and experienced judgment, one could earn extraordinary returns and find attractive opportunities. Investments have been focused primarily in California. Lakeside, through its investment partnerships has invested approximately $800 million of equity in 100 projects. This represents housing for over 46,000 homes, with a built-out market value in excess of $10 billion. Below is a graph of Lakeside’s investment commitments.
Lakeside seeks development partners that are good at what they do, and with whom Lakeside can establish a joint development strategy for our projects and participate in overseeing the execution of that plan. Lakeside looks to invest in projects with solid economics in strong markets. Lakeside’s core belief is to be disciplined in its underwriting. We invest every dollar as if it is our own. We also seek to be forward looking, which led to some very opportunistic investments before other equity providers rushed to the market, and also led us to make very few investments after 2004, thus allowing us to avoid much of the pain of the current market downturn.
History of Lakeside’s Investment Activity
As indicated in the chart below, after 2004 Lakeside made few new equity commitments. This was because the investment fundamentals Lakeside focuses on were no longer present in the vast majority of prospective transactions we considered. By the end of 2004 the amount of capital chasing residential and land development opportunities had increased considerably, contributing to the buying and investment frenzy that resulted. Most of the investments Lakeside made post-2004 were infill developments, located in strong markets, with limited competition.
Lakeside has invested in the development of approximately 46,000 residential lots and homes. To-date about 23,000 of these have been sold and delivered. In 2005 approximately 18,000 were recapitalized with preferred equity investments returning all the company’s investments with some profits. The remaining 5,000 are in infill markets either under development or on hold. Approximately 60% of Lakeside’s investments have been in land development transactions with the balance in homebuilding and urban infill projects.
In the current market turmoil, we are finally seeing more opportunities; mostly to acquire distressed residential developments. While there appears to be a fair amount of capital in the market, Lakeside offers greater experience and investment discipline to identify attractive investments.
What We Invest In
Lakeside’s last major land development acquisition was made in 2004. Up until that time there was little competition from the public homebuilders, who were reluctant to do land development deals. Many of our investments were opportunistic – we were purchasing just ahead of the market or where there was minimal new homebuilding. As a result, we realized attractive price increases on many of these projects, not because of the crazed price appreciation we saw in later years, but because the existing mainstream housing markets expanded to encompass our developments. Land development projects range from 100 lots in infill locations to over 3,000 lots in the suburban markets of California’s major employment centers. Lakeside seeks land development projects with defined entitlement and land development risks and which typically have a development life of 4 to 7 years.
Homebuilding projects are focused in California’s major employment centers, and are positioned at the more affordable end of the price spectrum. On a select basis Lakeside has invested in projects that required additional entitlements, though most would have had some basic level of entitlements in place (ex. zoning). Before 2004, few public homebuilders would pursue such transactions. As a result, these acquisitions could typically be structured such that the property was controlled under a purchase option, while entitlements were being processed. All of these have been successfully entitled. After approximately 2004, we identified few such opportunities because many more public builders were pursuing them; driving up land prices and paying cash for properties, instead of using a more conservative, and we believe appropriate, land option structure.
Beginning in 2003 Lakeside made a number of investments in urban in-infill housing opportunities, aggregating approximately 2,000 units. They range from, podium condominium developments with public builders, to infill town homes, to high-density (50 to 100 units per acre) apartment projects.