Grosvenor is seeking co-investors for the next iteration of its True North partnership in Canada, targeting $150m of committed capital, including Grosvenor’s, to support the construction of multi-residential housing, Green Street News can reveal. The firm also is looking to raise US$150m (C$212 million) in the United States for a U.S. version of the partnership.
Dubbed True North IV, the structured-development finance program provides capital to close the gap between a traditional construction loan and a developer’s equity. Since 2000, the business has invested in 72 residential projects with more than 5,600 units, representing $4bn of gross development value.
True North IV aims to work with developers on apartment, condominium and townhouse projects in gateway cities in the U.S. and Canada. It’s targeting an internal rate of return of 16% to 18%.
In Canada, the partnership so far has targeted only Vancouver, but it’s now weighing opportunities in Toronto. In the U.S., the firm’s core markets are Seattle, California and Washington, D.C.
Green Street News spoke with Michael Ward, Grosvenor’s managing director of co-investment, about the role the 340-year-old real estate giant plays in helping bring residential developments to market, the True North partnership and the path forward.
What’s the True North partnership’s thesis?
There’s this fundamental need to help the developers supplement their equity and close the gap with the bank. Without access to this type of capital, many housing projects wouldn’t proceed.
What’s the targeted capital commitment?
C$150m in Canada and US$150m in the United States. We would seek to raise the same amount in the United States for a U.S. version of the partnership, which would focus on California, Seattle and Washington, D.C.
The ideal size [in Canada] is probably three investors, which would include us and two others. It’s a group of like-minded investors who are putting their capital together. We don’t leverage our capital. The projects themselves have leverage, but we don’t then put further leverage on our bucket of capital.
Can you talk about the dislocation in gateway markets, and the challenges and opportunities that are present today?
There’s a lack of supply, but also a lack of capital to get more [homes] built. To me, that’s the dislocation. Whether it’s California, Seattle, Washington, D.C., or Vancouver, which, talking holistically, are the core markets where this program is active for us. Those markets, along with some other large gateways where we’re not active, is where that housing shortage is most acute. Yet the available capital is often just not there.
In Vancouver, there’s certainly some good opportunities we’re seeing, but nonetheless, the developers behind those projects are having a greater challenge than ever closing the [fundraising] gap.
Examples would be any single one of the 79 loans that we provided over the last 20 years from this [structured-development finance] program.
I think Gardena [in Coquitlam, B.C.], which we financed earlier this year, is a good recent example. That was the final investment in the third iteration of the True North partnership. It includes both purpose-built rentals, condos for sale and a component of below-market-rate rental units.
Percentagewise, it was just under $40m in financing we provided, which would be around 60% of the equity piece, and about 8.5% of the overall capital stack.
What problem does the True North partnership solve?
We helped that project [in Vancouver] get off the ground. That’s sort of the upper limit of the dollars we like to commit to these projects – $7m on the low side to $35m to $40m on the high side.
The problem that we solve is in that gap between the conventional bank debt/financing/
construction loan, and the amount of equity the developer has to put into the project.
A project often requires 15% to 20% equity in Canada and higher in the U.S. – up to 40% – with the balance being conventional construction loans from a bank.
But these projects are big – $100m to $300m – so the equity required is a lot of capital, which is often difficult for a developer to come up with. So, we fill that gap between the amount of equity the developer does have and the amount of bank debt that they can secure. We’ll lend in that middle area.
We’ll lend up to 80% of the equity piece. If the equity piece is 20%, we’ll lend 16% [of that 20%]. It’s increasingly becoming a critical piece of the financing for these much-needed projects, particularly purpose-built rentals. That’s starting to make those projects viable.
What are you focused on now?
There’s two activities we do in this business: We have capital that we provide to developers to start their projects and [to] close the gap in the capital stack.
But the other part of it is, where do we get that capital? And that is the True North partnership.
We have been working with partners since 2006 on structured-development finance; typically, we work with one or two other like-minded investors, either an institutional group or a high-net-worth individual, and they provide capital to us, which we put alongside our capital. If it’s us and one other, it’s 50/50 typically. If it’s us and two others, it’s one-third each, so we’re all standing shoulder to shoulder, aligned with our capital partners.
“There are more development opportunities for us to place capital into than we can possibly do right now. The bottleneck is the availability of capital”
Once we have that bucket of capital, we can then seek development opportunities to invest it into. That’s a big focus for us now, working with past and new investors to raise that capital for the fourth iteration of our True North partnership, which we call True North IV.
Raising capital is really difficult. There are more development opportunities for us to place capital into than we can possibly do right now. The bottleneck is the availability of capital. There’s a constant challenge in terms of getting capital into these projects, and that’s a big part of our focus right now.
What are your core gateway markets? Are you exploring Toronto?
In Canada, Vancouver is the only core market that we operate in. Although under the fourth iteration for the [structured-development finance] program, we have been exploring some opportunities in Toronto. We’ve not committed to anything yet.
Our other gateway markets are California, Seattle and Washington, D.C.
The three leading things we know to be true about those gateways are that they lead the countries in pay and productivity, so they have highly educated workforces, the innovation ecosystem and the final thing would be a vibrant, urban walkable experience.
Grosvenor is a believer in the durability of these gateway cities. What we loved about them seven years ago, 30 years ago, 50 years ago – all those reasons we loved them then are all still true today.
