How Calvera Became a Value-Add Apartment Investor

How Calvera Became a Value-Add Apartment Investor

Brian D. Milovich

Managing Principal, Calvera Partners

Nature versus nurture is a long-standing debate in psychology and biology. Of all places, I was reminded about this on a recent fishing trip with other real estate professionals. There, I had the opportunity to meet someone who is also located in the Twin Cities and is close in age to me. His career has been focused almost exclusively on ground-up development, and mine has been focused largely on acquisitions of existing properties. To him, development is the natural path, as in the Twin Cities there is an inordinate number of developers of apartments, industrial properties, hotels, you name it. There aren’t many groups like Calvera in the Twin Cities, and I am curious how much the local real estate market and one’s experiences shape their outlook on risk and opportunity.

Ground-up development is admittedly low on Calvera’s list of investment opportunities. Not because we don’t believe it’s a good investment, it’s just that it is not our specialty. Prior to forming Calvera, my co-founders and I worked in San Francisco and Los Angeles for a large real estate private equity firm. That company did both investment and development of urban real estate. There, we had the opportunity to work on large-scale development projects. In my case, I was part of the team building the largest residential tower between San Francisco and Los Angeles and I also worked with the City of Las Vegas to transform a shuttered downtown casino/hotel and improve the surrounding area. It is unbelievably interesting work, especially for lovers of real estate and urban revitalization.

In development, though, timing seemed to be everything and unfortunately, I saw for-sale residential developments get delivered during the Great Financial Crisis (GFC) right as home values dropped precipitously. This wasn’t the fault of the developer, as you cannot reasonably stop a large project once it has meaningfully started. There was also no way to assume that a project started during prosperous times would reach completion during a generational collapse. Construction can take 12 to 36 months or longer, depending on the project. Once you start a project, there is no going back. Unlike real estate that already exists and is generating cash flow, construction projects are spending money the entire time. There’s no guarantee that a project will be done when the market is good, and I saw that example in real time.

Aside from the general unknown of construction, California (where we founded Calvera) has an unusually long permitting and approval process for development projects. It is not unusual for approvals to take 2 to 3 years before starting construction. Some projects, including one particular proposed apartment building in San Francisco’s Mission District attempted to get approvals for over 7.5 years before the project finally died. This widespread aversion to new construction throughout the San Francisco Bay Area continues to exacerbate their housing crisis, both in affordability and access to units. Against this backdrop, we had no desire to try to spend 5 years seeing an apartment development through from idea to completion, let alone attempting to figure out how to finance a project in one of the most expensive parts of the country.

What we did know is that rents were continuing to increase in the region and the housing stock was very old, since hardly anything new was getting built. We could also put our own design stamp on existing product through significant renovations. A great example of this is Calvera’s 2014 purchase of an apartment property in Sunnyvale, CA that we identified for substantial renovation. At the time, large employers in Sunnyvale were LinkedIn, Apple, and Yahoo. This provided us with the potential to capture a high-end tenant base and justify the major renovations. Over $60,000 was spent per unit, taking the apartments down to the studs and doing a condo-quality renovation. Amenities were created in spaces where previously there were none, and we had a well-known San Francisco muralist create an art piece at the pool area. The property was rebranded as “pksl apartments” and sold for a 19% net IRR and 1.8x net multiple within 3.5 years. We thought, why do development when substantial renovations could be done in less time and for an equally tremendous return?

We continue to refine our value-add strategy and tailor it to the opportunity the market gives us. Today, we’re more interested in finding ways to create meaningful amenities, make sure we do high-ROI (return on investment) unit renovations, and reduce energy costs through sustainability. Branding has been and always will be a hallmark of our success. The outlet for our creativity has always been through improving existing real estate. However, if our environment (“nurture”) had been different and we had started Calvera in a place like the Twin Cities, I wonder if we would we have become ground-up developers. The Twin Cities have low barriers to entry, contractors are readily available, and the cities don’t overly get in the developer’s way. I tend to believe that the “nature” part still would’ve taken over, given our conservative personalities.

This takes us to why we started Calvera in the first place. We saw value-add apartment investing as a way to provide current cash flow, and, if done right with creative and targeted improvements, we could provide higher returns to investors. That’s what we’ve done, and that’s what we still do. Historically, we have even been able to produce investment returns normally seen in higher-risk developments, but with a much lower risk strategy. Calvera is a combination of both nature and nurture. Our conservative nature and investor-first mindset uses years of experience to find the best risk-adjusted returns in the apartment market. We believe that the Calvera Income and Growth Fund is the culmination of this strategy by incorporating our value-add history with a long-term tax-efficient focus.


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