Since relocating its headquarters from Carlsbad, Calif., to San Juan Capistrano early this year, TPG bought an apartment property in San Diego and is progressing toward entitlements on a development in the Ontario sub-market of Southern California’s Inland Empire.
Kenneth A. Picerne is the founder, president and chairman of The Picerne Group, an investment firm with a portfolio of financial, operating and real estate assets. Founded as Picerne Associates in 1988, The Picerne Group’s portfolio includes investments in Asia and in the domestic and Japanese multifamily market, as well as an ownership interest in the City National Tower office building in Downtown Los Angeles. Picerne began his career at Picerne Real Estate Group, his family’s business that was formed in 1925 as a brokerage and home builder in the Rhode Island area by his grandfather, Romeo. Ken Picerne helped Picerne Real Estate expand into the Southwest and Southeast, moving the company up to 29th on the National Multi Housing Council’s list of Top 50 apartment owners.
Crown Pacific Properties CEO John Ed Easley brings more than 30 years of experience and operations expertise in the multifamily industry to the merger. Easley co-founded Crown Pacific in 2003 with Greg Anderson, executive vice president and chief operating officer. Anderson currently serves as EVP and director of development for TPG. Since its inception, Crown Pacific acquired and redeveloped more than $300 million in multifamily properties, including Landmark Towers and Sunscape Villas in Phoenix and Scottsdale, respectively, for condo conversion, and the 155-unit Mirror Woods and 180-unit Colony in Seattle, Wash., as value-added income deals.
Picerne and Easley knew each other for years, but never shared any ventures. They began talking in January 2006 about how they might do just that. “We found we were very much aligned strategically,” said Easley. “Ken is very well capitalized, but he didn’t have a company or infrastructure that allowed him to go out and execute a business plan. We had the company and we had been very successful during the three years we were in business as Crown Pacific Properties. It was a good marriage. Now, we are very well capitalized, we’ve got great infrastructure and are in an excellent position to go out and take advantage of market opportunities as they develop,” said Easley.
“Crown Pacific Properties has done most of its business in Phoenix, Southern California and Seattle, and recently added Denver, Austin, Las Vegas and the Bay Area as markets of interest. We were net sellers in 2005, primarily to condo converters, and we did not do a lot of acquisitions. We plan to double the company’s portfolio over the next several years now that the condo craze has faded. There is lots of competition, a lot of liquidity and a lot of people chasing multifamily, but now the focus is on rental rather than condo fundamentals,” said Easley.
TPG Residential inaugurated its acquisition activity in March with the purchase of the 108-unit Porta D’Italia, in the heart of San Diego’s desirable Little Italy’s district. The development, which was built by Intracorp in 2002, consists of two five-story residential buildings with a total of 184 rental units above 10,727 sq. ft. of ground-floor retail and subterranean parking on a 1.15-acre site.
Shortly after completing construction and gaining approval to convert the residential portion to condos in 2005, Intracorp sold the entire project to a joint venture of Lennar and Centex, which paid $52 million, or $282,608 per unit for the residential component and began converting the units to for-sale. They flipped the ground-floor retail in both buildings to Arvanni Properties LLC for $4.8 million. That space is 100 percent leased today.
The partnership was able to convert and sell the 76 units in the south building and vacate and upgrade 20 percent of the units in the 108-unit north building before San Diego’s downtown condo market reached over-saturation. With one whole floor in the north building vacant and renovated but unsold, the partnership was faced with either re-renting the units until the market came back, or considering a new exit strategy.
Enter TPG, which took the north building off the partners’ hands for $25.9 million, or $23,958 per unit, and changed the name of the property to Il Palazzo. Rents in San Diego’s Little Italy/Gaslamp district are some of the priciest in Downtown San Diego. TPG plans to push rents, which were slightly below market due to the ongoing construction activity, yet still offer renters an affordable alternative to typical lease rates in the sub market. Jason Check, TPG acquisitions associate, expects average gross rents of $1,930 after stabilization. The unit mix consists of studios, ones and twos that range from 384 to 860 sq. ft. As comparison, average gross rents at Camden Property Trust’s 160-unit Camden Tuscany several blocks away are around $2,300.
The predicament of the Lennar/Centex partnership isn’t unique, especially in markets like San Diego, Phoenix and Las Vegas, all markets Easley is targeting for more busted condos. “The condo market definitely has softened. My estimate is that in San Diego this market will be with us for probably the next 18 months before we start to see a rebound. I don’t believe that we’ve seen all the softening at this point and it may be late 2008 before we see any signs of recovery. We are very well positioned to capitalize on this market slowdown,” said Easley.
Crown Pacific caught the conversion wave and transformed two assets– Camelback Towers in Phoenix and Sunscape Villas in Scottsdale–to condos. “At Landmark, only four units are left to sell and Sunscape is about 70 percent sold,” said Easley. And, as condos fell out of favor in San Diego, Easley leveraged his expertise, acting as consultant to the joint venture of Hammer Ventures and the Carlyle Group, which got caught with unsold units in two projects in San Diego at the end of the cycle.
Development also is a part of TPG’s business plan and another arena with which Easley is familiar. He served as divisional president and managing partner for JPI’s Western and International divisions. Easley established JPI’s San Diego office in 1996 and expanded the company’s California operations to include the San Francisco Bay area, Los Angeles and Orange County, as well as opening the JPI’s Canadian office in Toronto, Canada, in 2000.
“TPG is working on a development site in Ontario that Ken Picerne has owned for 15 years, located at the corner of 4th and Haven, and we’ll hopefully be in a position to break ground there late this year. When I was with JPI, I did two projects close by at 4th and Milliken on the General Dynamics property they had in Rancho Cucamonga. I haven’t done anything in Ontario, but this is very close to those two projects,” said Easley, who added that TPG’s project will be an urban- style garden community with a mixed-use flavor on an 11-acre parcel. The yet-to-be-named development with around 400 apartments and a small amount of retail is being designed by Thomas P. Cox Architects.
