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Feature Article, April 2005
Beyond Development
What do you do after you create many successful centers? For one developer, funding the development of more shopping centers is the answer.
Randall Shearin
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First Interstate Properties’ Legacy Village, just outside Cleveland, at night. First Interstate’s president, Mitchell Schneider, has founded Legacy Capital, a company that creates real estate capital funds to develop more centers.
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What do you do after you have developed some of Northeast Ohio’s most successful shopping centers and you don’t want to leave the area to develop more centers? For Mitchell Schneider, deciding how to expand his lines of business without continuing to develop at a rapid pace was perplexing. As president of First Interstate Properties, Schneider had concentrated his development efforts on Northeastern Ohio, near his company’s headquarters in suburban Cleveland. After developing and opening Legacy Village, one of the most successful centers in the Cleveland area, last year, Schneider knew that he couldn’t continue to develop properties like Legacy in a limited trade area. While First Interstate will continue to develop, it is now in a situation where it must wait for an opportunity.
“I’ve always operated on the principle that real estate development is a local business,” says Schneider. “The farther you are away from your home base, the more your risk profile increases in the development process.”
To extend his involvement in the shopping center industry, Schneider is launching Legacy Capital, a real estate capital fund, along with David St. Pierre, a former KeyBank executive.
“We view this fund as an opportunity to take our expertise in the development process and our capital and team up with local developers in other areas or shopping center developers that have local expertise and a presence in a variety of markets,” says Schneider. “We want to be a partner in finance, but a partner that can also contribute to a project with our expertise. We bring not only capital to the table, but tenant relationships and experience with problem solving capacities.”
First Interstate Properties is a long-term owner of its projects. Similarly, it anticipates as an investor, Legacy Capital will hold its investments in the centers it helps to build. An ideal partner for Legacy is a developer that has a track record with successful projects, but a developer who needs to have an equity partner. Medium-sized companies who have been developing a portfolio for the long-term, and who have a good pipeline of development and that are willing to share some equity risk, are another possible good match with Legacy. Lastly, Legacy is looking for merchant developers who may have a project they want to hold, but because of their structures, can’t. Legacy is willing to step in as an equity source if the deal is right.
To create its fund, Legacy has avoided institutional money. Its investors are high net worth individuals and families, most from the Cleveland area. The first fund consists of $44 million, and Schneider predicts that the first fund will be committed within the next 2 years. It expects to begin raising capital for its second fund in mid 2006. Legacy’s second fund will consist of between $80 million and $100 million.
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Mitchell Schneider, president of First Interstate Properties and CEO of Legacy Capital.
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Legacy Capital plans for 50 percent of its first fund to be invested in retail properties, but it is also pursuing multifamily opportunities. Although the goal is a 50-50 split, Legacy is squarely focused on identifying the best opportunities, regardless of property type. Therefore, a greater percentage of the fund could be invested in retail, Schneider says. Ideal retail projects for Legacy are not small deals. It wants to invest between $3 to $8 million and will consider investing up to $10 million in a project. Schneider foresees a lot of the money going to fund the development of big box anchored power centers and lifestyle centers — properties that First Interstate is very familiar with.
“We are really focused on ground up development,” says St. Pierre. “We have the comfort and the expertise to understand it, and we are comfortable with the risks of ground up development. That said, a redevelopment opportunity isn’t out of the question either, if the opportunity is right.”
Decision-making on projects is quick. St. Pierre and Schneider are the sole decision makers with respect to the fund’s investment decisions. St. Pierre and Schneider will meet with every developer where they are considering making an investment. Legacy is going to be choosy. Since closing the fund in November 2004 until mid-January 2005, and without any publicity, the company had already seen more than 30 deals pass its way, and there are a couple that are materializing into potential opportunities.
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David St. Pierre, president of Legacy Capital.
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“We raised enough money to create diversity, enough money to be meaningful,” says St. Pierre. “But we didn’t raise too much money so that we have this incredible amount of pressure on us to invest. We are going to find the opportunities; we have the ability and the flexibility to be patient to find the right deals.”
Legacy wants to structure its deals so that both parties will have an exit strategy. In some cases, that may mean in 10 years Legacy and its partners sell the project to a third party or it could mean that the partner buys Legacy out after 10 years.
“We’re confident that we will find great projects to invest in,” says Schneider. “We want to come to the table when we are raising money for the second fund 18 months from now with a track record of projects that will help us generate the money very quickly.”
©2005 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.
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