GlobeSt.com: By 'economically', are you referring to the disconnect between seller expectations and what buyers are willing to shell out? That seems to be one of the prevailing complaints by investors these days.

Allen: Yes. There was a significant gap between sellers' expectations of prices and buyers' expectations of where prices should be. I think a lot of that was borne out of the fear that was developing among investors about the state of the economy, which translated into the apartment business concern over where occupancies and rents were headed during that period of time in 2008.

GlobeSt.com: Overall, Raintree is looking at three segments of the market--multifamily acquisitions and development opportunities, land and non-performing and sub-performing loans in the multifamily space. Where are most of your efforts concentrated?

Allen: Our primary focus is on the acquisition of property. I'd say we spend about 75% of our time on that. The rest is split between looking at distressed debt and potential land acquisition plans.

GlobeSt.com: Is Trellis Square a pretty standard example of the type of property you're looking for?

Allen: In today's world, it's very difficult to say what's standard. Trellis Square represented what we thought was a good value in a very good location. From the seller's perspective, I'm sure they felt they were getting what they thought was a good execution in an asset that, for whatever strategic reason, they decided to sell. From our perspective, it represents a good, solid, long-term value play.

GlobeSt.com: What do you mean by long term? Seven to 10 years?

Allen: Yes, with the expectation that at some point, when the market justifies it, we will improve the property. We think there is a significant value-added component that we intend to execute when the economy gets to a point where it will allow us to generate the increased rents we would need in order to justify spending the capital to rehabilitate the units.

GlobeSt.com: And what are your yield expectations for property acquisitions?

Allen: In the mid to high-teens IRRs, on a leveraged basis. So 15% to 20% IRRs.

GlobeSt.com: Are most of the assets you're looking to acquire in the value-add arena?

Allen: Primarily. We would reduce our return expectations if we were to find a high-quality, core asset that we could buy at an attractive price. For a core deal, depending on the location and quality of the asset, we might be willing to drop our return expectations down to the 12% to 15% range.

GlobeSt.com: What geographic areas are you concentrating on?

Allen: We've got two primary focuses right now in terms of location. One is the Coastal Southern California area--the corridor from Los Angeles to San Diego. Equally important to us is the Greater Bay area, particularly the more coastal markets such as San Francisco, San Mateo County, Santa Clara County, parts of Contra Costa County and parts of Alameda County.

Eventually, we intend to expand into other western markets--probably Phoenix, Las Vegas and the Pacific Northwest. But that's a longer-term plan. Right now, we've got plenty of business to focus on in Southern and Northern California.

GlobeSt.com: The market today is considerably different than when you formed the company in late 2007. Have you had to alter your strategy at all between then and now?

Allen: When we initially formed the company, we were also interested in doing apartment development. That business, over the course of the past year and a half, has become extremely challenged. There is very little capital available to execute new, ground-up development projects. In addition, the prices we're seeing on existing assets are falling to a level where you can buy existing, leased assets at a significant discount to replacement costs. So we just don't see a compelling need in today's market to go out and start new development projects. That's going to change at some point in the future, and there will be a justification for starting up our development business.

GlobeSt.com: The acquisition of non-performing and sub-performing loans has received a great deal of investor attention over the past few months. Was that segment an initial concentration, or did that come later?

Allen: That came later. It's a strategy that's really borne out of the extreme economic distress we're all experiencing right now.

GlobeSt.com: You have $200 million in equity committed. With leverage, what level of investment do you hope to reach?

Allen: We would like to acquire somewhere between $600 million and $800 million worth of property over the course of the next four or five years. A lot of that is going to be dependent on the quality and quantity of assets we can identify that meet our investment criteria. And I think a lot of it's going to be dependent on the capital markets and the ability to continue to access favorably priced debt.

GlobeSt.com: Speaking of debt, how are you finding the financing climate? Almost every lender has pulled back, though multifamily still has the agencies. [Fannie Mae provided financing for the acquisition of Trellis Square.]

Allen: Right now, Fannie Mae and Freddie Mac are still very much in business, providing mortgage loans on completed and leased apartment properties. We would expect that window to remain open, though there's certainly no guarantee of that. So long as there is attractive mortgage financing available for acquisitions of apartments, then we anticipate we're going to have a very high level of activity over the next several years. And that activity is going to be primarily acquiring existing assets as opposed to developing.

GlobeSt.com: What do you plan to do once you've invested all of your capital? Is taking on an additional equity partner an option for you?

Allen: Right now, we've got plenty of equity today from our financial partner. That gives us plenty of dry powder for the time being. Now, if we were successful in investing all of that equity, we would at that point in time consider seeking additional equity from our investor. But that's a problem that we're not going to have for at least several years, in our view. It's going to take that time to prudently invest the equity we have now.

GlobeSt.com: It's a tough climate for anyone to deals in, be it owning or operating property or buying it. What do you think is the key to closing deals and making money--or generally staying afloat--in this market?

Allen: From our perspective, the key to success is to properly underwrite the deals we're investing in. Don't be a Pollyanna about the next several years in terms of rent growth and occupancy. We actually expect that the market is going to get worse before it gets better. We're anticipating revenue declines over the course of the next couple of years, and we're building those declines into our pro forma models.

At the same time, we feel very strongly that eventually, the economy is going to heal and we will start to grow again. I don't know whether that's two, three or four years from now, but at some point the economy will turn and we feel that as long as we've prudently underwritten the downturn and not get too aggressive about what's going to happen when the economy does improve--and if we can buy assets with those parameters and still generate the kinds of risk-adjusted returns that are acceptable to us—we feel now is a good time to buy. If we can maintain disciple and focus on intelligently deploying our capital, I think we'll be fine. In fact, we'll be setting ourselves up to generate some pretty attractive investment performance over the next 10 years.