NEW YORK CITY—(For this installment of The Full Nelson, we join James Nelson, partner at Massey Knakal Realty Services, in discussion with George Yerall, co-founder of River Oak, a real estate investment manager who has invested in 40 projects since 1999 with an aggregate value of $900 million. River Oak has joined forces with Massey Knakal to create MKRO, a JV equity fund. The two discuss the fund and the state of small- to mid-size investment in the NYC market.)

James Nelson: According to Prequin data tracker, $65 billion was raised last year for private equity investments, and virtually none of it is targeted for small to mid-sized transactions. In NYC, over 90% of the sales are under $25 million so this is where the majority of opportunities lie. However, most institutional sized investors don't have the bandwidth to source, research, due diligence, and asset manage these smaller investments. So George, tell us what the purpose is of the new MKRO fund.

George Yerrall: The fund exists to make $3-7 million equity investments in value-add transactions in New York City.

Nelson: What investments have you made to date?

Yerrall: So far, the investments have come in a number of different forms. We're part of the GP in a portfolio of apartment buildings in East and West Harlem and LP equity on two separate free market multifamily properties in two different parts of Brooklyn.

Nelson: Is there a lot of competition in this space? Why did you target this type of check size?

Yerrall: There's obviously right now a lot of money looking to invest in Manhattan in general, but we have found over the years that for the check size we write, $3-7 million, there's not a lot of organized capital.

Nelson: Right. We're reading a lot about record pricing in New York City, so why now? Where are the opportunities, and how do you find value today?

Yerrall: There's two ways to find value. One obviously is the old maxim, “Location, location.”

Nelson: I think there's one more “location” there.

Yerrall: There is one more “location”, but I wanted to be brief. In NYC, this often means proximity to public transportation, particularly subways when it comes to housing. And, we look for experienced operators with track records that have an attention to detail, a creative bent, and create value as well. Finally, we look for off market investments where we believe the property is being purchased at below market value.

Nelson: Great. Talk about the capital stack today. Back in '06, '07, we were seeing loans, non-recourse loans up to 90-95%. What does the capital stack look like today and how much equity do you bring to the table?

Yerrall: We bring anywhere from 50-80% of the equity required for the transaction. Although debt is plentiful and cheap, the first lender is very reluctant to go above 75% LTV now, so we need to provide more equity, sometimes 80-90% of the equity.

Nelson: And, how do you structure these transactions with the sponsors?

Yerrall: We structure them typically as an LP investment where we have major decision authority, which means a sponsor cannot change their basic business plan, refinance the project, or ultimately sell the project without our affirmative permission.

Nelson: How does your promote structure work?

Yerrall: It works differently across every deal. Since we're a value-add buyer, we're looking for value-add properties. The more risk that we see in a property, typically the higher our preferred return is before we get to the promote for the seller. How that splits up is all dependent on what the sponsor is putting in. To the extent, the sponsor puts in more money, the sponsor gets a bigger piece of the promote.

Nelson: What asset classes can you invest in?

Yerrall: The fund will go across all asset classes. So far, where we found the value has been in residential properties. But, we're actively looking at hotels, retail properties, and office properties throughout the boroughs.

Nelson: I really appreciate you joining me today and look forward to being in touch.