Legacy Capital Partners pivots in hot apartment market – Crain’s Cleveland Business

From a third-floor office at Legacy Village in Lyndhurst, a private equity firm with a lean staff sold off close to $726 million worth of real estate last year.

It was a banner run of dispositions for Legacy Capital Partners, which targets apartment properties in need of a little love. The sales spanned 13 assets in nine states, stretching from New Hampshire to Florida to Texas.

The transactions illustrate the vast amount of money chasing apartment deals, during a nationwide housing shortage that is only being exacerbated by surging materials costs, supply-chain snarls and a lack of skilled labor. The trends bode well for sellers but present hurdles for buyers, who are being pushed to new cities, and product types, in their quest for yield.

To better compete for sought-after properties, Legacy Capital Partners is changing its approach. The firm will no longer create funds to invest in a series of acquisitions. Instead, the company’s principals will pursue one-off deals.

“We’re going to stay on the multifamily highway. We’re just going to change lanes a little bit,” said David St. Pierre, the firm’s co-founder and executive director.

A former banker, St. Pierre teamed up with developer Mitchell Schneider and launched Legacy in early 2004. At the time, Schneider was working on what he thought would be his last major retail project, the Steelyard Commons shopping center in Cleveland’s industrial valley.

The pair made for an unusual blend of financial savvy and hands-on real estate experience. Schneider leads Lyndhurst-based First Interstate Properties Ltd., a developer of Northeast Ohio shopping centers and apartment buildings.

Legacy’s premise: Give individual investors the chance to put money into high-quality real estate deals. And do so in a modest way, without aspirations of creating ever-larger funds or trying to bring institutional players into the fold.

“We’re out and about in our communities, and the people that we run into are people that have invested with us,” Schneider said. “So our sense of responsibility to this capital is just on a totally different level, I think, than institutional capital or other funds.”

Initially, the duo focused on ground-up developments. That model seemed promising at first, as Legacy put money into student housing in Florida, a lifestyle center in Massachusetts, senior apartments in Colorado and other deals.

Then the housing bubble burst, and the country slipped into the Great Recession in late 2007. Development ground to a halt. And St. Pierre and Schneider found themselves wrangling with banks and adding years to their anticipated holding periods for projects that stalled.

In 2009, the partners emerged from those battles with a new blueprint.

They would buy existing apartment buildings, fix them up, raise rents and, after a few years, sell. In every case, they would partner with an experienced operator who would tackle the renovations.

“We’re putting in the lion’s share of the equity,” St. Pierre said. “Our partner is putting in a decent amount of their equity. And then together we own the asset. They have the boots-on-the-ground expertise … in markets that we otherwise never would have identified.”

Florida-based American Landmark Apartments teamed up with Legacy in 2009, on the firm’s first such multifamily deal. The partners have jointly invested in 18 properties and have sold off 17 of them.

American Landmark, an owner and operator of apartments across the Sun Belt, upgrades all of the units, addresses structural and mechanical repairs and changes everything from a building’s name to the color scheme to the landscaping.

Joe Lubeck, the company’s founder and CEO, described Schneider and St. Pierre as shrewd and sincere. “We work with a lot of limited partners,” he said. “But with all due respect, some are brighter than others.”

Over the last 18 years, Legacy has created seven funds, each of them topping out at $40 million to $60 million. To participate, investors had to contribute at least $500,000. The funds promised geographic diversity and partnerships with a variety of operators.

The firm closed out its fourth fund in September by selling off the last remaining asset. That fund, which made its first investment in early 2013, returned $2.11 to investors for every dollar they put in. The net internal rate of return, a key profitability metric, was 20.3%.

They made the final acquisition from their seventh fund in December.

Bob Campana, the CEO of Westlake-based Campana Capital, has participated in the funds, along with single-asset investments that Legacy has offered as an add-on since 2015. A real estate developer with a hand in a wide range of industries, Campana said he has total confidence in Schneider, St. Pierre and Barb Rauhe, the firm’s chief financial officer and managing director.

“We’re investing in jockeys, not horses,” he said. “And Mitchell and David and Barb are great jockeys. They also are really good at picking different horses to ride.”

Going forward, those horses will all be syndicated deals, where investors pool their cash to buy a single property.

Soaring apartment pricing and fierce competition are making it harder for the firm to find its bread-and-butter deals: Apartment complexes of less than 400 units, in need of transformation, that typically cater to middle-income tenants.

By ditching the fund-based approach, St. Pierre and Schneider will have room to pursue a broader range of investments, including newly opened buildings and planned projects; to move faster on purchases; and to be more flexible about their holding periods. They also can raise larger pools of cash for each deal, rather than being limited to an average $5 million to $6 million investment from a fund with obligations to spread investors’ money around.

And they’ll potentially appeal to a bigger audience. For their past single-asset deals, the minimum investment was $100,000.

The downside, of course, is that participants won’t have the same diversification that comes with a multi-asset fund.

But the shift makes sense to longtime Legacy investors like Ned Huffman, the CEO of Bellwether Enterprise, a national mortgage banking firm based in Cleveland.

“Especially in the cycle that we’re in, in real estate in general, there’s a lot of challenges when you do a fund approach. … When it’s a single-asset investment opportunity, you know it’s there, you know what capital you need. With a fund, there’s more unknowns,” Huffman said.

Attorney Dave Tavolier, who has advised Legacy since the firm’s inception, said the new strategy speaks to its principals’ practicality and their desire to do right by investors in a hot real estate sector that shows little sign of cooling.

“Their concern is never to do a deal just to do a deal,” said Tavolier, who leads the tax practice group at the Taft law firm in Cleveland. “Do a deal that makes sense.”