Bigger funds

At a recent commercial real estate conference in Fort Myers, attendees mobbed Stephen Hagenbuckle after his presentation.

It's easy to understand why. Hagenbuckle, the founder and managing principal of TerraCap Management in Bonita Springs, had just finished a presentation about two successful real estate investment funds he oversees totaling more than $125 million.

Now, there are plans for a third fund that will seek to raise $300 million to invest in commercial real estate around the state. “We'll start raising that in Q1 or Q2,” says Hagenbuckle.

In the meantime, Hagenbuckle and Co-Managing Principal Robert Gray have some $40 million left from their $102 million second fund to invest in commercial real estate deals. The first fund, which closed in late 2010 with $25 million, invested in residential real estate land and has posted annualized returns of 30%, says Hagenbuckle.

For the second fund, TerraCap has been snapping up distressed commercial real estate throughout the region, from office buildings to hotels. It buys underperforming buildings, spends money to improve them, fills them with tenants and resells them within a few years. The fund targets annualized returns of 25%, and Hagenbuckle says its performance currently ranks in the top quartile of its peers.

TerraCap targets acquisitions in the $3 million to $15 million range, deals that are too big for local investors but too small for large institutional buyers. “That's our sweet spot,” Hagenbuckle says.

For example, the fund recently scored a deal in the Westshore business district of Tampa buying a 223,547-square-foot near-empty office complex on 17 acres for an ultra-low $21 a square foot. The two-year average price per square foot for office space in the Tampa Bay area is $115, according to CoStar Group.

“We've been sniffing around Tampa for three years,” says Hagenbuckle. “You have to be a patient buyer.”

TerraCap also has been scouting sites in places like Tallahassee and Orlando. “We're running out of deals we like in this area,” says Hagenbuckle, whose office in Bonita Springs straddles the Fort Myers-Naples market. “We have three more deals in this area, but they're smaller.”

The third fund will focus on commercial real estate deals that are less risky and it may use more leverage to boost returns to an 18% to 20% annualized target. For example, it might buy an office building that is 70% occupied if it's in a prime location. The lower risk profile of the third fund is more tailored to institutional investors. Besides, the days of distressed deals might be numbered to another year or so.

The second fund uses as little as 5% leverage. Though it could use more, TerraCap has preferred to remain conservative in its use of debt in case the economic recovery relapses. Plus, buying buildings so cheap means it can achieve target returns without resorting to debt to goose them.

Whatever the economic situation, however, TerraCap views Florida favorably. “It's one of the more fiscally sound states, and that's going to continue to attract population for years to come,” says Gray.

Florida's supply and demand profile remains attractive. “Rapid growth with limited potential supply combined with very low prices compared with building something of like quality puts you in position to outperform with limited risk,” says Gray.