History: Real Estate

Signature Portfolio in Denver:

A regional search led us to Denver in 1988 where severely depressed real estate prices followed the energy and real estate boom and bust cycle of the early 1980’s. Repeating its successful Southern California business plan, Pacifica began acquiring commercial income property with its private clients as the local economy was rebounding. To provide a hands-on presence, it soon opened offices in Denver that accommodated some of Pacifica’s top executives – including Steve Leonard (and his wife) who relocated from Los Angeles. He wanted to have a “local hands-on presence” to take full advantage of the opportunity. As the cycle continued and the market improved, Pacifica began partnering with institutional investors on both acquisitions and development opportunities. (Some of those same institutional partners, including the Mack Family of New York/previously “Apollo”, resumed investing with us after Pacifica returned to Southern California a few years later. We later invested in other markets including in Spain, Oregon and Washington states, as well as in San Diego and Santa Barbara, California.)

By 1997, Pacifica became the largest private owner of commercial space in Colorado, the 2nd biggest commercial property manager in the state, and its 4th largest commercial brokerage firm.

As the cycle matured and commercial markets became strong in the mid-1990’s, additional investors with large amounts of capital came to Colorado. They included Real Estate Investment Trusts (“REITs”) which raised money on Wall Street. New developments were planned that would soon exceed the demand. So, in 1997 and 1998, Pacifica sold its 8 million square feet of industrial, retail and office product to three public REITs for approximately $750 million. Those sales resulted in an attractive IRR for its investors. As they were exiting the Denver market, principals in the Pacifica portfolio began to pursue opportunities in other markets.

Modest Portfolio in Las Vegas:

With a local partner, Blake Isaacson took his portion of the Denver portfolio to Southern Nevada. There he established new industrial and retail holdings initially funded in part by 1031 exchange money generated from sales in Colorado. The portfolio was assembled in the late 1990s before being liquidated in approximately 2004 and 2005 as prices began to reach their cyclical highpoints.

Resume Investing in Los Angeles:

Meanwhile, Steve Leonard with Pacifica’s LA partners resumed developing in Southern California from 1996 through 1999. They built a portfolio of approximately 4 million square feet of commercial product. Those efforts culminated in 2004 when Pacifica sold the last facilities built in that phase of the cycle for approximately $400 million, again resulting in an attractive IRR on the equity invested. Other than that selective activity, Pacifica had generally paused investing in commercial real estate in the early 2000’s, as it was concerned that too much capital – public, private, and institutional – was being deployed in the sector. Those concerns proved justified as The Great Recession decimated real estate markets, creating new opportunities to find value for Pacifica’s capital and that of its investors.

Investments in Opportunity Zones:

Pacifica has invested in larger development projects in Qualified Opportunity Zones which allow investors to benefit from favorable tax treatment of profits generated while meeting certain long-term hold and other requirements. They include a 175-unit multi-family project with 10,000 SF of retail space in Wood Village, Oregon, a suburb of Portland. That development has been built, stabilized, and refinanced for a long-term hold. We are also developing up to 800 multi-family units with other uses mixed in. That project is located on the western bank of the Willamette River next to Downtown Eugene, Oregon, within walking distance of the University of Oregon Campus. Phase I with 95 units has tenants moving in, and Phase II with 130 units is under construction.

High Yield Loan Fund:

Through its extensive connections and experience in real estate markets, Pacifica has been funding loans that are secured by real property. Pooled into a fund, these mortgages provide Pacifica investors with a higher yield alternative to the returns available in money markets and certificates of deposit (“CDs”). Pacifica’s cautious investment approach remains consistent when applied to these loans. We focus on markets and product types Pacifica knows well and where there is a high margin of safety. Loan-to-value ratios usually range between 40% to 70% of cost, appraised or market value with loan terms of six to 30 months. These loans, in turn, serve as an alternative funding source to borrowers who opt to secure financing for their real estate projects from sources other than traditional institutional lenders. Pacifica’s decision-making is quicker, transaction expenses are lower, and flexibility is greater to accommodate certain borrowers who will pay higher rates as a result.

Pacifica has typically leveraged the loans with institutional debt at lower rates, generally with personal guarantees by key members of Pacifica’s management team.

Markets & Product Types:
Pacifica concentrates on local markets and product types with which its principals and/or local partners have experience. That translates into a focus primarily on Southern California, and in Colorado, the Denver Metro Area, and Western Slope of the Rocky Mountains. Our affiliates also have experience in Southern Nevada and in Gateway Cities along the West Coast. The product types similarly are within our areas of expertise: industrial, R&D, office, retail, multi-family, and certain residential developments, including single family ones and senior living facilities.

Loan Structure:
Borrowers typically pay interest at annual rates in the low double-digit range. Our loan selection process places safety above yield. We often employ leverage through unsecured bank debt that increases yields up to 25% from stated rates. The loans are “pooled” for diversification to minimize risk and provide greater liquidity.

Real Estate: Investment Philosophy

Pacifica has a consistent approach to investing that it has opportunistically deployed in select markets in the Western United States over more than four decades. Our approach relies heavily on the belief that markets are cyclical, and one of the keys to success is anticipating the next phase of the cycle ahead of the competition.

The best investments we find exist in markets that are depressed due to temporary conditions – typically, in response to a local economic downturn. In real estate, we seek to buy at a discount to replacement cost (adjusted for age and necessary capital improvements) which is an important measurement of intrinsic value. The advantage to buying at such a discount is that no competitive construction is likely to occur until rents rise further to justify the higher cost of new development. Waiting patiently for those types of buying opportunities provides us with a margin of safety and greater potential upside.

We focus on markets that have good, long-term potential. And we enter them initially when the local economy appears to have begun its recovery by generating sustainable growth. We either are local experts or join with local operators who have that expertise. We stick to product types in which we or our partners are also experts: most often industrial/office/showroom; R&D and retail; and occasionally multi-family and office. With strong product and market knowledge, contacts, and expertise, Pacifica feels we can limit the downside risk on our investments.

When those conditions exist, we begin buying among the best buildings in the market. At that point in the cycle there is limited competition and typically some distress in the marketplace due to the weak or recently recessed economy. As the market tightens, it’s necessary to find acquisitions where we can add value by repositioning buildings to make them more desirable and/or re-tenanting them.

As the economy and real estate markets improve, buyers enter the market and drive-up acquisition prices. As they approach replacement cost, we begin buying land, figuring it is preferable to own new product at a comparable price point. New product commands the highest rents and sales prices from tenants which can provide attractive exit opportunities from owner/users and institutional investors. Typically, more construction follows as the building herd arrives in response to higher rents and strong demand. At that point Pacifica evaluates whether it makes sense to continue to hold or consider selling based on emerging supply and demand conditions. Whenever we sell, Pacifica evaluates the benefit of completing tax deferred exchanges with reinvestment opportunities.