Q.So why did you start Stoneforge Advisors?

A.The last time we had a dislocation like this was back in the late-80s and early-90s and it turned out a lot of people got their start during that time and were very successful. I look at this time as being very similar. In the turmoil is opportunity and it’s a great time to start up a business to try and take advantage of that.

Q.What are you finding out there since you announced the startup?

A.It’s a combination of things. There is plenty of capital interested in jumping into the real estate market at this time. If you look hard enough there are also a lot of interesting acquisition opportunities. The interesting thing is where people think the deals are, such as distress coming out of the big banks, that’s not happening. Everybody expected this tsunami of deals to come out as a result of foreclosures, but the big banks haven’t had to do that. So you have to be more creative in finding deals from smaller sellers, people who have individual distress.

Q.Where are the opportunities?

A.The opportunity is in the smaller deal size, less than $20 million. That takes out a number of the institutional players because they don’t want to spend time on a $5 million or $7 million deal. I also think our geographic focus is going to be the Sunbelt and there are certain markets that are experiencing a lot of pain right now that will keep some people away. That’s where you’ll find some opportunity. In the long term, demographic and economic trends are going to turn markets around that are having problems now, such as Tampa and Atlanta. On a longer range basis these markets are going to do great but on a short term basis they’re hurting right now.

Q.Are you raising debt or equity?

A.Equity. Our fund will be low leverage in the 30%-50% range because relying on higher levels of debt these days is a fool’s game. You can’t get it, especially if you find properties that have some challenges. To be able to take advantage of things you need to be fast, so having equity at your disposal where you can close a transaction and then get to work on it is going to win deals these days.

Q.What would be your ideal deal?

A.Either a suburban office building or industrial project in the $5-$10 million range that has a tenant in place with only a 3-5 year term left. So you’ve got certain cash flow but some question about will the tenant stay or go and there is some vacancy to take care of. Something that we can come in and apply our expertise in terms of owning and operating properties to create more value.

Q.How much capital are you trying to raise?

A.We’re looking to raise $100 million-$150 million, which would give us about $250 million of buying power.

Q.Are you looking at secondary and tertiary markets for deals, maybe Oklahoma City, for example?

A.Any deal we see, the main driver for us is going to be the basis in the property, your price per sq. ft. relative to the competition in the market. So if I can be in Oklahoma City in a well-positioned office building at a competitive basis per sq. ft. then I’m happy to be there. Equally I want to look at Dallas, Atlanta and Miami in the same vein. The real key to being successful is not having too much initial value in the property where you can’t compete on a leasing basis.

Q.When do you expect to make your first acquisition?

A.We could see a closing in the next 60 days but nothing is solid yet. More likely we will close our first deal in the next four to six months. There’s one thing I’m concerned about right now, the amount of capital already raised, which may be getting antsy to be placed in the market. You’re beginning to see some pricing being bid up, especially for highly stabilized assets or the more trophy properties with a little distress because the capital hasn’t been able to be placed yet. I think people are getting a little itchy with their trigger fingers. Some of the pricing that’s happening on recent transactions appears to be pretty aggressive. We definitely went through this in the late-80s and early-90s where some folks jumped in too aggressively and they got hurt. What clearly could happen is you have some first half of the year transactions that look pretty decent and then there’s a flood of property that comes on the market based on that pricing and the second wave of capital is not going to pick that up because people are going to scratch their heads and say this doesn’t make sense. There’s a scarcity premium right now, especially on the stabilized properties. Because of that, cap rates have moved back in by 150 basis points at least. For more information, see www.stoneforgeadvisors.com.