Do-it-yourself guys

Even with a significantly upsized $850 million fund to manage, Philadelphia-based BPG Properties says its secret to success is keeping the entire investment process in-house. By Eva Poon

Dan DiLella, president and chief executive officer of Philadelphia-based BPG Properties, applies an expansive definition to the term “private equity real estate.” He says of his firm: “We have built a unique operating platform. Wrapped as one entity, we are the actual real estate operating partner, the developer and the fund manager.”

Started in 1980 by a group of entrepreneurs investing for three investors, BPG has grown into a more than $5 billion operation with offices across the US. Firm head Daniel DiLella and executive vice president and chief operating officer Arthur Pasquarella, along with three other principals, took over operations of the company in 1989. The firm raised its first fund in 1993 with $26 million (€17.5 million), starting with regional investments in the mid-Atlantic states. It closed its eighth fund in July with $850 million in capital – a significant step up from its previous $550 million fund.

DiLella and Pasquarella have had a long history in real estate. “I got into the business through my family,” says Pasquarella. “At the age of 15, I went into my dad's real estate appraisal shop and started working summers and weekends.”

“From every part of the real estate process, from investment allocation, to acquisition, repositioning strategies and closings, they're all done internally.”

DiLella started his career as a banker in Philadelphia working on new construction real estate loans and asset recovery of property along the east coast. He spent ten years in banking before joining BPG in 1983. “I spent my entire career, almost 35 years, in real estate in one form or another—ten years in banking and 25 years here.”

Under one roof
At BPG, located on busy Market Street, everything is done in-house. “From every part of the real estate process, from investment allocation, to acquisition, repositioning strategies and closings, they're all done internally,” says DiLella. “All the market research that we do is done internally. And with third-party service providers—we'll engage local experts such as appraisers to help us in a market, but all of the real estate acquisition effort is done solely within the organization.”

“When we buy a property,” says DiLella, “the investment strategy is put forth, again, with the eye that we're going to be the ones operating the asset, adding value to it, and then ultimately selling it.”

Unlike many other private equity real estate firms going after new investments, the firm does not use local partners. “We have the internal staff do the work,” DiLella says. “We don't have to go out and hire people to do the work. An allocator or our competitors would rely on the local partner to do all that work for them. We do the work ourselves with our own staff and therefore control the cost and enhance returns to our investors.”

In BPG's case, the whole is the sum of its parts. The firm's structure can be broken down into pockets of expertise. Says Pasquarella, the firm is organized into regional experts, such as those who handle the East, Midwest, or West Coast; an in-house valuation group, that does a lot of primary research for the firm; and asset managers, who handle certain property types in certain parts of the country.

BPG also houses its own research and acquisitions specialists throughout its offices in the US that focus solely on retail, office, industrial and multifamily sectors.

“Each person brings their expertise to the process,” Pasquarella adds. “It's a team effort, there's many people feeding information all from their own particular background because they each have a certain strength and so we bring them all into the process at the same time.”

BPG is geography-agnostic, and willing to go where the opportunity is. And in real estate, as in bargain hunting, one man's cast-offs are another man's treasure. And the greatest treasures can be found in assets whose intrinsic values are not immediately obvious: “We look for assets to acquire that others don't want,” DiLella says. “We want excess corporate real estate assets where a corporation was the owner and the user of the facility. They make a decision to move and don't need it anymore, they want to sell it, get it off their books and recoup the cash. We'll go in and buy from them at a deep discount by virtue that it is empty. We'll go ahead and put together a strategy to add value by renovating and re-leasing the property.”

The firm's approach is applied across sectors and property types, says Pasquarella. “We'll buy something that has very poor occupancy, needs to be fixed up physically, and then we do both the fix-up, the leasing and ultimately the resell. And that's true across all property types, whether it's a shopping center that has an empty supermarket box in it, or an apartment complex that has fallen on high vacancy and very much disrepair.”

In its value-add strategy, BPG is testament that many happy returns can be had investing in properties other investors would overlook or otherwise turn their noses at. “Sometimes it's not the prettiest building that makes you the most money,” DiLella says.

The firm's most recent deal was the December acquisition of Grand Oak Business Park in suburban Minneapolis. The deal was hot on the heels of its acquisition of Metropoint, The Center for Business, in nearby St. Louis Park. BPG has invested more than $10 million in that property, generating more than 338,000 square feet of leasing activity.

The ties that bind
Most BPG-ers have deep roots at the firm. “Among our top 20 people, we have been together for eighteen years,” DiLella says. The amiable, silver-haired receptionist who greets visitors to the firm is evidence of this dynamic. “She's been with the firm for 25 years now,” says DiLella. “She's almost 80.”

BPG's fundraising history is equally extensive. Having closed its first fund fourteen years ago with $26 million in capital, the Philadelphia-based firm has built a fortress of buying power—raising successive and larger funds in 1995, 1996, 1997, 1999, 2002, 2005 and again in 2007, closing its eighth fund.

But amidst the capital raising it all comes back to an enthusiasm for real estate for firm heads DiLella and Pasquarella. “It's fun, there's something new everyday,” says DiLella, who recently funded $1 million to establish a new center for real estate at the local Villanova School of Business. “It doesn't get any better.”