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LandBaron raising $255m for southwestern US land fund

The Las Vegas-based real estate investment firm is raising its debut fund to take advantage of a short-lived period during which homebuilders are unloading properties at deep discounts. The firm says it plans to take advantage of a tax rebate window. The fund will have a lock-in period of just one year after the final close.

Property investment firm LandBaron Investments has launched an opportunistic fund, the Western States Distressed Land Fund, targeting $255 million in commitments from European investors.

Since 1988, LandBaron has invested in real estate in the southwest US on a deal by deal basis but is raising its first institutional fund to take advantage of heavily discounted land prices, co-founder Michael Chernine told PERE. It was an opportunity, he said, that could dry up by the end of 2009.

“We’re collecting money to capitalise on what we think is an opportunity that we haven’t see yet before where we have public homebuilders that are looking to divest their projects with the highest basis at the deepest discount in order to get a cash tax rebate from earnings gained two years ago,” said Chernine. Because 2007 was the last profitable year for most homebuilders, he does not expect this to be a driving factor for investment beyond 2009.

LandBaron is targeting investments of at least $5 million apiece from European high-net-worth individuals and institutional investors, such as small pension funds. The fund is being raised to take advantage of the “unique opportunity” but did not reflect LandBaron’s fully-fledged move into the private equity real estate space, said Chernine.

Roughly 60 percent of the fund will focus on land earmarked for housing development and being sold at discounts by commercial developers and financial institutions. The fund will focus on Nevada, Arizona, Idaho and Utah, beginning with Las Vegas where several lots have already been identified for investment.

“We’re basically getting the land for free and just paying pennies on the actual hard improvements like the utilities and streets and curbs and water fees,” said Chernine, who expects these residential investments to be sold within a year.

The remainder of the fund will go towards investments in commercial, industrial and office sites that are ready for development and have been seized by banks.

The Western States Distressed Land Fund will make unlevered investments and target returns of between 25 percent to 50 percent. Investors are subject to a lock-up period of only one year following the vehicle’s final close, unlike most private equity real estate funds which lock-in capital for the life of the fund, typically five to seven years. Redemptions will be possible within 24 months of the fund’s final close, a 12-month notice period for redemptions is required, when Chernine said the fund should be at least 20 percent divested. Chernine said the fund would keep 10 percent cash available at all times in order to maintain liquidity for redemptions.