AMERICAS NEWS: More bang for the Buck

For its fifth real estate fund, The John Buck Company is doing things a little differently. The Chicago-based developer will continue the same value-added strategy it pursued for its previous four funds, forming joint ventures with allocators to build urban office, apartment and mixed-use assets. However, JBC Fund V is offering a fee structure that is different to prior John Buck offerings and that represents a rarity among the private equity real estate funds in market.
While John Buck is charging the typical 1.5 percent asset management fee, the firm is waiving the usual hurdle rate and 80-20 profit split. Instead, profits will be divided among all limited partners based on their capital contributions, resulting in ‘property level’ returns to all investors including John Buck, which plans to invest a 15 percent share of the total equity in order to demonstrate its alignment of interest. If the fund reaches its $75 million target size, the firm will kick in approximately $11.25 million.
In return for forgoing the traditional profit split, John Buck will be entitled to 65 percent of the fees that Fund V receives for managing joint venture investments. In a traditional structure, such fees usually are distributed throughout the fund pool.
Although John Buck officials declined to comment, market sources said the approach is a rare one. “Since the global financial crisis, institutional investor partners have imposed increasing requirements on development partners so that they put more money into joint ventures,” commented one lawyer familiar with fund formation. “John Buck is probably either experiencing a situation or envisioning a situation where its capital availability is going to be under pressure because of the number of deals it has in the pipeline.”
Focusing primarily on the Chicago, Washington DC and New York markets, with a secondary focus on Boston, Denver, Los Angeles, Minneapolis and San Francisco, John Buck will serve as the operator and developer in joint ventures with large institutions, typically with a 25-75 split. In the past, the firm has worked with such partners as The Blackstone Group and Partners Group. Recent deals include the $145 million development of 151 North Franklin Street in Chicago in partnership with the Canada Pension Plan Investment Board.
Fund V, which has a hard cap of $100 million, is targeting a 20 percent net internal rate of return and a 2x equity multiple. With the capital from its joint venture partners and maximum leverage of 75 percent for each deal, the fund’s total firepower could reach approximately $1.2 billion. 
John Buck has been seeing a lot of interest from high-net-worth individuals for Fund V, whereas institutional investors and their consultants have been a little more wary of the unfamiliar fund structure, according to a person familiar with the situation. That said, John Buck is quite accustomed to working with high-net-worth individuals as such investors have accounted for an approximately $35 million to $50 million share of each of the firm’s previous funds, the person noted. 
Data from PERE’s Research & Analytics team lists institutional investors in John Buck’s previous funds as the Teachers’ Retirement System of Illinois, the Chicago Municipal Employees Annuity & Benefit Fund, the Michigan Department of Treasury and the Cook County Employees’ & Officers’ Annuity & Benefit Funds. According to the person familiar with the situation, the firm has soft-circled approximately $30 million in commitments after just two weeks of marketing and expects to hold a first close in August, with additional capital to be raised over the subsequent 12-month period.
John Buck’s fund history suggests that a traditional structure was not necessarily the ideal setup for the developer. After raising $289 million for JBC Fund III, which was launched in 2006, the firm formed JBC Fund IV in 2010. That vehicle closed on just $90 million in equity, despite initial reports that it was targeting $500 million.
“There are other big developers like Tishman Speyer and Hines that used to do joint ventures, but they were able to raise their own funds with large amounts of capital,” noted the lawyer. “John Buck apparently tried to do that, couldn’t get it done and still is doing joint ventures with institutional players. In my view, John Buck is using this new fund as Plan B.”
While John Buck is aware of other operators that are in the process of launching funds with a similarly tweaked fee structure, the firm finds its arrangement to be the most investor-friendly, according to the person. 
“From the standpoint of the investors, they will end up paying the same management fees as a traditional fund, but the total amount of carried interest that they would be leaving on the table is less,” commented the lawyer. “Not paying the carried interest at the fund level and only paying it at the joint venture level, that could be viewed as more favorable. If John Buck is successful in raising this fund, I think other developers will try to do the same.”