Hines - Development Strategy
There have been plenty of forums on Hines and was looking through most of them, but did not see anything related to what Hines is known for as far as their ultimate development strategy. It seems based on research that they have internal flexible capital and optionality as far as being a merchant developer or holding longer-term. It states on their website that they still own some of the assets that they developed years ago.
With that said, was curious if anyone had insight on what dominates their development strategy? It would seem the strategy would lean more towards being a merchant developer and the firm has just decided to hold onto some particular assets.
Thanks in advance.
While the firm may appear to hold on to assets long term, what can often happen in the background is the equity is recapitalized with a new LP or alternatively the asset is put up for sale and Hines are retained by the next buyer for asset and property management services. Makes sense given they know the asset intimately and are highly experienced in both service lines, and from a business point of a view it's a great income stream given lower variability vs. development sourced income.
Given the amount of capital partners they have access to (this is not internal capital), they have a lot of options on how to capitalize each project. If you can capitalize a project with someone looking to hold the asset 5-15 years post stabilization and retain you as asset and property manager, this is a lot more appealing than someone looking to exit it once its stabilized. In these structure it's not uncommon for a promote to be paid at stabilization given length of time to exit.
That makes sense, appreciate the clarity. Essentially, based on your response, they are just a merchant developer then. When I mentioned internal capital, I was thinking along the lines that their Investment management platform could buy the asset post stabilization and essentially then be deemed a long-term holder. Not as far as being an LP in the initial JV structure for the project. I just wanted to clarify that on my part.
Thank you again, very helpful.
They're raising more discretionary funds so their investment management platform could potentially do that, particularly if the development JV has a ROFR included in the shareholder agreement. I doubt they would though as it could taint future sales processes they're involved in. Could be done on a bilateral basis with the capital partner in the development JV but this creates other potential conflicts from the perspective of investors in the discretionary funds.
There actually isn’t anything wrong with it as long as it’s at a fair market value. Many PE funds actually sell their stabilized companies to funds they have which target lower returns.
Also, it’s pretty genius when developers get ROFRs on their assets to stay in the deal when they sell. They get their promote (if they are in the money) and than stay in the deal, keep their fees, and get to re-up on a promote for the next turn of the deal.
Would you mind elaborating on the ROFR aspect and how the GP is able to stay in the deal? I assume the acronym stands for Right of First Refusal, but how is this incorporated when the GP is selling their interest? Do they receive some type of back-end incentive if certain thresholds are met in the future?
You have it written into the JV that the GP gets the ability to raise fresh equity from a new LP at a market price (in the future) to stay in the deal. So when the deal is sold, the LP and GP sell the deal to the new LP and old GP. The GP ‘re buys’ the deal at the new price. But if they made money on the deal, they also get their promote based on the new purchase price for the new LP.
The GP and LP each contribute their new fresh equity to the deal.
Think of it like the deal is being purchased by a new firm in a market sale.
Are you saying that Developer GP's could initially have JV agreements with LPs that have a promote structure based on a merchant development deal and provided they have a ROFR clause they can then recapitalise with new LP under a new promote structured towards a cash return deal?
Yup.
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