05/27/2009

RREEF Mulls Options for Squeezed Projects

A RREEF fund is looking to recapitalize at least one troubled project in a bid to salvage its deteriorating development portfolio.

As with other investors that plowed capital into construction as the market was peaking, the $1.3 billion RREEF America 3 took a beating over the past year. And no segment of the fund's portfolio was harder hit than its development projects.

In the fourth quarter, the open-end fund wrote down the value of its development portfolio by 39%, or $342 million. The bulk of the writedowns - $312 million - stemmed from three projects, in Silicon Valley, Manhattan and Austin, Texas.

A planned $750 million mixed-use development in Sunnyvale, Calif., has ground to a halt since the financial downturn accelerated last fall. RREEF's operating partner says another $450 million of equity or debt is needed to complete the project, which will include retail, hotel, office and residential space. RREEF, which has put up virtually all of the equity so far, told investors this month it would seek to bring in a partner. Given the tough market conditions, that might not be an easy task, according to market players familiar with the project. Wachovia, the project's main lender, has granted RREEF a 90-day extension on the debt while it looks for new capital.

The two other development projects, Domain in Austin and Riverside South in New York, are also sputtering. The Domain mixed-use project is slated to be developed in phases. Riverside South is a 50-acre mixed-use development whose focal point will be two luxury residential condominium towers. RREEF is expected to exercise loan extensions on both developments. It's unclear whether it will also seek to recapitalize them.

Like others investing in developments, RREEF is trying to avoid selling in a depressed market. But the unit of Deutsche Bank faces pressure on several fronts, including having to deal with $260 million of redemption requests from its America 3 fund. America 3 also faces $762 million of loan maturities this year, only $288 million of which carry extension options that would give the fund more breathing room.

America 3 posted a 41.6% decline last year, which reduced its cumulative annual return to just 1.6% since inception in 2003. The fund, which invests in a mix of properties and developments in the U.S., targets an 8-10% return.

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