Our worst real estate deal, a campus apartment complex and parking structure, looked like a sure winner on paper, but resulted in the smallest profit in our company’s 11-year history. Yet we learned significant lessons about risk management in joint ventures that changed the way we think about how to invest in real estate — lessons I believe can benefit other property investors.

My partner and I started our private equity real estate investment business in 2007 to preserve and grow wealth for our investors and ourselves. At the time, real estate as an asset class was coming under great stress. So when we bought this campus asset in 2012, we had experience in short sales. When a lender agrees to take a loss, it’s a recognition that a troubled asset isn’t going to turn around on its own. It needs a workout — a supervised improvement regimen that the bank may not have resources to execute.

We bought the apartment complex at $14.4 million, a significantly discounted short-sale price, as the 900-space parking garage alone cost more than $15 million to build. But the deal also included an equity partnership with a local operator that owned other student housing complexes in the area.

Partnerships Pose Operational Risk

Before we finalized the acquisition, we were confident that we did our homework on our soon-to-be partner. He was local and had worked with other property investors who spoke highly of his competence and honesty. Furthermore, the partner would have skin in the game — a 10% equity stake. Both of these factors led us to believe we were in good hands.

We were dead wrong.

Student housing leases are signed in April as students and parents make plans for the next academic year. During these important spring months, our partner did not report to us on leasing progress. In the summer, we learned we were 20% behind the prior year’s fall occupancy rate. At the same time, we learned that our partner had hired his own companies to work on the property. Both the conflict of interest and the lack of transparency were troubling.


To amend the situation, we threw ourselves…