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A little less than five years ago, Bonita Springs-based TerraCap Management had built up an impressive portfolio of $150 million in assets under management, thanks to its performance on a pair of real estate acquisition funds aimed primarily at distressed office assets in Florida.
Together, the two funds raised enough capital from high net worth individuals and others to buy some four million square feet of space.
Then TerraCap hit its stride, fueled by a clear vision of what success would look like and a commercial real estate market with considerable tailwinds statewide.
Powered by impressive returns to investors on projects such as Sarasota’s Gateway Professional Centre and Kane Plaza, the Tampa International Business Center and Lakeview Center, in Tampa, and dispositions in Orlando, TerraCap increased the amount of capital its funds raised, sought out multifamily, land and other investments.
At the same time, the company expanded its geographic reach beyond Florida markets to Texas, North Carolina, Georgia and Colorado.
In all, four TerraCap funds to date have raised about $700 million, though many properties purchased in the initial funds have since been sold and capital returned to investors.
Today, TerraCap controls assets under management totaling $1.5 billion — despite a series of high-profile dispositions — and its portfolio contains eight million square feet.
“It’s been a fantastic run,” says TerraCap Co-Founder and Managing Partner W. Stephen Hagenbuckle. “Our success has stemmed from the fact that we’ve stuck to only those markets with key baseline drivers. As we’ve grown, our deal size has grown, too.”
In 2015, for instance, TerraCap focused on deals ranging from $5 million to $20 million. Fast forward to the present and the company routinely seeks deals valued at $50 million to $75 million.
In 2017, the now-12-year-old company invested $116 million in Atlanta to acquire a series of apartments containing 1,100 units.
“They have a high level of integrity, they work hard, do what they say and acquire projects very intelligently,” says Ike Ojala, a senior director with commercial real estate brokerage firm JLL, who has sold a number of TerraCap properties for the company.
TerraCap’s formula has been deceptively simple — and effective.
“We’ve focused on markets with hyper population and employment growth and where corporations are relocating,” says Hagenbuckle.
Whereas U.S. population growth averages about 1% annually, TerraCap targets markets with 1.5% to 3% annual growth.
That means avoiding so-called gateway cities like New York, Boston, Chicago or Seattle, in favor of cities with a lower cost of living and better opportunity for investment.
Dallas, for instance, has added 850,000 jobs in the past decade — roughly equivalent to the population of Boston today — and during that period the city has ranked as the third most desirable spot for corporate relocations, Hagenbuckle notes.
Once in a market, TerraCap has sought out distressed assets in quality locations where capital improvements can lead to significant occupancy and rental rate gains.
On each deal, TerraCap leverages one-third equity to two-thirds debt and formulates an asset-specific business plan. When a property meets its target goals, it’s brought to market and sold.
The company — whose partners also include Michael Davis and Susana Alvarez Davis — has also been the beneficiary of sustained low interest rates and banks’ reluctance to lend money for speculative construction projects.
“The cost of construction is up 35% over the past six years,” Hagenbuckle says. “That’s daunting, and it’s holding back lenders who have little or no appetite for speculative lending. That’s the reason the real estate cycle has been so elongated, too, because there’s very little overbuilding as there has been in the past.”
TerraCap partner Michael Davis says that while the company’s deal size and geographic focus have changed over the past dozen years, its guiding principals have not.
“Our thesis that we started out with has not changed over the past 12 years,” he says. “We’ve gotten better at executing deals and the deals are different in many respects, but our approach hasn’t altered, and that’s a large part of why we’ve done well, I think.”
Susana Davis, who heads TerraCap’s accounting department and joined the company in 2011, says she’s been surprised only by the velocity behind the company’s success.
“I knew we could achieve a certain potential, but the pace at which we’ve achieved it has been a bit of a surprise,” she says. “It’s been great to watch and be a part of.”
But as TerraCap’s funds, asset management and deal volume have grown — the company has acquired 24 properties in the past two years, for instance — so, too, has the company.
In 2015, TerraCap comprised 10 employees, including Hagenbuckle, Davis and Davis. Today the firm has nearly two dozen employees.
That growth hasn’t diminished, however, the caliber of TerraCap’s staff.
“They’re all first class, everyone you deal with there,” says Joe Rossi, an executive managing director with commercial real estate brokerage Colliers International, in Orlando, who has worked extensively with TerraCap.
“They do what they say, and they do the right thing,” he adds. “Every time. And they’re really good at adapting to market dynamics and rolling up their sleeves and figuring things out.
“I’d say they’re lucky but they’ve had to many instances where they’ve done so well so many times,” Rossi says. “So it’s definitely not luck.”
Hagenbuckle acknowledges that the company has had to drill down to find real estate with good return potential.
“We have to do more surgical acquisitions now,” he says. “We have to seek out operating inefficiencies that aren’t so apparent and look for opportunities where we can do new leases or lease renewals at higher rates where the market overall is performing well.”
A fifth TerraCap fund — one that could raise more than $400 million in equity — is rumored to be in the works, but Hagenbuckle won’t discuss it.
He does admit, though, that the company’s decade of acquisitions, turnarounds and dispositions has made it easier to approach larger pension funds, endowments, employee retirement funds and corporations.
“It’s a lot easier to sell potential investors now, because we have a huge repertoire of good stories to tell,” Hagenbuckle says.
In addition to the kinds of assets TerraCap hunts for, Hagenbuckle notes the company also has had to ramp up its reporting methods to investors.
“Investor expectations are for institutional quality, and they won’t settle for less,” he says. “So we’ve had to become more institutional as a result.”
Still, come 2025, Hagenbuckle hopes TerraCap will still be growing, will still be investing and operating and improving properties.
“Five years from now, I like to think we will have delivered to our investors what we’ve aspired to, and what we said we would do,” Hagenbuckle says. “The rest hopefully will take care of itself.”
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