In 1998, Norfolk, Virginia-based Harbor Group Capital Corporation and Tel Aviv, Israel-based BO-DA Investment and Trading joined to form Harbor Group International (HGI). BO-DA, which was a boutique money management firm, had made real estate investments in the United States and in Europe prior to the merger. In 1995, the two firms started investing together on a deal-by-deal basis and, after a couple of years, they had completed about 10 deals together.

Point Inverness, a 248-unit apartment complex located in Fort Wayne, Indiana is part of Harbor Group International’s Midwest portfolio of apartments.

According to Jordan Slone, chairman and CEO of HGI, the two firms meshed well together while working on these deals. Harbor Group Capital had asset management infrastructure while BO-DA had great equity sources. As a result, the firms decided to merge.

Now, HGI employs about 300 people worldwide, and it has an $850 million portfolio of commercial real estate investment properties, consisting of 6 million square feet of office space, 1.2 million square feet of retail space, 490,500 square feet of industrial space and 4,500 multifamily units. One-third of its investment properties are located in the Midwest.

During the years, HGI has built a franchise of high-net-worth individuals, money management firms, foundations and corporations in 10 countries. These investors, which are typically invested in traditional asset classes such as stocks, bonds and treasuries, are interested in real estate because it provides risk-adjusted returns and reduces portfolio volatility. Most of these investors participate in all of HGI’s deals. Occasionally, a corporate investor partners with the company to buy a property, Slone says.

“Our investors are less focused on property type or geographic area than on absolute returns,” says Saul Lubetski, managing director of HGI. “They look to us as real estate advisors, and they expect us to identify opportunities in various sectors.”

HGI seeks to generate positive returns on investments regardless of whether the financial markets are rising or falling. It accomplishes this goal by acquiring relatively stable, income-producing properties with price appreciation potential.

HGI uses several criteria to analyze a property for acquisition. First, it looks at the macro economy in the immediate area. “If the economy in general is deteriorating or stagnant, we will typically avoid the market,” says Chuck Patty, chief investment officer of HGI.

Second, the company looks at job creation, housing starts and demographic data, Patty says. Then, HGI drills into the fundamentals of the property, such as quality of tenancy; how well the property is constructed; how the property is perceived among its competitors; how difficult it will be to execute the specific business plan for the asset; and HGI’s ability to exit the investment.

According to Slone, HGI typically holds properties for 4 to 6 years to maximize the internal rate of return (IRR). The IRR is the annual percentage change in the investment taking into account the timing and impact of cash inflows and outflows such as capital contributions or distributions.

“We currently offer our investors a preferred return of 8 percent with a targeted IRR of approximately 14 percent to 18 percent,” Lubetski says. “From 1998 to 2002, HGI sold 30 properties for an aggregate disposition price of about $148 million, generating an IRR of 26.55 percent and returning 221 percent of the original equity during the holding period.”

HGI acquired PNC Center, a 497,394-square-foot office building located at the corner of Fifth and Main streets in downtown Cincinnati, in February 2002.

The company predominantly uses two types of financing structures to acquire properties: long-term, fixed-rate debt and short-term, floating-rate bridge debt. According to Patty, most of its long-term debt is originated by commercial mortgage-backed securities (CMBS) lenders, is 5, 7 or 10 years in term, and is leveraged in the 70 percent to 80 percent range. Its short-term debt is sourced by banks, credit companies, life insurance companies and the CMBS field; is indexed off of the 30-day LIBOR; uses a term of 3 years to 5 years; and leverages a 65 percent to 80 percent loan to value ratio.

“We will typically use the long-term, fixed-rate debt when we are buying a stable property that doesn’t require a major repositioning,” Patty says. “If we are buying a property that has upside due to a renovation plan or drastic improvements in property performance, we will use short-term, bridge debt that is easier to exit once we have implemented our repositioning plan.”

In the next few months, Slone predicts that HGI will hit the $1 billion asset level. However, the company has no plans of stopping there. It has set its sights on becoming a global real estate investment firm. “We will accomplish this goal by expanding our product line (including purchasing debt) and our geographic presence,” Slone says.

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