Rebuilding an empire: Quinton Primo bought and sold billions in real estate assets. Now he's making moves into New York City's high-stakes gold coast.

ON A FLIGHT FROM CHICAGO to New York, Quinton E. Primo III glances out his window and peers down at the skyscrapers that make up l Manhattan's world-renowned skyline. As the plane soars over the majestic towers of steel, concrete, and glass, Primo is filled with anticipation that soon he'll be a major player there--and he probably will be.

This is a bold prediction, but Primo has made some bold moves to make it possible. By 2004, the Harvard Business School grad had already proven his industry mettle by building Capri Capital Advisors, a Chicago-based real estate investment management firm into a $7 billion entity. The company, which Primo founded in 1992 with childhood friend Daryl J. Carter was the largest black-owned business of its kind in the nation. But then Primo did the unthinkable, In March, he sold his firm's mortgage banking unit--with a loan portfolio of $5 billion--to CharterMac, a $19 billion real estate finance company, and in return received millions in cash and access to CharterMac's resources.

The latter was critical to Primo's strategy to swim with the big fish, since substantial deals now require the backing of real estate titans. "There are trillions of dollars of capital represented by New York organizations that invest across all asset classes," says Primo, 50. "To become a major factor in this business, we as a firm must have access to that capital."

Just as important was establishing a business relationship with CharterMac chairman Stephen M. Ross. A heavyweight in the New York real estate scene, Ross is chairman and CEO of The Related Companies L.P., which specializes in different aspects of real estate development and management, ranging from commercial development in New York to affordable housing development nationwide. As the developer of projects such as the $2 billion Time Warner Center in New York, Ross is among the industry's elite.

The alliance provides Capri with access to the expertise, contacts, and capital of Ross' entire organization, giving Primo the tools he needs to create real estate deals that can elevate his firm to the upper echelon of real estate investment management companies. But the $2.5 billion real estate investment advisory portion of the business Primo still commands already makes him the most significant African American figure in commercial real estate today.

"Quinton is extremely charismatic and extremely focused on being the best in his space," says Stuart J. Boesky, CharterMac CEO. "It is always energizing working with someone who wants to be the best."

If Primo can successfully reposition Capri to profit from the next big trends in the real estate industry, then add the contacts and capital of Ross' organization to his shrewd industry know-how, there's no telling how much landscape in the real estate industry he will be able to control before he's through.

MOTOWN BEGINNINGS

Staying ahead of the market is a hallmark of how Primo and Carter managed to create the largest African American real estate advisory firm in the country. The two decided to take a stab at making it in the industry together after each had successful careers in corporate America. Carter had experience originating construction loans for Continental Bank before heading the Western commercial real estate division of Westinghouse Credit Corp. in California, and Primo rose through the ranks at Citicorp to head up its Midwest real estate investment banking operations.

At the start of the 1990s, the pair intended to start a real estate asset management firm. But breaking into the real estate investment advisory business was particularly challenging. The country was mired in a recession, the real estate market was hard hit, and no established white-owned firm in the U.S. was willing to take a chance on two relatively unknown black men in such poor market conditions.

After many failed attempts to obtain startup capital from U.S. firms, Primo and Carter decided to look overseas. They reasoned that they knew the U.S. market better than any European firm--so race would be less of a factor--and that it was a good time for a foreign firm to buy into the American market since real estate prices were depressed. So they approached Chesterton International, a 200-year-old, London-based real estate company.

Chesterton initially wanted to purchase a pension fund advisory business to provide it access to the U.S. market, but was persuaded to consider another option. "We presented Chesterton with our business plan, which said we needed $2 million to $3 million in capital to start the business," says Carter, an MIT graduate. "They told us they would give us $100,000 of the first million and see what we did with it."

Primo and Carter used Chesterton's initial investment to cover operating expenses until they got their first big break in 1993, when the state of Connecticut gave them $100 million of the state's pension fund to manage, which they placed mostly in real estate investment properties.

By 1997, Primo and Carter were already managing pension fund assets of a number of institutions. They adopted a strategy of acquiring financial services firms that could create several revenue streams and provide a solid base of capital and contacts they could use to defeat competitors. To diversify into the multifamily mortgage lending business, they acquired the delegated underwriter and servicing (DUS) lending division of First Tennessee Bank, which was trying to get out of the business. This allowed Capri to easily meet the stringent approval and $7.5 million net worth capitalization requirements to become a designated Fannie Mae lender. Approvals for Federal Housing Administration and Freddie Mac lending were also easier to obtain because Capri owned an entity that already had a track record in the government lending business.

Vince Toye, vice president of multifamily sales and marketing at Fannie Mae, says, "In 1997, Quinton and Daryl came to Fannie Mae with a business plan, and they had a service and niche they wanted to provide to us. They also had backers and supporters, and we felt they could bring us business we weren't getting."

STEPPING OUT ON THEIR OWN

Confident in their ability to survive, Primo and Carter bought out Chesterton's stake in their business later that year, for approximately $4 million. "For every dollar [Chesterton] invested, we gave them a $40 return," Carter says.

With the backing of two pension fund clients, they then acquired Washington Capital, an independent asset management firm, for $40 million in 1998. Capri had only $500 million in assets under management at the time, while Washington Capital had a $2.8 billion commercial real estate loan portfolio. But the deal was made possible because one of Washington Capital's shareholders needed to liquidate, the loan servicing systems of the two companies were compatible, and Carter had worked with both the CEO and CFO of the holding company. "The relationships were key in the execution of that transaction," says Carter.

The acquisition of Washington Capital diversified Capri's investments, gave it the size and scale needed to finance additional multimillion-dollar real estate projects, and provided the contacts to pursue asset management opportunities with some of the largest pension funds in the country.

Prior to Capri's strategic alliance with CharterMac, the company generated roughly $40 million in revenues. These revenues were primarily from fee income--asset management, acquisition, and loan servicing fees--produced by:

* Purchasing core investment properties on behalf of separate account clients, with initial yields of 6% to 7%.

* Originating mezzanine loans that had borrower pay rates of 7% to 11% and overall investment returns of generally 13% to 15%.

* Completing first mortgage acquisition, renovation, and construction loans as a Fannie Mae DUS lender and as a seller/servicer for Freddie Mac and the FHA. Interest rates on these five-to 10-year loans ranged from 6% to 10%.

The strategy of acquiring firms that already had sizeable assets and standing in the industry allowed Capri to build a $5 billion mortgage banking portfolio while it benefited from the phenomenal growth in mortgage lending from 1997 to 2004.

Just as he navigated Capri into the mortgage banking business at the right time for maximum gain, it appears Primo timed his exit from the business just right as well. Frank Nothaft, chief economist for Freddie Mac, says the red-hot market for mortgage loans has slowed significantly as homeowners are reluctant to refinance at higher interest rates. He says originations dropped from $3.9 trillion in 2003 to $2.7 trillion in 2004, with 2005 estimates at $2.6 trillion. "Refinance volume is down so much that overall lending volumes are down," says Nothaft. "What we are looking at in 2005 is a market that is something on the order of 33% smaller than 2003--that's the total market, refinancing and home purchase lending."

THE POWER OF PARTNERSHIP

Shedding Capri's $5 billion mortgage loan portfolio was the first step toward repositioning the firm for future growth. In the deal, CharterMac's mortgage banking arm, PW Funding Inc., was merged with Capri's mortgage banking operation, Capri Capital Finance, to form the new CharterMac Mortgage Capital, which manages more than $9 billion in assets. The new entity is 100% owned by CharterMac, and Carter is CEO. The deal also allows the two companies to pursue joint ventures and provides CharterMac the option to purchase a 49% minority stake in Capri's remaining business between Aug. 1, 2005, and June 30, 2006.

"We had $5 billion worth of relationships through our mortgage banking portfolio, which helps distribute a fair amount of our mortgage-related products," says Primo. "We now have a $10 billion organization that helps us source deals for our investors." He also explains that because the market requires the advisory side of his firm to co-invest in the funds they offer to institutional investors, the amounts Capri must co-invest increase as their funds grow, leaving less capital for acquisitions and other deals. "To have a partner that we can share some of the [co-investment] burden with allows us to not constrain the growth we are experiencing."

Since the CharterMac deal, the firm has redirected its focus to pension fund advisory services, the core business it started with 13 years ago. "We have been growing our institutional advisory business consistently now for the past five years, and we see ourselves building to $5 billion to $10 billion within the next five years," Primo says.

To accelerate that growth, Primo used his strategic partnership with CharterMac to engineer the acquisition this August of Trilogy Capital Advisors L.L.C., an $80 million company that manages publicly traded real estate securities funds such as real estate investment trusts. A subsidiary of CharterMac provided a portion of the funding to acquire the firm, which will operate under the new name Capri Real Estate Securities L.L.C. While this first financed acquisition under the CharterMac agreement is relatively small, it fits neatly into Primo's long-term plan to stay ahead of the competition by transitioning from an institutional investor advisory firm to one that also serves the retail investment market.

Trilogy gives Capri retail real estate securities investment funds that are traded in the public markets at a time when investor interest in real estate securities is burgeoning. Primo estimates the market for real estate securities at nearly $300 billion and growing, and he vows to capitalize on that growth.

"Virtually every major country in the world now is planning on or already has a REIT marketplace," says CharterMac's Boesky. "They have looked at, and are rapidly moving toward providing, commercial real estate with a way to be traded on an exchange. So this is a worldwide trend, and buying Trilogy really puts us in the forefront of that trend."

Acquiring Trilogy also complements the product line Capri offers its clients. "Trilogy gives us the ability to play in private and public markets," says Primo. "It allows us to expand the services we provide to our existing pension fund and other institutional investors but will also allow us to start working with smaller institutional investors that have investment mandates of only $5 million to $10 million."

When Primo began flying from Chicago to New York to discuss how Capri could establish a joint venture for real estate deals with CharterMac, he didn't envision selling any part of his firm. But the more Primo talked to Boesky, the more intriguing a merger of the two firms became.

"The only way to create value is to take risk, but you have to build a better mousetrap as well," says Primo. "Being African American means that we have to build something better." With this first acquisition under his belt, he says the process for creating a firm that is better than before is well under way.

THE CHALLENGE OF GROWTH

"We're going back to our roots in the pension advisory business," Primo says. In these tough times, he has decided to play to his strength.

Jon Bauman, executive director of the Teachers Retirement System of the State of Illinois, says Capri is its longest tenured real estate separate account manager and its largest. The firm is skilled enough to manage properties from "the four main food groups of real estate: office, industrial, retail, and apartments," he says.

"We gave them a real estate portfolio that had been managed by other real estate advisers, and that portfolio had a lot of investments that were not institutional quality properties," says Bauman. "What Capri did for us is they made good decisions about which properties to dispose of and which ones could be, with minimal investment, improved. And, they did a great job of maximizing the value of the assets in the five- to 10-year period, which is reflected in their results."

Bauman says Capri was in the top quartile of its peer group for the one-year, three-year, five-year, and 10-year periods ending June 30, 2004. The company's record managing the $820 million real estate separate account has been so exemplary that last year it won a commitment for an additional $100 million to go into the Apartment Fund III and another $20 million for its Select Income II fund.

It's this type of management track record that Primo is banking on to grow his business over the next five to 10 years. He will be challenged to find bargains in an industry that has seen real estate prices skyrocket in recent years. To illustrate, housing price appreciation for 2003 was 8.4% and 11.2% for 2004, according to Freddie Mac's Nothaft. He says beyond 2005, long-term appreciation rates should moderate to about 5% to 6%.

Robert L. Johnson, CEO of RLJ Development L.L.C. (No. 40 on the BE INDUSTRIAL/SERVICE 100 list with $92.2 million in sales), who is building a real estate portfolio focusing on the hotel industry, waxes positive on Primo's accomplishments. He says Primo has done "an outstanding job raising capital and deploying capital in the best interest of investors," going so far as to give him credit for "setting the mold for what I'm trying to do in the [real estate] fund management business."

To grow his $2.5 billion real estate advisory firm, Primo says he will look to add more corporate accounts to the pension funds and institutional investors he already serves. Over the next 12 to 24 months, he hopes to open a retail investment vehicle that will allow Capri to work with individual investors through publicly traded closed-end mutual funds and 401(k) programs. And the acquisition of Trilogy might be joined by the acquisition of another securities asset management business to expand and accelerate Capri's reach into the retail market.

In the meantime, Primo has been content to earn frequent flyer miles trying to find the next burgeoning real estate market. "I spent two weeks in western Europe looking at markets and exploring European sources of capital," he admits with a grin. With the financial resources he's put together, who knows? Perhaps the next flight he gets on will take him to the deal that real estate legends are made of.

--Additional reporting by Rene Brinkley and June Smith Bryant