Mandel Group Selling More Than 40% of Portfolio in Complicated Deal
Leading Milwaukee housing company dramatically changes business.
Aperture and Fresh Thyme. Photo by Mariiana Tzotcheva
Mandel Group is preparing to transfer ownership of roughly 40% of its real estate holdings and hand off day-to-day management of its entire apartment portfolio in a sweeping transaction that will fundamentally reshape one of Milwaukee’s most prominent real estate firms.
The company announced Friday that 13 apartment properties valued at more than $600 million will be merged into the portfolio of Salt Lake City-based Cottonwood Communities Inc. In exchange, Mandel and its investment partners will receive a combination of cash and ownership units in Cottonwood’s operating partnership.
An investor presentation filed Friday with the U.S. Securities and Exchange Commission puts the value of the 13-property portfolio at $614 million and says it includes 2,259 apartments.
Mandel says it will retain ownership and asset management responsibility for approximately $900 million in other real estate. Based on those figures, the transaction represents approximately 41% of the value of the approximately $1.5 billion portfolio currently controlled by Mandel and its investment entities.
The deal is far larger than the $94.1 million sale of Park Lafayette Towers that Urban Milwaukee reported last week.
The two-building, 271-unit East Side apartment complex was acquired by Cottonwood at the end of July and is one of the 13 properties covered by the broader transaction. The SEC presentation indicates approximately another $520 million of Mandel real estate is expected to shift to Cottonwood through the remaining 12 transactions.
Those mergers are expected to close between October and December, subject to approval from investors in the individual property-owning entities, lender consent and other closing conditions.
But Mandel isn’t simply cashing out of the properties.
Excluding Park Lafayette, Cottonwood says Barry Mandel and the investors in the Mandel investment entities will receive at least 50% of their merger consideration in Cottonwood operating partnership units. Up to 50% can be paid in cash. The structure allows Mandel and its investors to exchange their interests in individual properties for an investment in Cottonwood’s much larger, geographically diverse portfolio.
The transaction also represents a major change in how Mandel operates.
Mandel and Cottonwood will combine their property management operations, and Cottonwood will assume management of all of Mandel’s apartment properties — including those that Mandel continues to own and projects that remain under development.
That effectively takes Mandel out of the direct property management business that has been a major component of the vertically integrated company for decades.
Mandel will instead continue as an independent real estate development and asset management company, without the need to provide day-to-day oversight of tenant issues.
Cottonwood’s SEC presentation says approximately $700 million of Mandel real estate will be added to its third-party property management portfolio even though Cottonwood will not own those properties. Cottonwood estimates the assignments will generate approximately $2.1 million in annual management fee revenue.
All of Mandel’s on-site employees and nearly all of its corporate property management employees are expected to be retained by the combined management operation, according to the companies.
Mandel and Cottonwood have not identified which 12 properties, beyond Park Lafayette, are slated to change ownership.
Cottonwood’s investor presentation does offer a look at the pool of Mandel properties involved in the broader relationship. It highlights Beaumont Place in Whitefish Bay, Gaslight Lofts and Corcoran Lofts in the Historic Third Ward, The North End downtown, Taxco Apartments in Walker’s Point, Library Hill Apartments in Westown, The West Living in West Allis, Hackney House in Oconomowoc, Caroline Heights in Elm Grove and PrairieGrass at Waukee in Iowa.
But the presentation explicitly says the examples include both properties Cottonwood will own and properties it will only manage.
Mandel Group has played an outsized role in Milwaukee-area real estate development since Barry Mandel founded the company in 1991. Mandel, who previously worked at Trammel Crow, transformed a vacant corridor at the edge of downtown by developing East Pointe and kickstarting the modern downtown housing market.
Urban Milwaukee has covered a long list of Mandel’s Milwaukee projects over the years, including East Pointe, University Club Tower, Marine Terminal Lofts, Gaslight Lofts, Corcoran Lofts, the six buildings that form The North End (ONE, Portrait, Silhouette, Aperture, Vignette and Chroma), DoMUS, Belay Apartments, Taxco and Library Hill.
The area developments were long concentrated along the Milwaukee River and lakefront, but now span Whitefish Bay, West Allis, Elm Grove, Oconomowoc, Waukesha and Wauwatosa, as well as a handful of surrounding states.
The company, in its press release, says it has developed or transacted more than $2.4 billion of residential and commercial real estate since its founding.
The restructuring comes as founder Barry Mandel, now in his 70s, has spent more than three decades building the company into one of the region’s largest apartment developers.
The company did not characterize the deal as a retirement or succession plan. Mandel, currently the company’s chairman and CEO, will join Cottonwood’s advisory board as part of the transaction, while the Milwaukee firm says it will continue pursuing new developments.
“This transaction brings together two organizations with complementary cultures and core values and a shared commitment to acquiring, developing and managing exceptional multifamily communities,” said Mandel. “By combining a significant portion of our portfolio and our management operations with Cottonwood, we’re creating a platform with greater scale, enhanced operational capabilities and geographic diversity in high-growth metropolitan markets.”
Cottonwood is a publicly registered, non-traded real estate investment trust focused on apartments. It raises money from investors but, unlike publicly traded REITs, its shares do not trade on a stock exchange.
Following completion of the Mandel transactions, Cottonwood expects to own approximately $3.3 billion in assets encompassing 13,400 apartments in 16 states and 21 markets.
The company would also manage thousands of apartments it does not own, including much of Mandel’s retained portfolio.
“This partnership with the Mandel Group accomplishes our objective of growth and expansion in the best possible way” said Daniel Shaeffer, Cottonwood CEO. “This transaction not only adds high-quality properties to the combined portfolio but also brings many talented and well-trained people to our team. We are delighted about both the financial advantages and the cultural and other intangible benefits these transactions produce for both Cottonwood and Mandel.”
The SEC filing highlights Milwaukee’s high rental growth rate and slow new development pace compared to other markets, and how the acquisition fits Cottonwood’s “Upper Midwest Investment Thesis,” which also targets Minneapolis and Des Moines.
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