Tammy Jones, the founder and chief executive of Basis Investment Group, has a single vision for the New York-based investment management company: to create the largest African American and female-owned diversified commercial real estate platform in the United States.
The goal was always part of her plan for Basis Investment Group, formed in early 2009 with an investment thesis of providing debt and structured equity to institutional-quality mid-market commercial real estate borrowers across the US. Thirteen years later, after a series of joint ventures and separate accounts, the firm has just closed its second commingled investment fund as part of its long-term plan to scale its platform.
“When I founded Basis, I wanted to create a company that would be different than other commercial real estate companies – one that valued diversity, equity and inclusion and employed the most talented, diverse people – and I’m happy that 13 years later, we have achieved that,” Jones tells Real Estate Capital USA.
Basis invests and lends across the capital stack in commercial real estate, with a focus on the mid-market, on behalf of some of the largest public pension plans and family offices in the country, as well as sovereign wealth funds. The firm is the only diverse investment company of its kind with a successful track record that is African American and female-owned, Jones adds.
“We are the only agency lender that has a license that is African American and female-owned, as well,” Jones says. “Putting those pieces together has not been easy, but we are really on a good trajectory. The focus for us is to create a platform that can be resilient, invest through cycles, and provide investors with different strategies that can be nimble when you go through volatility.”
Basis Investment Group closed its second commingled fund in June, raising $832 million against its target of $550 million and a hard-cap of $750 million. With all the investors from its first fund making new commitments to the firm’s second vehicle and new investors signing on, Basis Investment Group had to go back to its clients to increase the total size of the vehicle.
“I wanted to create a company that would be different than other commercial real estate companies – one that valued diversity, equity and inclusion and employed the most talented, diverse people”
“When you look at a successful fundraise, you want your old investors to come in, you want new capital to come in, and you certainly want to achieve your target,” says Jones. “The purpose of this fund is solidly a follow-on to fund one. It has the same strategies, with probably an allocation to potential distressed debt or situationally distressed opportunities.”
The firm’s inaugural offering, the $410 million BIG Real Estate I, closed in May 2019 and was also oversubscribed. Jones notes, however, that it was a long road to the firm launching the fund – the offering was the firm’s ninth venture.
“It’s important to note that you don’t just go out and raise your first fund; you have to build a track record,” Jones says. “We have been investing and managing capital on behalf of institutions all throughout our history.”
Launching a new fund during the covid-19 pandemic was a bit daunting, but Jones was sanguine about the prospect due to the firm’s track record and relationship with its investors.
“I had the faith that because we were delivering on returns and communicating with investors, it would be successful, but I didn’t know that we would have to go back an increase our hard-cap,” Jones says. “Many of our investors doubled or even tripled their allocation. Every investor from fund one came into fund two. That doesn’t happen because of anything other than your track record.”
Basis Investment Group recently closed a loan in southeast Queens, New York, with a repeat client, BRP Companies.
The sponsor, a New York-based company co-founded by Geoff Flournoy and Meredith Marshall, is breaking ground with Ninety/90 – a $367 million multifamily mixed-use development that happens to be close to the neighborhood in which Jones grew up.
Basis provided $141 million of structured equity for the transaction with BRP – a major African American-led developer – and the sponsor obtained a construction loan from AIG.
“In this transaction, two African American-owned firms came together for the development of a 614-unit multifamily project, 30 percent of which will be affordable,” Jones says. “What is also really special to me is being a person who grew up in South Jamaica and walking by that site many times as a young girl and being able to return to my community with a beautiful multifamily product and to be able to partner with another successful African American-led firm.”
While this project is an important one, there is still a long way to go for African American and other minority-owned developers in commercial real estate. These firms are typically capital constrained, which makes it difficult for them to scale their businesses.
“Post George Floyd, which highlighted some of the systemic and structural racism that we know has existed, there has been somewhat of a shift, but there is still a ways to go. If you look at the asset management business, minorities and women are 1.2 percent of that capital. It speaks to a larger, broader problem,” Jones says. “This financing in Queens is an example of bringing together two firms that have two different areas of expertise. Basis is an allocator of capital, and BRP is a developer that has been very successful, first starting with smaller projects and now doing projects like these.”
As a lender, Basis wants to only work with smaller developers. “We need folks to scale – that is what Basis is trying do and what this developer is also trying to do,” she adds.
Much of the fundraising for the firm’s second fund was completed via Zoom, which demonstrated some benefits for Basis and its clients. While historically, much of this activity would have been in person, working through Zoom in some ways made the process more efficient.
“I can honestly say that I could not have called this outcome – that raising capital via Zoom would be as successful as it was,” Jones says. “We are in an evolving and changing market, even with respect to capital raising. There is nothing that replaces us [meeting and] talking to each other. But if you have a process that moves as quickly as a fundraising process, this technology has made it more efficient because you can be in different places at the same time. It tested us all to say, ‘Does this have to be in person?’ And I think it shook us up. But I believe fundraising won’t go back to just in-person meetings; it will be hybrid.”
Jones sees a hybrid future for fundraising, noting that the same due diligence is being done and managers need to have the same meetings with risk, operational and investment teams.
The firm also found a hybrid strategy worked for its annual investor meeting, with some clients attending in person and some participating online. “I do think that would have never happened pre-covid. At that point, we only had a live conference,” Jones says. “A hybrid format means all of the investors can participate – some will be in the room and others will be virtual. It’s a change that shows the evolution of the industry.”
Debt as an investment has been increasing in popularity with institutional investors since the end of the global financial crisis, with a greater understanding of how these strategies work and fit into an institutional investment portfolio, Jones says.
“Investors are really understanding the nuances of debt – that there is senior debt, mortgage debt, mezzanine debt and preferred equity. There are all of these different strategies within the asset class,” Jones says. “I think they’re appreciating in this market that debt and credit provide a defensive strategy and consistent cash-on-cash returns.
“It can also provide equity-like yields, with a lot of protection against downside and volatility through the structuring that can happen in debt instruments that doesn’t necessarily happen when you’re playing for the upside and investing in equity.”
The firm is finding that many investors are seeing the core benefit of a debt strategy, which is the ability to tap into equity-like returns with downside protection. “Many investors are saying, ‘This makes a lot of sense; I can get similar returns, have less risk and be at a basis that is more protected,’” Jones says.
Being able to structure bespoke investments that take all of this into account will be critical as the commercial real estate market moves through today’s economic and geopolitical headwinds. “We rode the wave of recovery up for the past decade-plus,” Jones says. “When I started my company, it was a good time because in adversity there is opportunity. It’s different now, and a little bit more difficult, but I believe we are back at that place and that there are opportunities.”
Investors today are looking at their portfolios in different ways. “It’s about capital preservation and ensuring you have defensive positioning today because not everyone is so sure about the equity yields and growth,” Jones says. “You come back to capital preservation, and asking, ‘Where can I get consistent returns and where can I mitigate risk?’”
The birth of dequity
A key principle of Basis Investment Group’s investment philosophy is the idea of dequity, or commercial real estate debt, which has equity-like features. Jones says it is an example of the creativity that is possible in structuring debt investments. But it is also about diversification.
“Our investors love dequity because it speaks to a way of diversifying the strategy – dequity means a blend of credit- and equity-like yields,” Jones says. “You can have senior debt, preferred equity and even more structured equity that complement each other and create a blended portfolio with the right profile of risk.”
The firm is originating debt that fits this profile in all of the main commercial real estate asset classes throughout the US, with Jones noting that classifying Basis Investment Group’s investment process simply as a “credit” strategy doesn’t capture what the firm is doing.
“We have geographic diversity and, as a mid-market player, we’re focusing on the smaller check sizes,” Jones says. “We’re also looking at the real estate lifecycle and having deals that are not all stabilized, which means value-added or development deals as well. Having a diversified strategy also includes bridge debt, mezzanine debt, preferred equity and even some CMBS B-pieces and distressed debt. We are putting together this portfolio that equity-like returns and debt features.”
In addition, dequity creates the ability to provide customized solutions for borrowers that also work for the underlying real estate.
“We’re trying to show folks that dequity can actually be accretive to the equity as you look for creative ways to build a capital stack”
“It’s about trying to come up to a credit solution that is appropriate and customizable for that property. If a property doesn’t have cashflow, you can build in a reserve,” Jones says. “There are things you can do that make the debt structure appropriate for that property, but you have to understand the real estate. Other credit providers are very debt-focused – but we are both real estate- and credit-focused. We look at the underlying real estate, and that matters first. We also understand the technology of debt structures. We can marry those two worlds and that makes us better debt investors.”
Rising interest rates are the most common concern for the firm’s borrowers. “We have known this was going to happen, but we have also had some unprecedented movements from the Federal Reserve, and folks are trying to understand how that truly impacts returns, especially at a time when inflation is at 40-year highs,” Jones says. “Folks are worried about the volatility.”
This is particularly true for deals that have a floating-rate component. “Cap costs are high and, for borrowers with a value-added strategy, they’re worried about supply chain issues. If we’re doing a development deal, they’re worried about construction costs and budgets,” Jones says. “There is also a general sense of caution, and borrowers are worried about their ability to fix their debt, because who knows it if it’s going to get higher? Yes, we have the forward curve and people are looking at that, but people are thinking rates are expected to go higher. If they miss the opportunity, then they may have made a decision that impacts them for many years.”
However, Jones notes, there is a big difference between what is going on today and the global financial crisis, when the financing markets were frozen.
“Certain aspects of the market are more challenging than others. The CMBS market has had huge volatility and it’s been difficult, but I think the debt platforms have been stepping up to fill the gap,” Jones says. “Borrowers have to be creative about building out the capital stack. Today, it’s not just getting that one loan at 3 percent and getting all of the capital you need. Now you have to say, ‘What can I get with my senior mortgage? Do I need some preferred equity? Can I be creative about my equity because returns are harder to achieve?’ We’re trying to show folks that dequity can actually be accretive to the equity as you look for creative ways to build a capital stack.”
The DNA of ESG
When Jones formed Basis, the principles behind ESG and diversity, equity and inclusion were a part of the firm’s philosophy. Part of this was based on her personal experience as an African American woman working in commercial real estate.
“I grew up in the commercial real estate business, but I never saw anyone who looked like me in the C-suite. I never saw any African American women and very rarely saw African American men,” Jones says. “And although I’ll say that I always had an entrepreneurial spirit and that was the main reason why I started Basis, I also knew that I needed to create my own role as a CEO if I wanted to become a CEO. If you look at the numbers and do the research, you’ll know what I’m saying is true.”
With this understanding, Jones set out to create what she hoped would be a commercial real estate company like no other. “My company was going to be diverse and inclusive,” Jones says. “And to that end, 75 percent of our team is comprised of women and minorities, and now we have invested more than $1.2 billion of capital with qualified diverse and female-owned commercial real estate companies.”
The firm has incorporated many ESG principles in its investment process since its inception, formalizing that commitment in 2016 with the adoption of a firm-wide ESG policy.
“Many years ago, we looked at the ESG risks and opportunities through the lens of the stakeholders, had internal and external ESG goals and committees. It was literally incorporated into our process,” Jones says. “We produce an ESG report that talks about measurable targets we have hit. As an allocator, we’re not running the properties, but we can certainly influence our borrowers, track our outreach with diversity, and understand the environmental risks within our properties, which are ever-changing because of climate change.”
And while ESG risks are real, they also present opportunity – and a chance to be a part of the great change of use and efficiency that is happening in the commercial real estate industry. Investing in an office building to make it more efficient can be accretive to the bottom line, just like having an agency lending license helps provide liquidity for affordable and workforce housing, Jones notes.
“We look at those opportunities, we look at who we’re doing business wit, and try to understand how they’re approaching ESG, and we’re focusing on affordable housing and workforce housing,” Jones says.
“We’re making sure diversity is included in who we’re doing business with, and asking the right questions, and we’re happy to see that other lenders are beginning to do the same. We did this from the start, and we’re now getting good information that we hope will help make a change in the industry.”