Q & A with Gustaf Arnoldsson, head of real estate group Stonemason

Nobody knows when commercial real estate will hit bottom, but Miami Beach’s Stonemason Partners believes now is the time to get a jump on opportunities it sees coming down line over the next four years.

Stonemason, a full-service real estate group of companies founded in 2008 and headed by Gustaf Arnoldsson, netted $35 million in its initial round of private equity fund raising, and hopes to buy up $100 million worth of multitenant assets and properties throughout the Southeastern U.S. and along the Eastern seaboard.

Stonemason’s philosophy: redevelop, reposition, re-tenant. The firm’s portfolio includes three South Florida property types: strip centers, apartment buildings and hostels. The firm’s mantra: keep vacancy low, implement cost controls and secure new tenants.

The Real Deal caught up with Arnoldsson, the firm’s managing member, to discuss the firm’s strategy and outlook for the commercial real estate industry.

You recently raised $35 million from investors. What’s your strategy?

We raised the money cautiously and are looking for opportunities with strong fundamentals. Is it an infill location where there’s not a lot of vacant land and we can build something else? Can we buy the property at the lower replacement value or a discount to the replacement value? What we saw in the up cycle was more like roulette. We’re going back to basics.

Are you picking up properties from banks?

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I just got an 18-page report from a bank detailing about $300 million worth of loans they have foreclosed on. I found only two properties that are even worth taking a look at. Most of them are deals that fundamentally are no good. We’re still actively looking at anywhere from $200 to $300 million dollars worth of deals every month from brokers or banks or lawyers or principals. But there’s very little out there that is worth buying right now.

Considering the circumstances, how long does one need to hold a property in order to make it profitable?

We raised a 10-year fund. We’re here for the long run. It’s not sustainable to flip properties. You have to have a business model where you buy it, renovate it, rejuvenate it, re-position it, hold it, pay down the mortgage and make a decent return for yourself and your investors. If you look at real estate historically, it’s not some wild pony that you put money on and hope that it comes in first as a long shot.

Is there a lot of money waiting on the sidelines for the right opportunities?

There’s a lot of money on the sidelines, but it’s intelligent money. Intelligent investors are not just going to jump in because somebody else is doing it. They will invest because they’ve done their analysis, their due diligence, and it’s prudent to proceed with the purchase based on the fact that it can make money now. In the future, even if the market takes a hit, whether it’s 5 percent or 10 percent or 15 percent, it’s still fundamentally a good property.

How is your approach different from a vulture fund?

Some people call us a vulture fund, and I think to some degree maybe it has a negative connotation. We don’t necessarily look for distressed properties. We just look for sellers that find themselves in a distressed situation.

If somebody has 10 properties and needs to sell three to raise capital so they can hold on to the other ones, they will most likely try to sell the properties that they don’t like. But nobody will buy them. So they might have to shift to sell their trophy properties, and that’s where we want to step in and buy.

Do you see the bottom?

We don’t know where the bottom is. We think we’re in the lower quartile of real estate in terms of pricing but I couldn’t tell you for sure. It looks like this is still the first phase. The banks aren’t willing to take a hit now or maybe they don’t need to take a hit. So they are holding on to the property and not deeply discounting yet.