Apartment Investment and Management Company
Apartment Investment and Management Company
Sales: $1.55 billion (2001)
Stock Exchanges: New York
Ticker Symbol: AIV
NAIC: 525930 Real Estate Investment Trusts
Apartment Investment and Management Company (AIMCO) is the largest U.S. real estate investment trust (REIT) in terms of apartment units—owning or managing more than 360,000. The Denver, Colorado, business is second to Equity Residential when it comes to sales, a function of the REIT’s strategy of concentrating on second tier properties. Altogether it owns more than 1,500 properties, located in 46 states, Puerto Rico, and the District of Columbia.
Launching a Real Estate Business: 1975
One of AIMCO’s founders, and its longtime chairman and CEO, was Terry Considine, who was also well known for his political activities. He was born in San Diego to a well-off family and was educated at Groton and Harvard University before he received a J.D. from Harvard Law School in 1971. He became involved in real estate while at Harvard, acquiring and operating apartment and commercial properties. He also syndicated apartment properties, selling limited partnerships to others while serving as general partner. Still a law student, he established a REIT under the sponsorship of the prestigious Boston real estate firm of Cabot, Cabot, and Forbes. Upon graduation Considine remained in Boston, becoming a member of the Massachusetts Bar. Following a real estate crash in 1974, he established a new venture he named The Considine Company, later known as The Cairn Company, which he built into one of the country’s largest property management firms. In 1981 he moved to Colorado and became involved in politics through his father-in-law, Howard “Bo” Callaway, the state chairman of the Republican Party. In 1986 Considine attempted to win the U.S. Senate seat vacated by Gary Hart but was unable to secure the Republican nomination, despite a well-financed campaign. A year later he became a state senator, appointed to a vacancy after his district’s state senator resigned. He would win the Republican nomination for the U.S. Senate in 1992, Gary Hart’s old seat once again vacant, but Considine ultimately lost out to Democrat Ben Nighthorse Campbell (who, in an ironic twist, soon changed his party affiliation to Republican).
Considine met one of the future founders of AIMCO, Steve Ira, in 1987, when he acquired a 75 percent interest in McDermott, Stein and Ira Marketing Management (MSI), Denver’s largest fee-operated apartment management company. Ira had become involved in real estate in an unusual manner. He was originally a police officer who moonlighted as a security guard at his own apartment community. He eventually quit the police department and in 1982 went to work with Arthur McDermott and Chuck Stein, who had been partners in apartment management since 1979. Considine assumed the MSI name, then in 1988 he expanded the business geographically with the acquisition of a Florida-based property management company, Property Asset Management (PAM). Two years later MSI changed its name to Property Asset Management.
Because Considine was busy serving as a state senator he asked Ira to take an active role in running the growing property management business. Considine was impressed by Ira’s hands-on management style, embodied in his “one-hour rule,” which maintained that his top people had to live within one hour travel of a property they managed, by all available means of transportation. Together, Considine and Ira, who served as president, grew PAM into the 12th largest fee management company in the country. By 1994 they decided to form their own apartment REIT.
Establishment of REITs: 1960
REITs were established by Congress in 1960 as a way for small investors to become involved in real estate in a manner similar to mutual funds. REITs could be taken public and their shares traded just like stock. They were also subject to regulation by the Securities and Exchange Commission. Unlike stocks, however, REITs were required by law to pay out at least 95 percent of their taxable income to shareholders each year, a provision that severely limited the ability of REITs to raise funds internally. During the first 25 years of existence, REITs were only allowed to own real estate, a situation which hindered their growth. Third parties had to be contracted to manage the properties. Not until the Tax Reform Act of 1986 began to change the nature of real estate investment did REITs begin to gain widespread usage. Tax shelter schemes that had drained potential investments were shut down: Interest and depreciation deductions were greatly reduced so that taxpayers could not generate paper losses in order to lower their tax liabilities. The 1986 Act also permitted REITs to provide customary services for property, in effect allowing the trusts to operate and manage the properties they owned. Despite these major changes in law, REITs were still not fully utilized. In the latter half of the 1980s banks, insurance companies, pension funds, and foreign investors (in particular, the Japanese) provided the lion’s share of real estate investment funds. That period also witnessed overbuilding and a glutted marketplace, leading to a shakeout in the industry. With real estate available at distressed prices in the early 1990s REITs finally became an attractive mainstream investment option.
To help in forming a REIT, Considine and Ira turned to their largest client, PDI, Inc., a Los Angeles asset management firm run by Peter Kompaniez and Robert Lacy. The four men became the founding partners of AIMCO. A lawyer, Kompaniez had helped to create four REITs while a senior partner at a Los Angeles law firm. In 1986 one of his clients hired him to serve as president of a company, which among other holdings included some 6,000 apartments. He left in 1992 to form PDI with Lacy, and they hired PAM to serve as their fee manager. When Kompaniez and Lacy agreed to team up with Considine and Ira, they added the PDI business to the mix of AIMCO, which also included properties controlled by Considine.
With Considine named president and CEO, AIMCO completed an initial public offering of shares in July 1994, raising almost $170 million. The REIT quickly moved to use some of the funds to buy 37 apartment properties, totaling nearly 10,000 units, spread across Colorado, Utah, New Mexico, Nevada, Georgia, Florida, and Arizona. From the outset AIMCO focused on Class B properties, where management believed a greater increase in rent could be achieved in the coming years. By contrast, tenants of Class A properties might opt to buy homes if rents reached a certain threshold.
Aimco grew at a steady clip during its first two years, but became especially aggressive in 1997. In little more than a year the REIT’s market capitalization increased from $1 billion to nearly $3 billion, and shareholder’s equity expanded from $216 million to $1 billion. The most important acquisition of this period was the $296 million purchase of NHP Inc., the nation’s second largest apartment management company, with 133,000 units under its purview. NHP was established in 1970 as The National Housing Partnership, a private-for-profit business created as a result of Title IX of the Housing and Urban Development Act of 1968 and dedicated to the promotion of private investment in the building of low and moderate income housing. Over the next 15 years NHP developed more than 300 affordable housing projects, which it also managed. In the early 1980s the corporation began to offer property management services to third-party multifamily properties. NHP went public in 1995. It had a significant presence in the Atlantic states and the Midwest, which complimented AIMCO’s strengths in California and the Southwest and provided solid geographic diversification. As part of the NHP transaction, AIMCO gained an interest in Foxchase Apartments, which later in the year it bought outright for $69 million. Foxchase was a 200-building community of more than 2,100 apartments located in Alexandria, Virginia, some ten miles south of Washington, D.C. Also in 1997 AIMCO acquired 8,175 units in 35 apartment communities from Winthrop Financial Associates for an aggregate price of approximately $253.5 million. The garden-style apartment communities were located in Arizona, Texas, Florida, Michigan, Georgia, Illinois, and North Carolina.
AIMCO succeeds by providing quality services to residents and third-party management clients, good jobs to employees, and attractive returns to shareholders.
Because of proposed changes in the laws that governed REITs, AIMCO created a spinoff, CK Services Inc., which contained non-core business services, such as food services, assisted living, and home health. The new company was named after Considine and Kompaniez, who jointly owned it. AIMCO, in the meantime, continued to focus on growing its property management business and ownership of apartment properties. In May 1998 it acquired Ambassador Apartments, Inc., a Chicago REIT, at a cost of $713.6 million in stock, cash, and assumed debt. The Ambassador deal brought with it ownership and management of some 16,000 units in 52 apartment communities, located in Arizona, Colorado, Florida, Georgia, Illinois, Tennessee, and Texas. An even larger acquisition was completed in October 1998 when AIMCO purchased Insignia Financial Group, Inc., a floundering South Carolina-based REIT controlled by its founder Andrew Farkas, who according to the Wall Street Journal was involved in the “controversial business of taking control of real-estate partnerships and buying out limited partners at steep discounts. Separately, Mr. Farkas will spin off what is left of Insignia’s rapidly growing commercial-property services business.” AIMCO paid $350 million in stock and $460 million in assumed debt to acquire ownership of 122,000 apartment units and third party management of another 69,000. As a result AIMCO became the country’s largest landlord with 390,000 apartment units in 2,100 communities under its ownership and/or management.
In 1999 AIMCO made adjustments to its portfolio, acquiring 28 apartment communities in a series of transactions at an aggregate cost of $494 million, while selling 63 properties at an aggregate cost of $426 million. In addition the REIT initiated a major development project in south Florida on the former site of Miami Beach’s legendary Flamingo Hotel. The new project was to be called The Grand Flamingo and projected to become the largest apartment community in south Florida. At a cost of $121 million, AIMCO planned to renovate existing structures on a 17 acre site as well as build a new 32-story apartment tower, resulting in a 1,690 apartment unit community.
HUD Lawsuit: 1999
With much of its portfolio devoted to the affordable housing sector, AIMCO found itself coming under fire from housing activists and the government, related in large part to its NHP-acquired properties. Many of AIMCO’s tenants took advantage of a federal housing subsidiary program, Section 8, which was introduced in 1974. Landlords who signed up for the program received subsidies for low-income tenants, who in turn were guaranteed to pay no more than 30 percent of their income for housing. Not only did AIMCO opt out of the Section 8 program, it announced its intention to sell the Section 8 properties it had acquired from NHP. The REIT was also accused of buying HUD properties on the cheap and then developing them in order to raise rents to a higher level than Section 8 participants could bear, resulting in low-income and older tenants losing their housing. In 1999 HUD sued AIMCO, alleging mismanagement of HUD-assisted or insured apartment properties. The matter would not be settled until August 2001 when the two parties reached a $4.2 million settlement in which AIMCO was absolved of any wrongdoing.
With REITs undergoing a period of consolidation in reaction to investor pressure in the late 1990s, AIMCO was one of the most aggressive companies in the apartment sector. In 2000 it acquired Oxford Realty Financial Group, Inc. in a cash, stock, and assumption of debt transaction valued at nearly $1.2 billion. AIMCO gained 167 apartment communities located in 18 states, nearly 37,000 units in total. Individual acquisitions in 2000 also resulted in AIMCO adding 12 apartment properties at a cost of $136.5 million. At the same time, the REIT sold off 64 apartment properties, as well as some parcels of land and commercial properties, realizing an aggregate sales price of $573.5 million. By now AIMCO was very much dedicated to reducing its holdings in the affordable housing market.
Continuing to adjust the mix in its portfolio, in 2001 AIMCO bought five apartment properties in separate transactions, paying $120 million, while also selling 72 apartment properties, a commercial property, and land for nearly $410 million. Despite soft economic conditions, exacerbated by the terrorist attacks of September 11, 2001, AIMCO surprised industry analysts when in December 2001 it announced the $1.5 billion acquisition of Casden Properties, a Los Angeles-based REIT with over 17,000 apartments. Almost two-thirds of the units, some 11,000, were conventional apartments and did not fit in with AIMCO’s stated strategy of mitigating its exposure to affordable housing. According to management, however, the REIT intended to redevelop many of the properties and sell off others. Also as a part of the Casden purchase, AIMCO acquired a subsidiary, National Partnership Investment Corp. (NAPICO), which as a general partner controlled over 40,000 apartments in 400 properties. As a result AIMCO entered 2002 with more than 360,000 apartments that it owned and/or managed, an asset base of some $15 billion, making it the largest apartment owner and operator in the United States.
Archstone-Smith Trust; Equity Residential; Lend Lease Corporation Limited.
- Terry Considine forms The Considine Company, later renamed The Cairn Company.
- Cairn acquires McDermott, Stein & Ira, becoming MSI.
- MSI acquires Property Asset Management and becomes PAM.
- PAM converts to REIT status and is taken public.
- NHP, Inc. is acquired.
- Property management division of Insignia Financial Group is acquired.
- Casden Properties is acquired.
Burrough, D.J., “Denver Firm Buys 7 Valley Complexes,” Business Journal—Serving Phoenix & the Valley of the Sun, August 26, 1994, p. 1.
Enkoji, M.S., “Denver-Based Company Grows into Nation’s Largest Owner of Apartments,” Sacramento Bee, January 27, 2002.
Griswold, Dan, “Man on a Mission,” National Review, October 5, 1992, p. 26.
Moore, Paula, “HUD, AIMCO Clash Over Housing,” Denver Business Journal, May 8, 1992, p. 3A.
Pacelle, Mitchell, “Insignia Sells Apartment Business to AIMCO for $350 Million in Stock,” Wall Street Journal, March 18, 1998, p. B14.
Rogers, Beth, “The Evolution of AIMCO,” National Apartment Association, July 1, 1998.