SKB invests in real estate on behalf of about 450 high-net-worth individuals, families and trusts. The public-non-traded REIT wasn't designed for its existing clients, which typically invests between $100,000 and $1 million in a deal and must have a minimum net worth of $1 million or be earning $200,000 annually alone or $300,000 as a couple. The REIT shares, on the other hand, could be sold to anyone through a national network of broker-dealers and typically attracts investments of between $1,000 and $50,000, with the average being about $23,000 per person.
Scanlan tells GlobeSt.com that while going through the approval process to operate its public, non-traded REIT, company principals became concerned that the new product may be perceived as taking his focus off the high-net-worth clients with whom they have built the business to date. They also have concerns about the rapid proliferation of such REITs--which numbered six at the end of 2003 and now stands at 29, either in existence or in the planning stage--and the fact that the heavy up-front fee structure runs counter to SKB's existing business, which makes its profit only if there is significant upside on the ultimate disposition of an asset.
Related to that, Scanlan says during the REIT approval process he got wind of a deep-pocketed player who plans to enter the market highly capitalized and turn the game on its head by taking their fees on the back-end, after the investor gets his or her preferred return. If that happens, most if not all of the existing public, non-traded REITs, which do it the other way around, would likely be unable to compete.
The planned $50-million private equity fund, on the other hand, will be a new vehicle for his traditional client. Under the current set up, once SKB finds a good deal, it ties up the property then goes out to its client base to collect the necessary equity for the transaction. Under the new set up, the fund would provide up to half of the equity for every deal in which SKB decides to invest. The other half would continue to come in as usual, in smaller chunks from individual SKB clients.
With the fund accounting for half of the equity in any particular deal, Scanlan says it will take less of an effort to accumulate the remaining equity. As a bonus, no client that invests in the fund will ever miss out on a deal unlike the current set-up, where only a portion of its client base gets to invest in any particular deal, and fund investors also will receive slightly better preferred returns and back-end splits.
Scanlan says he expects many of his clients to be involved in the fund--in order to be in every deal--while also taking the opportunity to separately invest additional dollars in particular deals. Such a set up would have helped tremendously during the last three months of 2004, when SKB staff was pulling long hours in order to close on some $200 million worth of real estate to bring its 2004 investment total to a record $254 million. Some of those purchases included a 1.3-million-sf Utah industrial portfolio acquired from General Growth Properties, and Lakeside Center, a six-building, 152,600-sf office property in the Metrocenter submarket of Phoenix that was purchased from Laguna Hills, CA-based Muller Co.
In Portland, SKB is investing in the development of the South Waterfront by backing the high-rise residential projects of locally based Williams & Dame, including the Meriwether, which is under construction and selling out more quickly than expected. SKB also is working with Williams & Dame in Southern California, where in partnership Gerding/Edlen is developing Elleven, the first new ground-up condominium development built in Downtown Los Angeles since the 1980s. The first 179 units of the 750-unit project are under construction.
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