As Warrensville Heights-based Weston Inc. prepares its plans for installing apartments in parts of the recently purchased Standard Building in downtown Cleveland, the real estate ownership and management firm has added a surprising member to its development team.
Besides the accountants, architects and lawyers on every multimillion-dollar real estate development project, Weston has brought in for the Standard Building a different type of professional, the middle-market investment banker Brown Gibbons Lang & Co.
For BGL and Michael Gibbons, the Cleveland-based founding partner of the company that also has offices in Chicago, Newport Beach, San Antonio and Tampa, it is a chance to put their growing national real estate advisory practice, which typically works on huge deals out of town, to work a few blocks from their Cleveland office.
“For years, developers whose fathers I may have worked with have called and asked if we can help them with something,” Gibbons said in an interview at BGL’s new One Cleveland Center offices done in a stark white design (think Progressive Corp.’s Flo’s surroundings white). “Now we can.”
However, that is not to say that Gibbons and BGL have not done some interesting, and substantial, realty work along the way.
BGL helped both Beachwood-based DDR Corp. and Richmond Heights-based Associated Estates Realty Corp. as an adviser before they went public in the 1990s. Gibbons also serves as a board member at Associated Estates.
Gibbons’ interest in real estate dates more than 30 years when he bought duplex rentals as investments and later moved into apartments as a sideline to his financial career.
In the early days he met a lot of real estate developers as he traveled the countryside in his first job selling industrial bonds for real estate transactions. The offspring of those developers are the ones BGL now hopes to advise.
“I like the stability of cash flow in real estate,” Gibbons said, noting he has owned “a good bit” of real estate although he would not disclose details of his holdings.
BGL in 2008 started building a real estate advisory practice and it recently expanded beyond analysts to include asset management and even real estate agents who market properties. BGL now has a total of 10 such agents in California, Florida and Texas, with one here.
Adding agents over the past year was a big step. Realty agents are compensated on a commission structure, which is different from compensation for investment bankers who follow the Wall Street pattern: They earn a salary and a bonus based on firm profits. But Gibbons said it is worth the effort.
“Often our assignments may lead to a sale of a property or a sale-leaseback,” Gibbons said.
“We watched significant commissions being earned for less work than we were doing. We were leaving money on the table.”
In a nutshell, the real estate advisory business amounts to applying the same analysis and financial structuring skills that investment bankers use to increase profits or reduce losses at businesses, recapitalize or sell them.
“If you have an apartment building, you can benefit from the same things we do for a business,” Gibbons said as an example.
“You could not find the sources of capital on a national and international basis we deal with regularly.”
Gibbons also rattles off a series of business analyses the firm may undertake, such as studying the net present value of the property, future income and comparing different investments.
David Browning, managing director of CBRE Group’s Cleveland office, said realty brokerages and service providers typically deal with single property transactions at the local level.
Investment bankers operate in capital markets and execute transactions for real estate developers and companies based on their balance sheets and advise on whether to use debt, raise money in the public market or restructure the company.
“We are not committed to finding a transaction at the lowest cost. We are committed to doing what’s best,” for the property or company, Gibbons said. If a developer is going to suddenly do a deal with his brother-in-law, we’re out of there.”
In Weston’s case, it has real estate and construction expertise, but faces a complicated proposition with a project such as the Standard Building.
Such office-to-apartment conversions often involve multiple layers of financing from different sources, more equity than in the past and securing state and federal historic tax credits.
“These are very complicated capital projects,” Gibbons said. “We’re excited about the Standard Building. It’s our first project of this type in our hometown.”
Ed Asher, a member of the Asher family that owns Weston, said it engaged BGL to seek equity investments on its behalf for the Standard Building.
“They were referred to us by some folks who had positive experiences with them,” Asher said. He added that beyond the tax credits, the project may also entail finding some junior debt as well as the typical first mortgage.
Anthony Delfre, managing director for BGL’s real estate advisory practice, said BGL adds synergies to the typical real estate deal. For example, a developer might raise equity with some asset sales as well as tapping the capital markets for funds.
For the time being, Gibbons describes the real estate practice as a “pretty small” part of the firm’s revenues.
However, as developers need more help raising cash than in the past, he said, BGL expects to grow the practice at a high rate.
Although BGL is adding real estate financial experts its focus remains on its broad mergers and acquisitions practice, saying, “We don’t want to be Realty One.”
By Stan Bullard