Real Estate students at the Wisconsin School of Business received an educational visit from a leading player in the industrial real estate arena, Brennan Investment Group (BIG), on Friday, December 7. Chairman and Managing Principal Michael Brennan, who also serves as the executive director of the James A. Graaskamp Center for Real Estate, was joined by Managing Principal and Co-Founder Robert Vanecko to discuss a deal that proved James Graaskamp’s time-honored adage: “The successful real estate deal is nothing more than a series of crises tied together by a critical path.”
“All deals are sagas,” was Brennan’s lead comment as he opened the discussion of Brennan Investment Group’s (BIG) two recent mega-deals: the acquisition of a 20-property, $155M portfolio and a 19-property, $178M industrial portfolio. The presentation, “Start to Finish: The Acquisition of Two Major Industrial Portfolios,” was a detailed look into the creation of Brennan’s company, how his team sourced the capital necessary for the two “mega-deals,” the unique structure of the deal, and the successful closing of one of the largest industrial acquisition portfolios in 2012.
Creation of Brennan Investment Group
Before discussing the transaction, Brennan spoke about the creation of BIG, “without which, we would never have closed an acquisition of this scale,” said Brennan. After the expiration of Brennan’s non-compete restriction from First Industrial in 2010, Brennan assembled a team of largely ex-First Industrial professionals. “Each partner had unique skills, and each partner came from a critical region in the U.S.” Within nine months, Brennan set up five offices in Los Angeles, Houston, Chicago, Tampa, and D.C. Brennan described his company as an “eat-what-you-kill deal shop,” where partners risks are high, but reward is as well.
The Unique Qualities of the United States Industrial Portfolio (USIP) Deal
Robert Vanecko explained his firm's focus is on transactions that can create value for all investors in the deal. An interesting methodology used by Brennan is something Vanecko referred to as the “STP Matrix.” The matrix sorts and ranks acquisitions by seller circumstance, transactional complexity, and property-level attributes. In this deal, Vanecko cited transactional complexity as the factor driving the “value-add” component. Because of its sheer size and inherent complications, there was a limited pool of buyers, and hence limited competition.
The USIP deal also employed a fairly complex and unique equity-financing scheme. The L.P. equity was provided via a sharia-compliant equity partner know as Gatehouse, located in London. Sharia-compliant financing must employ different legal structures to avoid direct payment of interest. As well, the investment cannot lease space to tenants involved in usury, gambling, munitions, or pork products.
Vanecko joked that if Graaskamp were alive today, his famous adage on the critical path of deals might be revised to read “A successful real estate deal is nothing more than a game of ‘whack-a-mole’.” Vanecko emphasized that in every deal, there will be three or four things that will arise that have the potential to kill a deal. In USIP I and II, there were “dozens of rounds of ‘whack-a-mole’ we had to win in order to close.”
Given the young audience, Brennan offered great tips regarding start-up operations—including “startups have to starve”—and discussed his firm’s critical ability to manage start-up and pursuit costs without being left “holding the bag” if you cannot come up with the equity or the desired properties. Brennan also placed great emphasis on the importance of relationships in this industry. On behalf of the students here, we would like to thank Mike and Bob for sharing their knowledge and experience with us!