“Blank-check” companies make a comeback in real estate

SPACs, long associated with penny stocks, are seen as a cheaper route to go public. And property investors are curious

From left: Trinity Investments CEO Sean Hehir and Benchmark Real Estate Group principals Aaron Feldman and Jordan Vogel (iStock, LinkedIn, Trinity Investments)
From left: Trinity Investments CEO Sean Hehir and Benchmark Real Estate Group principals Aaron Feldman and Jordan Vogel (iStock, LinkedIn, Trinity Investments)

The 1980s called. They asked for their investment strategies back.

In July, an affiliate of prominent New York-based real estate investment firm Benchmark Real Estate Group raised money through a vehicle known as a blank check company. The Benchmark entity, Property Solutions Acquisition, raised $200 million by selling shares of a shell corporation to private and public investors.

Such an entity — also called a special-purpose acquisition company, or SPAC — has no underlying assets. Rather, it’s a promise to investors that it will acquire a target company in the future. If no acquisition is made, investors are supposed to get their money back.

Despite having a reputation as risky – the entities were associated with “pump and dump” penny stock schemes in the 1980s – SPACs are making a comeback. Bill Ackman, the billionaire hedge funder known for his crusades against Herbalife and Target, raised $4 billion through a SPAC in July. Richard Branson’s Virgin Galactic, trucking company Nikola, and sports betting site DraftKings also raised funds through SPACs. Real estate is taking notice.

“We simply viewed SPACs as an interesting business line for Trinity to be in,” said Sean Hehir, CEO of Trinity Investments, a Honolulu-based firm that has stakes in a number of hospitality properties in Hawaii, Florida and Mexico, according to its website. Hehir, in partnership with investor Lee Neibart, raised $300 million through Trinity’s SPAC in May 2018.

Last year there were 59 SPACs, up from 8 in 2013, according to Jay Ritter, a finance professor at the University of Florida.

“The main reason is that a lot of companies are saying that the cost of doing a traditional IPO is too high,” Ritter said. Hefty underwriting fees, which can run into the hundreds of thousands of dollars, are one burden. Another is the time spent on roadshows to gin up private investment, a period in which the company opens itself up to a lot of scrutiny and media attention, as was the case with WeWork.

Hehir added that “today’s volatile market” made it tricky to go the IPO route “because underwriters can’t always price companies effectively.” In the case of renters and homeowners insurance company Lemonade, for example, underwriters targeted a share price of $29, which trading pushed to $69.38 on its first day, resulting in the company leaving hundreds of millions of dollars on the table.

Proponents of SPACs see them as a better way to capture value for early investors.

Aaron Feldman and Jordan Vogel, principals at Soho-based Benchmark Real Estate Group, roared through the New York multifamily market in the 2010s, acquiring buildings which they sold at a hefty profit for more than $400 million between 2015 and 2017. After sitting on the sidelines for a few years, Feldman and Vogel seem ready to get back in the game.

Sign Up for the undefined Newsletter

By signing up, you agree to TheRealDeal Terms of Use and acknowledge the data practices in our Privacy Policy.

Benchmark declined to comment or offer further details about its SPAC. Once the funds are raised, SPACs have about two years to find and acquire a target company. Former Vornado Realty Trust CEO Michael Fascitelli, for example, formed a SPAC in partnership with financier Noam Gottesman in late 2017, and closed on an $860 million acquisition of cell tower lease investor AP WIP this March.

For managers of a SPAC, the payday can be significant. Managers often own about 20 percent of the outstanding shares, which they purchase at a fraction of the offering price.

According to the Benchmark SPAC’s SEC filings, private investors can purchase shares for a price of half a cent each, compared to the public offering of $10 per share. That means an initial investment of $25,000 could yield $50 million if values hold.

SPACs still have some drawbacks for real estate. Chief among them is that the entities cannot be used to acquire individual properties.

“Once you raise the money, you start kissing a lot of babies,” said Trinity’s Hehir, likening the process of finding a target company to a political campaign. He said his firm looked at between 30 and 50 companies before ultimately merging with the Seattle-based capital firm Broadmark in November.

“You actually aren’t allowed to have a target company in mind when you form the SPAC,” added Hehir, whose shares in Broadmark will remain locked up until a full year after the merger. Lionheart Acquisition Corp II, associated with Ophir Sternberg’s Lionheart Capital, the Miami-based real estate development and investment firm, was set up at the end of last year and is on the lookout for a company to acquire.

Companies with real estate assets, such as a data company or a home listing company, could be promising targets, according to Paul Monsen, a capital markets advisor for George Smith Partners. Proptech companies have proven another popular target, such as Porch.com which just merged with PropTech Acquisition, a Los Angeles-based SPAC formed last year by Abu Dhabi Investment Authority veterans Thomas Hennessey and Joseph Beck. The deal values Porch.com at $523 million.

According to SEC filing documents, Benchmark’s SPAC may also seek a proptech firm to merge with.

Given the way SPACs are structured, they can be thought of as primarily a show of faith in the principals behind them. They may sound like a good deal to retail investors, since they can get in on deals that may have previously been restricted to institutional investors and big private players. However, SPACs do not have to disclose to investors which companies they are initially going to invest in, leaving investors to take a leap of faith. And they do have a reputation: blank check companies were commonly tied to penny stock frauds in the 1980s and their share prices were often manipulated to benefit stock promoters. Not until 2005 were SPACs required to submit a traditional registration to the SEC before going public, according to law firm Kirland and Ellis.

“They (investors) are being asked to make an investment based on their faith in the (SPAC) managers,” said Tom Hazen, a securities law professor at UNC-Chapel Hill. “Unless a manager has a track record like Warren Buffett does, it’s a very risky proposition.”