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Market turmoil always offers great opportunities. Back at the end of the 1990s when anything that had to do with the Internet was going to be worth a fortune, wild-eyed investors funded one startup after another in the hope it would be the next Amazon or Yahoo.

When the bubble did burst, there were some remarkable discounts to be found in the real estate arena. Two of our clients had primarily stock, bond, and hedge fund portfolios that we knew would benefit from allocations to real estate. Given the scale of their assets, we recommended that they buy properties directly rather than participate in a partnership or publicly traded REIT. Partnerships typically involve high fees, lockups (seven-plus years) resulting in investments becoming illiquid, and little control over when the partnership decides to distribute or sell properties, which could come at an inopportune time for tax planning. REITs, being publicly traded, are liquid, but can also suffer high fees and are vulnerable to the volatility of the overall stock market.

Working with our clients, we developed a customized mandate to acquire the kind of properties they would want to own directly. Together we decided to focus on historic properties offering mixed-use opportunities, including office space and retail, and located in cities with secure demographics and sound economic conditions.

A brief search uncovered a property in San Francisco owned by a company that had purchased it for future exclusive lease by a major Internet company. The owner had purchased this historic coffee warehouse in the south of the Market Street district, investing an additional $20 million to renovate the building with an abundance of venture capital “bubble” money. In addition, the company itself had invested more than $13 million in tenant improvements but never moved in because the tech bubble burst. San Francisco certainly met our requirement for a secure demographic, and the beautiful old building was physically very attractive and retained many of its historic features. With no tenant to move in, the owner was anxious to unload the property at more than a 50% discount.

Touring the building was actually quite sad. Inside we found 500 brand-new Herman Miller chairs that had never been sat in. Each of the six floors had multiple conference rooms with state-of-the-art audio and video equipment. Beautiful cabinets and cubicles were each labeled with a prospective employee’s name, never to be occupied. The giant server room in the basement meant to handle gigabytes of electronic trades was empty save for a five-inch modem with two tiny yellow lights flickering.

Walking through the building, you could feel the dreams and aspirations of eager employees who never got to sit at their desks or turn on their computer screens. Although we were sympathetic to those who suffered when the bubble burst, we also knew the situation represented a perfect opportunity to fulfill an investment need for our clients at an extremely attractive price.

Manchester is one of the few firms, if not the only firm, to purchase real estate for clients as their fiduciary manager rather than as commissioned salespeople. Most real estate developers first find a project, then try to find investors, employ as much borrowed money as possible, and charge high fees for development, management, and, later, carried interest. Manchester purchases real estate only at the direction of a client as part of the client’s overall asset allocation, and then charges only an asset management fee based on the appraised value of the property. There are no commissions or carried interest, and we use very modest leverage, typically less than two to one.

Direct ownership of real estate offers many real advantages. Clients typically enjoy the pride of ownership that comes from their direct involvement in something they can see and touch. Real estate can be depreciated over time, so it has significant tax advantages. Real estate can be leveraged in a conservative way that accelerates the rates of return. And real estate makes an excellent vehicle for transferring wealth, as interest in a property can be placed in family partnerships at discounted values, given its illiquidity.

Commercial real estate, however, does require experienced professional management because the properties are true operating companies—the roof needs to be fixed, elevators must operate smoothly, lobbies have to be kept clean, tenants cared for, leases drafted and managed, etc. Each property is different and requires a different level of attention, some of which can be delegated to outside vendors. Overall, real estate can be a very rewarding investment for wealthy families, especially when managed by a fiduciary who represents their interests directly.

The case studies described herein are intended to illustrate Manchester Capital Management’s approach to developing personalized solutions to our clients’ unique investment management problems. These examples should not be considered to be recommendations for any particular client and are not intended to demonstrate a pattern of success or guarantee positive performance. Because our recommendations are individually tailored based on each client’s individual needs, there is no guarantee that our approach to managing any client’s account will share some or all of the characteristics as the situations depicted.

Nothing contained on this website constitutes investment, legal, tax or other advice and is not to be relied on in making an investment or other decision.