Friday, August 15, 2008
Washington Business Journal - by Douglas Fruehling
Three year after founding J Street Development, Bruce Baschuk made big waves by buying one of D.C.’s oldest firms. But he didn’t stop there. Meet the man who’s building a real estate empire one company at a time.
After years at Coldwell Banker and Barnes, Morris, Pardoe & Foster, you took what you call a five-year sabbatical from real estate. Why? I had four kids; the oldest was 18. He was about to go to college. I had spent very little time at home. I called myself the “absentee landlord” as a parent. I wanted to spend some time with my kids; I could afford to. I looked at my wife and said, “I don’t have to do this anymore. Let’s think about something else.” She said, “Great, I’m with you.” She was teaching, so I was able to spend some time with the kids.
What did you do? I learned how to fly, scuba dive, got my handicap under 10 in golf and I started coaching lacrosse at Archbishop Carroll High School in Northeast. They never had a program before. The school is 100 percent minority. It was a complete cultural immersion for me. It was fascinating and some of the most meaningful work I’ve done in my life.
You eventually jumped back into real estate? An old friend of mine calls me up and says, “How would you like to buy the Cafritz Co.?” And I said, “I really don’t. Plus I don’t have the money to buy it.” He said, “Well, I think we can work something out, and you’d be a good match. They’re a very philanthropic organization.” Long story short, that happened in about a month. They had a time deadline they had to get it done by.
Did you have any apprehension taking over the Cafritz Co.? I’ve always been blessed with some nearsighted abilities. I don’t see what’s directly in front of me. I’m looking down the road and I just kind of charge through whatever is in front of me. Sometimes that works out well; sometimes it doesn’t. It did not trouble me in the least. I’ve been imbued with a sense of self-confidence — not cockiness. Once I believe that this is the right way to go, I’m in great shape. I’m fairly determined. I knew we would be able to do well.
Why did you end up getting out of the deal after just nine months? I could not see eye-to-eye with the chairman of the foundation, who felt that the Cafritz Co. itself should be run differently. This was a company that the foundation had nurtured for many years. And it was very personal. It’s not right and wrong — the vision we had didn’t match the vision for the chairman of the companies.
So you left with the team you had assembled and started J Street. You were a tenant rep and commercial services type of guy. What made you think you could do development? To me it’s all about the demand side. If you understand the demand side of the equation — why people do want to or don’t want to go to a certain location and what you need to do to get them there — then you’ve got a large part of equation figured out.
I am an inch deep and a mile wide. I don’t have a tremendous amount of expertise in any one area. I have confidence and understanding in each of those facets. But we have very bright people in this company who know a heck of a lot more about how to develop, manage, lease and finance properties.
How were you able to land financial partners? You didn’t have a track record. Our partners never wavered that we didn’t have experience per se as a development team, because if you looked at the individuals, these are people with deep experience in real estate or transactional work. They just hadn’t worked together. We have a great roster of investors: Fidelity, Westbrook, Archon, UBS, New York State Teachers’ Retirement System, state of Michigan.
I was shocked when I first heard you were buying Randall Hagner Ltd., a longtime D.C. residential and commercial brokerage. How did that happen? We sat around the table, a small cadre of J Street people. We had enjoyed initial success — we had sold our first acquisition and had done very well, we had bought a couple more properties and had begun to entitle them. What concerned us is we had almost all our eggs in one basket. What happens if the cycle changes or Bruce gets hit by the proverbial truck? I was the only one sourcing business at that time. And I was the only one putting equity in the deals of significance. We were collectively concerned that we were too weighted in our approach.
We looked to diversify — I began putting the word out to some friends in the industry — by buying a small property-management and leasing company. We weren’t looking for something the size of the Hagner company, which at that time was 102 years old, had a couple hundred people and did residential, commercial, finance and mortgage servicing. John Sargent, who I had met while I was at the Cafritz Co., was looking for an exit strategy. We got together through a mutual friend and instantly liked each other. We struck a deal in two weeks. It was very fast. It was much bigger than we were looking for initially, but the culture of the organization fit very well with ours.
How much did you pay? I can’t disclose the number, not without running the risk of breaking a confidentiality agreement with the Sargent family.
How did you finance the deal? It was a cash transaction for me. I don’t expect that I will be refinancing that. The company throws off cash; there is a return on the investment. With an operations company, there’s income through property management and leasing that’s fairly steady.
You obviously did well for yourself financially before starting J Street. Where did your money come from? The tenant rep business was a great business. At one stage in my career, you could earn $10 a square foot on transactions on a gross basis. I’ve been involved in a lot of leasing.
That’s a good way to live comfortably, but not to amass a fortune. Yeah. My wife and I were lucky enough to be born in a generation when Apple was not a household name, when Microsoft had just started. Because of my traveling around the country and representing tenants, I talked to my counterparts in Silicon Valley and other places and heard about Moore’s law [that the potential for computer hardware doubles about every two years].
If you understood Moore’s law, you understood the industry that they were in — Intel and others — was going to do very well. I’m a big fan of intellectual capital. I understood what they were doing based upon my knowledge of the industry. We put a little money in — and a little bit of money in some of those investments did very well. It gave us an additional cushion. We’ve also invested in real estate and done very well.
How much residential experience do you have? I’m not a residential expert. But I know more about buying a house than most people do. I’ve bought and sold a lot. I’ve done well in some cases, in other cases haven’t.
What was the reaction within Hagner? It was difficult. You have a 100-year-old firm that was family-oriented. It was insular, and I don’t mean that in a pejorative manner. It was tightly held — a small group of people who managed the firm in a very paternalistic way. That is antithetical from my whole M.O. I want to know what’s going on in China, because it’s going to affect us. I don’t mean to suggest that the people here weren’t intelligent. They valued the fact that they had local relationships and the local relationships would be what they depended on. For those people, it was scary: Here’s some dude who doesn’t know anything about the development business or residential business.
You lost some leading brokers? We lost on the commercial side one or two people; residential, a few others. But not nearly what you would envision given that you had a total change in such a short time. There were a half-dozen leaders at the top of the company who left because they had hoped to own the company. It was nothing personal.
Did Sargent not entertain their offer? It was John’s decision to sell to me instead of them. What he told me is he felt I was the right person to take the organization to the next place. It needed some oomph. I think he viewed the existing leadership as people who would replicate what had been done. And I think he was right.
A year after you bought Hagner, you announced a deal with Woodmark Cos., a property-management, leasing and commercial services firm. How did that come about? We had been talking to the principals of Woodmark for a couple years about what we might do together. They were disappointed that they had not had an opportunity to win some institutional-quality business because they may not have had as large a platform as they needed. And they did not have access to the development opportunities.
Did you pay cash for Woodmark as well? It’s a merger. The principals there are now part-owners in what I have, and I’m a part-owner in what they have.
Does that ease things for you financially? It worked well for me because a merger generally doesn’t require the same kind of cash outlay as if you’re going to get into an acquisition. I’ve got other principals now who are in the company, and we’re looking to expand to include some other senior-level people who are here.
What’s next? This is a time where we’re going to see a lot of fallout in the industry because of belt-tightening. I would say that we are going to look to make strategic additions to the niches that we want to become known as experts in. But it would probably be more individuals or small teams of people.
So if anybody’s reading this, they should call you? Always, always. We’re always looking for good people, especially on the brokerage side of the business.
A lot of firms these days are refocusing on their core competencies, shedding extra lines of business. You’re doing just the opposite. One of my favorite analogies is from Wayne Gretzky. He never went to the puck. He tried to anticipate where the puck would go. We’ve been able to anticipate some things — office condo development, getting into NoMa, merging with other companies.
We aren’t looking to do what everybody else is doing. The fact everybody is pulling back tells me it’s a great time to try to find other opportunities. I think we’re going to find some terrific opportunities over the next year. Being countercyclical is not a bad thing, assuming you’re making the right bets. You better be sure about the bets you’re making.
And you’re sure about your bets? My old buddy used to say “Bruce is always certain that he’s sometimes right.” You have to have some self-confidence. But that self-confidence has been tempered and formed by years of failures. My career is a series of failures. I skipped Woodstock for a lacrosse game. How smart can I be?
All contents of this site © American City Business Journals Inc. All rights reserved.
Click Here to Download a PDF of this article