As Real Estate Prices Soar, So Does Fundraising at Inland Unit
CRAIN’S CHICAGO BUSINESS – Inland Group is known for its public real estate companies, but its private side is making some noise these days. The sprawling Oak Brook real estate conglomerate is on track to raise $600 million this year through Inland Private Capital, a business that raises money through private placements, mostly from real estate investors looking to defer taxes on property sales. The sprawling Oak Brook real estate conglomerate is on track to raise $600 million this year through Inland Private Capital, a business that raises money through private placements, mostly from real estate investors looking to defer taxes on property sales. That's up from $478 million last year and $440 million in 2014. Money is flowing in as surging real estate prices allow property owners to cash out for big profits, resulting in big tax bills. But the sellers can defer capital gains taxes by re-investing sale proceeds in another property through a transaction known as a 1031 exchange. Many turn to Inland Private Capital to find their next investment. “When Inland comes out with a deal, it gets swallowed up quickly,” said Taylor Garrett, managing director at Mountain Dell Consulting, a consulting firm in suburban Salt Lake City that works in the 1031 industry. “They can't come out with deals fast enough.” Formed in 2001, Inland Private Capital is the undisputed leader in an industry that's riding high after some slow years after the crash, when few investors had gains to protect from the tax man. The firm accounted for 42 percent of equity raised last year by firms that run 1031 investment programs, according to Mountain Dell. Passco, an investment firm based in Irvine, Calif., was a distant second, at 14 percent. Inland Group's 1031 unit has taken off as its biggest business is still trying to bounce back from the bust. The firm is best known for running unlisted real estate investment trusts: public companies that own commercial property but whose stocks don't trade on an exchange. A decade ago, Inland Group was the top company in the unlisted REIT business, but its reputation and fundraising suffered after the crash took a toll on two of its REITs, Inland Western Retail Real Estate Trust and Inland American Real Estate Trust. Inland's REIT business has made strides the past couple years, but it newest REIT, Inland Residential Properties Trust, is off to a slow start. Since it began selling stock in October, Inland Residential, which invests in apartments and has a fundraising target of $1 billion, had raised just $11.3 million as of Feb. 29, according to a Securities and Exchange Commission filing. Inland Private Capital raised nearly five times that much just in January. “The 1031 business has kind of taken a front seat in (Inland Group's) capital raising,” Garrett said. LOW FEES Rising real estate prices have been good for Inland Private Capital. But Keith Lampi, the company's president and chief operating officer, also expects a boost as real estate investors in the baby boom generation reach retirement age. They still want to own properties but they'd rather leave the job of managing their investments to someone else, Lampi said. “Even the most astute investor gets to the point where they don't want to do that anymore,” he said. “I think that will drive our success for years to come.” Lampi, 35, joined Inland Group in 2002, and started out working in asset management. He was named chief operating officer of Inland Private Capital in November 2012 and president last December. The firm, which employs about 45 people, makes money by charging its investors' fees. In return, it oversees the entire investment cycle, bringing investors together to buy a single property, contracting with other Inland entities to manage, lease it and then sell it. Though the 1031 industry is flourishing overall, Inland Private Capital is grabbing more than its share due to its strong investing track record and low fee structure, Garrett said. The firm has cut its fees the last few years; it now charges a 2 percent fee on acquisitions, down from 5 percent previously, Lampi said. Inland Private Capital ventures own properties all over the country, including four Mariano's Fresh Market stores in suburban Chicago, an apartment building in Albany Park and the Ace Hardware headquarters in Oak Brook. The firm these days is focused on buying apartments, student housing, medical office buildings and self-storage properties, a sector it recently entered. Though today's high property prices are good for fundraising, they aren't when it comes to acquisitions. “Clearly, the low-hanging fruit has been picked,” Lampi said. “It becomes more challenging to find value.” The crash of 2008-2009 crushed the 1031 industry. After peaking at $3.65 billion in 2006, fundraising by 1031 firms dipped as low as $170 million in 2010, according to Mountain Dell. Fundraising totaled $1.07 billion last year, up 47 percent from 2014. The next downturn, whenever it comes, could make life tougher for firms like Inland. After all, if prices are falling, fewer investors have taxable gains. “It is very cyclical, and if people aren't selling real estate, they aren't going to go into a 1031,” Garrett said. Yet Garrett doesn't see a slowdown anytime soon, saying he expects 1031 firms to raise $1.5 billion in 2016, a 40 percent increase from last year. “If it really takes off, it could be more,” he said.