Grubb & Ellis Readies a Blank-Check Deal

The firm is set to become the first real estate-focused special-purpose acquisition company.
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Updated from 7:02 a.m. EST

The executives who rescued

Grubb & Ellis

(GBEL)

, a leading commercial real estate management firm, are looking to tap the so-called blank-check IPO market to form a new company.

Grubb & Ellis Realty Advisors

is seeking to raise $100 million from investors for a SPAC, or special-purpose acquisition corporation, in an IPO scheduled for Thursday. Deutsche Bank is running the offering, which is the first for a SPAC focused solely on real estate.

While Grubb & Ellis focuses on property management and leasing, the SPAC would actually buy properties. Under the terms of the deal, 80% of the initial funds raised must be used by the SPAC to buy an existing company.

The SPAC's plan is to purchase office and industrial assets located in tertiary markets surrounding major cities. By shunning the central business districts, Grubb & Ellis believes it can locate underperforming properties that it can revamp for attractive rates of return.

"Other than the form of the SPAC, the substance of what they're doing is a traditional real estate strategy," says Bruce Schonbraun, managing partner of The Schonbraun McCann Group, a real estate consulting firm.

Several firms, especially private real estate companies, have been "going into suburban tertiary markets and trying to get ahead of the curve and seeing where the office market is recovering," he says.

While this might be a good strategy, not everyone likes the way the Grubb & Ellis SPAC deal is structured.

"In principle, I don't see the point in paying a premium for something that doesn't own anything," says Morris Mark, a veteran REIT

real estate investment trust investor who heads Mark Asset Management.

A SPAC is much different than a C-Corp or REIT. Investors in a SPAC are essentially buying a shell company that owns nothing. In effect, it's a bet on management.

Grubb & Ellis Realty Advisors will be run by Chief Executive Mark Rose and Chief Financial Officer Shelby Sherard, who both hold the same titles at the Grubb & Ellis real estate firm. Maureen Ehrenberg and Robert Osbrink, two other members of Grubb's senior management who helped rescue the property management company from the brink of failure several years ago, also will be affiliated with the SPAC.

Michael Kojaian, the Grubb & Ellis chairman who owns a controlling stake in the property manager, will own about 7.8% of the blank-check company. Grubb & Ellis, the real estate firm, will own 21% of the SPAC after the offering.

The thinking behind the deal is that Grubb & Ellis, as a leasing agent and manager of commercial properties, already knows the commercial real estate market and is constantly eyeing possible acquisition targets. However, investors in the SPAC will be kept in the dark until management says a real estate business has been found. Once a partner is found, shareholders will vote on the deal.

If management doesn't find a suitable acquisition candidate within two years of the offering, the IPO funds are returned to investors, minus the investment bankers' fees and other expenses associated with finding a business to buy.

Grubb & Ellis declined to comment further on its plans because it is in its registration period.

SPACs recently have become popular as a new way for investment banks to raise funds. But their track record so far has been mixed. Many of the investors who've poured about $2 billion into these blank-check companies to date have been hedge funds and wealthy individuals.

Offering a private equity-type play on real estate investing is a unique concept. But it remains to be seen how investors will view the Grubb & Ellis offering.

Kenneth Campbell, managing director of ING Clarion Real Estate Securities, says one of his colleagues had been told about the Grubb & Ellis SPAC but turned it down.

"He just didn't like the structure. His view, and I share that view, is fund investing should be done on a private basis and these blind pools in the public tend to be less attractive," Campbell says.

Part of the problem with doing a blind pool in the form of a SPAC is that the company is dealing with analysts and investors who may not realize the risks inherent in real estate investments, he says. With private deals, it's easier to convince investors, because they are more sophisticated and there are typically fewer of them, Campbell says.

"If they want to do this, raise the money privately and don't try to sell in a public sense," Campbell says.

Grubb & Ellis is seeking to sell about 16.67 million units of the SPAC at $6 per unit, according to the company's registration statement filed with the

Securities and Exchange Commission

. Each unit consists of one share of common stock plus two warrants, or rights to buy the stock. Only 15 million units will be offered to the public; the rest are being offered to Kojaian.

Shareholders buying the IPO will experience substantial dilution in the value of their shares, since the existing stockholders -- Grubb & Ellis' management -- paid just $2 million for their 21% stake in the SPAC. The dilution amounts to roughly $1.76 per share (the difference between the pro forma net tangible book value per share of $4.24 and the IPO price of $6 per unit).