Although David Puchi isn't a gem-ologist, he favors diamond metaphors. Puchi heads up an investment team at Baceline Investments that buys commercial real estate in the American heartland. Some properties are what he calls "diamonds," outstanding assets to be improved and put back on the market. Others are "diamonds in the rough," distressed properties with strong potential for revival that need a lot of polishing.
Puchi learned how to work with real estate gems in the mid-1990s, when he and his partner Douglas Arnold started a property management company in Denver called Highline Group. "Managing commercial buildings for other people gave us nuts-and-bolts knowledge of the commercial real estate business," he says. Highline made its first investment in real estate in 1998 and engaged in both investments and property management for third parties. In 2003, after Craig Zoellner came on board as a third partner, Highline was wound down and the three men started Baceline Investments.
Investing In The Heartland
The core of Baceline's strategy is investing in neighborhood retail and industrial properties located in the broad midsection of the country. This is the "secondary market," in contrast to the "primary market" in the gateway cities on the east and west coasts. The firm is active in the southwest, the Rocky Mountain states and the Midwest in cities such as Dallas, Denver and Minneapolis. It is also active in Chicago, a primary market.
The secondary market's attraction for Baceline is the absence of large institutional competitors. "Buying real estate in the heartland gives us a competitive advantage," Puchi says. "We simply don't have the competition that you see in gateway cities on the coasts."
Baceline's advantage is temporary, however. "Large institutional investors have played in the secondary arena before, and will do so again," Puchi says. This will happen when they tire of competing with dozens of bidders on core assets on the coasts. Puchi thinks it will take large institutional buyers two or three more years to return. "We're already seeing some movements. It's not only the operators and the equity capital, but it's also the banks; the lenders have to get back to the middle of the country."
For now, though, Baceline has the secondary market largely to itself, Puchi says. "Our competition more often than not is a local buyer rather than a regional or national buyer," he says. Baceline typically beats out local buyers on target properties because they may not have capital backing or the ability to get financing, he says.
Add to this another competitive advantage: Baceline's reputation among sellers. "We have an impeccable record as far as closing on real estate that has gone through our due diligence process," Puchi says.
This is especially important since, after the financial crisis, buyers would put a property under contract and then not close because of lack of capital and a nonexistent operating platform. "The sellers have to be wary," he says. "It's important for us to keep our buying reputation intact when we go into markets."
Two Fund Offerings
Baceline offers its accredited individual and family investors funds in two strategies. One is its flagship debt-free income initiative. "When we go in, we buy a property for all cash," Puchi says. This gives Baceline greater control over the property and the ability to stay nimble. It does not have to sell at an inopportune time. "We don't have a debt maturity or refinancing gun to our head," he says.
Baceline looks for centrally located commercial properties with existing cash flow, available at prices that reflect discounts to prior peak values. These will also have positive indicators for added value, such as high occupancy rates and new leasing potential.