COVER STORY, MAY 2008

UNCOMMON TOUCH
Experience, creativity have made Faris Lee Investments stand out in Southern California and nationally in retail property sales.
Brian A. Lee

Whether setting trends or setting records, Faris Lee Investments uses an innovative approach to retail investment sales to deliver unparalleled returns to its clients. The all-in-one, indivisible retail investment company has even turned a cliché on its head — the sum of the parts can be greater than the whole.

In 2001, Faris Lee Investments was entrusted with marketing and selling Torrance Crossroads, a 500,000-square-foot power center with a grocery component in Torrance, California. When placed on the market by another brokerage company, the $107 million offering, which featured Sam’s Club, The Home Depot and Vons, received a lot of interest from institutional buyers. Faris Lee, with its integrated sales and marketing approach and imaginative deal structuring, was then consulted on the deal.

Walter

“We were asked to take a look at it to see if there was any other value that could be had for a minority owner,” says Rich Walter, president of Faris Lee Investments. “What we decided to do was look at the property from the standpoint of breaking it up and selling it in pieces. That really started a trend because we were able to advise our client to acquire the property for that $107 million price and move it to $138 million, making our client over $30 million in profit by just looking at it from a marketing perspective and executing a breakup strategy.” 

The company’s unique vision and ability to get creative were the difference; there was nothing done to the real estate itself. Specifically, by taking the property and selling it as eight separate deals instead of one, Faris Lee increased the potential buyer pool. By dividing the property, the company gathered together more prospective buyers, opening up an asset class to smaller private investors and more limited institutional investors to be able to buy into a center that had remarkable sales. The transaction closed in less than 8 months.

With apologies to Neil Sedaka — breaking up is hard to do, unless Faris Lee is handling your sale. Then, it’s actually quite profitable. Walter estimates that the firm has performed between 20 to 25 breakup investment deals since then. 

“This really started a roller-coaster effect,” he says. “We’ve really been the only firm to be able to do it and execute on it because of how we’re structured internally. Since every broker is working on every deal, you can assign various parts of a deal like that to different brokers, avoiding fees and commissions so it’s not an issue relative to money but rather to how we market. We make those kind of deals very, very successful.”

Unique Setup, Creative Dealmaking

Started in 1995 by founder and chairman David Lee, Faris Lee Investments originated from a retail specialty group that broke away from another firm. The 30-person company, which focuses completely on retail investment sales, operates under one roof in Irvine, California. Faris Lee has grown from a Southern California firm to a national one, while seeing its sales expand from about $100 million in its first year to $1.9 billion in 2006.

“As far as volume goes, we’re probably growing at 25 percent a year,” says Walter. “We have about $20 billion total transactional experience.”

A big key to the company’s growth is its integrated, “one-team, one-company” structure. As mentioned before, each of Faris Lee’s 10 brokers works on every investment deal. 

“Nobody else in the industry would do that,” says Walter. “You’re going to get one broker elsewhere. Here we’ll be sharing in it and we all want to see how we can make the best deal for the seller.”

When a new retail listing comes in, all of the firm’s very knowledgeable dealmakers — the average Faris Lee broker has 15 to 20 years of experience — meet for an hour or two to review the details and brainstorm on ways to market the property. 

“We have a company that’s built around the brokerage network,” says Walter. “Our databases are all shared amongst all the brokers, all the employees here. So we’re not working on our individual clients trying to sell individual deals but rather as more of a broad brokerage firm. We’re a full-on marketing, full-blast type company.”

Faris Lee’s innovative, proven sales strategies and ability to tap extensive, more unique buyer pools come from more expert minds working on every property listing, from its marketing to the deal structuring. The result has been a reputation in the marketplace for providing its clients with the best pricing; the company holds cap-rate records and price-per-square-foot records throughout the country, says Walter.

“We built ourselves on creativity,” the Faris Lee president says. “Rather than looking at a transaction, we look at a strategy on how we can sell the property. That takes us into some areas that, quite frankly, we didn’t even realize we were going to grow into so quickly [like the Torrance Crossroads deal].”

TIC Trendsetter & More

The retail property on which Faris Lee Investments closed its biggest deal, Puente Hills Mall, it actually has sold twice, the latest sale totaling $170 million in 2006. True to its pioneering investment spirit, the company was undaunted in leveraging a new investment methodology to get the lucrative transaction completed. Tenant-in-common (TIC) investing has grown exponentially since the first sale in 2003.

“A big part of that growth was trying to become efficient on the financing side because there’s a lot of equity in that market,” says Walter. “We basically branded the Puente Hills Mall as an opportunity for a TIC group to basically accept a new bar.” 

According to Faris Lee’s president, the largest TIC deal at that time was around $30 million or $40 million, and the largest TIC loan ever extended was approximately $25 million. The retail investment company did what it does best — got creative and pushed the investment envelope — when selling the 1.2 million-square-foot property in City of Industry, California.

“We took the mall, which was a $130 million asset, designed a deal with a TIC group called Passco Cos. and were able to execute that deal, finding a lender that was willing to step up and make a $92 million loan to 36 individuals,” says Walter. “Eighteen months later, we were able to successfully resell that to a mall REIT and make a $40 million profit, which I guarantee was the highest profit any TIC has every made. We moved the bar up to enable the TIC industry to look at bigger deals in more difficult structures, and once the lender put that loan on the books all the lenders kind of jumped on board and said, ‘We’ll do that as well,’ because someone’s already created the paperwork and the way to make it happen.” 

Given that the innovative firm has done $5 billion in TIC deals now, it’s easy to see that Faris Lee has become the expert in crafting acquisitions in that investment sector.

Using low-interest financing to drive the deal, Faris Lee Investments sold The Shops at Aliso Viejo in Orange County, California, for $7 million more than the seller expected.

Another noteworthy deal by the retail investment pioneer involved The Shops at Aliso Viejo in Orange County, California. The seller of this nearly 50,000-square-foot property, which purchased the center 6 years earlier in a deal handled by Faris Lee, came back to the company to maximize the shops’ sales value in early 2007. Knowing that the cost of debt was extremely low at the time, Faris Lee crafted a strategy where the owner maximized the terms of the refinancing on two of the parcels and left one parcel without financing.

“This would enable us to match up that deal with multiple types of buyers, specifically targeting 1031 buyers,” says Walter. “We captured a 5 percent interest rate, which really made the deal very attractive. Then we found a foreign buyer who stepped up and paid $39 million for the property, which is $830 per square foot and a 5 percent cap rate, the highest price per square foot and the lowest cap rate in California. That was a very unique transaction where we got involved early on the financing side because the financing would actually drive the sale. In fact, we had the application for the assumption in even before we had funded the actual loan.”

The Shops at Aliso Viejo’s seller, a private group, envisioned the property selling for about $32 million. Thanks to its marketing and advisory services, Faris Lee was able to exceed the seller’s expectations by $7 million, which amounted to a margin of $27 million over what it originally paid for the property.

National Net 

With the investment firm’s impressive results, it was just a matter a time before word of Faris Lee’s work got out to the rest of the county. It has recently completed transactions in Texas, Kansas, Alabama, Florida, South Carolina and New Jersey.

More than 5 years ago, Faris Lee initiated a strategic plan to target opportunities nationwide. The investment conditions in California were the genesis of that movement.

“Sales and cap rates were going down, and the [California] sellers were looking for a place to land their capital after their sales,” says Walter. “To a certain extent, we were taking California capital and moving it across the nation and landing it in other major markets with similar credit to the tenants here in California. We became buyers out there with their money, and were able to get some cap-rate arbitrage so that their return here could be translated into a higher return nationwide.”

Faris Lee continues to build its buyer pool, which is easy to do given the firm’s performance track record and the fact that many apartment owners, office owners and land sellers are attracted to the triple-net, lower-management appeal of retail investing. Now the firm has found a way to add even more certainty, speed and choices for a client in the buying process.

Capital Improvement

Obviously, with such tremendous success over the years in retail investment transactions, Faris Lee’s personnel have demonstrated much more than just adequate knowledge of the financial component of deal-making. From this reservoir of unique financial expertise comes FLI Capital, the company’s new capital team designed to better serve client needs and create value through custom financing solutions for both buyers and sellers.

“Realistically, in the last 5 years, we’ve been micromanaging every detail on the institutional side, which obviously includes lenders,” says Walter, who notes that typically 65 to 80 percent of a given capital stack is going to be debt-sourced. “Internally, we’ve always had people here with higher-level financial backgrounds, and we’ve used that to our advantage in helping to structure loans.”

The FLI Capital division is different from other company setups because it’s an integrated capital group inside the brokerage company, says Walter, who has a financial background himself. Because of Faris Lee’s impressive deal volume, its financial arm has been able to capture and maintain fruitful, long-term lending relationships.

“We give lenders a lot of volume; by giving them volume, they will give us terms and conditions that they may not give other providers,” says Walter, whose company also performs a lot of loan assumptions and loan defeasances. “When you walk in the door here and you want to buy one of our assets, we’ve already talked to the lenders, we already have the financing set up — we’re ready to go. It’s helped us time and time again to be able to craft deals and make sure the structure stands.”

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