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The CRE Sector Discovers the Benefits of SPACs

Some investors are raising capital for so-called "blank check" companies to snatch up emerging opportunities they see in the marketplace.

Property Solutions Acquisition Corp. launched a successful IPO in July that raised $230 million. But investors who bought a stake in the “blank check” company are still waiting to see exactly what assets they will end up owning.

Buying something sight unseen sounds a little unorthodox, but special purpose acquisition companies (SPACs) have surged in popularity in recent years and that includes some targeting commercial real estate and the proptech sectors. SPACs are basically a shell company created with the sole purpose of using proceeds from an IPO for a yet to-be-determined merger or acquistion. Year-to-date, there have been a record 140 SPAC IPOs that have generated $54.4 billion—more than quadruple the $13.6 billion raised in 2019, according to SPAC Research. “It is incredible how much more SPAC activity there is today versus even a year or two ago,” says Jordan Vogel, Chairman and co-CEO of Property Solutions Acquisition.  “SPACs have become a very credible way of taking a company public,” he adds.  

The SPAC structure caught the eye of Vogel and partner Aaron Feldman about a year ago. The two also are co-founders and co-managing partners at Benchmark Real Estate Group, a multifamily investment and management firm focused on acquiring assets in New York City. “I wanted to get involved in a high-growth business that touches real estate, and the SPAC structure is a very good structure to accomplish that goal,” says Vogel.

Property Solutions Acquisition plans to target proptech companies or real estate service companies with high growth potential. The SPAC is looking closely at a half dozen different companies and Vogel expects to announce a transaction within the next three to six months.

Property Solutions Acquisition is one of a growing number of SPACs being formed to target merger and acquisition opportunities in the real estate industry, many of which are targeting fast-growing proptech firms. Hennessy Capital executives Thomas Hennessy and Joseph Beck filed plans with the SEC last week for their second SPAC IPO. The two hope to raise $175 million with PropTech Investment II. Their first venture, PropTech Acquisition (PTAC) has a merger currently pending with home services software provider Sam Zell also is another big name commercial real estate player who is reportedly considering creating a SPAC.

Growing popularity

Although the SPAC structure has been around for more than two decades, it is gaining more attention in financial markets thanks in part to some very high-profile deals. One notable transaction was Virgin Galactic’s merger with SPAC Social Capital Hedosophia last year with a current market cap that puts the value of the company at about $5 billion. In addition, hedge fund giant Bill Ackman raised a record $4 billion in a July IPO for new SPAC, Pershing Square Tontine Holdings.

“There are peaks and valleys as it relates to the utilization of the SPAC vehicle, and a lot of that is driven by the market,” says Karen Cronin, real estate leader, audit and assurance at Deloitte. Another reason that SPACs are seeing record activity this year is due to an abundance of uninvested capital or dry powder that is driving demand for investors.

SPACs also are attracting attention in both residential and commercial real estate circles. For example, the Wall Street Journal reported in September that United Wholesale Mortgage was planning to merge with SPAC Gores Holdings IV Inc. in deal valued at a record $16.1 billion. “SPACs are growing broadly across all sectors, and in real estate different substantial real estate sponsors are finding different utilities for the SPAC vehicle. The most obvious of which is property technology,” says Douglas Ellenoff, a founding partner at the New York City-based law firm of Ellenoff Grossman & Schole LLP. 

Historically, the thinking was that the real estate market was so efficiently priced, and there was so much capital targeting the sector, that it was difficult to buy real estate properties or portfolios at deep discounts that would make it worthwhile for the SPAC sponsor to take the assets public, notes Ellenoff. However, the distress to certain sectors of the commercial real estate market that has been caused by the pandemic could create a window of opportunity for SPAC structures to take a bigger step into real estate assets. “That is precisely what is now happening with people who are focused on those opportunities both domestically and internationally,” says Ellenoff.

SPACs offer a fast road to public markets

SPACs offer a variety of benefits to sponsors, investors and companies looking to go public. They mitigate some of the traditional risks of an IPO, which is pricing volatility. That is especially attractive now given the volatility resulting from the pandemic and the upcoming presidential election. Second is speed. It is a faster way to take a company public. In some cases, a company can go public in eight to 10 weeks versus a year or more for a traditional IPO. “What’s happening is that the SPAC vehicles are providing an opportunity for seasoned investors and management teams to come together in a more expedited manner,” says Cronin.  

Investors who participate in SPACs not only get common shares, but they also receive warrants as part of the IPO process. Buying into a SPAC gives investors a free look into what that sponsor is buying, because they can choose to redeem shares in the new entity or get their money back prior to any transaction closing. Investors are gravitating to those sponsors that have a good track record of identifying interesting opportunities, and they like that SPACs give them early access to start-ups.

The proliferation of proptech and other real estate tech companies is expected to fuel more SPAC activity in the real estate sector in the coming year. “There are a number of very competent and well established proptech companies that are looking at potential exit strategies,” notes Cronin. Those companies are weighing the options of going the traditional IPO route or partnering with a SPAC. “What is interesting is that we’re seeing a lot of competition. So, these private companies are not taking the first offer or first SPAC that comes along,” she adds. “They are interviewing the sponsors to make sure they know the backing and sophistication of the entity that can help them, because once the transaction closes, you have all of the same things to consider as it relates to managing a public company.”

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