Betting Big is Better

Betting Big is Better

Real estate by Mark Gordon | Managing Editor

A Michigan developer who seeks out retiring baby boomer hot spots picked the Gulf Coast as the next location for his $1 billion portfolio. He's pitting his stellar track record against a not-so-stellar condo market.

Brent Virkus was getting along just fine investing other people's money in suburban Detroit. At least until the stock market tanked a few years ago and his life became one recurring nightmare of declining portfolios.

Now Virkus is still investing other people's money, but he's getting along even better, having switched his focus to real estate as lead developer and founder of the Triton Cos. The high-flying Rochester, Mich.-based firm is focusing its vast $1.2 billion-plus portfolio on locales that attract retiring baby-boomers, such as Phoenix and Hawaii.

And in Florida, too, specifically, in Sarasota. In April, Triton, partnering with another Michigan company, closed on a $36 million deal to buy the former Gold Bank Plaza on South Pineapple Avenue in downtown Sarasota. Now known as the M & I Bank building, Virkus intends to build a ten-story luxury 100-plus condo tower on the adjacent land, off of Palm Avenue. Soon after that deal, Triton bought the Sea Castle rental apartment complex in Siesta Key for $35 million, also with the intention of turning the popular vacation spot into condos.

The M & I Bank building deal, worth just more than $50 million after acquisition fees and planning, is one of the most expensive purchases of a single building in Sarasota this year. When combined with the Sea Castle deal, it puts Virkus into an exclusive club of developers - backed by deep-pocketed investors - that are hoping to put a new face on downtown Sarasota. The list includes John Simon, the point man behind Pineapple Square, a condo and retail project on Lemon and Pineapple avenues, and Patrick Kelly of Irish American Properties Inc., who intends to turn the Quay on Tamiami Trail into a complex of condos and offices retail stores.

Still, long before any multimillion-dollar condo contracts are signed, the condo project presents a daunting challenge for Virkus, 38, and his firm, when considering the steep price he paid for the building, the competing projects and the stalled condo market. On the last count, several economic and real estate analysts are predicting a long and loud thump of the over-built condo market.

Virkus recognizes the risks but remains optimistic about the project, focusing on the financials of the deal that leave room for error. He says the sale price of the building allows him to cut back on the individual condo price, if necessary, and he's also turned cost cutting into a science when it comes to construction.

What's more, Virkus feels he's somewhat insulated to the condo slump by surrounding himself with an A-list of investors, including top Wall Street firms. "If you bought into it right," he says, "you have a cushion you can fall back on."

Besides, Virkus has hands-on experience in making difficult calls.

You're all fired

At the top of Virkus' difficult calls list would have to be the one he made to refocus Triton in 2005. The then-three-year old company, which Virkus had been running as a combination of a financial planning and real estate investing and developing had some backwards numbers: About 80% of the revenue against 20% of the overhead was coming from development, while the reverse, 80% of the overhead against 20% of the revenue, was true for the financial planning segment.

The 80-20 theory was a drain on company profits, a fact cemented when Virkus' trusted advisor and one-time client, Stephen Fagan, told him that "the reality is you have all of your buddies working for a you, like a little fraternity network." What's more, the dozen employees, made up of former auto company employees and colleagues from Virkus' days as a financial planner, didn't share Virkus' think-big real estate vision. Instead, they were focused on selling life insurance and mutual funds.

So in 2005, Virkus fired all the employees, save his office manager.

"It was one of the toughest things I have ever done," Virkus says, adding that the purging, hard as it was, had a bright side: He was able to bring in talented people with similar philosophies on development that could help him grow the company.

That growth came in a furiously quick spurt; Vikrus calls the last two years a snowball. Prior to the $70 million in Sarasota purchases, projects Triton has been involved with developing the last two years include: the Atrium at Aventura, a 192-condo project north of Miami scheduled to be completed next year; three condo complexes totaling more than 300 units in Hawaii; and the Royal Park Hotel, a 135,800 square-foot 143-room hotel near Triton's Rochester, Mich. headquarters. Triton also counts several office parks in Michigan, Arizona and Hawaii, as well as a Kohl's-anchored retail center in Greely, Colo. in its portfolio.

The bigger the better is Virkus' motto. That gives him better bargaining power, greater economies of scale and leverage when doing new deals or bringing in partners. "The best projects are the huge ones," he says, "because you're not competing with the masses, with every doctor or dentist that thinks he's a developer."

Terrifying times

Virkus, a Michigan native who vacationed with his family in Sarasota as a kid - including spending time at a house next door to the Sea Castle in Siesta Key, the property Triton recently purchased - passed on a chance to play professional golf in his 20s. After graduating from Western Michigan University, Virkus instead went into the volatile field of financial planning and money management, working for Merrill Lynch and UBS Paine Webber for 10 years.

For most of that time, Virkus had several high net worth clients where he advised them on several real estate-related deals.

But in 2002, Virkus dropped his securities license to focus on real estate. The switch, he says, was necessary after working without a safety net as a money manager during the early years of the bear market. "You go through three years of totally destroying people's money," he says. "It's terrifying."

As Virkus became more involved in real estate development, he learned it takes more than just big projects to become a go-to real estate developer. One key lesson he's learned is to make sure a project has "institutional quality" behind it, including sound investors, smart managers and top outside help; for instance, Triton is working with Kraft Construction in Sarasota.

Research into an area prior to developing is essential, too. Virkus displays his penchant for data while explaining why he chose Sarasota as Triton's next place to build. He draws all over a map of Florida, displaying how his analysis shows Sarasota as the epicenter of growth in the Sunshine state, taking comers from all directions: Miami, Naples and Tampa.

The Sarasota projects follow Virkus' bigger-is-better philosophy. With the Sea Castle property on Siesta Key, he intends to build 40 condos, each with Gulf and beach views, at prices starting at $1 million each. Virkus, along with representatives from RBS Cos., the partner in the M & I Bank building deal, presented preliminary plans of the downtown project to Sarasota city planners in August. Called One Palm, the developers are planning a ground floor of stores to highlight the projected $100 million project.

It could be as long as two years before construction begins on the project, a time where some analysts predict Florida's condo market will continue to falter. One defender of the downtown condo market is one of Virkus' competitors, John Simon of Pineapple Square Properties, the company behind the project of the same name. (See related story). In a recent interview, Simon says that some predictions are too general. "The market is suffering in Sarasota," he says, "but not in downtown."

At a glance: the competition

Brent Virkus and his Triton development company are getting into the downtown Sarasota condo market a few years after several other players. Two other large-scale condo-centric developments are being planned, in addition to several other straight condo buildings. Some smaller projects have been scaled back due to the housing slump, but the developers behind the biggest have soldiered on. Here's a glance at where two big projects are in the process:

Bayside Development/The Quay, Tamiami Trail and Fruitville Road: Planned as 700-plus condos, 189,000 square feet of commercial space, 39,000 square feet of office space, a hotel and restaurants. The $1 billion development covers 14.5 acres.

The Sarasota city Development Review Committee is scheduled to look at the plans early this month, and if it passes there, it goes to the planning board and then the City Commission. If the project is approved, construction could start in late 2007/early 2008.

Pineapple Square, Lemon and Pineapple avenues: $200 million project planned as 30-40 retail shops and restaurants, 200-plus condos and 1,000-plus parking spaces. Reservations for condos were recently opened up to the public and developer John Simon says sales have been going well, despite reports of a failing market. About one-third of the 157 units in the first phase of construction, a 13-story tower, have already been reserved. The project has to go through a similar approval process as Bayside, but if approved, construction could begin as early as next spring.

-Roger Drouin and Mark Gordon

Courtesy photos

In conjunction with a regional development partner, Triton acquired the 84,000-square-foot Ocean View office building, right, in late 2005. It is located in the Central Business District of Honolulu, next to the state capital. Since acquisition, all major tenants re-signed, significantly increasing the buildings valuation. Triton bought the 30,000-square-foot Genoa Business Park I office building in Brighton, Mich., below top, for its location next to a physician-owned medical building and a planned retail structure. The 24,000-square-foot Genoa Business Park II office building, below bottom, was acquired due to its exceptional location. Also positioned next to the 80,000-square-foot physician-owned medical building and the planned 20,000-square-foot retail space, this building is located in a burgeoning medical hub. Like its sister building that Triton also acquired, The Genoa Business Park II location helps insulate it from regional economic swings.