North Loop developer Schafer Richardson builds a portfolio with REIT

As it marks 20 years in business, the commercial real estate firm Schafer Richardson is branching out from developing trendy condominiums and apartments by starting a real estate investment trust.

Schafer Richardson has been known for its boundary-pushing residential projects, particularly in Minneapolis' North Loop, where it made its mark as a prime mover in the neighborhood's remarkable transformation from a postindustrial landscape to a creative hot spot.

The company, founded in 1995 by Brad Schafer and Kit Richardson, made big bets in the early 2000s that condominium projects such as the Bassett Creek Lofts and the 710, 720 and 730 Lofts would lure new downtown residents. They did, helping spark an urban renewal that is still ongoing.

And in the apartment-hungry postrecession era, Schafer Richardson has continued to make large-scale investments in big projects such as Third North in the North Loop and 71 France in Edina.

In a far less flashy vein, the firm this year has quickly built up a new REIT that, while certainly not as eye-catching as developing new apartments, is nonetheless proving attractive to investors.

Led by Evan Richardson, SR Realty Trust has snapped up 13 office, industrial, retail and multifamily properties with a current market value of approximately $64 million.

Richardson says while recent acquisitions such as the vintage IDC Building in the North Loop and the 2112 Broadway industrial building in northeast Minneapolis may be comparatively prosaic, they're answering investor demands for bread-and-butter consistency in the postrecession economy.

"Schafer Richardson will mark its 20th anniversary [in November] and in that time our core business has changed very little — creating shareholder wealth by taking measured risk in development and value-add investment strategies," he said. "Coming out of the last downturn, however, we observed a shift in the motivation of our current shareholders as well as those of prospective investors away from high-risk, high-reward opportunities and toward capital preservation and consistent income. It was clear a real estate investment trust could meet this need and would complement our existing business."

After raising about $22 million through a combination of cash and real estate equity in an initial funding round last year, the REIT hit the market, spreading its resources into a diverse range of properties. One is located in Schafer Richardson's familiar North Loop neighborhood — the 66,000-square-foot, brick-and-timber IDC Building, which was 94 percent leased when it was acquired.

Its most recent acquisition, at 2112 Broadway, illustrates the REIT's strategy of diversifying across property types. The property is an 83-year-old office-warehouse flex building that has been repositioned as a transit-friendly creative space with 18-foot clear ceilings.

With the firm's long experience and roots in the metro area, it's not surprising that 12 of the 13 properties acquired by SR Realty Trust so far are in the Twin Cities market — the one exception was a minority interest investment in Rochester.

Richardson, however, said that may not always be the case.

"While Minneapolis will continue to be our primary market, the REIT is evaluating assets in other markets throughout the Upper Midwest," he said. "I expect SR Realty Trust will be in one or two new markets by the end of 2016."

Commercial real estate REITs in general remain in favor with investors for several reasons, he says, including "attractive income potential, relatively low correlation to traditional asset classes, significant tax advantages, opportunities to leverage, low volatility, and a hedge against inflation."

Richardson added, "Beyond that, most REITs will offer the benefits of diversification, liquidity options and professional management. REITs are also required to distribute 90 percent of their taxable income and generally do not pay corporate income tax — the obvious benefit of this being higher dividend yields to investors."

Don Jacobson is a freelance writer in St. Paul. He is the former editor of the Minneapolis/St. Paul Real Estate Journal.