Guiding Principle

By the time Randy and Michael McQuay finished grade school, their father owned six homes as real estate investments. In junior high, Randy McQuay often talked to school chums about having his own real estate company. The McQuays business destiny was apparently already in their genes.

Although their brotherly relationship was sometimes rocky, the McQuays tossed those differences aside and are now partners in a burgeoning commercial real estate venture. While their father dipped his toes into the real estate investment waters, his sons are swimming laps in an Olympic-size pool.

The owners of Principle Equity Investments Inc., Kalee Investments and Principle Equity Management -- the newest addition to their mini-empire -- are scrambling to add management staff, jockeying deals around the country and adding desks to every nook and cranny in their corner of a low-rise office tower.

Sitting down in the company boardroom on a Friday afternoon after just returning from a trip to Boston to meet potential investors, the brothers' differences, and strengths, seem apparent.

Michael McQuay owned a Seattle company, Pacific Export Marketing, for about nine years, selling fresh food and bulk commodities to Eastern Europe and the Far East. He made frequent trips to Houston to oversee port shipments. Like his father, he had made a few real estate investments on the side, and saw enough opportunity in Houston that he moved the business here in 1995.

But with the Asian currency crisis looming large combined with the loss of a key overseas customer, Michael made the tough choice to exit the export business.

"I really didn't want to go back to Seattle, so I just stayed here and did more real estate deals," he says.

When Michael acquired his first multifamily project, Collingwood Gardens in Greenspoint, in 1996, he formed Kalee Investments to manage the property.

A year later, Michael got on the phone with his brother -- who had experience in real estate finance and asset management -- and convinced him to come to Houston to finalize the acquisition of a large multifamily complex in Pasadena. But the deal was more cumbersome than they expected, and it fell through, sending Randy back to the West Coast.

"We both lost money on the deal, but we didn't lose our relationship over it," says Randy McQuay.

By 2002, Michael told Randy he had reached a turning point -- he could either continue to run his company as a small "mom-and-pop" operation, or Randy could join him to turn it into something bigger.

So the brothers created a limited partnership, Principle Equity Management, to offer private investors a chance to own chunks of large, institutional-size investments in commercial real estate properties through 1031 Tenants-in-Common, or TIC, real estate transactions. TICs emerged in 2002 through a new Internal Revenue Service-approved procedure that allows investors with equity proceeds from real estate investment sales to defer capital gains taxes. One of the brothers' California investment contacts urged them, on multiple occasions, to look into it -- and his persistence paid off.

Randy packed up his family and joined his brother in January 2003 to help with multifamily real estate transactions and acquisitions through Principle Equity Investments, which had been formed in 1998, and to work behind the scenes for a year to get the fledgling PE Management off the ground. Kalee Investments also continued to operate.

"I had to hire somebody like Randy, or just hire Randy," says Michael, Principle Equities' CEO. "He has the real knowledge of this industry and speaks the language of the tax attorneys, and I always consulted with him on the phone about other deals. I just have the will to get a deal done. We push and pull each other."

Randy, who serves as the firm's chief operating officer, has an equally affectionate way of describing his brother's business style.

"He's a deal junkie," he says of Michael.

The real thing

PE Management's first TIC transaction closed in December 2004, a $10.5 million deal for a 60,000-square-foot retail center in San Antonio. The second TIC was twice that size, a $25.6 million investment in a Chicago-area retail center in Downers Grove, Ill. The deal, which closed in June, includes 22 private TIC investors from around the country who threw in about $410,000 apiece. The McQuays have two more TICs, totaling $82 million, scheduled to close in November in Phoenix and Fairfield, Calif.

TIC deals are extremely complex, especially because of the securities element involved and extra hand-holding for the smaller private investors.

Matt Franke, a commercial mortgage banker with Kinghorn, Driver, Hough & Co. in Houston, who arranged financing for part of the Chicago TIC deal, says the McQuay brothers seem better prepared than some competitors when it comes to doing their homework.

"Their due diligence and knowledge of underwriting allows them to purchase properties that are off other people's radar screens, and they work harder than almost anyone I know," says Franke. "The way Randy and Michael have structured the company, they take the committee out of the decision-making equation. They make key decisions very quickly so they can move on to the next problem or opportunity. It's very entrepreneurial."

When Randy arrived in 2003, the company had five employees. It now has 11, plus more than 40 on contract as property managers under the Kalee arm. After a couple of expansions, the three companies occupy 2,500 square feet of space, but the brothers are looking to acquire a space twice that size and relocate from U.S. Highway 290 to the Galleria area in 2006.

Meanwhile, transaction volume is growing. The corporate group had $25 million in property investment assets at the end of 2003, increasing to $36 million in 2004, and is projected to exceed $140 million at the end of this year.

These days, the McQuays must apply the same expertise and gut instincts they use for finding and structuring deals to create a solid company. Michael McQuay says it was obvious that the complexity of putting together the TIC deals and other imminent opportunities meant they needed help.

"We're both deathly afraid of growing too fast beyond our ability to put in the right infrastructure to manage growth," he says.

Since April, the company has hired Michelle Rhone from Oak Leaf Management to oversee multifamily properties; Dan Summers, former CEO of real estate investment firm Madison Realty Group Inc. of Pittsburgh as an analyst to search out investment opportunities; and Marc Smith as president to handle day-to-day operations. The company plans to create a chief financial officer position in 2006.

Rhone has 11 years of experience in the multifamily real estate sector, mainly on the fee management side. As regional property director at Kalee, Rhone oversees management of the company's portfolio of multifamily properties, including seven apartment buildings and two mobile home parks.

"I made the decision to go over to owner management because I knew (the McQuays) wanted to build and buy additional assets for growth and longevity," she says. "They have a lot of enthusiasm for the multifamily market and huge visions of where they want to take us for the next five years."

Greg Barr is a Houston-area freelance writer