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Saturday, 18 March 2017 05:30

OPEN FOR BUSINESS: Tribes invest in economic diversification via M&A, real estate deals

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Gun Lake Investments opened the $4.4 million Noonday Market, a gas station and convenience store, to capture more money for the Gun Lake Tribe’s economy from people visiting its gaming facility in Bradley, south of Grand Rapids. Gun Lake Investments opened the $4.4 million Noonday Market, a gas station and convenience store, to capture more money for the Gun Lake Tribe’s economy from people visiting its gaming facility in Bradley, south of Grand Rapids. COURTESY PHOTO

BRADLEY — Across West Michigan, Native American tribes have started to hang out their own shingle in enterprises that move them away from the familiar tribal-owned casino.

While they’re mostly in the early stages of exploring the non-gaming economy, the tribes are starting small by investing in local companies and in local commercial real estate deals. Out of concern for their long-term economic sustainability, the tribes are diversifying their sovereign economies away from casinos to ensure they are not gambling with the livelihoods of the next seven generations.

That’s true in Bradley, a small Allegan County community that’s home to the ever-expanding Gun Lake Casino. The casino’s owners, the federally recognized Match-E-Be-Nash-She-Wish Band of Pottawatomi Indians, want to leverage gaming revenues to grow a sustainable economy for tribal members and the surrounding West Michigan community. To do it, they’ve borrowed best practices from other Native American tribes in pursuing acquisitions of controlling or minority interests in complementary local businesses, and by partnering in real estate deals around Grand Rapids.

“It was important for the Gun Lake Tribe to look to diversify their assets,” said Kurt Trevan, the CEO of Gun Lake Investments, the tribe’s economic development company that formed nearly two years ago. “Obviously, the Gun Lake Casino is a big investment for the Gun Lake Tribe, but we really wanted to start to spread those investments around into other opportunities.”

KurtTrevan
Trevan

Gun Lake Investments uses casino revenue to make investments in industries outside of gaming. The tribe’s first investment — launching the $4.4 million Noonday Market, a convenience store and fast-food restaurant near Gun Lake Casino and U.S. 131 — builds off synergies with the gaming operation to capture more dollars locally, Trevan said.

But Gun Lake Investments also will pursue business opportunities outside the tribe and the casino. Particularly, the group wants to make direct investments in performing companies with earnings before interest, taxes, depreciation and amortization (EBITDA) between $500,000 and $1.5 million. It especially wants to identify situations involving a longtime owner who’s looking to retire within five years of the deal.

Gun Lake Investments also provided a mortgage for an undisclosed office building in Grand Rapids in late 2016. Trevan was unable to disclose any specifics on the deal.

“It was an owner that we knew well. They were looking to refinance some debt on a property that they owned,” he said. “It was an opportunity to help out a party that we know and have relationships with and that we trust.”

[RELATED: EXPLORING THE TRIBAL ADVANTAGE — How non-tribal companies can benefit from working with West Michigan tribes]

As a lender, the tribe would not be subject to the same restrictions as a regulated mortgage company, potentially reducing the cost of capital, according to Fred Schubkegel, a partner at Varnum LLP in Kalamazoo who specializes in American Indian law.

He sees tribal economic development organizations becoming yet another piece of the capital continuum in what’s been a hot M&A market over the last several years.

2 FredSchubkegel
 Schubkegel

“The non-gaming economic activities of tribes are on the rise. I would say it’s definitely growing,” Schubkegel said. “People are getting more comfortable and more familiar with tribes and their business entities and how to do business with them.”

Aside from its early deals, Gun Lake Investments, which operates autonomously from the Tribal Council that funds it, has yet to finalize its investment strategy, Trevan said. However, the group hasn’t ruled out deals in any industry at this point.

“We’re very open to opportunities in manufacturing, so long that there’s a solid operator that’s looking to stay on for another three to five years, and historical cash flows,” he said. “We like services-based businesses such as facility or property management, especially in I.T. services, especially in categories in which we can capture some of our tribal government or casino spend to help enhance the tribal economy and keep that dollar recycled.”

 

ESTABLISHING A PORTFOLIO

Gun Lake Investments has turned to fellow tribal economic development organizations in Michigan and nationwide for advice and best practices. For example, the group shares a board member with Mno-Bmadsen, the Dowagiac-based economic development and investment arm of the Pokagon Band of Potawatomi that’s served as “a big brother, of sorts” for Gun Lake Investments, according to Trevan.

Mno-Bmadsen, a diversified holding company, has been active in dealmaking in recent years as it develops a portfolio of businesses that can benefit from the tribe’s “sovereign economic advantages,” particularly in federal contracting.

Native American-owned businesses can qualify for minority set-asides in government contracts, plus they pay no federal or state business taxes, increasing their rate of return, said attorney Schubkegel.

Mno-Bmadsen owns or holds majority positions in six businesses, including an architecture company, a civil engineering firm, a mechanical contractor, a plastic injection-molding manufacturer and a convenience store.

TroyClay
 Clay

This year, however, Mno-Bmadsen plans to step back from actively pursuing acquisitions as it reviews its long-term investment strategy, said President and CEO Troy Clay.

“We want to level off at altitude and make sure all of our companies are operating in the most disciplined, performance-oriented manner that they can be,” Clay said. “That’s not to say that they’re not, but we can always improve.”

In addition to updating its current investment strategy, Mno-Bmadsen wants to find ways to consolidate expenses across its holdings to increase operational efficiencies, Clay said. He expects the organization to ramp up its dealmaking again in 2018.

“Going forward, we’re still looking at buying companies; it’s a question of what kind of companies we want to buy and what size,” he said. “That could be companies that merge with our existing businesses. It could be new industries.

“We do know that we will probably be out of the business of doing any more startups going forward. We’ll just buy companies in industries that we determine we want to move into that are well managed, fairly priced, and will continue to have management on board when we acquire the companies. (We want to) add value as a tribe so we can start growing that company after you acquire it.”

Mno-Bmadsen typically sources deals from its network of contacts in the region, including area banks and economic development organizations like Southwest Michigan First. That’s who connected Mno-Bmadsen with Portage-based Accu-Mold LLC, which it acquired in 2013 as the company’s owner looked to retire.

Under its former investment plan, Mno-Bmadsen would invest $2 million to $3 million per deal, with a $1 million floor and a $5 million maximum, including add-ons.

Part of the organization’s momentum to date has stemmed from setting clear boundaries that it will not cross in pursuing acquisitions, Clay said. Aside from moving away from starting up its own businesses, Mno-Bmadsen avoids any sort of turnaround situation, preferring instead to buy “existing companies that simply, for the most part, have no succession,” he said.

Avoiding turnarounds forms part of the strategy Mno-Bmadsen has helped instill in Gun Lake Investments.

“Tribes are just historically bad at turning around companies or getting into distressed situations,” Trevan said. “Institutionally, we know we’re not ready for that.”

 

FLEXIBILITY TO FUNCTION

While the federally recognized tribes in West Michigan all have established economic development organizations that invest gaming revenue, they differ in their funding mechanisms for deals.

Mno-Bmadsen’s starting budget for acquisitions was “in the low millions,” Clay told MiBiz previously, noting he requests funding from the Tribal Council — its governmental body — on a case-by-case or project basis.

At Mount Pleasant-based Migizi Economic Development Co., the investment arm of the Saginaw Chippewa Indian Tribe, the organization functions as an autonomous entity, but works closely with its tribal council and its “very involved” top executive, Chief Frank Cloutier, according to CEO Robert Juckniess.

RobertJuckniess
 Juckniess

“The tribe has shown they’re interested in economic development and if the right opportunities present themselves, the tribe has proven that they are willing to make the right investments at the right time,” Juckniess said, noting the Tribal Council funds the deals on a case-by-case basis.

That willingness extends to being flexible in funding Migizi’s various types of investments. The organization owns and manages a golf course, water park, pharmacy, sporting goods store and marina, as well as gas stations. Migizi also invested in a diverse land portfolio including commercial and residential real estate and farmland.

While Migizi typically wants to invest in long-term holdings, it’s also open to opportunistic investments that have “a clear exit strategy.”

“When you talk about a family office versus venture capital versus private equity: We’re utilizing the tribe’s money, which belongs to all the tribal members, and we can play a role in each of those different aspects,” Juckniess said. “We’ve got the flexibility to function as a private equity partner, we’ve got the flexibility to function as a venture capital partner or as a family office.”

At Gun Lake Investments, Trevan declined to disclose the amount of funding the organization has available for investments, but said the Tribal Council provided an initial distribution when the entity was created. An affiliate, GLIMI, received $3.2 million as part of a settlement with the state of Michigan. The agreement also created an ongoing funding mechanism for GLIMI, which has state and tribal oversight, until the dispute over the state’s expansion into online gaming reaches a final settlement.

Moreover, the autonomous board of Gun Lake Investments — which includes some Tribal Council members — makes decisions on its own.

“From a speed and efficiency standpoint, it really helps us to operate more in a business-like fashion and a business-like speed, as opposed to at a government pace,” Trevan said.

 

‘PRIME FOR PARTNERING’ IN REAL ESTATE

Aside from direct investments in companies, tribes also have started to get active in commercial real estate deals, both as an owner/property manager and as a financial partner.

For example, an affiliate of Waséyabek Development Company LLC, the economic development arm of the Nottawaseppi Huron Band of Potawatomi based in southeastern Kalamazoo County, acquired a retail facility in Kentwood last November.

In a $2.4 million deal, the tribally chartered Terrapin Properties of Michigan LLC bought the 17,169-square-foot retail store at 3270 29th St. from Goodwill Industries of Greater Grand Rapids, according to Kent County property records.

Goodwill “took advantage of an extremely aggressive real estate market” in selling the property and in turn, signed a 10-year lease for the facility, said Jill Wallace, the nonprofit’s chief marketing and communications officer. Specialty broker Marcus and Millichap brought Terrapin to the table for the deal, Wallace said.

“This was an ideal investment for WDC as it provides an asset that will continue to build value and provide stable revenue over time,” the tribe said in a statement announcing the deal. “With Goodwill Industries of Greater Grand Rapids as a 10 year tenant, WDC can continue to build a solid base and look towards the next acquisition with an economically stable, long-term leaseholder as part of the WDC portfolio.”

A representative from Waséyabek did not respond to a request for comment. The non-gaming entity’s growth strategy includes “acquiring or investing in profitable companies and income properties within Michigan and the Midwest,” according to its website.

In Mount Pleasant, Migizi has taken the real estate strategy a step further by developing its own industrial and commercial business parks.

“We’ve got thousands of acres of land both in Isabella and Arenac counties that’s prime for partnering with people such as manufacturing firms,” Juckniess said. “We’re actively looking for deals, especially as it pertains to having outside businesses relocate onto tribal property and realize the benefits of being located on tribal property.”

Those benefits include removing a company’s exposure to state property taxes, as well as local zoning and state building regulations, Varnum’s Schubkegel said.

“No one wants to go in and build a substandard building, but to the extent that you’ve got problematic barriers to development that would be imposed by other local units of government, the tribe would function as that local unit of government and they might be easier to deal with than a township or a city,” he said.

Migizi is working to bring national and international companies to the 58-acre Makawa Industrial Business Park, which has available water, sewer and power infrastructure. Meanwhile, only 1,120 square feet of space remains in the 14,000-square-foot Arnold J. Sowmick Sr. Plaza in Mount Pleasant, although the tribe has plans to double the facility in a second phase, according to Juckniess.  

In West Michigan, Gun Lake Investments plans to reach out to developers to partner on commercial real estate deals for new projects and stabilized properties, Trevan said.

“We’re generally seeking opportunities up to $5 million, but will partner for larger properties,” he said. “Because we prefer to be passive and invest in the right people, GLI is open to taking minority positions; thus, we’re able to get into larger opportunities by partnering with other capital.”

An active West Michigan developer contacted by MiBiz didn’t think tribal financing was a fit for his company, but said he could see where its investment strategy “might be something for a one-off developer who needs equity.”

For his part, Trevan said the tribe remains interested in starting conversations with entities heading up local projects where Gun Lake Investments’ funding can lead to broad-based benefit.

“We definitely want to explore all opportunities, especially where patient capital has the potential to make a community impact,” he said.

 

BUILDING MOMENTUM

Of the local tribes, the Saginaw Chippewa have been active in economic development for perhaps the longest time. Even so, Juckniess acknowledges the tribe has a long way to go to realize its mission of securing the economic well-being for tribal members.

“We’re in the nascent level of economic development, although I believe that the Saginaw Chippewa Tribe is far ahead of a lot of the tribes in this area because we’ve been doing this now for about a decade,” he said.

While most Michigan-based tribes do not disclose the value of their assets, executives admit they lack an investment portfolio and track record for economic diversification on par with Native American groups in other areas of the country that have been active for longer periods. Many cite Winnebago, Neb.-based Ho-Chunk Inc. or the Potawatomi Business Development Corp. in Milwaukee as examples of successful ventures they want to emulate.

In the case of Ho-Chunk, the Winnebago Tribe of Nebraska in 1994 invested $9 million of gaming revenue as startup capital. In the years since, Ho-Chunk has leveraged the Small Business Administration’s 8(a) certification for Native-owned small businesses to access federal contracts and set-asides.

In 2015, the most recent year for which data are available, the investment management group reported $15.8 million in net income and assets of nearly $118 million, according to its annual report. Additionally, Ho-Chunk distributed more than $3 million in dividends to its members that year.

In Michigan, the state has taken a more focused approach to the tribes since 2010, when it formed an annual $1.1 million fund the Michigan Economic Development Corp. can use to support tribal business activity. The MEDC also regularly checks in with the tribal governments to see if it can provide any state resources for tribal businesses, said Tom Durkee, the agency’s project manager for tribal business development.

“In the early start of this, it was looking at the lower hanging fruit in the kind of success a tribe could have, rather than taking on a complex project with a lot of moving parts and that would need a lot of funding,” he said. “Now, being almost seven years in, the sophistication level across the tribes in the state has risen dramatically, and their engagement … has risen dramatically as well.

“As we do this longer, we’re not in our infancy anymore in terms of the tribes. Each year gets a little better and a little stronger, and the projects get a little more complex and a little more involved. We’re leveraging some of the dollars better.”

Despite their progress, the Michigan tribes “are not the leading edge” among tribal economic development nationally, particularly compared to the Alaska Natives and tribes in the Western U.S., Schubkegel said.

“(Michigan’s) tribes are above average in where they’re at in their economic development activities, but certainly not the leaders,” he said. “We’re able to learn from the mistakes of what’s gone before and really build this thing right. We’re doing OK.”

Clay at Mno-Bmadsen sees the level of sophistication continuing to improve as more tribes seek economic diversification outside of gaming. As that happens, it’s incumbent on the tribes to do a better job of communicating the impact they’re having in their broader communities across Michigan.

“If the tribe’s doing good for itself, it affects the community around them. When you look at the jobs we’ve created, we have enormous opportunities for our people, but we also have a lot of neighbors work for casinos and work for us,” Clay said. “The old saying is that rising tides lift all boats, and I think that’s the attitude here.”

Read 2243 times Last modified on Sunday, 19 March 2017 09:34
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