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No-frills California real estate trust finds small is a beautiful market niche


SAN FRANCISCO -- Free associate with REITs and you instantly think of the elite and grandiose world of real estate tycoons backed by Wall Street -- big-time operators who sit in mahogany boardrooms with gold-dipped chandeliers, pay cold cash for multimillion-dollar properties, and hop the company jet to visit their investments.

All of that brings a chuckle to David Rabb, president of David Rabb Real Estate Investment Trust (REIT). His REIT is so tiny that it's barely known outside of a small circle of 200 investors, virtually all of whom Mr. Rabb knows by name.

The REIT's assets total less than $3.5 million -- hardly a financial footnote for some of the better known REITs. And none of the properties are located more than an hour from his suburban San Francisco headquarters in San Rafael.

And the only other employee in the office is not paid. That's Mary, his wife of 29 years. Still, the 8-year-old REIT has been very successful with an investment strategy of buying and adding value to small commercial and residential properties. Ten properties just north of San Francisco in San Rafael, Novato, Petaluma and Napa comprise about two-thirds of the REIT portfolio. Short-term mortgage loans represent the rest.

REITs are real estate mutual funds that pool investor money to buy large commercial and office projects or mortgages on such real estate. There are more than 300 tax-qualified REITs in the country. Most of them are publicly traded on Wall Street, while a few, such as the Rabb REIT, sell shares privately.

REITs have become a booming business during the past three years. The largest is Resources Mortgage Capital of Richmond, Va., with $3.6 billion in assets, according to the National Association of Real Estate Investment Trusts.

Investors can purchase REITs for between $10 and $30 a share. As a corporation, an REIT is exempt from income tax as long as 95 percent of its net income goes to stockholders. The Rabb REIT increased its 1994 dividend to 60 cents per $10 share -- the fourth straight year of increased dividends.

Neither Mrs. Rabb, 50, nor Mr. Rabb, 56, harbor any illusions of becoming a corporate behemoth. Small is a beautiful niche, thank you.

"We don't have the gold faucets and the helicopter. We don't want to be gorillas," Mrs. Rabb said. "The minute you become the gorilla, you're no longer your own boss, you're no longer an entrepreneur. The larger REITs are less entrepreneurial because they have to respond to Wall Street and pension funds."

The Rabb REIT also has the mobility to move quickly when a good deal is spotted. No need to meet with various layers of management.

If that had been the case, the Rabb REIT probably would have lost out on what was one of its better deals -- a four-unit office building in Novato. The property came on the market on a Monday morning. Mr. Rabb drove by and liked it so much he immediately picked up three of his five board directors and returned to the property.

"They gave me their nod [of approval] and I ran back to the office, wrote the offer and faxed it to the broker -- all within two hours," Mr. Rabb said. "By the time we had acceptance, there were three other people who were going to make offers."

Shortly after the REIT's purchase, the only two tenants on the second floor moved out after their lease expired. Within 10 days the vacant space was converted into six smaller offices and re-rented with 25 percent higher rents.

The Rabbs hope to grow into a $20 million operation by the end of the decade. But as Mr. Rabb said, "We get bigger by staying small."

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