As Jacobs steps aside, JBG aggressively repositions itself again

By Jonathan O'Connell
Monday, January 10, 2011; 16

Benjamin R. Jacobs was a young man in a hurry. While still in law school at American University, he was hired as a clerk at a small Washington legal practice in 1962 and engaged to be married the next year. The firm's real estate work interested him most, which came in handy when two 30-something attorneys from the firm suggested he join them in a newly created real estate company.

So keen were Donald A. Brown and Joseph B. Gildenhorn on the 23-year-old that they soon offered to add Jacobs's "J" to the fledgling company's name, making it JBG.

Five decades later, the JBG Cos. has grown into one of the region's most successful real estate firms, an owner or manager of $10 billion in assets, and Jacobs is ready to turn the company over to a new generation of young leaders. Last week, the co-founder traded his position as a managing member of the firm for a senior advisory role, the last of the three early partners to back away from day-to-day responsibilities, meaning there is no longer a "J," "B" or "G" at the helm of the JBG Cos. for the first time in its history.

Jacobs said he is not worried. He and his partners have long run the company like a law firm, hiring new managers in their 20s and 30s and grooming them into ownership positions much like the way law firms develop associates into partners. JBG is a unique entity -- it is private, focused exclusively on Washington, and, though not owned by a family, it has passed the mantle along over 50 years as though from one generation of a family to another.

The new leadership team led by Michael J. Glosserman is now busy positioning the firm for the next real estate boom. With 450 employees and gleaming offices off Wisconsin Avenue NW, the company is moving aggressively to accumulate properties for development, buying some outright and taking control of others by acquiring debt, filling in for fleeing investors and forming joint ventures.

Jacobs said he is proud of the fact that young people at JBG are given a seat at the negotiating table early. Rarely are executives hired from other firms. The company's culture, Jacobs said, has been "one in which everyone's individual contribution is respected and appropriately and fairly rewarded."

That consensus-driven environment started early. Jacobs still remembers the days when all that was necessary to complete a deal was the needed capital and an agreement between the three partners. He says the three never had an argument.

"It was the minority rules," Jacobs said of the original team. "If one person didn't want to do something, we just didn't do it. Period."

Jacobs recalls blocking a suggested expansion into nursing home development. Whether or not it turned out to be the right choice, he said, he wasn't about to invest other people's money into something he didn't feel 100 percent about.

"I don't think that we would have the respect of the investment community today that we've been able to develop had our investors not felt that we treat their capital in the same manner as we treat our own," he said.

A gift for good timing

JBG and its investors for the most part aren't interested in being long-term property owners. They want to acquire properties, improve them and sell them when they feel the time is right.

After the original partners found initial success raising money from wealthy individuals and doing deals, they hired the next generation of leaders in the 1970s: Lewis Rumford, Robert H. Braunohler and Glosserman. JBG built the Four Seasons Hotel in Georgetown while developing projects for other property owners, such the World Bank and Geico.

In the mid-1980s JBG added Robert A. Stewart and Brian P. Coulter, preparing the firm for an aggressive period of acquisitions beginning in 1991, after Washington's last major downturn. By 1998, after years of increasing real estate values, the firm had a 26-building portfolio and considered going public. Instead, it sold nearly its entire portfolio and some of its business to TrizecHahn Corp. for about $580 million.

JBG could have dissolved then. Brown and Gildenhorn had stepped away from daily operations. But Jacobs, Glosserman and Stewart decided to make another run. This time, led by Glosserman, they began raising discretionary funds, which would free them from having to raise money deal by deal. After beginning with funds for individual investors, the Yale Endowment became JBG's first institutional investor, to be followed by other endowments.

The first institutional fund closed in 2002, as the country was emerging from a recession, and JBG shortly became a fund-raising machine, securing $4.7 billion in 10 years. It added Kenneth F. Finkelstein (now chief development officer) in 1998, Porter Dawson in 2000, James L. Iker in 2002 and W. Matt Kelly in 2004, all of whom became owners. And in August 2007, JBG decided to sell again, creating a joint venture with MacFarlane Partners; in the deal, JBG sold an 82 percent stake in 93 properties to MacFarlane for more than $2 billion and another 9 percent stake to Morgan Stanley.

The deal looks like a blockbuster now. A year later, the credit crisis shook the economy and the real estate market collapsed.

Victor MacFarlane, managing principal and chief executive of MacFarlane Partners, said if he had carried a crystal ball at the time he would "not have bought a thing."

"Unfortunately we formed that venture at the peak market. But nonetheless it was great real estate," MacFarlane said.

'Cream rises'

Glosserman, as managing partner, remains the link between Jacobs's generation and the new waves of leaders. Another law school graduate, he has continued a collaborative, entrepreneurial culture as the company has grown by gradually creating space for new hires to become owners. Several JBG alums have also gone on to assume key roles at other firms in town.

Braunohler, one of the first six owners and now vice president at Louis Dreyfus Property Group, described his time at the firm as "six guys with a very informal decision-making process and a very loose kind of office environment."

Another former JBG employee, Timothy Helmig, grew up knowing Jacobs's son and was surprised at receiving frequent advice from executives as a young leasing associate in the 1990s. He is now executive vice president and chief development officer at Monday Properties.

"The environment there, the culture bred that type of mentoring," Helmig said. "The younger guys got exposed to a lot of conversations and discussions that they might not [have been part of] at other organizations."

Glosserman said his goal has been to maintain a private, legacy company and that the path to ownership at JBG reflected that. "We have always viewed ourselves as a meritocracy, as a place where people could come and succeed on their merits," he said. "And so we spend a lot of time along the way thinking about the ways in which not only you transition leadership but you transition ownership."

"The pattern has been," he said, "you come in here as a young person and cream rises."

Three-way fight

JBG says its investors have received an average annual gross investment return of 30 percent since 1999, when its first fund closed. Jacobs said he could not remember any JBG investor who realized a loss, though there may have been a few.

The success has not come without occasional controversy. One JBG joint venture irritated D.C. government leaders when it sued to prevent construction of a convention center hotel, claiming the project would unfairly damage its ownership of the Marriott Wardman Park hotel. Marriott, a JBG partner on other properties, called the suit an "extortionate plan" to force renegotiation of the Wardman Park's management agreement.

Jacobs took a lead role in protecting the firm's Wardman investment, negotiating with city leaders, attending court hearings and speaking with newspaper reporters. Already owning a reputation for being a hard-nosed negotiator, Jacobs was singled out by name by Marriott in a suit it filed in response.

Glosserman said it was unfair for Jacobs to have borne criticism for the legal action alone. "In the community, to the extent that they needed a whipping boy -- you know, why is JBG doing this -- it was always Ben, Ben, Ben. The fact is, that like anything we do around here . . . this was fully vetted by the executive committee, there were enormous amounts of discussion," he said.

JBG executives deny the extortion claims. The joint venture eventually agreed to a deal with Marriott out of court and the suits were withdrawn.Though he is stepping aside, Jacobs has not necessarily slowed down. A 70-year-old grandfather and lifelong auto racing enthusiast, he has decided that he would prefer to spend more time driving the speedsters he constructs in his Bethesda garage than the Chevy Chase real estate firm he helped build.

But as Washington's real estate market heats up again, Helmig, for one, wouldn't be surprised to see the former legal clerk stick his head back in the mix. "There is no way that guy is going to leave competition quietly," he said.

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