Frank Kahn (W í46) Creates the REIT Industry

Wharton Club of DC Alum of the Month

Lively and engaging, Benjamin Franklin Kahn has been a creative wonder all his life. Talking with him was a real treat, and not only because he bought me lunch!

The founder of the Washington Real Estate Investment Trust and longtime guest lecturer at Wharton talked with us about how REITs became established, and about his continuing efforts in retirement to foster and recognize world class creativity.

So sit back and enjoy Frankís wit and storytelling. Youíre sure to enjoy this monthís spotlight alumni interview.

Frank: I graduated from Wharton with a bachelorís degree in í46. A general major allowed free run of the place. Today my majors would be finance and real estate. There was no real estate major in my day. I was part of the group that created the real estate center.

After many years, Peter Linneman, who became head of the real estate center, convinced Dean Palmer to allow him to carve out a full-blown real estate department. That doesnít sound like much. But if you stop and think, there were only eleven departments in the Wharton School, and after more than one hundred years of institutional life, carving out a new department, particularly from the well-established finance department, was a heck of an undertaking.

AJ: Iíll bet it was. Iíve been around academia enough to know that academic organizations. . . seldom thrive on change.

Frank: Yes, exactly! It was Dean Palmer who later allowed Peter to carve out a real estate department, an outgrowth of the real estate center. In my way, I helped to create it.

AJ: How?

Frank: In 1973 when Bill Zucker obtained permission to create a real estate center, Dean Carroll said, ďStart all this up if you want, but donít come to me for money.Ē Bill Zucker had to obtain his own financing, or he couldnít do it. Wonderful!

AJ: So when did you get to put your theories into practice?

Frank: When I graduated, my real estate professor and mentor, David Rowlands, asked me if I would come back and give some lectures to his class. He knew my thinking from my time as his student, but did not give me any specific directions. He just said, ďI like you. I think youíve got very creative ideas.Ē How can you say no to your mentor?

I did case method seminars, based on my own experiences, which Dave liked, though at first he didnít know if they would work or not. I continued these for thirty-five years. Even after Dave died, his successors, including Bill Zucker and Peter Linneman, kept inviting me back. I love teaching. I assure you I didnít do it for the money!

In 1960, I was in real estate investment work, when a group of us went to Lyndon B. Johnson, who was then majority leader of the Senate, with a concept. At that time, we had the Thirties Act, creating mutual funds for stocks and bonds. Investment specialists and fund managers picked stock and bond portfolios. Based on that successful legislation, we asked Congress to pass new legislation for mutual funds with real estate equities in place of common stock equities, and mortgage debt in place of bonds. Itís the same thing, except itís real estate-related.

AJ: How did Johnson react?

Frank: He liked the idea. He said obviously there are big differences between stocks and bonds and real estate equity and mortgages, but theyíre both debt and equity, and thereís no reason why you shouldnít have your own mutual-type funds for real estate investments, which react differently. So we named them ďreal estate investment trustsĒ which we now know as REITs.

AJ: Thatís quite a bit of history!

Frank: Itís gets even more interesting in the details. Lyndon attached this bill to the back end of a cigar tax bill, so when it got voted on in the United States Senate, they thought they were voting on a cigar tax bill. Few members knew about the real estate provision. The vast majority of members who voted on real estate investment trusts thought they were just voting on cigar taxes.

AJ: They didnít call Johnson the ďMaster of the SenateĒ for nothing. . .

Frank: The day the vote came up, I happened to be in Lyndonís office, when he said, ďOh, I forgot something.Ē He picked up the phone to call the second most powerful man in Congress, Sam Rayburn, a fellow Texan, and his counterpart as Speaker of the House.

Lyndon gets on the phone and says, ďSam, I forgot to tell you something. Donít let your guys go home for Thanksgiving. Iím sending a bill over there in about an hour, a cigar tax bill. I want it voted on tonight.Ē

Sam said, ďLyndon, you want the cigar tax voted on tonight? Itís gonna go before they go home for Thanksgiving.Ē Thatís how we got our legislation!

With that, I became the grandfather of REITs. I formed the first one, called the Washington Real Estate Investment Trust. Itís quoted on the New York Stock Exchange under WRIT. Thatís how I got into the REIT industry.

AJ: So what were these novel investment theories of yours?

Frank: David Rowlands asked that I teach a strange theory of mine that you should not use maximum leverage. Pay your debt down constantly as fast and as far as you can and sell stock equity. Youíll have a better credit rating. The yield on dividends will be less than what the rate on interest would have been, so when you want money for anything, you pay less.

At WRIT, I got our cost of new funds so low after a few years that no one understood that we could raise money cheaper than they could. We earned an A rating. No one in real estate came close. We were solid as a rock. When I retired, the Washington Real Estate Trust had zero debt. There was another company with that record, a pension fund in California that wasnít allowed by law to have debt.

AJ: Very interesting.

Frank: You get a 30-year, self-amortizing loan, so that every month when you make your payment, youíre paying the debt down, automatically. The debts paid themselves off. Thatís the beauty of it. Nobody else ever figured it out, because they were so aggressive, wanting to grow faster. I was willing to grow more slowly.

The result was we could sell common stock underwritings in poor markets when nobody else could. When the industry falls, when you have a lull in the market, the first people who canít sell stock are the IPOís. Then the downturn hits everybody else: normally you canít sell stock in a falling market, you canít sell a new issue. But with our 20 consecutive years of annual dividend increases, we could. We were able to grow and sell stock in a falling market, and the dividend yield was lower than interest rates.

When I had first begun to talk about this, I was a kid, and David Rowlands said, ďWell, itís easy to talk, Frank. But if itís so easy, why arenít the rest of the guys doing it?Ē I told him I had no idea.

AJ: I usually ask my interviewees the question, ďWhom do you admire?Ē I think I can guess your answer.

Frank: David Rowlands.

AJ: Hah! I knew it. Tell me why.

Frank: He was absolutely passionate about teaching. The greater the passion, the better the teacher. You can probably name the great teachers youíve had on one hand. He was one of those great people. He loved teaching. He loved staying after class to talk to the students who wanted to talk to him. He was that kind of a guy.

Another person I admire is Peter Linneman, another passionate teacher. Heís still at Wharton. He took over and built the real estate center and created the real estate department, which was unheard of. Thatís how good Peter Linneman is.

AJ: Tell me about your current foundation.

Frank: Itís called the Creativity Foundation, which I started five years ago at the age of 75 . . . It began in partnership with the Smithsonian Institution, and we give an annual Laureate Prize for Creativity. Our first winner was cellist Yo-Yo Ma. Our second winner was the late Daniel Patrick Moynihan. Our third winner, just the year before last, was Eric Kandel, who discovered fascinating things about the inner workings of the brain and won the Nobel Prize. These are very creative people. Our fourth winner in May of 2005 was Justice Sandra Day OíConnor, who accepted our prize a week before she announced her intent to retire from the Supreme Court.

A second part of our work at the Foundation involves the encouragement of the best of the countryís young, creative minds.

AJ: How do you do that?

Frank: What we really want to do is mentor the next generation of geniuses and Nobel Prize winners. Westinghouse created the original Science Talent Search for the brightest young students in high school; Intel has taken that over. Every year, Intel brings its regional finalists to DC for the final phase of their nationwide competition. Like Intel, we search for the best and the brightest, but in various disciplines.

We invite our young stars to Washington for a weekend. The highlight is a Round Table with our Board, the Benjamin Franklin Junto and the Creativity Laureate, held at the Cosmos Club, where Iíve long been a member. Can you imagine Nobel Prize winners sitting around with high school kids talking about creativity?

No one else is allowed in the room. There is no audience. This is not show and tell with a microphone. It is an intimate talk for these kids with some Nobel Prize winners and other creative geniuses. Through the foundation, we also provide an online community that gives these youngsters ongoing access to our Junto and Laureates, where they can obtain further mentoring and encouragement.

AJ: I have to ask you, what possessed your parents to name you ďBenjamin FranklinĒ Kahn?

Frank: We have the name Benjamin going back a couple of centuries in my family, and one branch of the family in Milwaukee includes Benjamin Franklins. Iím not directly descended from Pennís founder, but thereís a whole branch of my family in Milwaukee who are Benjamin Franklins.

AJ: It seems Wharton was your destiny. Was it your name or something else that put Wharton into your mind as a young man?

Frank: Even as a kid, I knew I was going to go into business. I knew it very young, from summer jobs and so on. I knew what I wanted to do. To study business, I knew I wanted to go to Wharton. It was my interest in business, and not my given name, that made the connection to Wharton for me.

As a high-school kid in Washington, DC, I worked in different places, such as advertising agencies and real estate offices. I knew before I went to college I wanted to go into real estate investment, and knew the place to go at an undergraduate level had to be Wharton, because it was far and away the best undergraduate business school, and still is.

AJ: You are, to say the least, a real champion of the school.

Frank: I love the practical philosophy of Wharton, stemming from Benjamin Franklin. At Wharton, we value the contributions of people who are out in the world putting knowledge to practical use, while developing new insights along the way. As a result, students at Wharton gain the ability to listen, not only to the professors, the books and the theory, but also to some of the wonderful men and women who are professors and practitioners who know intimately their fields. Itís an aspect of Wharton that most other schools canít touch.

AJ: Have you read anything lately that really interests you?

Frank: Ben Franklin is my number one passion, and there are so many good things being written about him lately, I have a hard time keeping up. Iím very close to the Yale University Ben Franklin papers. You might have noticed 38 volumes of the Ben Franklin papers on the shelves here in my library. I go up to Yale to meet with the scholars for lunch and their meeting, and they publish one of these heavy volumes annually. You donít read through one of those very fast! Every once in a while they call me with a question. ďFrank, what do you think? Whatís your take on this?Ē

AJ: Thanks so much for taking the time with us today, Frank. Itís a real pleasure to put together a profile of you for our members and other web readers; youíve contributed so much to the school and to the world of business.

Frank: The pleasure is mine. Thank you.

A. J. Schuler, Psy. D. is an organizational development consultant and executive coach. He is the author of the forthcoming book, "Revolution: How to Transform Your Company from Within."