J Darrin Gross Podcasts

High Leverage Competitive Capital for Real Estate Investors with Maxwell Wu – CRE PN #447

Maxwell Wu 0:00

Typically given where interest rates are, the leverage points are capping out at around 70%. And realistically, unless you’re in a very high cap rate market that can withstand the interest rates that that we have. But for the most part, it’s a it’s a 1.0 debt service coverage ratio that will lend to and that’s based on our underwriting or lender, cash flow underwriting. And the difference between our cash flow underwriting and a borrower’s cash flow underwriting is that we’ll use a large swath of data that we have proprietary data that allows us to you know, get get smart on the market quickly, but also be able to understand the true cost of operating an asset wherever it is in the country, whether it be in Florida, or Oregon or or in the Midwest.

Announcer 0:57

Welcome to CRE PN Radio for influential commercial real estate professionals who work with investors, buyers and sellers of commercial real estate coast to coast whether you’re an investor, broker, lender, property manager, attorney or accountant we are here to learn from the experts.

J Darrin Gross 1:16

Welcome to Commercial Real Estate Pro Networks CRE PN Radio. Thanks for joining us. My name is J. Darrin Gross. This is a podcast focused on commercial real estate investment and risk management strategies. Weekly we have conversations with commercial real estate investors and professionals who provide their experience and insight to help you grow your real estate portfolio.

Today’s interview is sponsored by Building Insurance and Risk when you invest in real estate. It pays to work with a real estate investor protection specialist to protect yourself and your investments from catastrophic loss. The experts are Building Insurance and Risk focus on real estate investor protection. They provide you with multiple insurance coverage offers and a side by side coverage comparison. To learn more, go to Building Insurance Risk.com.

Today, my guest is Maxwell Wu. Maxwell is the founder of Fulcrum Lending a direct balance sheet lender for multifamily properties nationwide. And in just a minute we’re going to speak with Maxwell about nationwide multifamily lending and credit investing.

But first, a quick reminder, if you like our show, CRE PN Radio, there are a couple things you can do to help us out. You can like share and subscribe. And as always, we encourage you to leave a comment. We’d love to hear from our listeners. Also, if you want to see our handsome Our guests are Be sure to check out our YouTube channel. You can find us on YouTube at commercial real estate pro network. And while you’re there, please subscribe. With that, I want to welcome my guest, Maxwell Wu. Welcome to CRE PN Radio.

Maxwell Wu 2:58

Darrin, thanks for having me.

J Darrin Gross 3:01

I’m looking forward to our conversation. But before we get started, if you could take just a minute and share with listeners a little bit about your background.

Maxwell Wu 3:09

Absolutely. So you know, my business is in commercial real estate lending specifically multifamily. We don’t lend on retail industrial office hospitality. We have a deep focus in multifamily specifically and, and that’s in part due to my background, but also, in part due to our hyper focus on credit. And we’re true believers that, you know, to be as competitive and perform at the highest level, you must have that specialization. You know, have been in the equity and debt investment space for over a decade started off in private equity, moved through investment banking and VC and principal investing roles. Ultimately, I found myself kind of going full circle back into credit and really more on the private credit side lending higher leverage on multifamily properties. And you know, as as the lender as the originator will hold the riskiest piece and and typically banks, financial institutions will take the more senior safer piece. And there’s a really great alignment of interest there. Just given that if there is any, you know, shortfalls and interest payments, we truly eat our own cooking and we’re the first ones to you know, take take a loss there. You know, aside from that, you know, I would say my background and just building businesses been doing it at an early age. But you know, real estate has been my focus for the past past decade and excited to see what 20 Before has for us in the store, especially in light of a pretty interesting 23.

J Darrin Gross 5:07

Yeah, no kidding. Hopefully good things to come and in 24 Definitely be rooting for. Well, hey, let me ask you a question here. So you mentioned a direct lender. And I just want to make sure I understand because when you were talking, you sounded like you are fulcrum takes a piece of the, the, you know, the capital raise, as opposed to like, there’s a there’s a bank in a, in a road, some of the banks can be in first position. So are you are you in more of a secondary position? Or how’s that? How are you? Tell me about how you guys structure your, your, your loans?

Maxwell Wu 5:56

Absolutely. Yeah. So I mean, really how we can be competitive in this market is really by offering higher leverage, but at a better price per pound. What do we mean by that, you know, ultimately, for equity investors, it’s about your cash on cash and return on equity. And, you know, for the, for more leverage at the right price, you can oftentimes deliver a greater IRR, a greater cash on cash to your, your limited partners or to your capital invested. That’s the reason why we structured as such, not only to be competitive in the market, too, but to also create a product that’s not only beneficial for our borrowers, but us as credit investors. You know, how the structure works is we lend the full loan amount, and we manage cash on behalf of these institutions. And, again, because our capital is sitting right next to them, and in a subordinate position, there’s a lot of trust that goes into that. But also, as mentioned, a lot of alignment that naturally occurs there and enables us to provide higher leverage but at a, a conservative and safe level.

J Darrin Gross 7:17

Got it? So are you primarily providing like the capital needed for capital improvements, like on a new acquisition, if there’s some sort of a value add strategy that calls for renovations? Are you providing that or?

Maxwell Wu 7:35

We’ll provide capital for light value add, if you’re ripping down the property to the studs, and effectively, we consider that effectively new construction, we’re not going to be the capital for that we’re lending on in place cash flow, that’s a really important piece to remember, we’re not lending off pro forma. Again, we are, we are lending high leverage amounts. So with that we must take the appropriate precautions and have the appropriate sizing thresholds when we’re making these loans. And, and some of those thresholds include in place cash flow versus pro forma cash flow.

J Darrin Gross 8:21

Yeah, no, that’s a number that you know, as opposed to a number you’re you’re hoping for. So when you say high leverage, what kind of percentage of loan to value are you comfortable providing?

Maxwell Wu 8:36

We won’t go higher than 80% of value or cost. Typically, given where interest rates are, the leverage points are capping out at around 70%. And realistically, unless you’re in a very high cap rate market that can withstand the interest rates that that we have. But for the most part, it’s a it’s a 1.0, debt service coverage ratio that will lend to and that’s based on our underwriting or lender, cash flow underwriting. And the difference between our cash flow underwriting and a borrower’s cash flow underwriting is that we’ll use a large swath of data that we have proprietary data that allows us to get get smart on the market quickly. But also be able to understand the true cost of operating an asset wherever it is in the country, whether it be in Florida, or Oregon, or or in the Midwest.

J Darrin Gross 9:42

Oh 1.0 That’s, that’s pretty aggressive from a standpoint of oversight. The banks, you know, they always want to see like a 125 you know, two two, which always kind of squeezes the deal a lot more so. So I guess Let me ask you this. So that the the trade off, I’m assuming is the the interest rate you mentioned, you know, you’re making certain that something’s dragged for you and your investors. So what would kind of an interest rate are you commonly seeing or offering based on what you what you guys typically do?

Maxwell Wu 10:19

Right. So will will typically offer interest rates in the range of, and we’ll quote this in this spread, right, we quote and spread, but our rates are fixed. The longer term loans are five years, not two years, typically on two year loans. You’ll see it over Sofer. For loans around the five year mark, going up to 10 years, you’ll see priced over the the no match term treasury. So for us, right, our spreads are typically around 285 to 300, over the five year treasury, we’ll lock that hole coupon that coupon defined as your spread plus the Treasury amount, we’ll lock that about a week before closing. So that’ll flow until we close, it takes about 60 days to close a loan. For a one Oh, DSCR, our spread is closer to around 385 400 range over the five year treasury.

J Darrin Gross 11:23

Got it? Got it. And with that, is there a typical size of loan that you guys are a sweet spot for a loan size?

Maxwell Wu 11:34

So we won’t go lower than five. Typically, you know, sub 20 million is where we’d like to focus, it’s a market that we believe is, is certainly underserved and overlooked by some of the larger players. And, again, given the large swath of data and the technology that we have, were able to operate, you know, faster at a lower cost. Thereby delivering that benefit to the borrowers in the form of a lower rate as you can, as I just mentioned, right, our spreads, as you compare it to the marketplace are quite competitive. And that’s a result of, you know, how we built the business.

J Darrin Gross 12:18

So, are you the, I guess, the primary borrower? Are you seeing that typically syndications? Or are you finding individual investors or what what’s who’s a typical borrower?

Maxwell Wu 12:37

Our typical bars or, you know, I’ll give you an example. You know, someone that leaves a KKR Blackstone, and, you know, they want to go, you know, they’re used to cutting, you know, let’s call it $50 million equity checks. And they want to go off on their own and raise some money started off small do something and, you know, the 10 million, the $59 range, something sub 20. You know, there’s that profile. So we call it, you know, institutional sub institutional, high net worth family offices, generational real estate families. That’s, that’s also a large portion. And then there’s also emerging managers that we’ll call, we’ll call them that. And these are sometimes syndication groups. We’re quite selective in the syndication groups that we work with. Sponsor qualification is really the biggest, I would say, hurdle that some of these these syndication platforms have. But that being said, right, barring any kind of headlines that you see out there, you know, we welcome those platforms, and so long as the right processes are in place.

J Darrin Gross 13:59

Yeah. Have you seen a, an uptick in in, I guess, syndication, sponsor, and also failure, but just challenges here with the recent market?

Maxwell Wu 14:16

I mean, I won’t mention names. But again, I think folks are seeing the headlines in the in the trades. And what you’re seeing is that a lot of a lot of these syndicators that taken on large amounts of leverage. Two years ago, three years ago. They’re struggling to really recap the asset. Typically, the debt that was taken on is short term floating rate debt. And once they implement their value add plan, their intentions are to refinance the property with longer term conventional debt. Right now. I’ll just given interest rates, it’s really a credit crunch. So again, going back to being very selective, you know, our criteria is is is market assets sponsor. And we want to make sure you know, all three stand on its own own feet, right. And what we mean by that is making sure that the property is being operated that the thresholds that we believe is is is serviceable, right, we don’t want folks going in and slashing expenses, to a degree where it impairs the property and impacts lease up velocity or tenant satisfaction. And, and and I would say, Poor a poor performance is manifested through bad debt, and pet tenants not wanting to pay on time. So all these details in terms of operation are so important when evaluating the asset. And then there’s, of course, the property level, making sure that the rents are durable, there is growth in the area, that there is not a large amount of supply, creating headwinds. And then, you know, the market really, we’re we want to make sure that strong, strong population growth, net population inflows, good AMI growth, good rent and renter population, we’re looking at a multitude of factors there. But you know, all that is to say is that, if all those are, if those if they check the box, and all those three, you know, we’re happy to be that rescue capital, to let the asset let the sponsor live another day. Because again, if we believe in the asset, the sponsor in the market, there’s no reason why we shouldn’t put our money there and give them more time. Because I think it’s only a matter of time till interest rates come in, I’m not going to call a time or a period in the future when it will come in. But what I will say is that the threshold we’re at today, is something that cannot be sustainable in the long term. And if you have a long term view, like, like we do, and many equity investors, do, you think five years should be long enough. So if they can hit those three, three boxes, make sure that you know, all those are strong, we’re happy to lean into the deal, provide that rescue financing. And they’ll be able to syndicate or maintain their investor base. For new acquisitions, they may yet be able to continue this syndicate out. So long as you know, they can get the capital that they that they need.

J Darrin Gross 17:39

You mentioned it as you call it, rescue capital. And I think that’s pretty aptly put on some of the things I’ve seen. Are you flooded with opportunities, right now? Borrowers looking to refi rather than sell?

Maxwell Wu 18:02

Right? I mean, the great thing about this business is that, you know, these loans, unlike single family, residential loans, what we’ll define is one to four units. Those are all three, there’s a 30 year term loans, 30 year amortization, ours are term loans, five, 710 years, every five, seven and 10 years, these loans have to roll there needs to be a new loan, but on it, so there’s always a constant demand for our product. And again, it’s just being the right you know, right place, right time with the right product. And you can use serve a great need. Sure, the short answer is yes. But again, you have to be very selective, given those the criteria I mentioned before, and choosing your spots where you deploy capital, because in this market, you know, things are trading very thin, and the bid asks are very wide. So you got to be ready to have your capital out there for a long time. And again, that’s that’s our business. It’s, it’s putting out long term capital. And these illiquid positions, and and really leaning into the future seeing the future with these sponsors.

J Darrin Gross 19:20

Question for you on the capital that you are lending. Are you raising that from individuals institutions where we’re sure any array How do you go about raising your capital?

Maxwell Wu 19:35

Yeah, it’s all institutional capital.

J Darrin Gross 19:39

And in do you do deals specific or do you have a fund?

Maxwell Wu 19:44

They are separately managed accounts? So combined, we have about half a billion dollars of lending power there. Okay.

J Darrin Gross 19:54

In my preparation for this, I had an under so that you guys are using some of the FinTech, for your, your business is that when did I get that? Right? Are you? You do? Do you use any of the fintech?

Maxwell Wu 20:13

That’s right, that’s right. You know, our FinTech platform enables us to not only qualify, but also underwrite diligence structure and service or loans all the way through, you know, we’re can offer the full suite of services, and one shop, so there isn’t a you’re not being kicked around to multiple people. It’s, it’s a process that’s connected by our technology, from the loan itself, all the way to our investors, which invest with whom invest with us. And that technology allows them to also have a finger on the pulse of how the properties are operating at a very, very fine level. But the other benefit that borrowers also get is they benefit from a large amount of the data that we used to underwrite. So I’ll give me an example. You know, we had a deal come in and borrower seeking $20 million. And they think that could that threshold could clear all day, when you take a look at the underwriting that they had on the deal, what you realize is that the per unit expenses that they’re running relative to the comps in the area were quite thin. And we brought that to their attention and said, Hey, look, I think insurance needs to double, I think real estate taxes need to go up 30% And, and repairs and maintenance, you’re not going to be able to do this thing for less than 500 bucks, a unit. And that’s, that’s really, really thin. So you know, all that is to say is that we provided the information for this sponsor, that was investing out of market. And what they were able to take was, hey, thank you for this information, we’ve rewritten on our on our our numbers, and now understand that actually, this deal cannot actually stand on its own two feet on levered, and, you know, we’re gonna walk from this deal. As lenders, right, we want to be able to do the loan, but we can’t do loans that don’t make sense. And we certainly don’t want our borrowers getting into a transaction, that doesn’t make sense for them. You know, by providing that information, right, using our technology and data, it allows them to make smart decisions. And the same goes, some of the best deals you do are the ones who don’t. And by helping them sort out the good from the bad, we’re not only providing them a better experience, but we’re also protecting our investors and protecting them as investors.

J Darrin Gross 23:03

Now, I appreciate the kind of the walkthrough of how you guys underwrite because I, you know, I was kind of curious, I am certain, you know, lenders are going to take a look at the numbers and try and get a feel for something, but to be familiar with the line item cost, and to know, whether or not, you know, particular particular zip code or an area or, you know, what have you is, is maybe not hitting the mark, I would think that’d be critical to your, your underwriting. I’m just kind of curious, how often do you find that the the borrowers are not on, on point with their numbers.

Maxwell Wu 23:45

You know, again, we’re selective in the sponsorship and the borrowers that we work with. So typically, they’ve been local, they’ve been in the market boots on the ground for, you know, a decade, more than a decade, they’re able to show, you know, their prior performance and actually track record on how properties have performed. They may have certain synergies because they have in house property management, they have, you know, a good relationship with their insurance, right. They may have an umbrella policy, so forth. But all that is to say is that, you know, for the guys that and gals that have been around for a while, it’s quite, quite strong, but for the folks that are just getting in just starting. We see them have a little bit of trouble, but they’re oftentimes isn’t pushback. When we’re giving them feedback. It’s it’s often thanks.

J Darrin Gross 24:35

No, no, I would think that would like said that some of the best deals you do are the ones you don’t. Makes a lot of sence. So with the FinTech, you guys have like an app, or do you have a website or how do you go about integrating?

Maxwell Wu 24:56

Yeah, so our website, it’s a web app. Add where people can go on. And they can actually input you know, five or seven pieces of data and we can give them a quote very quickly, within 30 seconds, we’re able to resize the property within that time period. And give them an exactly how much money they can get and how much it can cause. Sometimes that’s all you need to be able to get the deal done. If you don’t know how much your debt costs and how much you can get very hard to buy a property.

J Darrin Gross 25:27

Very true. Very true. So you guys operate nationwide? Correct?

Maxwell Wu 25:35

That’s right.

J Darrin Gross 25:37

And with that, how is it that you know, as far as your your platform and and being familiar with all of the different areas, what do you have databases that you scrub to kind of keep up with? Or do you have input that, that you continue to finely tune or?

Maxwell Wu 25:58

All the above all the above? You know, more information, the better, but we have, you know, multiple proprietary sources that will ingest data, and then we are there’s also multiple purchase sources, right? redundancy is important when when you’re working with data to make sure that it’s full, its robust, but also making sure that it’s it’s correct, right? It’s good data in good data out bad data in that date out, right. It’s it’s pretty simple equation there. So making sure we’re using the right numbers, and using the best sources, is, is incredibly, incredibly important.

J Darrin Gross 26:43

So this is the first time I’ve ever thought this or thought they asked us but I’m curious based on, you know, having a platform that relies on all these different data points to try and, you know, like I said, be redundant and and make certain that you guys are have a good handle on what’s going on. Is there a function of AI that you guys are using for the the information gathering? Or is that not part of it?

Maxwell Wu 27:11

So there’s certain really, what we’ve heard too, is more machine learning, and how we go comb through the data, organize the data, structure, the data, clean the data, and then ultimately use it. You know, we use some AI applications for and we’re, it’s not actually launched out to the public is really more of an internal tool, but we’ll use that to help create market summaries and create certain men memorandums, foreign markets for the property, do you just, you know, help bring the information together and tell us in a clear and concise way, what what all we found, you know, that that helps us get from zero to 90 very quickly. That being said, right, that last 10%, I often say is, is where we’re where the money’s made, or where the magic happens, where, you know, we don’t want to spend 90% Over time getting 90% of the way there and then 10% of your time with 10% of the deal left, we’d rather spend 10% of art or 10% of our time getting 90% done, how do we do that? It’s by using technology data machine learning to get the deal to a point where it’s 90% done, and then we can spend 90% of our time on the last 10% of the deal. Right? And that that flip of priority or activity rather, is what makes the biggest difference when you’re sizing deals and and deciding you know, how much more leverage you can go deciding you know if the deal even makes sense, right? So that allows it just allows us to be a lot more thoughtful and in how we how we lend and how we evaluate markets sponsors and properties for that matter.

J Darrin Gross 29:09

Yeah, that that’s a beautiful use of technology. I mean you know from a standpoint of being able to you know, simply do a lot of the input to where you have something that you can spend that that majority of your time on the the the final final details I like that model at I wish I hope that that that reaches far and wide because there’s a lot of things that seemed like we do every day that we could be done better elsewhere heard differently, and it’s good. So nationwide, multifamily is there in we talked about kind of the the size of the deals and kind of the the asset the the ball Our let’s see, what was the other? Oh, the market market, the asset and the sponsor kind of the three things that you look at? Is there a market or a situation? We’ve, we talked primarily about the borrower being the one that would be a no or like if your underwriting turned up, you know, your numbers don’t add up kind of thing. But is there? Is there any kind of a situation right now, where you’re just seeing it just doesn’t make sense? Or that you can’t get to a, you know, make make something make sense, just categorically Is there is there a particular type of risk or place that, that you’re just not seeing an ad up?

Maxwell Wu 30:48

You know, I’m seeing a lot of, let’s call it rent regulated deals, where they’re kind of they’re self imposed by a sponsor, those are ones, you know, when you compare it to, you know, ones implemented by by the by the Federal, federal government. The wherewithal or the value of it can only go so far. And that’s one where it takes a lot more time because ultimately with these, with these abatements, right, it’s a lot of cash flow being sucked out of the property. And and that’s really more financial engineering. So I guess, you know, in so few words, right? Anyone who’s performing that’s call it a huge expense reduction at the property, and cutting it below where we think market is, you know, we want to touch those deals, because, you know, there’s got to be a threshold of operating the property where you know, you’re not, you’re not skinning flies and fleas rather than and, and making the property less desirable. Less than habitable for tenants, right? I’d say other deals that we’re staying away from our older vintage 70s 80s Vintage. It was a very popular trade, I would say over the last last decade or so. And, you know, what’s happened is, you’ve seen it and I’m sure a lot of your clients in buying a lot in the Sunbelt, and, and you’ve kind of seen the pricing run up their lifespan on these assets, let’s call it depreciable. Life 44 years, for kind of at that end, right. That being said, Right, we’re here in New York, some of these buildings were built in the 1900s, in the late 1800s, and they’re still standing. That being said, if you gone into a apartment building as built in at 90, you’ll notice that the floors aren’t too straight, and that, you know, maybe the doors don’t close all the way because the the doors are crooked, right? The point being is that those are all structural issues that we don’t want to live with. And we certainly think adds a lot more friction friction to carry costs to the property for the borrower, a lot more unexpected large items that come up as unexpected costs. So we like to stay away from those and focus on the newer vintage properties in markets that have strong tailwinds.

J Darrin Gross 33:39

No, spoken like an insurance underwriter. 30 years newer is what they want. So that’s, that’s what we’re seeing. So hey, Max, if we could, I’d like to shift gears here for a second. As I’ve mentioned, by day, I’m an insurance broker. And as such, I work with my clients to assess risk and determine what to do with risk. And there’s three strategies we typically consider, we first look to see if there’s a way we can avoid the risk. If that’s not an option, we look to see if there’s a way we can minimize the risk. And if we cannot avoid nor minimize a risk, and we look to see if we can transfer the risk. And that’s what an insurance policy is a risk transfer vehicle. And as such, I like to ask my guests, if they can look at their own situation. It could be your borrowers investors, interest rates, market, whatever, whatever you identify and consider to be the biggest risk. And again, for clarification, while I am an insurance broker, I am not necessarily looking for an insurance related answer. And so if you’re willing,

J Darrin Gross 38:05

Yes, yes, indeed. And, you know, there’s a number of factors that are causing the insurance market to do what it’s doing. But it’s, it’s, I my hope, is that it, the increase is slow, to a manageable level. And that as the results come back more positive than what was expected based on everybody trying to catch up to what they were experiencing, that you’ll see more carriers come back into the market, and be more willing to write business. And that’s that’s typically the cycle. But in the in the point we’re in right now is you’ve got basically the uncertainty that you pointed out, which creates the fear. And literally, we have companies that they would not put this in writing, they would not admit to it, but they’ve essentially said to us, we are not looking to write any new business. Because I think the notion is they don’t know where the where to price it. And, you know, kind of the uncertainty that you’re, you’re speaking to, is definitely reflected in the, the, you know, the insurance market right now. And, but it will, it this is not a forever place. It’s a point in the cycle. And, you know, we all cannot wait, you know, until October. Myself definitely included. But

Maxwell Wu 39:40

Yeah, it’s a volatile time. I’m curious. I mean, right outside looking in, you look at these price increases. And, you know, again, you read the same financial news I read, but what’s often discussed is the stickiness of inflation, right and You know, if the market is at the mercy if the market is accepting this price, right, and as always this supply demand curve there. But you know, how sticky is are these price increases, you know, on the insurance side going up 3050 100% of the prior year. In my mind, I don’t I don’t see decreasing by any time I certainly see it, the increases, lessening and becoming more normalized like they were previously. But these are just enormous jumps, that I find it hard to believe that they’re going to come back down for any reason, if the markets accepting it.

J Darrin Gross 40:38

Well, the only thing that I’ll add to that this conversation is that unlike whether it be a widget or a building, or what have you, insurance is basically it’s a, you know, almost like a reserve fund that you hope you don’t have to use. And the insurance company doesn’t know if they made money until the end of the year. Whereas, you know, compared to like a widget manufacturer, if they make 100 widgets, and they price them at x, and they sell out. And they they can forecast demand to be, you know, whatever it is, and they they’re able to more more readily, especially with the digital age, especially with the internet, and you know, Amazon, all these things to be more I guess, short term, understanding what what the market is, I mean, long term, maybe not so much, but insurance, you know, you set your price. And then all sudden, you have some big weather events that exceed what you thought, you can blow up your model and hurry. And then the reverse is true. If you, you know, set your price and nothing happens that you expected to have happen. You could have a great year. And one of the things that I’ve had to come to terms with that, I don’t know why it didn’t make sense to me previously, is that I think in insurance, a lot of times it’s viewed as something that they take your money, and they just they hold your money, and that they’re ready to pay out. When you have a claim. The reality is, is that the insurance policy you purchase is a one year contract. And the insurance companies look at their money annually. They take in premium, they pay out expenses, which are claims and, and other things. But each year they evaluate their their business, there’s not this big pool of reserves that they are they’re just sitting on waiting to pay a claim. It’s a year to year business. And that’s the thing that I think that and I I mean, it makes sense that that’s it’s always been that way. But I think that for whatever reason, the the messaging was more a matter of, of almost like put your money in the bank, you know, for a rainy day kind of thing. And it just could not be further from the truth, it’s a year to year thing. I think the the days of a long enduring relationship with with a particular carrier are, you know, sadly, there, it’s not not that way anymore. Because you know, that you could sign up for somebody that promised you everything, they’re going to be everything to you. And you have a claim and they go oh, sorry, it didn’t work out for us, you gotta go. As opposed to, you know, you are the risk, you are the, you know, Max, you’re exactly the kind of guy we want to insure. And, you know, we have, we have a long history of ensuring people like you and what you do and all this. And, you know, one slip on the banana peel and in the back, sorry, didn’t work out. We you know, we have other people like you that, that don’t have claims, you know, you gotta go. And that’s just like what it is doesn’t make, it’s been hard to reconcile from somebody that or for me anyway, as far as understanding just what the market is. But that’s, that’s, I think, really kind of the the modern view of insurance. And, but it will I it the time we’re in right now, we will cycle through it. When the balance sheets look better than projected, others will take note and they’ll come into the market, and then you’ll have more supply than you have demand. And that’s when the price will soften. And so, will it reverse or regress to what it was? Probably not. But you’ll see at a discount i i first got into insurance in 1990 is when I got licensed and we had just come out of a hard market. And you know, for the first three or four years when I was when I was writing business rule is basically you had to be 10% lower in order to get somebody to move. So you need to do that. A couple of years, and you do see a price regression. So

Maxwell Wu 45:05

Interesting. Interesting. Well, there’s hope there’s hope after all.

J Darrin Gross 45:09

Well, yeah, I mean, I, you know, we’ll see, I mean, you know, a lot of these, these, whether you want to believe in global warming or not, I can tell you the insurance companies are paying a lot of claims a lot of catastrophic weather related claims. You know, and that’s, that’s probably. And I that’s one of the things that’s really difficult to gauge. We’ve always had hurricanes in and around the golf. Historically, there have been tornadoes in the Midwest. Hurricane alley has since moved kind of below east. Now you have these, these deep freezes to where, like, places like Texas are having these, you know, these freeze events, and probably one of the biggest and scariest of the, you know, the events that are happening here as wildfires. You know, when I first got my license, there were, you know, stories of like, the Chicago Fire or the San Francisco fire or something, you know, but they were like, almost like anecdotal of like, you know, what, what used to happen? Well, here in Oregon, we lost a couple of towns here, a few years back, Hawaii just got lost. I can wrote the Dallas or the city there, but it’s, you know, Wind and Fire, it’s not a good thing to have. So, but anyway, enough on that, Max, where can listeners go if they’d like to learn more connect with you?

Maxwell Wu 46:49

You can go on our website, FulcrumLendingCorp.com in the top right hand side, and there’s a new create and you can create an account with us, you can reach out directly to one of our associates. And it’s it’s a platform that allows you to take a self serve, approach or work with one of our originators. You know, it’s good to have options there. So, you’ll be able to go on if you want to do self serve, you’ll be able to size and, and see how much money you can get and how much it’s gonna cost for your loan. Just by putting in the information, five pieces, get it in 30 seconds. If it’s something that’s a little bit more complex, or you’re having any trouble, reach directly out again to one of our originators and they’ll be happy to help you. But websites FulcrumLendingCorp.com.

J Darrin Gross 47:45

Got it. Well, Maxwell Wu, I cannot say thanks enough for taking the time to talk. I’ve enjoyed it. Learned a lot, and I look forward to doing it again soon.

Maxwell Wu 47:56

Absolutely. Thanks for having me on Darrin.

J Darrin Gross 47:58

You got it. For our listeners. If you liked this episode, don’t forget to like, share and subscribe. Remember, the more you know, the more you grow? That’s all we’ve got this week. Till next time. Thanks for listening to Commercial Real Estate Pro Networks CRE PN Radio.

Announcer 48:18

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Industrial Real Estate Market Conditions with Matt Brodnik – CRE PN #446

Matt Brodnik 0:00

The opportunities to buy, you know, good well designed vacancy. As I mentioned there’s you know, leasing demand is low but it’s not that I think so I think that there when we still have tailwind, we still have ecommerce we still have onshore nearshoring energy transition. With that manufacturing and whatnot. There is leasing getting done. It’s a matter of buying the best well designed buildings in these markets. And you know, making sure we price in the fact that it’s gonna take a little time to lease them.

Announcer 0:28

J Darrin Gross 0:48

Welcome to Commercial Real Estate Pro Networks, CRE PN Radio. Thanks for joining us. My name is J. Darrin Gross. This is the podcast focused on commercial real estate investment and risk management strategies. Weekly we have conversations with commercial real estate investors and professionals provide their experience and insight to help you grow your real estate portfolio.

Today’s interview is sponsored by Building Insurance and Risk when you invest in real estate. It pays to work with a real estate investor protection specialist to protect yourself and your investment from catastrophic loss. The experts have Building Insurance and Risk focus on real estate and investor protection. They provide you with multiple insurance coverage offers and a side by side coverage comparison. To learn more, go to Building Insurance Risk.com.

Today my guest is Matthew BrodnIk. Matthew is the Chief Investment Officer for EQT Exeter‘s North American industrial real estate platform. EQT Exeter, is the real estate division of EQT, a purpose driven global investment firm with 244 billion of total assets under management. And in just a minute, we’re going to speak with Matthew Brodnik about the current North American industrial real estate space.

But first a quick reminder, if you’d like our show, CRE PN Radio, there are a couple things you can do to help us out. You can like, share and subscribe. And as always, we encourage you to leave a comment. We’d love to hear from our listeners. Also, if you want to see how handsome Our guests are, be sure to check out our YouTube channel. You can find us on YouTube at Commercial Real Estate Pro Network. And while you’re there, please subscribe.

With that, I want to welcome my guest, Matt Brodnik, welcome to CRE PN Radio.

Matt Brodnik 2:44

Thank you, Darrin. Glad to be here.

J Darrin Gross 2:47

Well, I appreciate you taking the time to do this. Before we get started if you could take just a minute and share with the listeners a little bit about your background.

Matt Brodnik 2:56

Sure. Matt Brodnik as I mentioned, I go by Matt You have to refer to me as Matthew only my mother calls me Matthew. I have been with EQT, QT is the predecessor company to EQT Exeter. We merged with EQT back in 2021. I’ve been with the platform or with the company since 2008. I joined in September 2008. Prior to that I worked with a Philadelphia based development company. And prior to that I was in business school at Northwestern University and graduated from there in 2003. Prior to that, I tend to Villanova University where I got my, my my undergrad. So I’ve been in the real estate business now for for over 20 years between the time here at Exeter and in the development space principally focused here at Exeter on as you mentioned the industrial side. At Exeter or EQT Exeter, we also obviously get involved in other asset types where we’re we own and manage multifamily throughout the US Europe and Asia as well as Office. But but US industrial is my focus and really where it all all began at exit or almost 17 years ago.

J Darrin Gross 4:12

The industrial space is fascinating. I know, through the COVID. I was had heard and I’m hoping you can kind of shed some light on this. But there was projections of growth that were supposed to be Matt like, you know, in the future. And from what I understood, based on the kind of everybody stay at home and supply chain and all that fun stuff, that the demand was growing faster than what was projected and it’s supposed to reach like, you know, future dates. It was reaching that much, much sooner. So I guess one of the things I’d love to start with is just kind of, you know from your vantage point To the Industrial Marketplace, pre COVID through COVID, and what you’re seeing going forward?

Matt Brodnik 5:12

Yeah, I mean, I remember back when, you know, I started at Exeter and so it was a new investment platform, you know, adoption wasn’t popular, we would be explaining to investors why industrial why it’s so real, but it’s a real sector. You know, the the, the, the the sectors people wanted were office, they wanted retail, you know, multifamily and industrial was considered that, that, that that outlier. And really I mean, it’s it’s we’ve talked about ecommerce, obviously COVID was more of a igniter of an igniter. We saw ecommerce adoption, obviously pick up for obvious reasons out of necessity, but it was there before. And I would say we’ve seen that industrial demand, construction, the growth and industrial really going back, you know, well beyond 10 years into the global financial crisis and prior to it. And so we had been on this kind of upward trajectory since 2009, or 10, of, you know, positive absorption, construction deliveries, and it was really a steady increase. And obviously, in 2021, we saw, you know, record, you know, leasing, you know, construction starts and really that the ignition wasn’t just really, you know, the E commerce demand, but also supply chain issues. That drove a lot of that leasing a lot of that growth. And we’re still seeing it, I mean, those tailwinds are still there. But obviously, we’ll get into this, I’m sure they’re, they’ve been muted a bit or are taking a step back a bit.

J Darrin Gross 6:41

Got it? In may have jumped ahead of myself, it was kind of on top of mine. But let’s back up just a second here and talk about EQ T. And if I understand, right, you guys are a fund is that correct?

Matt Brodnik 6:56

Right. We we’re a fund manager and operator. So that’s an important distinction. As a fund manager, we, you know, we invest in real estate to private equity funds, sector specific funds. So we have funds that invest in US industrial, you know, across the board from core Core Plus to value at the same thing for office and multifamily. And those funds, we also have European funds that do the same thing. We’re pretty large operator in Europe, actually, in the United States, I would say we’re the third largest operator of US industrial, and we’re very Euro growing quickly on the multifamily side. And then we’ve been in office our entire careers, and here at exit or since the beginning as well. Asia, we’re growing in Asia as well. And so we’ve a larger platform there. But I would say that, yeah, with with with us, as a private equity fund manager, we invest capital on behalf of our investors, institutional investors, pension funds, sovereign wealth, investors and whatnot. So that’s us as a private equity fund manager, an investor. But we’re also what makes us unique is that we’re, we’re an operator as well, when I say we’re an operator, we lease our own buildings, we buy buildings, we develop them, and we manage them all in house. So it’s very important, I say that and kind of provides the distinction because others will say the same thing. But when I see we lease our buildings, our invent, we have 24 offices around the United States. And those offices are in the markets in which we invest. And those offices are staffed by an investment leasing officer. And that person’s job is to identify buildings to buy them, once you buy them to oversee the leasing, we have property managers who actually manage the properties, that we have development managers that oversee the construction of buildings. So in many ways, we do it all ourselves. So as an as an operator as a manager, we, we, you know, we’re not just investing in buildings from Philadelphia and saying, Hey, I’m gonna go buy a building, where you’re in Portland, from Philadelphia, we have a market officer in the Pacific Northwest, Chad Rawlings, who runs our Office out of Seattle. And he buys buildings in Portland and Seattle and manage them. He buys land and oversees all of that. So that’s what makes us very unique. I don’t think there’s another firm in the United States or in the world actually, that does it the way we do it. And it really harkens back to kind of how we viewed real estate or, or what we saw from the the great operators like the Trammell Crowe companies and Heitman back in the 80s and 70s, where they’d have these partners often different offices, you know, buying the real estate feeling real estate’s a local business, right. You know, you need to know that you need to know access highway access, what’s the right building for the for the market, who are the tenants in that market? You need to talk to the local players need to understand zoning and, and the different nuances of each of these markets, and then know the tenants. Our industry is one of the few or our businesses one of the few or most of our competitors, outsource the tenant relationship. To the brokerage community, which is absolutely insane. I mean, we’re here to serve the tenants. So, you know, in our minds we need to be, we need to have first name relationships with with the heads of real estate, all of our tenants. I mean, if we’re doing a deal with a fortune 500 company, we’re typically doing that a deal with them in the United States, and Europe and Asia. And it’s usually the same decision makers making the decision to where to put their buildings or where to lease space. So we want to have that direct relationship with them. So yeah, you know, while we’re a private equity fund manager, we’re a real estate operator in every sense.

J Darrin Gross 10:36

So just to be clear, are there any situations where you would invest in some, some property owned by others or another fund, or is it strictly everything that all the capital raised through the fund is invested in in properties that you acquire, manage, operate or develop in house,

Matt Brodnik 10:57

I would say that is almost always the case, with the exception of a few times where we might, somebody might own a piece of land, and they’ve gone through the entitlement process, they’re a local owner, and they’re looking for a partner to come in and help them construct the buildings. In that case, we’re bringing, you know, we’re bringing our tenant relationships to bear in those cases. So we’ll partner up with someone and you know, you know, effectively use their skills on the developer or work with them using their utilizing their skills on the development front. But But bringing, obviously our operating now, how on the leasing to bear. So we’ll do that in some cases, but by and large, we typically own managed develop, at lease our property out.

J Darrin Gross 10:57

Got it? So, from basically from ground to lease up, you guys are taken an in house, I assume all of the construction trades. Net, or are you subcontract all that out?

Matt Brodnik 11:54

Yes. So we will work with the general contractors and and we’re an act as the developer, you know, obviously, we engage the the architect and the engineers and the general contractors.

J Darrin Gross 12:07

Got it. Got it. So let me ask you, so is a strategy you mentioned, kind of a wide? Well, many different asset classes, and I assume are the funds and specific to the asset class?

Matt Brodnik 12:21

Yeah. So when I mentioned them as sector specific funds, are investors that invest in industrial, you know, we’re buying industrial buildings in our industrial funds, we’re buying office buildings that are office funds and whatnot. So, you know, we’re very focused on that our, our industrial team, our industrial operators, you know, I don’t, you know, our industrial team doesn’t go out and buy multifamily, because we’re experts on logistics, and industrial space.

J Darrin Gross 12:49

Got it? No, that makes complete sense. So, let me ask you, then. So you, I mean, I’m familiar. I mean, I’ve had, you know, many, many, many conversations about syndication and, and that were, you identify a particular asset, raise capital, secure, you know, alone, and, you know, acquire, operate, and then sell. And I’m curious with a fund, and largest is, EQ T is how, you know, when you acquire a property, when you identify a property, is there a kind of a date on the calendar circled that, you know, or a whole time identified at acquisition? Or is it are you guys more of a, like a forever hold?

Matt Brodnik 13:41

Well, I think it depends on the vehicle and our core strategies that opportunities to buy real estate, long term leased real estate and hold it and, you know, earn cash flow pay dividends to our investors. In those cases, we’re obviously buying buildings that we believe will stay at least for a long time. And that, you know, will provide that cash flow and we’re looking at them on a yield basis, you know, taking into account leverage, we typically put, you know, fifth percent of leverage down or core investments and are looking for a cash on cash return that that, you know, as I mentioned, pays dividends. On the on the value side, I mean, we’re looking at buying a real estate asset, whether we’re buying 100 buildings in a an assemblage and one transaction or buying one building, we underwrite each building individually. And the goal is to obviously stabilize the property. Usually that happens within five years and and and you know, really build up a portfolio of buildings through one off transactions or multiple transactions and really market that you know, value add portfolio turn into effectively a core portfolio by stabilizing so there are really only three you know, value add strategies either you can buy land and develop audit. You can buy a short term lease building and renew the tenant or reposition the building to be leased once that tenant leaves or buy vacancy in each of those three cases, there’s, there’s, there’s an active function that we have to do, we have to do something, we have to either reposition the building market differently, making a capital investment to do it, reenter the land, that type of thing. And then we can create value by by stabilizing the asset. And usually we’re looking to do that within the first few years of ownership. But But ultimately, the goal, you know, as on a value add asset is to hold it and transact within five to seven years or so.

J Darrin Gross 15:30

Got it? Got it. So you mentioned leverage, you know, around 50%, that would seem like you’re, you know, in a pretty strong position as far as cash flows. When, when you are with a fund, I’m just kind of curious on the mechanics of the fund. Because obviously, you’re, you know, the fund is your your, are you selling shares? I mean, is that, or is it more of a, or just a capital raise based on you raised enough capital to go out and acquire more more assets or?

Matt Brodnik 16:04

What typically in a private equity fund structure similar to what you know, the way other private equity funds do it like Blackstone and KKR. And some of the others, there’s no difference, we, we raise capital from our investors, they make commitments to invest in the in the real estate, that we call our capital as necessary, until you’ve invested all the capital that they’ve committed to you. And so that’s the that’s how that’s how that that model works.

J Darrin Gross 16:28

And then the valuation of the fund, is that a function of the value of the real estate? Or is it more a function of the return? That that’s generated?

Matt Brodnik 16:42

Well, I mean, they all kind of go together, right? So obviously, when you’re buying real estate, and within a fund, you’re building up a fund of real estate. And so say you have a fund, that’s a, you know, a billion dollar fund, and you go and you buy, you know, 70 buildings or so, and you aggregate that into a fund, you still have to rate each and every building on its own merits. And when you value the fund, it’s really just the assemblage of the values of those individual buildings.

J Darrin Gross 17:07

Okay, so it’s not an open ended fund, it’s there is a, okay?

Matt Brodnik 17:11

Yeah, these are all closed ended funds, and we believe in that closed ended fund structure and that, so that’s what we have, we we, you know, typically have a period of time to invest the capital, you know, buy buildings, we buy them, and then we manage them, and then ultimately sell them. Got it. That makes sense. I grew up in that. And, you know, investors don’t come in later, once the club once the, the the capitalizing period is over, it’s over. And we’re investing the capital.

J Darrin Gross 17:38

Now that that was a little easier to understand. I just had a thought like, when isn’t, if it’s open ended, you know, jumping in and jumping out and valuing, you know, put a value on the fun would be a little more tricky. Alright, so we talked about kind of your, your different strategies. Is there a, a, honestly a preference, but is there one that you’ve been more involved in, as of late, say, last five to 10 years as far as between development, you know, vacant, reposition or, or whatever at the other one, the lease, expiring lease kind of thing is eternally spellings. Yeah. Is there a strategy that you’ve found to be more, or any one of those have been more active?

Matt Brodnik 18:31

You know, it’s interesting, I’d say that, that the percentage needs, you know, we, we obviously put charts together to show how each bond invest capital in terms of three strategies. And I would say that, kind of during that, that post, global financial crisis recovery period, you know, the percentage of development went up from, you know, 20 to 35%. Of that, of that with with the, with vacancy being another 30%. And, and the short term lease being equal, I’d say, during the COVID, kind of post COVID recovery area, 21 to 22, I would say more of that was was development. So that development piece was up to as much as 40% with with a short term lease being a larger portion of vacancy being very small, because if you’ll remember, in 2001, with valuations as high as they were the cost of debt low, and the amount of leasing being done, people were valuing vacant buildings as if they were leased. So it was very hard to create value buying an existing, vacant building. So we saw that trend move I would say now in the environment we’re in and it’s a much different environment today than it was are over 21 and 22. And I’d say you know that that investment type more is going to be focused on vacancy and short term lease buildings with almost no development today. But development will definitely be a part of our strategy over the next few years. But But today the key is really focusing on really buying buying, you know, vacancy and short term lease buildings and pricing I’d say that is significantly lower than it was, you know, a couple of years ago. A lot of that, obviously, because we’re in a market. And if I start going off on a tangent today to stop, but we’re in an environment right now where over 2023 Think over 500 million square feet of industrial inventory was delivered, right? A lot of that construction started in 2001, nearly 22, those buildings were complete. But we saw absorption drop, you know, so leasing dropped, you know, over 50%, I think we saw something like 200 plus million square feet of absorption at 23. So you do the math, you’re 500 plus 1000 square feet of new buildings, 200 million square feet of absorption, we built a bit of a supply overhang. So in a lot of markets, right now, there are too many industrial buildings, for the tenants that are out there. And I think industrial leasing demand is going to continue to be a little slower this year as well, like it was last year. So you have buildings are going to be sitting longer owners, developers that you know, need to get out. Simply put word to word of an environment where there’s very little debt liquidity, right. You know, banks are not lending like they did, if at all, lending or borrowing is through either the debt funds or through the life coach, life insurance company side. And so you have owners that have a lot of debt on their buildings, that’s going to be coming due. And I think that’s going to force a lot of transactions this year. So the opportunities to buy, you know, good, well designed vacancy. As I mentioned, there’s, you know, leasing demand is low, but it’s not that. I think so I think that there, we still have tailwind, we still have ecommerce, we still have onshoring nearshoring energy transition with that manufacturing and whatnot, there is leasing getting done, it’s a matter of buying the best, well designed buildings in these markets. And, you know, making sure we price in the fact that it’s gonna take a little time to lease them. And then and then move forward that with that strategy.

J Darrin Gross 21:58

Curious, you know, on a cost comparison. And I would assume, till the market price changes dramatically from like you said before, when the demand was strong, vacant buildings were being priced as if they were fully occupied. Now that there’s this supply overhang, is there any kind of a sense of a discount you would expect from, you know, the high to what you’re seeing now? On the opportunities?

Matt Brodnik 22:30

Yeah, I mean, we throw percentages around. But I think we’re seeing you know, pricing, whether the building the buildings leased or vacant, and, obviously, just taking a simple example, you know, like, we were, I think we’re the largest landlord right now in Indianapolis, big industrial market, right. You know, big box market, typically larger buildings. In Indianapolis, you know, it would cost I guess, and if you started a building in early 22, you know, a 500,000 square foot building would cost like maybe $85, a foot, a bill a foot. And, you know, today you get a rant, that’s probably around five and a quarter or so I think that’s about a stabilized six yield on cost. Well, today that that those economics don’t work, right, you have that vacant building, you spend $85, a foot to build, if I’m a buyer, I need a yield, that’s over, you know, that’s, that’s maybe 150 basis points over my exit cap rate. And if exit cap rates in Indianapolis around 6%, and seven, half, stabilize your cost. So I pay, I’d pay that developer, maybe 60, you know, 60 to 63, I’m doing the math on top my head. So if I’m, if I’m, if I’m being if I’m wrong, let me know, you need to be in that low $60 foot or mid $60 foot number. So that’s a pretty big discount to replacement costs, that developer is going to lose money. The building should still be valued over their cost of debt. But there’s no way that developer is going to be able to refinance that building out in today’s environment. So I think what we’re seeing is is more valuations dropping, you know, because of those yields, it’s it’s the cost of debt today. And then, you know, the need for higher stabilized yields. That same building in 2021, at a six stabilized yield would have been would have been right, because the exit cap rate would be, you know, four and a half percent. That exit cap rates, obviously, 150 basis points higher today.

J Darrin Gross 24:16

Right, right.

Matt Brodnik 24:17

So we’re really seeing that story kind of spread among all of the markets. I mean, it’s really most pronounced, I’d say in places like Southern California, New Jersey, where those valuations went up so dramatically, and investors were willing to take such low yields. Today that that right sizing is is creating even a bigger impact.

J Darrin Gross 24:35

So you’ve identified a couple of markets where it’s it’s prevalent. Are you seeing the the primary issue being the the new construction that hasn’t leased up? Or is there any concern with properties that have been leased up that aren’t performing?

Matt Brodnik 24:58

I think when you ask You know, buildings that have been leased that aren’t performing, meaning they’ve got a they were leased another vacant type of that?

J Darrin Gross 25:07

Well, I’m thinking of just a building that’s performing period, you’ve got, you’ve got tenants, you know, they’re leased up. Versus, I mean, it makes sense to me, if you’ve got an empty building that you’re expecting to have full, and you’ve got a bank note that’s coming due that that’s, that’s a problem. But if you have a leased up building, and you’re 50% leveraged, I’m assuming that’s not necessarily a problem is that?

Matt Brodnik 25:37

I think for most, right, I think, you know, we, you know, it’s one of those things, what we saw during, you know, during those COVID years was, was a rapid increase in rents, right, so if you bought a building in 2018, you leased it on a 10 year basis and a rent that’s, you know, maybe 30% below where rents are today, you put 50% leverage on your fine, you should be able to wade through and wade through all the all of this and, and hold the building, but I think it’s more for those that bought a building, leased, or leased it to a very low yield, say a 5% yield on cost or so. And now today, you know, they’re they’re in need of new debt, or their debt is already, you know, floating rate debt, and they’re paying, you know, a 7% interest rate, they’re struggling to cover that debt service. And, you know, they haven’t fixed that if they didn’t fix their debt, when interest rates were low. There’s that struggle. And so, you know, we’ve seen a number of leased buildings transact over the last year, and I think it’s more those sellers that really need to sell. It’s a, it’s not so much anyone, anyone marketing their building today, for the most part isn’t marketing it because they think it’s good time to sell real estate. A lot of times there’s there’s a driver behind it, maybe the the fund that the building was owned, and it’s come to an end, the, you know, there’s a there’s a loan maturity coming up, where the math just doesn’t work, where they were financed at 65% leverage, and now it’s an effective 80% leverage to equity value in it, they need to transact before refinancing it. Or simply put a you know, there’s an issue with the fund. We’re we’ve also seen cases where maybe it’s a fund or an investor that owns a number of Office assets, and they’re struggling on the office side need to raise cash fast and industrials, still an attractive investment or an asset type. So there’s definitely a market for it. And they’ll sell the industrial the stave off issues on the office side.

J Darrin Gross 27:29

Yeah, no, definitely the office is a riddle yet to be sold. And I don’t know. I mean, I keep hearing that there are people that are starting to go back to the office, you know, not necessarily the frequency or the you know, what it was pre COVID. But that that is a that is a balloon, or are we gonna mess or however you want to say it? It’s, it’s something that’s going to come to come to be realized in a hurry here, I think?

Matt Brodnik 27:59

Well, I think it’s, it’s, we’ve been seeing it for the last year or so. And we’re seeing it right now. Most a lot of the lenders I’ve spoken to over the last 30 60 days have been talking about how it’s time to start realizing those losses or realizing those those situations, instead of maybe extending the loan on that, that office building underperforming office building is tied to either forced to sale or foreclose on it. And so we’re seeing, you know, in the office idle, I think I think it’s gonna get a lot worse before it gets better on the office side. And I think valuations are gonna continue to come down for a bit, I think office is a 10 year, I think it’s gonna take a long time to get through where we are right now. I mean, the return to work thing is one thing, we’re starting to see that more places, but it’s, and it’s not really the rank and file worker that we’re talking about in terms of return to work, it’s, it’s the managers, the management level people that need to come back to the office. And I think it’s going to take time, I mean, I think if you look at the, the world of office, there’s a big chunk of those office buildings that will never be office buildings, again, we’ll just have to be converted to some other use. And I would say about 10% of the buildings out there right now are ones that look at and say hey, that’s, that’s a building that’s going to remain leased. That’s you know, when there’s you know, any leasing demand available or the last time the leasing office space will lease that building, those are the ones I want to look at and identify and even those buildings are typically going to be in distress because of the you know, the they just simply need a basis reset they were bought at two higher price at one point the equity the debt is is poorly structured now in today’s terms and something needs to happen. So those are the office buildings that I would say are the attractive wants to buy today.

J Darrin Gross 29:41

Right. Right. No, I I’ve always or haven’t always but ever since I’ve kind of understood real estate. You know the buy is where you can really set your success is if you’re you’re buying at a below market. point and then if, you know, if you have the good fortune of time and appreciation and demand, you can have an attractive exit. So seems like those that that are able right now to, you know, to grab some of these underperforming lower priced assets that also have the ability to reposition and, and, you know, give it weight, I guess as the the, you know, give it some time could have really nice exit, but definitely going to be some interesting repositioning with the, the office assets. So let me ask you on on the, the deals that you guys are involved in, is there a deal size that that’s typical for your industrial assets that you you develop or acquire.

Matt Brodnik 30:54

So historically, we’ve been a buyer in small bite sizes, so we can buy, you know, I think our average, our average, our average investment size is, you know, is probably $25 million or so. So we do a lot of transactions. I mean, I think in 2021, we did almost 120 deals on the industrial side. And until that’s that’s, that’s the marketing or people in the field, our investment leasing officers are quite literally driving neighborhoods, industrial neighborhoods, looking at warehouses and saying, Hey, I, I like that one over there. And maybe we own a building next to it. And we just leased it, and we see the building next door is available, or, you know, there’s nothing we could do to it, to approve it, and we’ll go make an unsolicited offer on it. So it wouldn’t be surprising, I think, I think last, I think since the beginning of the year, we’ve made 56 offers on buildings. So we’re kind of constantly hunting for for real estate we like and whether it’s being marketed or not, and making offers on it. So it’s, it’s a, you know, we’re looking a lot different deal sizes, but I would say those that we typically target supply chain real estate, we call it when I say supply chain real estate, meaning, you know, we’re looking at the same tenants, they’re typically larger distributors that are either occupying everything from a million square foot distribution center, and, you know, Central Pennsylvania, to a last mile facility that may have been, you know, maybe 30 years old, you know, closer in here in Philadelphia, you know, at a at 50 to 100,000 square feet, and then all the way down to a truck terminal that might be operating close, right. And those cases, we’re still dealing with the same tenant type, those that are typically larger, and you know, more, you know, the distribution side, what you typically don’t see as buying or more of the smaller multi tenant industrial where the, the credit might be less, there’s more rollover, higher costs on the transaction side, or on the leasing side. So then then typically, with those, those supply chain tenants, you say, there’s a lot of repeat business. So you know, we’ll do as I mentioned, transactions with them. And, you know, Pennsylvania and in Seattle, and, you know, France, and you know, Australia, so those global relationships, we tend to see see more, more opportunity and having them?

J Darrin Gross 33:19

Yeah, I would think having a partner like that essentially, in you know, with those, are you typically finding a solution to a problem that they’ve expressed saying, hey, you know, we want to expand in this market, and that that’s kind of, you know, what you guys are cued into, that gives you the, the, you know, the impetus to find a solution or an opportunity in a particular market.

Matt Brodnik 33:46

That’s, that’s it exactly. I mean, that sums up kind of our acquisition strategy, we don’t really say we have acquisitions, people yet leasing people. And so when we meet with a tenant, you know, they’ll give us their needs, and they’ll tell us, hey, this is over the next five years, this is what we’re looking to do. This is where we want to be, and this is the kind of building we want, and then we go find it for them effectively. Whether it’s, you know, it’s whether it’s, as I mentioned, in the larger building side, it could be a bill to suit opportunity, or it could just be making sure we have that availability for them. So we do have a team here at Exeter, that that that maintains these relationships at a global level. We have our people in the field, we also have folks here that that that focus on those larger relationships and keeping track of what those tenants need tenants needs are. So if you’re meeting with these tenants, like a target a Lowe’s or Home Depot and you know, an Amazon and they’re they’re kind of all saying, hey, I want to be you know, I want to be a 581 in Pennsylvania near the 8170 corridor, and I want to be in this area specifically, and you’re hearing it from all the same tenants. It’s pretty good idea to go by Atlanta there and focus on buying buildings in those areas, and really focusing on that more than Say reading Green Street and hearing what Green Street, you know, the the REIT that does a lot of research where they where they tell you, I always kind of laugh when I see a publication called a market, a bad market and a good market, then I go and I talked to target, and they tell me exactly where they want to be. I’m gonna listen to the tests, they’re going to tell me where the good markets are. Um, so that’s, that’s, that’s your question was spot on? Absolutely.

J Darrin Gross 35:25

So I mean, just that relationship alone? Seems like you guys would be a couple steps ahead of anybody speculating? Kind of thing? Because I mean, essentially, if you were let me ask it this way. You’ve had the conversation, they’ve said where they want to be, you go find an opportunity, are you presenting it to them prior to locking up a particular piece of land or, you know, property?

Matt Brodnik 35:53

No, I mean, I mean, I think we have a general idea of where tenants by and large want to go by talking to them, and we’ll specularly buy land, and we’ll build on it. And we’ll buy, you know, vacancy existing buildings that we can put together for them. And it’s also on building size, in terms of what they’re looking for the different places that a tenant looking to distribute maybe at a Charlotte, you know, might not want a million square foot building like they wouldn’t Atlanta. From a distribution perspective, they probably want something, you know, maybe they want something smaller. So we know that, Hey, Matt, don’t focus on million square foot buildings in Charlotte. But um, you know, but on the other side, we do have tenants that, you know, we will specifically go and look for land and opportunities for them, tie that up, you know, put that opportunity together and bring it to them. But a lot of times, you know, we’re looking to buy real estate, we’re telling the seller that we’re short clothes, you know, we understand the market, we understand the neighborhood, we’re going to buy it, regardless of what the margin of what happens. So we’re, you know, when we put something under contract, or, you know, we’re going to close, you know, barring environmental issues or, you know, sudden changes in the environment.

J Darrin Gross 37:06

From the identification of a property to a leasable space, I’m talking about probably more development than any other options. What kind of a timeframe Are you seeing, as far as again, you’ve identified it, you, let’s see acquisition. So because I’m assuming in identification, there’s probably a fair amount of due diligence that goes on. But once you’ve acquired it, to me, at least up, what kind of a timeline Are you are you looking at.

Matt Brodnik 37:36

So if I’m buying a building, let’s say it’s a vacant building, and you know, that I can, I can tie it up and do my due diligence within 25 to 30 days and close 10 days after that. So I can typically close in 45 days, on average, after I, after I’d done it after I’ve made an offer on a transaction, the seller has accepted it. And then typically, you know, we project Lisa periods, depending on kind of the location what we’re seeing in the market, you know, if if I’m buying a vacant building in Dallas right now, and I’m buying a 500,000 square foot vacant building in Dallas, I know that there’s almost 80 million square feet of availability. And there’s something like 1924 buildings available that size and area, I’m going to I’m going to project takes quite a long time to lease that building. I’m hopefully buying a building or I’m expecting to buy a building that I think is the next lease because it’s functionally Excellent. At a certain qualities, the other buildings don’t have, but so it might take longer. There are other buildings, you know, in Dallas, you know, where there’s a lot availability, we just bought a building that was 200,000 square feet, and East Dallas, mesquite. And, you know, we we leased the we’re, you know, we have three tenants interested in we we closed a week ago, you know, that in that case, we, you know, we looked at scarcity, we said, hey, you know, we know that this market is a good market, we understand it, we looked at how many vacant buildings the size, there were, we knew that there was good amount of tenant demand in that size range. So we made offers on every 200,000 square foot building in East Texas, or in East Dallas. We met we bought one, we liked the one we bought as good and bad about our storage as functionally Excellent. And sure enough, it’s going to lease, you know, faster than then we’d project so it really is, in terms of projecting lease up and stabilization. It really depends on all those different factors. Are we buying into scale, you know, supply scarcity? Is the building. Excellent. What does that tenant demand look like? On development front? You know, it can take a very long time. I mean, obviously with with land, I mean, where you’re where you are in the Pacific Northwest, especially, it can take three years to entitle a piece of land, through zoning through site approval, just getting the the appropriate entitlements. And then from a construction period perspective. You know, we’ve seen construction times come back and a little bit, but it could take, you know, 12 months to build a building. I think pre COVID You’d say nine months during COVID got it to two years and now we’re probably back to somewhere close to that nine month period ten, eleven, twelve, months.

J Darrin Gross 40:06

Ya know, things got a little alone around there with the COVID years with the supply chain, I was just amazed at how much you know, that put everything into shock, you just couldn’t get things. And I mean, demand demand was off the charts was interesting times. So we talked a little bit about kind of the marketplace, are you seeing as far as a cap rates? Forever? They were compressing? Are you seeing? You know, obviously, we talked a little bit about, you know, the the cost of capital? And just, you know, what it’s doing? Are you seeing cap rates back to like, what they were pre COVID? Or

Matt Brodnik 40:51

I think we’re seeing cap rates back to kind of where they were a couple of years before COVID. So, you know, I think industrial cap rates on core real estate, and there are a lot of brokers out there that will get mad at me when I say but are probably closer to five and three quarters in the in the tightest markets to six and a half 675 and mortgage Midwest market. So I think we’re those cap rates, a lot of driven obviously, by cost of capital where, you know, if you’re if you’re borrowing at 6% interest, you know, you’re not going to pay cap rate on a long term lease building below that. I mean, there’s negative leverage makes no sense. And that doesn’t work for an investor, why would you do that you go by fixed income, go buy, you know, our corporate bonds or go buy, go buy debt, don’t don’t buy real estate in that case. So I think, by and large, we’ve seen that pricing move appropriately. And I would say, you know, 2023 was slow, there weren’t a lot of sellers out, there was a big bid ask spread, you had a lot of folks that had their four and a half cap rate offer from early 2022. And we’re holding on to that saying, Hey, this is this is what the building is gonna be worth, it’ll be worth that, again, I think what happened in 23 is all that hope of entry, it’s coming back down, you know, things are gonna get better. It’s, you know, everyone kind of realized it’s going to be higher for longer, you know, as the Fed, you know, saying, Hey, Ben, trees aren’t coming down anytime real soon. So we saw cap rates, you know, or we saw sellers come to grips with where that pricing should be. I mean, we’re, we own a lot of real estate, and we’re, we’re a seller of real estate. So it took us a while to come to grips with it as well. So I think that pricing is set. And I think, you know, from a stabilized yield for value add investments of cap rates are closer to 6%. For Lease buildings, you really need to be stabilizing buildings to you know, mid sevens on a yield basis to add that investment makes sense these days?

J Darrin Gross 42:44

No, it is an interesting kind of a roller coaster. You know, and to watch it happen in real time. And I think the the lag you know, I guess what’s interesting to me is just the lag, you know, from, from recognizing what was to now accepting what is, and, you know, I guess, then what, what’s interesting to me is how once the market kind of accepts this as it how then it kind of gives them permission to kind of go forward at a at a more aggressive rate than if they keep, you know, if it keeps hanging on and hoping that it’s going to return to what it was or what it might have been. And then, you know, the the weird thing is, what’s going to drive the market again, into a, you know, rapid frenzy, and it would be a, I mean, I’m assuming the economy would have to do much better, and there’d be some interest rates, you know, cuts and in demand. I mean, if there’s demand demand will, you know, will funnel or fuel a lot of that. So,

Matt Brodnik 43:50

I would say and, you know, you know, obviously, we’re buying real estate right now, and we bought real estate at the end of the year. So I’m the highest paying buyer and these cases, right, um, you know, in first place on the bid. So, you know, when I talk about this stuff, you know, it’s, you know, we’re as aggressive as the market is allowing us to be, but I do think we’re when Cap rates move, it’s a combination of things, right? It’s not just interest rates since rates came down, I think October the 10. Year Treasury hit five, and now it’s somewhere around 4.1%. Today, but it dropped down below 4%. And, you know, but we didn’t see an 80 basis point or 100 basis point drop in cap rates with interest, I mean, because, you know, leasing demand, this whole notion that, you know, and I hear this, especially with the younger people here that, you know, inch rental rates keep going up, leasing rates keep going up, they don’t ever know, they always grow, right. But now we’re seeing them macro, in some cases going backwards. So I think when when leasing demand picks up, and we see you know, leasing rates increase again, interest rates Come down and you start seeing those lower cap rates, and it won’t happen. I mean, the interesting thing about all this supply I mentioned, it’s in the market right now is that nobody’s building a new building today. I mean, there are no new construction sites. So those buildings will lease that 500 million square feet that was delivered. And we will be in a point in the next couple of years, I’m pretty certain that we’ll have supply scarcity again. And sure enough, we’ll we’ll, we’ll be building and I think we’ll see be seeing whether rates go up, especially in those markets, where, like the one you’re in where, where, where there are a lot of land use issues, and it’s hard to find land, it’s hard to develop warehouses on land, so it’s going to come back. And it’s just a matter of, of, of being there until, until that happens. And obviously, now making those right investments and, and transacting and preparing yourself to, you know, for that period of time, I just don’t know whether it’s going to be 25 26 or when. But it will happen.

J Darrin Gross 45:58

No but, again, that just that cycle, you know that when the demand is hot, you know, everybody’s trying to build and then all sudden, demand stops, and you’ve got to, you got an excess of supply, and then you gotta wait for it to get absorbed. And so it’s all kind of interesting. But he Matt, if we could, I’d like to shift gears here for a second. As I mentioned, before we started recording by day, I’m an insurance broker. And as such, I work with my clients to assess risk, and determine what to do with the risk. And there’s three strategies we typically consider, we first look to see if there’s a way we can avoid the risk, when that’s not an option, we look to see if there’s a way we can minimize the risk. And if we cannot avoid nor minimize the risk, then we look to see if there’s a way we can transfer the risk. And that’s what an insurance policy is. And as such, I like to ask my guests, if they can look at their own situation. Could be your your investors, the marketplace, interest rates, whatever it is that that you identify, and consider to be the biggest risk. And again, for clarification, while I am an insurance broker, I am not necessarily looking for an insurance related answer. And so if you’re willing, I’d like to ask you, Matt Brodnik, what is the BIGGEST RISK?

Matt Brodnik 47:22

I mean, I think I mean, I’ve been harping on tenant demand all this time. And as I mentioned, you know, tenant demand hasn’t disappeared, it’s, it’s still there. I mean, you know, we talked about demand, kind of reverting to the mean. And right now, I’d say demand is fallen below the mean, a little bit, which is expected. I mean, tenants lease a lot of space and 21 and 22 leads to more than it turns out, they may need now, but they, they’re not giving it back, they still still need it. And I think what happens in recession, which we haven’t seen, we’re not in a recession right now. And there’s talk right now with the Fed that, that this whole idea of a soft landing, you know, employments near 100% Here, you know, we still have economic strength and growth, and as long as we do tenants are going to need space. And I think the biggest risk for us right now is is is recession, and, you know, tenants actually giving space back like they did during the global financial crisis, and that demand disappeared. And I think then, you know, it’s, that’s the, that’s the big concern, that man going, you know, really, you know, falling through. And, you know, we talked about it, you know, if you talk to an office investor in 2021, during the pandemic, you know, they didn’t forecast that this whole return to work thing would, or this work from home thing would last for four years. They didn’t even see it as a risk at all. So I think, and that’s what’s killed the office world, right, is that tenant demand is completely disappearing, and not just disappear, but there could be giving space back, it’s going backwards. So that’s the risk, we see is this whole integrated environment. You know, maybe there’s a another black swan event, something that happened, obviously, we talked about as a black swan event, maybe you can’t predict what it is, but it seems like, you know, war in world between Russia and Ukraine and, you know, Israel and everything going on in the world, that is a real risk that something else comes in, there’s another shock to the system. So that kind of demand, that’s the thing that we you know, we stay up at night thinking about and, and focused on.

J Darrin Gross 49:25

Yeah, that that is a risk. I mean, you know, as landlord, he, you want full buildings, you know, that’s the, that’s when they, that’s when they work best.

Matt Brodnik 49:39

Yes, vacancy kills and occupancy is everything. And it is something you know, I you know, we talked about that. I remember in 21. I was at an event I was talking to a developer who I know he’s well known and he mentioned that he wasn’t going to lease his building that was under construction. Did they just started construction refused to lease it saying we’re not gonna respond in any tenant inquiries. Should why wouldn’t you do that? Well, you want to lease right now I want to be there for the runway grow. I mean, rents are growing so rapidly by what I lease it now before the building’s done, I’m going to wait till it’s complete. And I remember hearing that, and that wasn’t that was unique to that one developer. It was a pretty, pretty constant theme of 2021. And early two, you know, not really early 22. But 21, for sure. And sure enough that developers are building right now that’s been vacant for a long time. I’m sure you look at that and say, Wow, that’s, that’s a tenant demand risk, right. That’s what I was talking about. So you lease your buildings when you can. And, and so that’s something that, you know, that sticks with me. And when I think about, you know, that that whole idea of tenant demand, it’s, it’s, you know, lease the buildings now, and it’s for as long as possible.

J Darrin Gross 50:53

Amen. Yeah. Hey, man, where can listeners go if they’d like to learn more or connect with you?

Matt Brodnik 51:01

Well, I’m on our website at EGT Exeter, and I’m on LinkedIn. And you know, I’m, I’m very active in the industrial estate world. I’m a transaction oriented person, I buy real estate for a living. So I’m interested in seeing any opportunity one has and evaluate and understanding it. And by the large appetite right now to buy real estate.

J Darrin Gross 51:27

Right. Matt Brodnik, I cannot say thanks enough for taking the time to talk today. I’ve enjoyed it. Learned a lot, and I look forward to doing it again soon.

Matt Brodnik 51:37

Thank you.

J Darrin Gross 51:39

All right. We’re our listeners. If you liked this episode, don’t forget to like, share and subscribe. Remember, the more you know, the more you grow? That’s all we’ve got this week. Until next time, thanks for listening to Commercial Real Estate Pro Networks. CRE PN Radio.

Announcer 51:58

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Multifamily B and C Class Underwriting with Frank Xia – CRE PN #445

Frank Xia 0:00

basically three ways right now for you to make money. Number one is you basically raise the rent. Number two is you improve your operation or you improve your operating sorry, now rental income. And number three is your interest rate the market, right? I want to make sure that I don’t come to the market. But I can control the knob, the the noun rental income and also the rent, right, I want to make sure that I’m able to have enough meat on the ball that even though there’s nothing happened on the on the side, I can also make a lot of money on the other two. This basically you’re down to a property that doesn’t have the highest rent over its neighborhood. This also means that the property has a lot of meat on the board and now rental income side that I can, for example, go back to the tenant, or I can improve here and there to make 20 bucks a mouse a door somewhere, right? I’m actually looking into these deals.

Announcer 1:03

J Darrin Gross 1:23

Welcome to Commercial Real Estate Pro Networks, CRE PN Radio. Thanks for joining us. My name is J Darrin Gross. This is the podcast focused on commercial real estate investment and risk management strategies. Weekly we have conversations with commercial real estate investors and professionals who provide their experience and insight to help you grow your real estate portfolio.

Today’s interview is sponsored by Building Insurance and Risk when you invest in real estate. It pays to work with a real estate investor protection specialist to protect yourself and your investment from catastrophic loss. The experts at Building Insurance and Risk focus on real estate investor protection they provide you with multiple insurance coverage offers and a side by side coverage comparison. To learn more go to Building Insurance Risk.com.

Today, my guest is Frank Xia. Frank is an ex engineering director in tech startup where he specialized in pricing and decision making. He is passionate about AI and investing in real estate and alternative assets. And in just a minute, we’re going to speak with Frank Xia about deal underwriting and raising capital for B and C Class multifamily deals in Dallas, Texas.

But first a quick reminder, if you like our show, CRE PN Radio, there are a couple things you can do to help us out. You can like share and subscribe. And as always, we encourage you to leave a comment. We’d love to hear from our listeners. Also, if you want to see how handsome Our guests are, be sure to check out our YouTube channel. You can find us on YouTube at commercial real estate pro network. And while you’re there, please subscribe. With that, I want to welcome my guest, Frank Xia. Welcome to CRE PN Radio.

Frank Xia 3:12

Thanks for having me.

J Darrin Gross 3:15

Well, I’m looking forward to our conversation. But before we get started, if you can take just a minute and share a little bit about your background.

Frank Xia 3:25

Yeah, no problem. So over the past seven years, I’ve been working in tech industry. My main responsibility was data scientist, machine learning engineer, engineer and also a co founder. So I spent the last of my five years pricing alternative asset, such as real estate, sports card watches, etc. And over the recent two years, I get fascinated about investing in real estate. And they I double down on my investment and up to this year, I decided to become a full time investor. So this is how our journey has been translated. But I’m always a math person in mind. I like pricing stuff.

J Darrin Gross 4:10

No, that’s awesome. The generous in your, your background data science, with bank would lend lend very strongly to underwriting of real estate. You mentioned a couple other asset classes that I hadn’t really considered. I’m kind of curious. You mentioned sports. Did you say sports memorabilia, or?

Frank Xia 4:34

Yes, sports memorabilia?

J Darrin Gross 4:36

I’m kind of curious how that that to me is a fascinating one just from the standpoint of the rarity of particular thing, I’m assuming drives the price up quite a bit. What other alternative assets have you found that have piqued your interest and or you’ve invested in?

Frank Xia 4:56

So right now just sports memorabilia and watches Is because swimming sports memorabilia is more like a hobby of my partner who’s the CEO of the company. So we started to start a start this company. Me personally, I invest in watches a lot because I like wearing luxury watches. These are the two things we pay a lot of attention. But other people I know in the closer code they invest in wise they invest in arts. So whatever you see on the SSP or Christi auction is the is the buy box of our like our our circle, so we like collecting these physical goods.

J Darrin Gross 5:35

And on those types of items, is the plan to buy and hold or is it more of like recognize a underpriced opportunity, buy and resell?

Frank Xia 5:47

Yeah, so there there are basically two types of strategy over there. Number one is decorating. Number two is bed on the market. So if you’re doing speculating, you’re basically buying items at a cheaper price and sell at a higher price. So technically, this can be achieved by buying a item from a list firm from less experienced people and a similar to a seasoned collector, he basically arbitraging how different people perceive the price. The other one is you basically arbitrage between different platforms, for example, you buy it from China and you sell it on eBay or you buy it on eBay and sell in China. The third one is basically that’s that one is more like sportscar specific, because postcard is raw car and their credit card. And when you try to get a car and the grid is great, the grading itself add a lot of that value onto the car itself. So a good I would identify something wrong and purchase at a lower price send it to PSA or BGS have a graded like PSA 10 or PSA nine or BGS, nine a half, and the price increase maybe 20% directly. So as long as the cost paid off, it’s a good bet. So this is about speculating. Yeah, and buying a hole you’re basically betting like, okay, more people is going into this hobby, the trend is going up, people are willing to spend more money but this is more correlated with the market condition. And as you can see over the past few years, sportscar raise a lot during COVID. Because everybody has a lot of money. But right now it takes so different people profit differently in such a market. Well,

J Darrin Gross 7:35

it’s fascinating. Well, I appreciate you sharing a little bit about the memorabilia and and, you know, wine and watches and all that. That’s That’s fascinating. But let’s talk about the real estate. I’m curious what drew you to invest in real estate?

Frank Xia 7:55

Yeah, so I always saw so I think it’s everything boils down to the Kiyosaki Rich Dad Poor Dad book, right? He talks about how to earn passive income. And I know this concept when I was a kid. And I’m basically my strategy was basically starting to collect rent and become a landlord and earn passive income. And I started my journey is like, okay, single family, condos, etc. But then I realized, okay, the speed of a community of wells over there is very slow, for two reasons. Number one is that the I used to live in San Francisco and also obviously, like the rent to purchase rate isn’t really good. So I wasn’t able to make any positive cash flow over the edge, and then have to trend it into other markets, for example, Tampa, Florida, Phoenix, Arizona or Dallas, and then I become more full on buying these homes up until the point that I get bottlenecked by my mortgage broker, they say, Okay, you are not able to borrow more money because your debt to income ratio is that high. They are transitioning to multifamily, because I want to over overcome that bottleneck. So that’s how I ended up to right now. But I think real estate has been a very solid investment compared to other collectibles because other collectibles didn’t generate income versus real estate that generates income. So the pricing is a little bit different. And I think real estate is more robust because it always produce income. It will always have the price.

J Darrin Gross 9:37

No, I agree. wholeheartedly. I’m curious. You mentioned Rich Dad, Poor Dad and I thought I heard you’d mentioned as a child or as a kid, you had kind of understood this concept. Did your family into real estate or how what was your? Kind of

Frank Xia 9:54

they? They do real estate investment in China, but that’s A very different game, China is more about speculating on prices, right? Because you know, like over the past 10 years, the price just surge. So whoever purchased the real estate, doesn’t really matter what they purchase, they make grading return. So I started to know reached out for that, I think from a friend, he said that my parents, my parents didn’t really care about generating these kind of assets. So I have to kind of learn the hard way. So I spent a lot of time learning how to build up wealth myself.

J Darrin Gross 10:32

Got it? Got it. So all right. So you mentioned you started doing single family. He struggled in some of the markets, you found some markets with cash flow, and then the the mortgage your your debt to income ratio basically kept your ability to continue. So how have you gone about investing in multifamily?

Frank Xia 10:57

Yep. So it’s, it’s more of a luck. I was talking to a random friend, and he was bringing up this multifamily concept. And at the beginning, I was thinking he’s maybe just buying this duplex triplex or four Plex. And then he told me his buying like 100, unit 200 unit. I was like, how, how is it possible? And then he explained the concept of like, syndications to GP business model or other business model there. I was like, oh, okay, now I see how the game is playing out. So I chipped in a little bit money was him as the LP of a few deals a few years ago. And I just started to grill this person about all of the underwriting questions, because I’m very responsible for my money. So I learned over the past two years to understand, like, end to end how like, the underwriting sourcing goes, and then I feel like, okay, this is something I’m very comfortable. I’m able to do it myself. And I think, because I’m spending more and more money into this business. I’m doing what I’m doing my own underwriting, why don’t I become a investor and help other people to build up their wealth as well. So this is kind of the journey I started.

J Darrin Gross 12:17

Got it. So you, you started as an LP then. Okay. And in the did they hear you, right, two years is kind of the year and a half, two and a half years? Okay. Yeah. In the two and a half years, the lots changed. I mean, during COVID, the market was kind of everybody thought was going to stop and it just went nuts. Yeah. With all of the low interest rates and, and opportunities. So I’m curious how many how many deals have you invested in and if any, have gone full cycle? Yeah. Just because, you know, Ben? Yeah.

Frank Xia 12:56

So it was three deals, maybe 700. Doors in total. One went out fullcycle. One is doing okay, but you just cannot perform? Sell at good price. And the other one is mediocre housing. So I think one exit full circle two years 37% of return. On the cash on the capital side.

J Darrin Gross 13:23

77% In two years,

Frank Xia 13:24

that’d be 777. Sorry. 7737 Or three, seven. Okay. Yeah. Anyways, maybe like 20%.

J Darrin Gross 13:33

Okay, well, three, seven and two years still? Pretty good. Yeah. Oh, yeah. Yeah, yeah. And. Okay, and then you mentioned that one is okay. And once kind of mediocre? Are. I’m hoping that that all of them are still viable, or have you had any other? I guess, here’s what I see. And you tell me what your situation is, is basically it’s a matter of the interest rate and refinance coming due and and whether or not there’s buyers. You know, that or whether or not the the deals going to be able to hit its projected exit.

Frank Xia 14:14

Yeah. So the so yeah, they also they are using interest, flowing falling interest, but they actually bought a line of cap. So the downside, the risk isn’t really about interest rates. Currently, it’s more about enforce the tax in the tax increase. And we just have to fight every year about this tax situation, which didn’t end up with any cash flow.

J Darrin Gross 14:41

So tax situation meaning property taxes, yes. Probably. Texas.

Frank Xia 14:47

Yeah, because this is just a new new one and also insurance growth. So it’s mainly these two components. They’re basically eat up all of the cash flow. When I say when I say now good, meaning that we’re not distributing. We’re not distributing caches. It’s not about the properties being distressed or not just no cash return on that.

J Darrin Gross 15:06

Got it? And so what well, no, quarterly or monthly cash, the the assets still performing, it’s just a matter of some the expenses have grown beyond with projections were right, namely, the insurance and the property taxes. Right? Got it. Got it. All right. So you’ve you invested in three as a limited partner. And you mentioned that, based on your understanding, and, you know, interest in this, that you’re, you’re ready to go on and be a general partner, if I understood correctly, that appears to be a deal sponsor.

Frank Xia 15:48

So I choose my position very strategically, because I live in Orange County, I don’t live in Dallas, I don’t see myself operating the deals, I don’t see myself being able to compete with other GPS to fight for brokers relationship. I don’t play golf. So I, it’s harder for me to do that relationship with local dealers. So I choose not to become a lead GP, I choose to more become a money raiser and also underwriters. So my strategy is basically to collaborate with the GP that I know, I’d built up trust for a while. And then I helped them to bring in some money, and also underwrite the deals. So this is kind of my value add in this situation.

J Darrin Gross 16:43

Got it. And so in that, you’re not the the operator, how do you go about selecting? Or what’s your criteria for underwriting a general partner operator that you’re going to invest in? And invest in?

Frank Xia 17:01

So right, so you raise a very good question. So there’s basically two parts of underwriting right. You basically underwrite the people, you’re also reading the people, you also underwrite the deals. So for me? I think I still haven’t talked to enough operator, I probably talk to 20. So far. Right? Right, right. It’s deep conversation. 20. I mean, I probably met 15. But I probably only had deep conversation with 20 of the people, I only currently have two people or two groups that I trust. So however the people is basically I try and try to understand, okay, what is their philosophy? Right? Number two is how much is their skin in the game? Meaning that, like, what percentage of acquisition fee they took? How much their own money? Are they planning to calculate? The screen again? What’s the carry? Or the structure of the deal? Are they using a waterfall? Are they using pure 220? Those kinds of skin again, number three, is that how big is their property? Sorry, how big is their portfolio? Versus how big is your team? So a red flag will be somebody that grow exponentially without going too much of their team, which stretched them very thin? And number four, is, are they have spread housebreaking? Are they like, Are they are they all over the place? is are they like sometimes in Georgia, sometimes in Dallas, sometimes Florida, or they just focus on Dallas? How much? Number five is how much they what do they do on a daily basis? How hands are they? How much delegation? Do they delegate to the property management? versus how much do they like oversee everything. So basically, I’m looking for a boutique shop, like a boutique company that owns a lot of things. Because if you own a lot of things, then you have to also make sure they have the system to manage like 10 party properties. I’m currently I’m looking for a boutique versus like big boutique, meaning maybe they saw like they only manage five properties or three to five property, let’s say maybe 1000 doors. They’re capable of doing five property by themselves. They are able to find optimize their contractors, their prices, the vendors by themselves. They’re not fully integrated yet. But I know these people is going to spend money very wisely. They’re going to eagerly to make the property work because they have a huge skin in the game. Right? They’re not taking a lot of money out up front, which means that they all return is very correlated to the performance of the properties. So this kind of GPs are the ones I liked the best. So far. I’m in

J Darrin Gross 20:01

that I’m just curious as you go and, and interview or qualify a different potential GPS, is there a, an average number of years or experience that these tend to have that are meeting your criteria.

Frank Xia 20:21

So the two that I trust, number one, he’s in a business for 10 years. And he just choose to operate Buddhistic. Like, like, like not growing up. The other one he just started three years ago. So I want to make sure at least they have two or one for exit. And I want to also see how they manage right now how they communicate to the investor, what type of report do they say, what do they do on their bare daily basis? And also, I will also pay attention to how do they how did they underwrite the deals? Few years ago, versus how they do perform? are basically say, Hey, can you send me your underwriting files for that deals you closed three years ago? And how they perform, I’ll ask him to benchmark did that person actually perform? Or he’s committed to do right? That perform that person say, Okay, you’re going to build up this top part, you’re going to build up 50, reserved parking, you’re gonna build like 50, popular carport, sorry, you’re gonna build up 50 carport, or you’re going to transfer this laundry machine to Amazon lockers? Did you actually do it? Are you going to peel back? Did you actually build up to the utility to the Senate? Did you actually raise the rent? 10%? So actually, I check if they did, what they promised they’re gonna do. This is the implication of okay, are they going to do what they think they’re going to do in the next day? So I think this tells me,

J Darrin Gross 21:59

ya know, it’s one thing to have a plan, it’s the execution that, you know, determines results. Right. So, so, that makes sense to me. I’m curious, you know, the, the, well, I’m just trying to think the the two parties that you mentioned, the the one that has three years, and one that has 10 years, in the last 10 years, the market has, let’s see, well, 2008 was the so we’re beyond the crash by right now. We’re recording December of 2023. So that would put us, you know, approximately 15 years past the crash. So and we haven’t had a quote, crash, but we’ve had certainly some interest rate. You know, interest rates went down, now they’ve risen, which essentially creates a cycle within the structure of commercial debt. How, how do you see when you when you review the past performance of these parties that you’re you’re interested in investing in? And how, how are they seeing or how are they responding differently? Are we reacting or responding to the market conditions to to create a positive outcome for their, their investors? Yep.

Frank Xia 23:29

So this is a good question. So short answer is we don’t know what’s gonna happen. I think anybody who predict, okay, the interest is gonna go down. It’s kind of betting they don’t let it nobody can clearly say, what’s really going to happen, then my philosophy of investing is number one, don’t lose money. Number two. Don’t forget about rule number one. I mean, don’t don’t lose money. Number three, don’t forget Rule number two, and number one. So I’m basically trying to figure out are we like me, and these two GPS, we both like all of us will agree that we want to currently buy a deal, that will yield as a reasonable return, even though the interest rate didn’t change. And that’s a very conservative assumption, versus a lot of other GPS, like I probably have the right 20 deals over the past a few months. And most of the deals, they’re going to present that to me say, Hey, we’re going to give you 14% Our because our exit cap rate is going to be 1.5% lower, because we do expect the interest rate gonna go lower. And this is a super red flag to me, because that seems the only reason to make money on this deal. Right? So you’re basically only betting on interest rate, not other stuff. And this is basically a bad sign because I could just bet it prostrate elsewhere, why would I bet an interest rate on real estate? So I’m basically trying to figure out, okay, how does a New Deal make money basically, there are three ways to make the deal. So these are basically three ways right now for you to make money. Number one is, you basically raise the rent number two, as you improve your operation, or you improve your operating sorry, now, rental income. And number three is your interest rate the market, right, I want to make sure that I don’t come to the market. But I can control the knob, the now rental income and also the rent, right, I want to make sure that I’m able to have enough meat on the ball, that even though there’s nothing happened on the on the red side, I can also make a lot of money on the other two, this basically you’re down to a property that doesn’t have the highest rent over this neighborhood. This also means that the property has a lot of meat on the ball on the now rental income side, that I can, for example, Bill back to the tenant, or I can improve here in a year to make 20 bucks a mouse a door somewhere, right? I’m actually looking into these deals.

J Darrin Gross 26:17

Yeah, I think you’re spot on. As far as you know, I had somebody else tell me that. If you couldn’t make money in real estate in the last 10 years, then you shouldn’t be in business, you shouldn’t be doing it right now, based on, you know, the, the market was just so ripe in so much demand. And you know, capital was so cheap, that all you had to do is buy one and so on, and you were making money. And but like you said it was kind of a, you know, the market, it didn’t it didn’t take any effort on your part basically, is what it did. Whereas now, the things that you’re mentioning the ability to increase revenue or decrease your expenses, is really, that’s it? I mean, it’s up to the operator to be able to figure out a way to do that. Yeah. Because the, the interest rates are clearly out of your control. And even if you execute your plan perfectly, if you’re if you’re, if your strategy is, you know, the hope that interest rates will fall and and the buyer will be able to spend more than then, you know, in a higher interest rate market, that that’s probably not the best strategy. So we’ve talked about the criteria that you look at for qualifying a, a general partner to work with, what about the actual property, tell me a little bit about some of the strategies and or criteria that you look for when selecting a, a property to, to invest in? Yep,

Frank Xia 28:01

so I’m a very number person. I believe in fundamentals. So my goal is to minimize my risk before closing, and then I can rest assured, because most of the work for me is done. During the writing time, I have almost zero control after the ogre clause, right, I can only influence the operator, but I have technically no control of how the deal is gonna perform. So. And the writing deal is the most important thing that I can protect my money, or I can either win or lose. And it’s going to be three years, five years to prove myself if I’m doing good or not, right. So I treat this very seriously. Number so how to actually underwrite the deal? So So I basically figure out okay, what type of property do I know? And I can mathematically underwrite it, and this basically yields to Class B, class C, plus, usually, because Class A return is slightly more lower than their my expectation. So I kind of haven’t really looked at Class A plus Class A require more money and operators. I know they have no experience of underwriting or many classes, because it’s just bigger operations. So I currently don’t know how to underwrite to assay. That’s just all of my knowledge. I’m very good at I will say right now for Class B, class C, because I just being underwriting these deals over the past few few months, my half year probably. So I’m currently focused on Class B Class C. In the future, I’m probably going to expand into other asset classes for example, self storage, for example, mobile park, or sorry, mobile homes, parking, self Park. A lot, etc. But right now I think Class B Class C are my bread and butter. So how do you underwrite Class B? Class C is basically, it’s very formal and the writing process, you basically grab their awareness, grab costar group or grab their rent roll t 12. Right, and plugging into a giant spreadsheet, that is pretty available online. And then you also change your assumptions. So I say, there’s like grabbing the number, which is kind of the same, and also pulling out options. And that gives you a real number of return. Right? So I think the most important thing is to figure out what assumptions do you use for these projections? This basically crude, okay, exit cap rate, this is the biggest number, your rent proves, right? What you’re gonna do for, for for non rental income? What are you gonna do for your expenses? And how much capex do I currently don’t know too much about FX because I’m not operation present. So that’s best reading the GP helps a lot, right? I usually trust the GP for their FX site. I personally put a lot of emphasis on the other assumptions, for example, rent growth, I’m currently not giving more than two and a half percent annually for the rent growth. Now, that’s not taking into consideration of renovation. Okay, renovation basically does its own bump. But if status quo and assume maybe two and a half percent over there, for the exit cap rate, I’ve usually assumed whatever the acquisition cap rate plus of the business point, this is my like, back to envelope underwriting for the cap rate, I can go deeper into underwriting of cap rate by using multiple data points, maybe I pulled the costar report, see what’s the market and plus 50 basis point on top of that, if the deal was so that, so basically, I want to make sure Okay, after all of these assumptions work, I can still achieve maybe 14% are for GP, sorry, for LP for my LP, I think that’s a very good signals to pull the trigger. And unfortunately, due to that, very restrictive in the writing process. The GPS I’ve been working on lost a lot of bearings to other GPS over the past few months. And I think that’s okay, because I don’t want to just wait to do for the sake of giving more price, because they’re always going to be somebody who’s willing to pay more to win the deal. But they’re just paying too much. And I don’t want to end up who’s doing that. I’ll just wait.

J Darrin Gross 33:05

So I want to make sure I understood the on the exit cap rate, you’re projecting, you’re taking the entry cap rate and adding half a half a point?

Frank Xia 33:15

Half a point pretty much. Okay, so

J Darrin Gross 33:17

if what are you seeing right now as a market cap rate in the Dallas BC class code, or not? Classico? Yeah, the the class of properties as well as an offering Capri?

Frank Xia 33:32

Yeah, so I think it depends on regions, but most of the region either, right, I think Class B is about 5.55 and a half 6%. And Class C is like 6.7%. That’s usually how I see it. But I mean, but the asking price is usually 1%, lower. So there’s a huge gap between us can bid, right? So we’re selling, they are giving you a 4.5% of cap rate, I was like, Okay, this is not gonna work for us. But 4.5% is probably the only rate, they’re not gonna lose money on their side. So there’s a gap between what people are willing to let go versus what people are willing to pay. And I think that’s also a reason of, there’s so little transactions on the market. Sure,

J Darrin Gross 34:14

when you do your underwriting, and you’re looking at the actual rent, rent roll and, and calculating the cap rate, presumably it’s off whatever they’re, they’re actually doing. If it’s substantially under market, do you give yourself any kind of a leeway kind of a room as to how much you can go higher than that based on you know, if if the current rent is x, and you know, that the, you know, the market rate is, you know, x times, you know, 1.25 or whatever, meaning that and showroom.

Frank Xia 34:56

Got it, so I’m trying to understand why the current rate is much lower. There’s usually two reasons right? Number one is the, the current owner is not doing the job, for whatever reason. It’s either they are a mom and pop shop or they live in a different state, they just don’t pay attention. There’s another reason is that okay? Maybe there’s something wrong with with the property, people are just not willing to pay that high. Right? So I’m trying to debug what’s the reason? If the data tells me it’s more about the operation, they’re probably can bump it up more aggressively. But if the reason that that oh, just because this this location is weird, right, there’s like three other locations that have better visibility, or for whatever reason, people just don’t like this kind of unit layout or etc, I will be very conservative. So I’m trying to figure out why it is as little

J Darrin Gross 35:57

as far as the BMC class properties to your underwriting, is there a number of doors that you focus on?

Frank Xia 36:07

Good question. So I’m most of the deals, like that’s being brought to me as usually 150 to 250. Doors. So this basically justify a full on side property management team.

J Darrin Gross 36:20

No, makes sense. And what are the projected hold times in your, in your models that you’re, you’re looking at for acquisition?

Frank Xia 36:32

Right now, I’m currently giving myself three to seven years of exit. So when I’m using that, I’ll probably use a longer term fix that maybe seven to 10 years. So my strategy right now is I want to experience another cycle, and sell that at a better price. Maybe I will refinance in the middle. But my goal is basically give myself I learned from the past, right, I basically gave myself a longer period of time before that, unless it’s like a super deal by deal is different, right, unless this deal is purely about just fix. Sorry, flip, fix or flip. Otherwise, if it’s just substandard deals, I’ll give myself very long term to realize over there.

J Darrin Gross 37:19

No, make sense. For debt, what are you seeing the the interest rates that are being offered? And what kind of downpayment percentage and, and the length of term on the on the debt? What are you seeing right now?

Frank Xia 37:35

Yeah, that’s that’s actually not my expertise. But most of the deals I saw is around 6%. So the percent down 30%. agency law

J Darrin Gross 37:46

agency, okay. And was that seven to 10? years, then on the Yeah, the term? Okay. Yeah.

Frank Xia 37:54

We had a deal that you can assume a debt. And also, I think that was like, very good. But for whatever reason, we pass it, but most of the most of the deals are six, seven to 10 years.

J Darrin Gross 38:08

On it. So as a capital raiser, what is the the temperature of the investors that you’re approaching? What’s their? What’s their response? Are they eager to invest? Are they cautious? What are you hearing?

Frank Xia 38:30

So I think it depends on how they Well, first of all, most of I think almost all of my investors right now are accredited. And these accredited investor make their fortune differently, right? There are basically two types of ways they make their fortune number one is they in tech industry, they had a big check their engineers. Another way is to like their financial workers, they are just super high pay, and they are very good at investing. So if it’s more tech, they are less educated, and they are looking for a way to park their money with reasonable return. And they are willing to do that because right now the only thing they can invest right now is is that is the Treasury. CD, right? So right now they’re getting paid 5% 6%. And if I can offer them a 10% 14% annualized return, this is a much better return for them. Other side of my, my, in my in my circle, they are super good at investing because they work in the finance industry. They work in a hedge fund. They are very picky about how they invest and they’re investing in real estate just merely for the sake of diversification. So these people are very conservative right now because they, they they park most of their money in their bank and they’re just waiting because they have their own thesis. They want to deploy their money at the right time. So they’re busy pretty saturated, like one group, that tech group they are, they are just looking for better opportunities versus the finance group, they are strategically waiting. So I think this part is easier to raise versus this is more hard.

J Darrin Gross 40:16

Yeah. No, I think that’s kind of what I’m hearing is. I hear there’s lots of opportunities here, there’s lots of opportunities that are due to come to market based on just the cycle of financing that’s in place. Right. And I think it all kind of comes back to the interest rate that the Fed is making available. The last I heard is the commitment is to not raise rates anymore. And, and the foreshadowing is that they plan to cut rates. But, you know, who knows? What the, what the if, you know, the numbers present something that doesn’t make or hold that to be true? You know, that could be, it’d be more worrisome. But yeah, you know, out of out of my control more, you know, pay attention to what’s what’s in front of us. That’s real. Yeah. And, like, you’ve said that the rent is real, you know, if there’s expense, expenses that can be cut, or were transferred to the residence. You know, these are ways you can prove your numbers here. I like that. Yeah, yeah, exactly. So, Hey, Frank, if we could, I’d like to shift gears here for a second. By day, I’m an insurance broker. And as such, I work my clients to assess risk and determine what to do with the risk. And there are three strategies that we typically consider, we first look to see if there’s a way we can avoid the risk. When that’s not an option, we look to see if there’s way we can minimize the risk. And if we cannot avoid nor minimize the risk, then we look to see if there’s a way we can transfer the risk. And that’s what an insurance policy is. And as such, I like to ask my guests, if they can look at their own situation. Could it be interest rates, investors, the market, whatever it is that you you see, in your situation that you consider to be the biggest risk? And again, for clarification, while I am an insurance broker, I am not necessarily looking for an insurance related answer. And so if you’re willing, I’d like to ask you, Frank Xia, what is the BIGGEST RISK?

Frank Xia 42:37

I think the biggest risk for me is, I think, interest rate right now, and how I choose to, I don’t think I can transfer that. But I think I can minimize it number before for a few for a few strategy. Number one is I just invest less deals, because the less you invest, the less risk you expose, right. But if you don’t invest anything, then you have no income. That’s not an option. So you have to participate in debate, but you can participate very strategically. So that’s number one. Number two is you can use a fixed rate mortgage to alleviate your risk, right. Instead of few years back, everybody is using floating interest rate with two years of recap. So we learned the lesson, we’re going to be more conservative using a fixed rate mortgage. So that’s number two. Number three is that we are looking for a cheaper price. We’re giving us more buffer so that we can tolerate this kind of waste. So these are the three things we’re going to be doing. But the biggest risk to us right now our interest rate.

J Darrin Gross 43:54

Now, let’s well said make your money on the buy and if you don’t buy right. Make makes it difficult to exit. Right. So yeah. Frank Xia, where can listeners go if they’d like to learn more or connect with you?

Frank Xia 44:09

Yeah, so right now I’m mostly active on LinkedIn. So my LinkedIn handle is Frank the Tank, CFA, and I post daily about career I post daily about wealth creation, and I talk about startups and entrepreneurship.

J Darrin Gross 44:28

Give that to me one more time, Frank the what?

Frank Xia 44:30

Frank the Tank CFA.

J Darrin Gross 44:35

CFA, gotcha. Got we’ll list that in the show notes. And listeners can find you. Yep. Right. Frank Xia, I cannot say thanks enough for taking the time to talk today. I’ve enjoyed it. And I learned a lot and I look forward to doing it again soon.

Frank Xia 44:53

Yep. Thank you very much for having me today. Darrin.

J Darrin Gross 44:56

You got it. Where our listeners If you liked this episode, don’t forget to like, share and subscribe. Remember, the more you know, the more you grow. That’s all we’ve got this week. Until next time, thanks for listening to Commercial Real Estate Pro Networks, CRE PN Radio.

Announcer 45:17

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Triple Net Lease Landlord Benefits with Michael Salafia – CRE PN #444

Michael Salafia 0:00

But in general, when we’re talking about triple net, we mean that when you’re the landlord and you buy the property, and you go to your tenant, you set up direct deposit. And all you’re doing is collecting a rent check every year or every month. Maybe you send them a property tax bill every year, but that’s about it. And usually these are 15 to 20 year lease terms, so they make really nice assets for passive income streams. They’re great for retirement purposes. These are typically very stable assets with very low risk profiles. So as a result, the cap rates become very compressed compared to the rest of the market.

Announcer 0:36

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J Darrin Gross 0:56

Welcome to Commercial Real Estate Pro Networks, CRE PN Radio. Thanks for joining us. My name is J. Darrin Gross. This is a podcast focused on commercial real estate investment and risk management strategies. Weekly we have conversations with commercial real estate investors and professionals who provide their experience and insight to help you grow your real estate portfolio.

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Today, my guest is Michael Salafia. Michael is the Founder and Managing Partner of Stax Real Estate LLC, a platform for sale leaseback of single tenant Net Lease real retail assets, located in Miami Beach. And in just a minute, we’re going to speak with Michael Salafia about the benefits of triple net sale lease backs for both investors and tenants.

But first, a quick reminder, if you like our show, CRE PN Radio, there are a couple of things you can do to help us out. You can like, share and subscribe. And as always, we encourage you to leave a comment I’d love to hear from our listeners. Also, if you want to see how handsome Our guests are, be sure to check out our YouTube channel. You can find us on YouTube at Commercial Real Estate Pro Network. And while you’re there, please subscribe with I want to welcome my guest, Michael Salafia, welcome to CRE PN Radio.

Michael Salafia 2:43

Good morning, Darrin. Thanks for having me on the show.

J Darrin Gross 2:47

Well, I’m delighted to have you and I’m looking forward to our conversation. But before we get started if you could take just a minute and share with listeners a little bit about your background.

Michael Salafia 2:59

Absolutely. So again, I’m Michael Salafia, I’m the managing partner of stacks real estate, and it stacks real estate we’re a sale leaseback platform for single tenant net leased assets. That makes us a mixture between being a commercial real estate developer private equity fund and brokerage, and it’s all in one. I’ve been in commercial real estate investment arena for about five years, got my teeth and got started my career Marcus and Millichap at from the brokerage side. And that’s how I started learning more advanced strategies and getting into commercial real estate investing for myself on structuring deals on my own. And you know, my family has always had a background in commercial real estate and retail specifically, going back to my great grandfather, so I’m kind of fourth generation owning and operating commercial retail properties.

J Darrin Gross 4:02

Got it. So that’s a pretty rich history with fourth generation real estate. So your family it’s

Michael Salafia 4:10

A very abbreviated version actually started my career in the technology sector in tech and doing tech startups. But with these commercial real estate deals, the cashflow is so incredible on day one, it just became so much more attractive to me than some of the venture capital projects I was working on, ended up working as a consultant for a number of real estate investment trusts and other kinds of finance companies in the industry. So I started before I went down the path to become a broker. I started as a consultant for large funds and financial institutions investing. So give me a very diverse background.

J Darrin Gross 4:52

So were you consulting from a tech side then, or were you were you consulting,

Michael Salafia 4:58

tech and communication In strategy, communication strategies.

J Darrin Gross 5:04

Yeah, well, that’s, that’s clearly exploded here in the last 15 years with what was the was the Jobs Act? I know that was kind of the big push for all the marketing with the ability to raise capital and stuff did that. Was that part of what you were a part of then? Or? I mean, is that kind of what?

Michael Salafia 5:25

Right? How do you how do you craft a investment presentation to raise $2 billion to build a commercial real estate investment? Trust? Right, kind of answers.

J Darrin Gross 5:38

I’d be coming up with God. So in your family, real estate experience, primarily retail,

Michael Salafia 5:47

retail and multifamily? Yeah. On the east side of Providence by Brown University. Okay, it’s the area that we’re focused on.

J Darrin Gross 5:54

Okay. And then when you were with Marcus Millichap, were you was a multifamily? Or what was your focus there?

Michael Salafia 6:02

No, I was on the national retail Property Group and the National net lease property group. So I focused on on single tenant net leased assets, I’d be happy to explain what that is.

J Darrin Gross 6:18

Yeah, no, that’s exactly where I wanted to get to. So we’ve got your your background here. So let’s talk a little bit about the triple net lease. Right? It’s always, you know, everybody recognizes the N and N. I’ve found that triple net is not always. Or I guess there’s some some interpretations that can vary. What is a triple net lease? And what are what are the three ends.

Michael Salafia 6:44

So when we think about a triple net lease, just from a broad stroke, we think about a lease that has no landlord responsibilities and all tenant responsibilities. That’s what we’re talking about. And I agree, there are interpretations where maybe something says triple net versus absolute triple net. And maybe there’s an exception, where the landlord might have to pay the property tax bill on their own, or maybe maintenance for the landscaping is reimbursed by the tenant, but the landlord pays it up front, there’s various ways to structure it. But in general, when we’re talking about triple net, we mean that when you’re the landlord, and you buy the property, and you go to your tenant, you set up direct deposit, and all you’re doing is collecting a rent check every year, or every month, maybe you send them a property tax bill every year, but that’s about it. And usually these are 15 to 20 year lease terms. So they make really nice assets for passive income streams, they’re great for retirement purposes. These are typically very stable assets with very low risk profiles. So as a result, the cap rates become very compressed compared to the rest of the market.

J Darrin Gross 8:01

Right, right. In the in the, the, the the triple net, I just wanted to go back real quick on the I mean, I liked the way you kind of said blanket, it’s like no expenses to the landlord, tenant covers all that. The ones that have always been kind of like identified, in my experiences, the taxes, insurance, and then maintenance is kind of the one where I’ve gotten kind of a little bit fuzzy, and you kind of explain a little bit like maybe landscaping or I’ve seen where like the roof is responsibility of the landlord or, but so I guess what I wanted to just revisit there, the concept is no expenses, but the details are negotiable. Is that fair to say?

Michael Salafia 8:48

Actually, Darren, it’s, as you explained, you have a correct in your head. So net net net, right. So as we’re, as we’re the landlord, right, and we’re adding our rental income versus our expenses, and we’re saying, here’s our income, net of insurance, net of taxes, net of maintenance, and breaking into those buckets. Got it? So so in this case, your rent becomes as the landlord, right, you’re looking for what’s my net operating income for the property I just invested in? Well, if it’s an absolute triple net lease, your rent payment is equivalent to your noi, your annual rent equals your noi.

J Darrin Gross 9:30

Exactly, and that’s what I was trying to get to is the the calculation and is it may look like a smaller number, but you have no expenses to reduce that number by Exactly,

Michael Salafia 9:42

exactly. And you don’t really need a property management company. Unless maybe you have 100 triple net lease properties and you want someone to administrate the leases and do that kind of work.

J Darrin Gross 9:58

Got it. And as far as is the the cap rates I mean, or does does a triple net change the valuation? I mean, again, we’re talking in a why it’s in a why as an ally,

Michael Salafia 10:14

it will, it will change the valuation because again, you’re having the tenant pay for costs, and you’re having the tenant basically be your property manager. So you end up typically you will end up paying for that in the cap rate, as compared to say, a modified gross lease or a gross lease, which you might see in an office building, right? If we have an office building with many different small offices in it, it might make sense for us to just be office building operators, and that’s our job, and we’re going to pay the electricity bill, make sure everybody’s office is set up. Now we’re going to charge them a higher rent, because we’re doing everything for them. Right, and it goes in the exact opposite way. Whereas I go to say, Chase Bank. And I say, okay, Chase, I’m going to lease you this one building, you’re in charge of everything, just give me a rent payment every month. And I don’t have to go and do the hedges the way they want. They Right.

J Darrin Gross 11:14

Right. Well, then, I guess what I was trying to see. And so if if the market cap rate for a particular asset class, you know, to to similar properties once triple net versus ones. You know, you’re more involved. And it’s it’s the the owner managers are, are doing all of the maintenance, paying taxes and insurance, the NOI on those two, would they would they not be comparable? I mean, because if you have a because I guess what I’m trying to understand here is would one expect a a higher noi in one way versus the other?

Michael Salafia 11:57

Does that make sense? The Yeah. So effectively? No, it should come out pretty similar.

J Darrin Gross 12:04

Okay, that’s that’s I was just trying to see if there was Yeah,

Michael Salafia 12:09

wouldn’t necessarily be a big difference that that gets, that becomes a very business specific decision, it’s going to come down to the asset, there’s, I wouldn’t say there’s necessarily a global rule there. But in general, it should be if you had the exact same properties, with the exact same management, all you’re changing is the lease structure, the match should remain the same.

J Darrin Gross 12:29

Got it? So that then brings me to how do you identify an opportunity to have a triple dead lease? And hey, I would guess from a landlord perspective, what would be a a? What are some of the criteria you would you would identify or recommend a landlord investor be aware of when when considering offering a triple net lease?

Michael Salafia 13:01

So they are owning a property and they’re offering it to a tenant? Or is their goal to buy a triple net leased property?

J Darrin Gross 13:10

Let’s take the first one in the you own it. And then also I want to talk about that if you’re looking to acquire a property and there’s a a tenant in a budget, just if I own a property right now, and I’m, I’m late I’m, you know, trying to lease it. When, you know, give me some other criteria that that you would recommend that an investor landlord have in place or consider whether it be like a caliber of tenant or term of lease or Yes,

Michael Salafia 13:42

and it really comes down to the type of the property right, so I focused on single tenant retail assets. That very simply could be is most often a fast food restaurant, a drugstore like CVS and Walgreens, a gas station convenience store. $1 General a standalone grocery store cost goes for example, or good single tenant assets. So I’m focused very focused on that. However, you can have a net lease on really any kind of property, you know, some of our offices are or triple net lease structure.

J Darrin Gross 14:23

So, but I guess the the if I’m understanding right, the single tenant occupancy is, is key is

Michael Salafia 14:32

the triple net structure works really well for the single tenant business model, because you have one tenant that’s very specialized in operating a specific property. And now you’ve just given them all the control. So let’s talk about why do we love triple net leases in the gas station convenience store space, because that one makes a lot of sense when you think about it. Okay. So let’s say Darren, you own a gas station, right? and you’re in a convenience store, and you’re looking for a new tenant, maybe it’s gotten a little rundown and you’re like, you know, this would make a really nice Shell station, when I get shell in here to put some fresh paint on it and put up that new sign I just saw down the street, I think this will pave the driveway space will look great, okay, but you don’t want to be responsible for all those pumps, right? You’re literally pumping motor oil, every day, stuff could go wrong. And then you have a giant tank under the ground full of motor oil, you might want somebody managing that property, who’s experienced in this, who carries that kind of liability insurance, who handles those kinds of insurance claims in their day to day business, who knows how to read the reports for all of this specialized equipment that you have on the property that’s very environmentally sensitive as a ton of liabilities associated to it. Right, that’s what it comes down to finding that tenant who really understands what they’re doing. And it could be at a fast food restaurant where you’re like, you know, these guys, they always have clean bathrooms, good landscaping, right? So you’re looking at the bigger picture of the tenant. And that could be at a small or national level, at a national level, you can think of brands, I’ll challenge you right now, to think of some brands in your head where, you know, you don’t really want to go into that store, it’s always a little kind of dirty, it’s not your favorite store. And then there’s other brands, where it’s a nice experience, you’re comfortable with that brands like Starbucks, everybody likes Starbucks, for the most part, they have a good experience. Blah, blah, they have a great customer experience. So those kinds of things are, are what we might look for.

J Darrin Gross 16:42

No, I think that that is appealing, at least from a a, you know, landlord standpoint, to know that you’ve got a brand with some, you know, recognizability and and presumably some some, you know, capital to maintain and, and operate and pay the rent, right?

Michael Salafia 17:02

And maybe a large brand with a franchisees. So as a landlord, you should go to the franchisees other locations and see how clean they are, how well are they maintaining the property? What does it look like on the outside? You know, you can tell a lot just from just from looking at the property and maybe walking through the store. Right?

J Darrin Gross 17:22

So you mentioned the kind of the national brands and then kind of the franchisees, do you find that for triple net, the the brands and the franchises are are kind of the kind of the target or most often kind of the, the opportunity there? Or do you find that there’s a lot of the local, lesser known brands that that can be a good fit for this.

Michael Salafia 17:51

You know, I come from the National Space. So the national brands are really all I know. I will say especially living here in Miami Beach, there are some fantastic triple net lease opportunities in the hospitality space. I mean, I’ve seen even some nice trendy restaurants buy their retail condo and say, Hey, we have you know, three years of sales history. So why don’t we do a sale leaseback and execute a 15 year triple net lease for a restaurant, right? And I can tell you I go to that restaurant, it’s great, they run a great business, I would buy that deal. You know, it’s not going to be as good of credit as buying a CVS store. But it’s a good it’s a good bet. If you if you’re interested in that kind of property type. Really, it really all depends.

J Darrin Gross 18:43

But as I say, I think the the the thing I’ve learned a little bit about commercial, especially the the retail, the value of the the property is dictated lot by the tenant. I mean the the caliber of the tenant, am I my corralling them, right?

Michael Salafia 19:06

Correct. And we’d measure that by the credit worthiness of the tenant, which is quite frankly, a measurement of risk. You’re measuring how much risk you have of that tenant failing to make your rent payment.

J Darrin Gross 19:22

Right, right. So let’s, let’s take the other direction. We mentioned earlier, you’re in the market, you’re looking for a property and you have a property like that’s an it’s leased. It’s currently got a triple net lease. What are some things that you would look at when underwriting that property? And the tenant to determine whether or not there’s, you know, what the upside is and or the opportunity is,

Michael Salafia 19:55

right. So for example, we have a restaurant right now, where Air, it’s near Philadelphia, the had to kick out the tenant, they weren’t paying the rent. And it was a national, quick service restaurant operator, like fast food. So now we have this big and fast food restaurant. So we look at for redeveloping the property or a couple of things, we’re gonna look at the other tenants that operate within that area, say they have a location within 100 miles within the same state. So we know this, these tenants are active in this area. And then from there, we’re going to look at market saturation, and see what the competition is where the closest location is, for each one of these tenants. We run through this process called void analysis, where we look for where the gap is in the market, what is the void that we can fill, and who are the potential tenants. And then our team of agents who will go out and engage each one of those tenants one by one through a series of business development, phone calls and meetings, with hopes of finding the right one that would take over that property. We go based on the best and highest use, run through the legalese aspects first.

J Darrin Gross 21:17

And when you’re when you’re looking for the that’s kind of the the read tenant thing, so when you when you find the property, would you the length of the lease that’s left with that factor into it? Or? Or how would you are you talking about just having buying an empty property where you can now you’re looking for a tenant? Yeah, this

Michael Salafia 21:39

in this case, I’m describing an empty property, we’re looking for a tenant. In the other case, you’re talking about just acquiring a net leased property, buying a triple that property, which is, as you said, you’d be very concerned with the amount of term remaining on the lease. Those are really the three big things that you’re going to look at are what’s my cap rate? And besides the price, obviously, what’s my cap rate? What’s the credit of this tenant? And how many years are left on the lease? Those are the three biggest levers that impact the market value of the triple net property.

J Darrin Gross 22:17

And as far as the lease terms, we’ve established the the triple net aspect of it. But as far as the the length, you mentioned anywhere from 10 to 15 years. Are there any kind of standard increases over that time? Or is it present all there’s negotiators what’s

Michael Salafia 22:38

typical, it’s all negotiable. There’s no standard practice. But what you typically see is 10%, every five years, or 2% per year, you really want to structure these leases. So to keep up with inflation, so anything below what’s effectively a 2% annual rent increase could get dangerous for the owner. We’ve seen this before I saw that, yeah, a Burger King where the lease was signed, it was near Miami, and the lease was signed in the 1980s or late 70s, or something, and the rent was so low, and they had such a strong lease that it was artificially decreasing the value of the property. So the most we could underwrite the property for based on the lease was like, maybe $100,000. Meanwhile, this property, the real estates worth, like $5 million, based on the average price per acre, according to the comps, they have a big discrepancy in the two appraisal methods. Ya know, that we ran into that.

J Darrin Gross 23:39

But as you say, the the, you know, if you have a long lease, and it’s written on some historical terms, when maybe real estate wasn’t been doing as well, that could, that can be a bummer. If you’re,

Michael Salafia 23:56

here’s something very interesting about the valuation of these assets that I don’t think most people fundamentally understand. So when I was first getting into this, I said, okay, so you’re telling me on a 15 year lease, and the value of the asset, it’s, its maximum value is when the lease hits its maximum term. So therefore, the value of the asset should decline year over year, however, you also have a rent increase, which could technically be offsetting it. But overall, you know, when you have 15 years versus 10 years term remaining on a lease, it’s going to impact the cap rate, the cap rate is always going to be higher for the 10 year deal versus the 15 year deal, assuming all other conditions are the same. So I thought, well, then there must be a linear decrease in valuation every time you lose a year lease term. That is not the case based on my independent research. So I took all the comps data that I did one year and compared it. And it’s not linear. It’s a waterfall of CLIs. You have value clips that go on. So the biggest one is after your 10, huge value clip. There the difference in your valuation between having 14 years or 15 years left 13 years left, very little, the difference between having 13 years versus nine years, huge 10 years versus nine years huge value cliff. It just works that way. I mean, that’s what I’ve seen based on studying the comps and I believe it’s, you know, primarily consumer psychology at that point. And

J Darrin Gross 25:35

is that just based on the the length of the payout that’s scheduled? I mean, that there’s a potential to lose a tenant or what’s

Michael Salafia 25:44

your thought process is accurate. And typically, we are looking at the net present value. But I’m I’m literally saying the difference between your evaluation at year 10 versus year nine, it’s not linear between love and 10. To nine, it there’s a big cliff that happens between year 10 And year nine. It’s just the market value goes down dramatically. These are all market conditions. So can be changed my market behavior changing, but this is just what I’ve noticed in my studies independently. Sure.

J Darrin Gross 26:16

So I guess here’s something to to ask you. So if we have an investor, and they’re looking to buy a property? Typically, if I understand correctly, they would expect to pay more if the lease had 10 plus years in it in what you just said, versus if it was nine or less, right, perhaps get a get a better price? And I guess my my question is, and so is, as a investor, if you’re looking to sell a property, is it, it sounds like if I if I’m understanding correctly, it’d be best to first get it released. With a longer term lease before you you go to sell that to get a higher price.

Michael Salafia 27:07

If your goal as the investor is to maximize the value of the property when you sell then yes, you can go to a company like Stax that does these value add strategies and we’ll find a new tenant will extend it to a long term triple net lease and dramatically increase the value of the property. For example, you wouldn’t come to stacks because we’re leasing agents who and say, Hey, I have this shopping center, I want you to lease it out. That’s not really what we do. But if you said I have a shopping center, I want to sell we need to bring it get in all the leases and get everything organized and ready to sell. We’d say okay, this is what we do.

J Darrin Gross 27:44

Okay, so that’s the next thing I wanted to ask you about this. Tell me about stacks and what is stacks.

Michael Salafia 27:50

Right, so at stacks, we work directly with tenants, we partner with kind of tenants and developers, and we bridge the gap using our sale leaseback platform to finance the opening of new stores. Basically, what that means is, we’re buying properties that are usually vacant, or maybe it has a tenant that I can move out with 30 days notice. Then I’m bringing in a new tenant, usually making some improvements to the property, you know, some like construction work or re imaging the property, putting up the new signage, oftentimes renovating the interiors, new bathrooms, new driveway, new landscaping, making it nice, we bring in the new tenant, we execute a long term called 20 year triple net lease, and then we’ll take that and we can sell it on the market to private investor, we can sell it to a real estate investment trust or some kind of fund acquiring these assets. And basically, when we sell it, that’s the money that we use to pay off the real estate and the the capital expenditures, the capex that we put into the property.

J Darrin Gross 29:05

Got it so that that

Michael Salafia 29:07

basically finances the cost of setting up the business for the tenant. So it’s a it’s basically a franchisee for example, coming in and getting to open up a new franchise, but they don’t have to put you know, a million dollars down in order to get done. We’re financing everything.

J Darrin Gross 29:25

So, snacks and basically facilitates that kind of the the returning and getting the the property leased. Is that the my understanding there right for the for the investor.

Michael Salafia 29:37

Yes, but more. We’re working with groups of tenants. So for example, we have Shell gas station operators, and we’re working with them we will find them their new site or new property that they want to take over. We’ll arrange a real estate invite estar to basically fund the acquisition of the real estate will arrange for another source of financing to cover any other costs, they have to re imaging the property. Let’s say putting up fresh signs new landscaping, re renovating the interior. That’s, that’s more what we do. Got it. Got it. So as a result, we have a lot of these brand new reimage. Net leased properties for sale. Because every time we’re done setting up a new store, usually we go and sell it for.

J Darrin Gross 30:36

Yeah, okay, I gotcha. So the goal, then is more of the, in for lack of a better word, flip the property, I don’t want to compare these two, you know, like,

Michael Salafia 30:48

we’re not really flipping because we’re the value of getting that tenant to sign that lease for long term. That’s extremely valuable. Right, right. Right, right. No, stabilized property. And now we have a stabilized triple net asset.

J Darrin Gross 31:05

Right? But what if I understand right, what you’re doing is you’re you’re finding the property, you’re finding the tenant, and then you’re, you’re making it so it, it’s a much more valuable property? And then are you selling? And then are you selling it then for the investor? Are you are you acquiring the property,

Michael Salafia 31:24

we have a private equity fund that we’ll use to acquire the property. But our part of our strategy and our fund is to get in and out of the property quickly. So we’re not flipping it, per se, but you know, we can get our money in and out within six months, we’re trying to turn over that money as many times we can per year.

J Darrin Gross 31:42

Sure. So like in a comparison, like a multifamily the value add kind of thing, but that for if you can do that 36 Or not 36, six months, that’s a pretty quick turn. So okay, so that’s, that’s the A P, I get it now, that that makes a lot of sense to me that. So let me ask you, so when, you know, I think one of the things that I recognize that I love about real estate is that it’s the buyers opportunity to recognize the opportunity that the seller doesn’t, or the seller is ready to be done with. And so if I’m understanding kind of your, your ability in your, your, your company’s ability, it’s to recognize that which is not recognized, and to you know, improve and, you know, make make more appealing and, you know, add value to the property, but I’m assuming also add value to the, the area, if you bring in a, you know, if you take something that looks kind of tired and all sudden you make it all pretty, and now there’s traffic and in more, more of a viable, big time, it’s,

Michael Salafia 32:56

you should see what we’re doing in rural communities with hospitals. I have a project right now where the hospital is completely under managed. And this is a proper regional Regional Hospital for a rural area. So the population within three miles is small, but this is servicing people within like an hour to a 90 minute drive. Right? It’s a big place. It needs work, it needs a new management team management team needs a budget to bring in like the proper equipment that they need to offer the new modern services and collect the healthcare billables that are just sitting there, not being collected. And so it’s another strategy where we’re setting up a sale leaseback right for this operator and getting them some tenant improvement allowance in the process in order to get this rural hospital out to the place. But when this one works, my point is we’ll have a bigger impact if we do 10 of these this year. I mean, that’s a lot of communities that were impacted and, and gave medical proper medical care that were lacking it before.

J Darrin Gross 34:03

Yeah, so let me ask you, I mean, what’s interesting to me and just kind of thinking, it almost feels like you guys are really touching on the operation side of thing. Whereas a lot of times I feel like the conversation about real estate is the, you know, more of the the asset and the and the the revenue it can generate as opposed to the actual operations. That makes sense. It does.

Michael Salafia 34:26

It sets us apart at stacks. We’re very focused on the mechanical operations behind the business, and what’s supporting that rent. And we dig in deep and we consult with these operators. We work very closely with them. We go through all their books and records in detail to understand, you know, what their business model is where they’re making money where they’re losing money, and we structure every deal in a sound way. But it works because it’s a single tenant net leased asset works because it’s one tenant with one building at one site. It’s going to have One traffic count and one population count. So we can break it down on a store by store level doing it that way.

J Darrin Gross 35:08

Yeah, no, I think that’s that’s, that’s interesting. I hadn’t really thought of it in that in this month. But I mean, really that how important the operations are in your ability to recognize and to, you know, find either a better operator and or improve the operations of the of the current operator, I’m assuming more often than not, you’re switching operators versus consulting the current operator to improve their operations. Am I correct on that? Are

Michael Salafia 35:38

we’re working with existing operators to expand into new locations? Okay.

J Darrin Gross 35:46

That makes sense. But you’re but you’re qualifying the operator first, and that they’re a high level operator before correcting them?

Michael Salafia 35:55

Got it? Correct. And then maybe we’ll provide some guidance along the way. Or maybe we’ll learn some things.

J Darrin Gross 36:03

So tell me who’s an ideal prospect or a candidate to work with stacks?

Michael Salafia 36:13

Right now, we’re looking for more operators in the medical space or gas station, convenience store or quick service restaurants. So any fast food franchisee would be a great person for us to talk to? Excuse me, gas station convenience store operators would be great operators of urgent care facilities, or any kind of replicatable medical retail? We’re very focused on essential retail properties.

J Darrin Gross 36:44

Got it? And your territory of operation? Are you are you limited to the Miami area? Or how far and why do you go?

Michael Salafia 36:52

Nope. Through our brokerage of record network, we can transact in all 50 states. We have deals going from California to South Florida. I do most of my business in Florida, I have numerous brokers, agents, consultants and partners that work for me. Not all of them are located in Florida, summer in Chicago and Tennessee and other parts of the country. So we’re pretty spread out and very well virtual connected with our home office here in Miami Beach.

J Darrin Gross 37:30

Hey, Michael, if we could, I’d like to shift gears here for a second, as I mentioned to you before, by day, I’m an insurance broker. And as such, I work with my clients to assess risk and determine what to do with the risk. And there’s three strategies we typically consider, we first look to see if there’s a way we can avoid the risk. When that’s not an option, we look to see if there’s a way we can minimize the risk. And if we cannot avoid nor minimize the risk, we look see if there’s a way we can transfer the risk. And that’s what an insurance policy is. It’s a risk transfer vehicle. And as such, I like to ask my guests, if they can look at their own situation, could be or clients investors, the Fed, you know, local municipality, laws, whatever. And identify what you consider to be the biggest risk. And again, for clarification, while I am an insurance broker, I’m not necessarily looking for an insurance related answer. And so if you’re willing, I’d like to ask you, Michael Salafia, what is the BIGGEST RISK?

Michael Salafia 38:43

As an investment manager, it’s the fluctuations in interest rates are our biggest risks that we are dealing with at the moment. That changes that become very, the changes of interest rates are somewhat predictable to a degree and we’d get communication from the Fed. Our challenge is the market reaction or slow reaction and and kind of gauging how slow the reaction is going to be to the shifts. So getting getting sellers to understand that, you know, interest rates are not at three and a quarter. They’re now at seven and a quarter. So your five cap property that you think is worth a five cap is now worth an eight cap and getting them to swallow that pill. That’s that’s been the biggest challenge.

J Darrin Gross 39:41

Yeah, no, that’s certainly a challenge with you’re gonna have to borrow to to buy.

Michael Salafia 39:48

So and then let’s talk about biggest risks in net lease investing in general. My biggest concern is what happens if the tenant doesn’t pay rent All right, what do you actually do? Okay, so I’m gonna sue them, okay? Ever seen somebody before you know that works, I’m going to do this, I’m going to do that? Well, at the end of the day, you have a tenant, and then typically you have a mortgage, and you’re responsible for paying the mortgage, the tenant is responsible for paying you, you need to get this over here. I don’t know, that’d be great if there was some kind of an insurance for tenants failure to pay that backed up mortgage payments. I’m sure there’s lots of complicated tools for this, but gaining a better understanding and, you know, thinking out loud that I don’t have a deep understanding about this, you’re gonna turn to 50 million in transactions this year. Right?

J Darrin Gross 40:48

Yeah, no, you’re not the first person I know, I’ve had insurance clients think that there was some sort of coverage for that. And on a, on a typical property and casualty policy, there’s not anything for a tenant on pain, unless there has been damage that was caused, and then perhaps might have some sort of a trigger for coverage. But yeah, straight up, but I have heard of some lease protection type stuff, but it’s been more like in the residential. Arena. But, you know, it’s interesting, as you say that I am kind of curious why the concept wouldn’t work on the commercial, unless it’s just a matter of the law of numbers. There’s a, probably a significantly lower risk with a residential tenant than there is on a commercial tenant, and maybe an opportunity to, you know, buffer, or spread your risk with more, versus the fewer kind of thing. So.

Michael Salafia 41:50

Right? And also for commercial investors, just our appetite, why are we in commercial real estate, you know, for me, I don’t want to pay that insurance, I’ll take the risk, right and paying the premium, because if something does happen, that’s why I mean, I’m a professional, commercial real estate investor, I’m prepared for something like this to happen, I really don’t need to go to the insurance company to go through that. What I would like the insurance company to do is cover me if there’s damage from a hurricane, or there’s theft, or vandalism, that kind

J Darrin Gross 42:19

of thing. Right. And I think that, you know, that that is the traditional insurance model is physical damage to your, your investment. And I would say that your, you know, what I what I heard you say is more often than not the investors I would categorize and the newer investors and the more seasoned investors, and the newer investors tend to be a little surprised. Whereas the seasoned investors just kind of go, well, that’s kind of that’s part of the deal. You know, these things happen. And that’s why you gotta have gotta have some reserves, and you got to have, you know, more than one property.

Michael Salafia 42:57

And think about it this way, you buy a $10 million property 75%, LTV, that means you only put down $2.5 million cash, now you have a $10 million property, you got it at a seven and a half cap. Okay, so now you’re on the hook for, that’s the should be $750,000 of rent coming in, you have to make your mortgage payment, mortgage payments gonna be substantial. If that tenant fails to pay, that is a big number to cover. And you’re someone who bought this $10 million asset with $2.5 million down, you’re trying to, you know, make your return on your 2.5 and cover your mortgage payment. That’s where you can get into when you get leveraged like that you could get into a bad situation if you have a tenant that fails to pay rent.

J Darrin Gross 43:47

Yeah, no, I I hear you loud and clear. And it’s it is kind of the I think what separates the the lesser capitalized investor from the the larger institutional level investor has just had ability to take the hit and or whether the vacancy you know, there’s a there is a I don’t know you know, COVID and, and all this kind of commercial reset, especially like with Office and even some retail there’s there’s been a little bit of a reset and in various markets, or a reset that’s about to happen based on the vacancies and when the notes come to and and be interested in see what happens in next couple years. Oh, yeah. Anyway, Hey, Michael, where can listeners go if they’d like to learn more connect with you?

Michael Salafia 44:48

During the best thing to do would be to visit our website. We’re also on all the social media channels. You can find our website at stacks our e.com That’s, that’s t AXRE. dot com. You can also just type in Stax real estate into Google. You’ll find us on LinkedIn, Twitter, Instagram, everywhere. We’re always posting Brian comp podcasts frequently release a lot of articles. And we’re very, very active in the marketplace.

J Darrin Gross 45:17

Awesome. Michael Salafia I cannot say thanks enough for taking the time to talk today. I’ve enjoyed it. Learned a lot, and I look forward to doing it again soon.

Michael Salafia 45:27

Darrin, it’s been an absolute pleasure. Thanks for having me on.

J Darrin Gross 45:31

All right. For our listeners. If you liked this episode, don’t forget to like, share and subscribe. Remember, the more you know, the more you grow? That’s all we’ve got this week. Until next time, thanks for listening to Commercial Real Estate Pro Networks. CRE PN Radio.

Announcer 45:51

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Power of Partnership with Mike Merrigan and Bo Kort – CRE PN #443

Mike Merrigan 0:00

But with a partnership, owning 25% later a year later buying them out. I understood I go, okay, I can get in involved in bigger things with the help of partnerships. I can learn things that I don’t know with help of partnerships. And so with that, I’ve always, I just have been trying to always to be a good person, identify other good people, surround yourself with those people in partnership with them. So as long as you have like minded beliefs, you’re all going after the same football. The partnerships have worked out, Bo & my friendship. We knew we had those things together for a long time just because of the way we thought and when we seen an opportunity in Texas with my brother who’s a partner of mine, we partnered up there and then just started doing more and more business through different partnerships.

Announcer 0:43

J Darrin Gross 1:03

Today’s interview is sponsored by Building Insurance and Risk when you invest in real estate. It pays to work with a real estate investor protection specialist to protect yourself and your investment from catastrophic loss. The experts at Building Insurance and Risk focus on real estate investor protection. They provide you with multiple insurance coverage offers and a side by side coverage comparison. To learn more, go to Building Insurance Risk.com.

Today my guests are Mike Merrigan and Bo Kort. After being best friends for 25 years, Mike and Bo started doing business together in 2015. He started purchasing buildings together in Texas. This partnership captured or catapulted their success. Together, the duo has found multiple eight figure companies in Houston motorsports cord industries and Mojave storage. Since the partnership began, 2015, Mike and Bo have built their portfolio of 43 companies have over $150 million in commercial real estate. They’re involved in 14 different industries, motor sports, industrial fabrication, special T services, construction and self storage to name a few. And in just a minute, we’re going to speak with Mike and Bo about the Power of Partnership, how to scale a business in any industry.

But first, a quick reminder, if you like our show, CRE PN Radio, there are a couple things you can do to help us out. You can like, share and subscribe. And as always, we encourage you to leave a comment. We’d love to hear from our listeners. Also, if you want to see how handsome Our guests are, be sure to check out our YouTube channel. You can find us on YouTube at Commercial Real Estate Pro Network. And while you’re there, please subscribe. With that, I want to welcome my guest, Mike Merrigan and Bo Kort, Welcome to CRE PN Radio.

Bo Kort 3:20

Thank you very much appreciate you guys having us.

Mike Merrigan 3:21

Thanks for having us.

J Darrin Gross 3:23

Well, it’s my My pleasure. Looking forward to our talk today. But before we get started, if you could take just a minute and share with listeners a little bit about your background.

Bo Kort 3:35

We want to go ahead fire away Mike.

Mike Merrigan 3:38

Okay. So we live in a town Bullhead City, Arizona. We both graduated from the same high school, which is probably five miles from here. Yep. So we didn’t get far. But we stayed in town because we recognize the huge opportunity when we were young. The town was booming. People were moving here from Southern California people were moving here from Phoenix that is still playing out today. So I think we pretty much nailed that. We knew it was gonna be a booming community. And there was a lot of opportunity here. So I started out young. My last job was when I was 18. At one of the local casinos here across the river in Nevada, opened up a chain of video stores with the help of a cousin, again was my first partnership. And that’s what took me down the road of seeing the value of partnerships during that period of time also got involved opening up a small chain of laundromats. Again, that was done with a partnership. What it did, I also opened up an advertising company and got involved with real estate with my brother. But what what I realized early on just from the very first partnership is one was a total positive experience allowed me to get into a business that I was under qualified for knew nothing about and did not have the financial resources to open up a full fledged video store to go up against the big chains. Nothing was out there. But with a partnership, owning 25% later a year later buying them out. I understood I got Okay, I can get involved in bigger things with the help of partnerships, I can learn things that I don’t know with help of partnerships. And so with that, I’ve always, I just have been trying to always to be a good person, identify other good people, surround yourself with those people in partnership with them. So as long as you have like minded beliefs, you’re all going after the same football, the partnerships have worked out, Bo, nice friendship, we knew we had those things together for a long time, just because of the way we thought. And when we seen an opportunity in Texas with my brother who’s a partner of mine, we partnered up there, and then just started doing more and more business through different partnerships. So we are in multiple businesses, my primary business is furniture stores. So I have a small chain of retail furniture stores, just like you would think brown building on the side of the road, try to do the best we can. And been doing that for a lot of years. No bones, primary businesses, pools, he does that. And then outside of those businesses, we have multiple partnerships and continue to do that in real estate, multifamily storage business, and don’t see any reason to slow down. But that’s kind of where we’re at. And we’re still running hard as the day we started.

Bo Kort 6:08

It like Mike said, it’s been one of those things that our partnerships have allowed us to scale. And a lot of lot of times people hit us up in our circles and go well, how are you guys doing 43 different companies and all the real estate and everything. And a lot of it is we had a really great staff. But the true way to actually scale is to actually partner with some of those staff that show that they got a little something special about them. And that’s what’s allowed us to be able to get into the motorsports industry, we’ve got a large fabrication company out in, in Texas right now that’s doing work with Tesla and SpaceX and and we wouldn’t be able to do a lot of the things that we’ve done without partnering up with people that are special, especially in those service areas that we are not and we can’t be there on the daily, right. So it’s worked out well for us. Good.

Mike Merrigan 6:58

The other thing is one thing, I realized I have a retail business and I’ve had multiple different retail businesses besides the video stores, is I was always in companies that I don’t make someone a partner, or piece of the action or whatever, you’re always at risk of losing that person. And so when we have partners, we know for instance, the amazing partner we have in the in the, in the sports motorsports, that person is not out looking for a job today, he owns the company, we’re a partner with him, he is not out looking for a job. And when that’s not part of it, you always have that risk. And that risk can be huge, because they take all the DNA that you create and put all those years in and you train that person. And it still happens to us on a regular basis. And we don’t discourage people from moving on and better in their lives. Matter of fact, we encourage that, but it does hurt. And when you make someone a partner, after you’ve spent years with them, and you identify their abilities, it feels good to give someone a partner, let them buy in, and it locks them in and allows us to move on to the next project. So we get a win win, the partner gets a win win. So we try to provide business background and expertise. And we get partners with people that are expert in a field that we may not be and probably are not be, and most likely are not. But we know we know, and we partner with great people.

J Darrin Gross 8:17

I love the there’s two things I love that that I heard one is that you recognize, you don’t always have to know everything you can become a pain in and then work your way in. And like I said with the video stores, starting with 25% and, you know, yes, becoming the total honor. But the other side of that is the the your staff and recognizing those that have talent and offering them an opportunity to be a partner. Because I think that a lot of times what what’s not recognized and I think it’s just kind of the the nature of business, I think a lot of times the the boss got into business because he was really good at what he did. So he left wherever he was and started his own thing he or she and but but never understood how to teach the support staff. They’ll hire people and wonder why they aren’t successful. And you know, they answer Hey, works for me, why doesn’t work for you? I don’t know. And, but they don’t understand the value of training and kind of nurturing that, that you know that the support staff or whoever they need to really propel their business. And then from that recognize that value add to now not to lose that value, but also then make that make, you know, make more value for everyone. That’s I applaud you guys for having that vision and in that model and understanding you know, the not only the opportunity for you to continue to grow your business but have the opportunity to provide to your, your staff there that’s that’s, that’s incurred.

Bo Kort 9:50

That’s just it. That being said, I mean when you’re offering opportunity to them, it’s doing nothing but scaling you up. I just had a quick meeting this morning with a couple of our staff that are younger Guys, and I had a situation to deal with this morning and work and just personnel. And I told him I said one thing you guys like Mike and I have lived through the 80s and 90s. And then business in the 80s and 90s. And our parents were

Mike Merrigan 10:15

Old school people that didn’t see partnerships as a value.

Bo Kort 10:17

No, exactly

Mike Merrigan 10:18

Work harder, here’s your quarter raise.

Bo Kort 10:20

Yeah, Mike has a bunch of stories of his mom going, Yeah, you should offer them a dime raise or a quarter raise. And then my dad was the type that he was like, Don’t get too close to your employees, you got to make sure that you know, keep distance or whatnot. But honestly, like, that is out the window. And it’s just, it’s proven to us through the scaling that we’ve done, that our way of doing things and not thinking those 80s 90s style of managing people and not giving opportunities and keep all your cards so close to your chest that it actually prevents you from from opportunities that are out there. And we’ve got some really good people that have worked for us, that have allowed us to scale that we didn’t bring something to it. But they brought just as much if not work ethic, but you know, just their, their education that they brought with them their experiences they brought with them. And it’s allowed us to scale to give up some you know, you don’t have to have everything our way.

J Darrin Gross 11:14

I just think again, that empowering people and kind of that, like you mentioned the mindset of the past. So it’s kind of a fear mindset of it, and I see it and I’ve seen a bunch of it in my life is that? Well, if I give you some, then there won’t be as much for me. Yeah. You know, like a limited, limited amount of opportunity, as opposed to kind of an unlimited amount. And so, congrats to you guys for seeing that and implementing that. I don’t I don’t see that. That’s always the case in more so not the case. But that’s great. So, you guys, clearly you met in high school to get there, right?

Mike Merrigan 11:56

Oh, absolutely.

Bo Kort 11:58

Yeah. Mike’s a couple years older than me. Him and my dad, Mike was 19. And he’s in Rotary Club with my dad. And like

Mike Merrigan 12:05

I was trying to level up, man.

This is before the internet who’s the smartest, oldest guys that know the most? No. All right, I’m joined.

Bo Kort 12:14

Mike was there hustlin that, and I got to know him through my dad. And Mike’s got a younger brother that I went to school with. But Mike and I became close friends, right? 25 almost, you know, 25 years ago, 28 years ago, and it just always knew that he was in business. And I always had the drive to want to get into business. I took off college for a few years. But whenever I got back, he was buying up businesses that I was pushing on my dad to try and jump into a partnership with him and do something and buy a carwash. Mike had already bought it and and Mike and my dad knew one another from from Rotary. But that’s that’s how far back we go.

J Darrin Gross 12:51

Yeah. So I mean, Mike, it sounds like you’ve always had some sort of a hustle. Before doing the video store. Were you an employee? Or I mean, do you have paper routes? What would you do before

Mike Merrigan 13:04

I honestly don’t have a memory of not trying to hustle. I just don’t my memory doesn’t go back that far. So actually, when I was six, I was knocking door to door selling coasters that I had made with my sister. So I literally never have a memory of not having some kind of business. And in my head, the lemonade stand I took a lot more serious than most kids that have a lemonade stand and set up a table and I built the whole cart. I had it off, my dad had a shop in so I was able to build a you know, put on bid on the back of my wagon, that tote. So I was if we took a vacation to Mexico, I came back with all the pop bottles in the back of the camper van we had or whatever. So I’ve just always been in business. And when an opportunity came, I knew I was looking for an opportunity. And I mean I was like consciously looking and I was at a funeral and overheard my brother who had struggled with alcohol for a while being drunk talking to a cousin and I go I just overheard and I just listened. Hey, he’s looking for a location. I came back did all the research and all the right things, call them up. He was in Fargo had a chain of video stores. And I go, I don’t know if you remember and I’m 18 years old. So it’s a kid. And I go but you said if I if you wanted to move up this way, and I had everything all my ducks in a row and he just he was a man of his word. And that taught me a lot. You know, if you say something you do, and he jumped on a plane and looked at all the research I’ve done and back then if you found a location, you’re pretty much making money if they were really successful video store business back then so but he was a man of his word. And a year later he informed me that I because I got my feelings hurt. He wants He wants me to buy him out. And he goes no, because business is a commodity. It’s meant to be traded and sold and such. So now you’ve got your business going, I live here you’ve got to go and now it’s time for you to buy me out at a fair profit. And this is how I’m gonna let you buy me out. And I’m like, alright, you know, I was scared to death. You know, I didn’t want to lose them, you know, because I felt like I needed him even though it was embargo. But anyways, he made it available for me to purchase them out. And then it just got me thinking right going forward. You know, he’s kind of set the base for me and taught me a lot of things. about, you know, living below your means and not getting fat with a company when it is doing successful, I made a lot of mistakes. And that cost me, you know, I didn’t know how to pay my taxes or 940 ones or anything. So I did make mistakes. And I had to get caught up on penalties interest that taught me how to hire a bookkeeper, how to hire CPA hired some of the things that he thought I already knew, he didn’t realize that I was a kid. But it was successful, I was able to learn a lot from it. And we’re still learning as we go on and try to do better every day. But partnerships have definitely helped this IQ scale, and I’m getting different things like we said before, so I love partnerships, and I love trying to attract quality people. And so that’s what it does. When you put some standards down, you live your life, right, you’re gonna attract like minded people.

J Darrin Gross 15:44

I love the Well, one of things I’ve always loved about real estate kind of is the kind of the Wild West aspect about it, where to where buyers and seller meet. That’s, that’s the price. Similar to what you you talked about, you know, you got into business not really knowing, I mean, you heard about it, you put it together and you had their support. But when they you know, ready to say no, you can fly on your own kind of thing. All those lessons you learned and I feel like that’s something that’s not always appreciated or understood is the value of the lesson learned through the mistakes. Whereas I feel like a lot of what is out there today is get in, build it fast, grow it fast and sell it. Everybody’s looking for an exit. Yeah, you see so many, like, I think, probably the the whole.com Boom, really kind of, you know, expose us to all that. But I see in all sorts of businesses. I mean, I know, you know, in insurance that I’m in, there are people out there that that their sole goal is to build a book of business so they can sell it. It used to be insurance was kind of like a, you know, Johnson and sons or something, you know, you had sort of a multi generational business. But it seems like that’s not, you know, not as prevalent.

Bo Kort 17:13

That’s everything today, I think, right? I mean, you get on social media, and you check it out, and all these young entrepreneurs that are flipping homes, and they’re doing this and driving Lamborghinis. And that’s why we started doing our social media and started opening up and helping people out and doing some coaching in that, because we knew that we put the groundwork in and made the mistakes and figured shit out on our own. And we’re long term hold Guys, Mike, Mike and Dino and myself. My older brother Dino lives out in Texas, but we own all our buildings and businesses together. But there is probably 98% of everything we’ve ever bought together, we still own Yeah, and it’s because it’s not it’s not a quick flip. It’s a long game, especially commercial real estate. It’s a long drawn out game, you got to be patient, and discipline and persistence. And again, eventually that river money will come but it’s not coming right away. It’s coming down the road.

Mike Merrigan 18:08

And we’d like to expose that right away with people we work with. We know nothing about getting rich, quick, nothing, don’t have one change of subject tune out because we if you’re tuning in for that for us, we’re the turtle, we’re, we’re slow. It says you got to pay down debt, you got to wait for appreciation to happen depreciation at the end of the year. Everything is a slow thing and real estate and these people that anybody that was flipping houses, hey, my hat’s off to him probably made a lot of money. But if you’re living off that flip money, where are you at today? That’s a problem. If you’re you’re knocking on our door wondering, hey, you know, a kid, you got something for us, Hey, you flipped 40 homes in the last six years and you didn’t keep one of them. You didn’t think about keeping one and that happened in our office we have a lot of people come into our office and for advice and coach and we’d love to have an open office policy but we look at a lot of people that are you know, 40 50 years old looks like a deer in the headlights because they didn’t buy the four Plex and just hang on to it use it for travel money later on. And then maybe bought another one now you got two of them now you can do whatever you want when you retire.

Bo Kort 19:08

Even if you buy it wrong.

Mike Merrigan 19:08

Even if you buy it wrong times gonna fix it but fast stuff we’re not in anything fast.

J Darrin Gross 19:12

No, I love it. You’re kind of preaching to the choir. I my wife and I have been kind of the slow skis. We’re definitely in the right lane, the far right lane. But just you mentioned a couple of things that you know you can you can buy wrong and still do well. Over time. Yes, you know, raise my hand on that one a couple times. And also that I think what gets lost in what you said about pay down the principal when interest rate or interest rates have been so low for so long. Nobody thought about what’s the cost of his capital just you know, just you know, it was all about you know, getting the deal, gross it up kind of thing then sell it to the next guy you know, you leave some meat on the bone or, you know, that was kind of the thing. Well, where are those guys? Now they’re they’re selling at a discount because all their you know investors want their money back or, or whatever they are they they can’t even afford to keep it based on the way the loan was structured based on the financings come, you know, coming due and, and so they’re whatever they put into it they’re not getting the return that they were seeking. But if they didn’t have that requirement to sell or if they could wait out that thing, they would benefit, like, like you said, you know, over time the appreciation does happen. I know. I’ve said this many times, but the first time I got a rental, I didn’t even understand depreciation, I didn’t understand appreciation, all I knew is that if you were renting from me, and you stayed in for 30 years, I would have, you know, something that was the limit of my understanding of your, because that’s all I could see in front of me was this mortgage, you know? And so I, I love that, that kind of mindset, because I think, you know, Warren Buffett, everybody cites him, you know, every time I tune into him or listen to him or read something, it’s never about selling, it’s always a buy and hold position. Forever. And, you know, so I think there’s, there’s a lot of wisdom in what you said, you know, and just kind of the slow growth to wealth. And, you know, kind of the, you know, the pay down the principal, because I swear that it’s, it’s really sexy to, to take cash out when loans are, or, you know, free. But when they adjust the rates, and you’re paying, you know, nine or 10%, you know, how sexy is that to be paying, you know, how much fun is that?

if you didn’t buy, right, you’re, you’re getting ready to lose it. Because you can only hang on to a loser for so long, it starts tastes terrible. So you’ll get rid of it sooner or later if if you’re having to add cash to it. But one thing like what we preach to ourselves, and our partners that we’re in business with, is you can only buy it once. No one guy told us that a long time ago. So we kind of live by that. And so our goal has always been to try to buy properties under value, and then add value to them, keep them long term and let let the depreciation do its job, let the rents go up and just keep them long term. So

Bo Kort 22:25

We just did a recently, I mean, we just did a deal. That’s it’s in our own backyard, we got to the point, we started out with small light industrial buildings, you know, 300,000, maybe six or $700,000. And then we started doing bigger deals and buying strip malls and big box stores and in larger storage complexes. And we’ve said, we’re not gonna do the small deals anymore. But even when the small deals come back to us, we said that for about six weeks, and then next thing you know, we’re buying another small deal, we bought one just in our own backyard. And we probably own nearly 50 buildings in our local community here. We thought we bought them all. Now, we found another one. And even on this deal, we bought it $200,000 Under value, it’s already got somebody leasing it, the lease is 50% of what it should be. But we still bought it because it’s only got two more years on it. So it’s not going to cash flow for two years, but it’s going to be breakeven. But after that two years, we’re sitting day one Wait, we close escrow, we made $200,000. So we’re $200,000 richer, and the day that we close escrow, we will sit on this thing for the next 24 months and breakeven with our $200,000 sitting in our savings account collecting only appreciation. But in 24 months, we’ll raise the rents, we’ll make it to where it cash flows. And it’s still paying down debt. And we’re not planning on taking checks anytime soon. So someday we will we’ll break the break the dam loose and start collecting the cash flow coming down the river. But for right now, it just makes sense. You know, if we can get into the deal cheap enough, but in in anything.

Mike Merrigan 24:03

We’ll put in our inventory there and it just, you know, we don’t have anything that costs us money or we don’t buy it, you know? And so it’s it takes talent it takes we didn’t realize, you know it is people go well, that’s hard to do. It is hard to do. But guess what, if that’s what you do for a living, if that’s what you do is find undervalued properties, you get good at recognizing them, you get good at finding them just like go home, start playing darts tonight, guess what playing every night, you’re gonna be really good. So that’s how we done it. So we just got really good at identifying properties that have we called the 3ds. It’s either divorce death or distressed properties. And if 3ds we catch one of those, guess what, we got a good chance. And we’re very patient. So we build relationships either with the old guy, and then a lot of times they’ll pass and then we’re talking to the kids but we’ve already got such a relationship that kids know that know about us, or else we’ll just call now I’m not ready to retire yet. Three years later, but we’ll check in every six months and it happens all the time. So we don’t bug him we just to become friends with them just were inquiring about their business and or property. And people, what people don’t realize a lot of times is people are emotionally attached to the property, especially older generation. So they like to sell it to someone they know is going to go in good hands, they see what we’ve done, we always add value by paint by new fences, gates, whatever, whatever we’re going to do, we try to add value to every property. So when you tell the old guy the different different buildings you bought, they feel good about, oh, this legacy is going to carry on, because a lot of times our kids aren’t interested in their properties or whatever. So we make it easy for him. A lot of times these old guys, they’ve been in business so long making gears or awnings or whatever the hell they do. They don’t even know how to list a property. It’s like going to talking to us Carswell, they don’t want nothing to do with it. So those buildings will sit there and deteriorate, we get a hold of them, they haven’t been in them. Sometimes it’s like going back in time, when you walk in these buildings, the calendar from 1999 is still hanging on the wall. It’s happened multiple times. But we befriend those people give them a lot of times we can give them their asking price. Because they only paid this much for it 30 years ago, they want this much. No problem, Mr. Johnson, we’re going to take care of your property, we get to work on it right away, they stopped by a lot of times, they’re happy about whatever. So we try to make it easy. And we try to do the right thing and get those buildings back in action.

Bo Kort 26:15

We got so many stories of that we I mean, last year, I think it was last year, we bought the eight Plex from the old guy that’s like he’s 84. And he comes in and Mike. I said, Well, we can give you a small down if you’d like to do it on our carrier whatnot. And, and Mike had thrown out, maybe we give you 100 grand and it was like 800,000. And the guy goes, Why don’t you know, my boy, I don’t even need that much. You know, why don’t you give me 50. But what but the thing about it is, is a lot of people, especially young cats, watching Social Media and wanting to get their first investment deal, they don’t understand it’s a long game. It’s a relationship game. And then just keep those contacts and keep steady with those people and build relationships and anything, anybody that’s involved in sales, people sell, it’s not the product. And so in investing in real estate and commercial real estate, which we love, it’s it’s a relationship game.

Mike Merrigan 27:09

And we have a passion for it. So it’s not like these, these old cats, they’re, they’re smart. They’re not you know, they’re smart guys, they’re not going to they’d rather let the property sit there forever. So they’re not willing to take lowball offers. So that’s not our style, we’ll come in and chop them off at the knees. We look at their property, talk about what their values are. And we we work with them and make it easy for him. But we don’t we don’t go in there and go, you know, mass. We don’t have a mass mailer going out? No, we don’t have any we don’t have a mass phone calls went out. We strategically pick areas we strategically, strategically pick the types of buildings and show total respect and love for the real estate. And they can see, see it and sense it,

Bo Kort 27:47

Just like you said, it’s the Wild West is way. That’s what makes it fun. They say all the time. We’re like cowboys. I mean, honestly, we don’t, that we’ll look at things off cap rate and stuff like that, but a lot of our acquisitions and we buy bigger projects now. So it’s not it was an old guy that we get a chance to talk to. But anybody that wants to get started, that’s the best way to start.

Mike Merrigan 28:08

Keep it in your neighborhood within 10 miles of your house, and find a piece of real estate and practice with with striking out, go to 30 different buildings, find out who the owner is find out what the taxes are finding what the insurance are, find out what the rents are going for, whether it’s multifamily, or if it’s light industrial, or if it’s storage. And then guess what, don’t plan on buying it. Just use it for practice. Oh, now we know how to gather that information. Now I know everything that’s happened in the 10 mile, build a relationship with a hotshot realtor that you can show respect to and go, hey, guess what, in the next 24 months, I want to buy a piece of property and start building that relationship. And so that when they have a good deal, and you’ve got a relationship because every realtor knows a cousin, well, if you have any great deals, let me know. They ain’t calling nobody, you know, but we literally have people call us almost on a daily text message, or whatever. If something goes up for sale in our area, either in Texas in our area that we’re in two different cities, there are here, we know it before anybody else because they know we can close deals we know we’re not goofing around, and our passion for the properties.

J Darrin Gross 29:12

I love the kind of the old school approach. It sounds like the Rotary meetings paid off there. So I’m assuming who which one of us president of the local Rotary group right now are you?

Mike Merrigan 29:26

Honestly, I left after probably a short period of time, I just realized I wasn’t ready for that. I I was to hustle and man I was I slept standing up and it was just I needed to be at work.

J Darrin Gross 29:39

But I think you know, all kidding aside the networking.

Mike Merrigan 29:43

We still use those people today in our network that I met at Rotary Yeah, truthfully.

J Darrin Gross 29:48

Right. And again, it’s the power of the I’ve got a client that always talks about, you know, real estate’s a belly to belly business. You know, it’s as much as the social media is kind of the I don’t know, it’s the opportunity to get your word out there. And if you’re, if you’re trying to sell something, it’s a, it’s a vehicle and you can’t ignore it, the yellow pages, I don’t even know if they make the yellow pages anymore. But, you know, social media is definitely the way you get the word out if you’re trying to attract people. But I think what you’ve you’ve hit on that I totally appreciate is the power of the network, and I belong to multiple different networking groups over the years. And those relationships, whether or not I’m still a member of that group or not, are people that I know I can count on. You know, that whatever they do, and likewise, you know, me as an insurance broker, they, you know, still reach out to me. So, I think that that’s, that’s a big, that’s a big takeaway, I want to make sure people understand that the power of networking, and then also just kind of as we were talking about the patient, you know, the patience that capital has, and the patience that you guys exercise in, in acquiring deals, and also nurturing those relationships. Because, you know, if you think you’re the first guy to call up somebody that that has a property offering to buy it, you’re the first guy to call, I mean, wake up. I mean, I get, I’m sure you get solicited all day, every day, every every property you’ve got, you know, yes. And whether it be the the phone call, or the the email or I mean, you can get somebody’s that or text now, I’m like, I don’t know how they can get my number. But, but, you know, it’s not new. And I think the reason why those those systems work, is it’s a numbers game. You know, if you’re willing to put in the effort to approach 1000 people and get, you know, to two people that are listened to you, then that’s probably, you know, reasonable opportunity for you. But if you’re trying to, to build your wealth, your portfolio in a community that you live in, I don’t know how how networking can be topped, you know, getting to know the people. I mean, that’s that’s, that is, you know, really smart. I’m, I’m kind of curious, you mentioned that people all the time are contacting you. I’m assuming that it’s kind of one of those momentum things as well. You got your first one, and then you found the second one. And as word gets out that you guys are, you know, in the acquisition mode, or that you’re good operators or that, you know, you haven’t screwed anybody over. That, that probably lends itself to more people that are in a similar boat that maybe you didn’t know, that knew somebody that sold to you, or coming to you is that you find that to be the case?

Bo Kort 32:55

All the time. I mean, it happens all the time. You’re right. I mean, it happens on the daily. You know, like Mike had said, we’re getting a phone call before stuff even hits the market here, we’re getting ready to put this on the market. But we want to find out if you guys wanted to take a look at it. Or we have one old guy, tell another old guy that might have a building. And then next thing, you know, they’re contacting us to say, Hey, I heard you bought those and just want to let you know, I’m gonna retire in the next couple of years, you’re gonna come down and see me. Yeah, so now a lot of that happens.

Mike Merrigan 33:22

And we realize that most, and I mean, most, most, most, we don’t ever buy him. We don’t buy most of them that come to us. But it’s nice to have the first option to look at him, because we are not retail real estate buyers. So like, say, our deals, and especially with interest rates where they are, you really have to be careful. And you have to be really diligent to make sure you know what the value add is going to cost. So we don’t buy anything retail. So we have to say no to most things, but every once awhile, someone needs a close, quick, close, or for whatever reason we make them work, we make it easy for them. And believe me, if something works, well, we’ll make it work. But we don’t try to force some of the work that’s not in our, in our range of what we do, you know, we have a criteria.

Bo Kort 34:05

And we’re just very clear to me that we don’t there’s no games or anything. Whenever we anybody that’s a banker in town or realtor or anybody that’s done business with us. It’s very cut and dry, especially with Mike Mike, Mike sets the tone right out of the gate. I’m not gonna I’m not gonna massage this at all, it’s either all good or or we’re not, you know, we’re not gonna move forward on it. So

Mike Merrigan 34:26

And that’s another thing about partnership Bo is really good at the longer game than I am. And some of the relationships have different not some, they’re all different personalities. And a lot of times he’s better at those type of negotiation. So I’ll just instantly we we’ve been know each other so well, it’s easy to tell who should be talking now. And so when those personalities, he knows he can build those relationships better on some people than I can if I got a sharp, you know, I like the grumpy old guys or the people that are a little sharp or as far as you know, edgier I can jump in and shoot back and forth and I’m never gonna stutter they’re not going to I’m not going to slip when they’re Need massaging we give them to Bo. He massages them.

I’ll talk to grandma for.

And he does. Yes. Like my eyes will glaze over. I go when you went in for the kill. He goes into more conversations. Oh, I’ll be like, No, tell him this tell him that he goes, No, no, no, I got. No, it wasn’t anything I’ve seen. But that’s partnerships. Right. I mean, it’d be my way I wouldn’t get the properties. You do we split it up.

Bo Kort 35:27

Yeah, exactly. Well,

J Darrin Gross 35:29

I mean, the power of the partnership is that, you know, you get both strategies, as opposed to just the one. And I mean, it’s beautiful the way you guys are making that work. I’m curious, you’ve mentioned kind of some seller financing out of the number of deals that you you’ve done? Is there a Can you guess on how many of those that are percentage wise, how many of those have been owner financing?

Mike Merrigan 35:56

Just real quick, let Bo go after this. There’s not one that just so your audience knows. We love owner finance. And everybody gets asked that and so many people don’t use that as the first option. So I’ll let Bo take it from here. But we love owner financing and the percentages, I’m not sure. Maybe you have a better idea of that?

Bo Kort 36:12

I would say well, even like dealing with community banks, we didn’t start dealing with community banks until probably around 2016.

Mike Merrigan 36:20

There was a period where they went loaned us money. Yeah, the day after the recession. We are, you know, no one wanted to do business with guys like us.

Bo Kort 36:25

Yeah. So we, we had some hard money guys that we’d established a relationship with and gotten their money back to them pretty quick. And they were always really happy with us. So we had that option in Texas. But I would say probably 60%, we will pit or we’ll pitch it on all of them. But I would say before we started doing business with the community banks and not using hard money, price, 60% of them, I would say probably 30 or 35 40% of them now we get owner financing on you know, we they and then and then we coach people on that also we we have a zoom call that we do once a week and and we got a good network of young entrepreneurs and real estate investors that they’ve contacted us they were trying to get their first storage facility, we actually coach them through getting owner financing in second position and keep Zero out of pocket on their first storage facility. We’ve got about 50 different storage facilities. And these guys are like, alright, well, we want to storage now we got some multifamily. We want to storage on storage, you want to build like you guys did Mojave storage. So they found identify one in their local 10 mile radius of their community. And when I talked to the realtor that and then I told him, I go talk to the owner, you get out of the military to get to the owner. And I go but before I tell you that he is going to tell you know wholeheartedly that he does not want to let you talk to the owner. So you got to come up with a good reason why whether it’s the doors and you want to check out the hinges work on them or whatever it might be, you got to find some inventive way to talk to the owner, thank you. They got from the owner, the owner loved them, told their story about them buying other properties and the properties in the area and how well they’ve been dealing with it. And ended up long story short, they got the loan from the community bank went back to the owner that they established a relationship with once again, our sim which he could have said no if he would carry the downpayment, they said sure, I’ll carry the downpayment. Alright, you have to be in second position. Are you okay with that? Yep. Don’t do that. These guys bought their first storage facility with zero money out of pocket.

Mike Merrigan 38:21

And that’s the best part about real estate like you say in the Wild West, it is the Wild West. It’s just what to you know, male or female here, but it’s just what two dudes agree on right? Hey, I’m gonna take your car for 100 bucks and take it across country All right, go ahead, you know, or can be a million dollars it’s just what two guys sitting there ladies sitting there come up with and then that’s what makes it so fun. Is like what are we going to be like get this for how are we going to do it? How are we gonna make both parties happy?

J Darrin Gross 38:46

Yeah, I think the the uninitiated and I, I know when we bought our first house was all about the sign in the yard and, and, you know, kind of following the protocol kind of thing. But my first investment was truly, you know, kind of a man I didn’t think I was gonna buy it I you know, customer was telling me that he wanted to go buy something else and all the while I had been recognized and all the money he was making, I said I gotta get into this, you know? You want to get in I’ll tell you this one like what what you know and and but it was it kind of a just really opened my eyes to just how the thing works. And you know, the opportunities and it’s all about how a willing seller and a willing buyer. It’s where they meet. And I think the key operative in that or the key word in that sentence is the willing because there’s plenty of unwilling people and I’m sure you experienced that where people come with a price doesn’t work for you guys. But if you have a willing seller, I mean all everything’s possible. And a

Bo Kort 39:49

A lot of the times they’re not willing at first and so let people know that that can’t happen. They said no. Yeah, me knows I’ve gotten I’ve gotten so many no’s, I would say 90% of the properties that we bought, and we had a personal relationship buying them started with a no.

Mike Merrigan 40:05

Yeah.

Bo Kort 40:05

The one the building we’re sitting in right now we have a big flex space at 64,000 square feet. Mike and I go, we started rent one of the buildings, I said, but we need to beat the owner when you got to call the owner. So figured out how to get the owners number from the guy that’s managing the property, call the guy up, hey, just want to let you know we rented unit C and really enjoy it appreciate the lease and thinking that we’re going to extend that lease. And by the way, at any time you think you might want to sell this building, we are interested, I love your building. It’s perfect. I mean it. We’re in this type of space and Houston. guy goes Bo, you know what, I’m just not ready to sell right now he goes, I like my building. And it provides his best friend, which was like, in his late 70s was managing it. It was more providing a job for his buddy. Well, that guy ended up a few months later wasn’t able to health health issues. And the guy called us back up he goes, All right, ready to sell the building Bo. I said, All right, perfect. You know, let me know what your price is. We bought this building for 1,350,000 from this old gentleman. And we ended up putting another piece of property for collateral didn’t even put anything down on this had another piece of property worth 300 or whatever they was paid for payment. And we’re getting ready to expand on this building just got an appraisal on it for 6.4. That was all through a phone call and a relationship.

Mike Merrigan 41:28

And anybody else in the 64,000 unit could have called the owner and asked them to sell nobody else called. And when we got a no we still called a couple more times. And then he did eventually call and we gave him I think his asking price.

Bo Kort 41:41

Yeah, exactly what he asked.

Mike Merrigan 41:42

So you give a guy his asking price. But at the same time he was on the East Coast, his buddy was out here managing it. He’d never even seen this building to this day. He’s never seen it. But that’s just goes to show there’s opportunity there. As long as you inquire as long as you network as long as you’re always looking. But if you’re not always looking and I never can find a deal like that. Because that’s not what’s most important to you. You’re most boring to us Monday Night Football, I guess or whatever you’re into. But that’s not what we how we roll. We were looking for things.

J Darrin Gross 42:11

I love it. Hey, I wanted to ask you the investment strategy, obviously is kind of a long term hold. You mentioned value add a number of times. And I guess asset class, I’ve heard you talking about flex, industrial, multifamily, retail, is there any asset class that you guys haven’t invested in or you swear off or won’t do?

Bo Kort 42:36

Section eight.

Mike Merrigan 42:36

We have never done section eight, you hear a lot about that. And so I honestly, I just haven’t gone down that rabbit hole to educate myself on it. So I just don’t know a lot about it. But um, we just we like real estate and it’s all you know, you break everything down to a lemonade stand in your head, you know, so there’s not much we won’t try. One thing we didn’t learn in the Vrbo thing when everyone jumped on that we got involved in that. We learned in our community, it’s a it’s a seasonal business. So in our opinion, in our area only, it’s a terrible business to be in. Because you make a lot of money in one season, you make nothing in the other and your bills are always moving forward. So I would just advise anybody that’s into Vrbo, it was sure neat, when that came out, everyone had to try it. And I was one of those people too. But then later on, I realized, you know, I like the concierge service downstairs. I like the the food there. I like all the amenities when I travel, so we kind of quit using them. Unless we’re having a family get together or something. We’re gonna have large group of people. So we’ve sold off most of our Airbnb, just because it wasn’t a space that was profiting the way we thought. And I just advise people, anything on the internet, just be careful because there’s no there’s nothing easy. Nothing’s easy. Airbnb is not easy. And a lot of places now it’s not working. So be careful. But there’s not much we won’t get into as far as real estate.

Bo Kort 42:40

Yeah.

J Darrin Gross 42:52

I think the Airbnb thing is very location specific, and you gotta have some sort of a year round attraction, like you’re saying otherwise, I had, it’s always been my resistance to any kind of vacation rental. If it’s not vacation, now. I’m paying the bill. So I like that. So. But hey, guys, if we could like to shift gears here for a second. As I mentioned by day, I’m an insurance broker. And as such, I work with my clients to assess risk and determine what to do with the risk. And there’s three strategies we typically consider. We first looked to see if there’s a way we can avoid the risk. And that’s not an option. We’ll see if the way if there’s a way we can minimize the risk. And if we cannot avoid nor minimize the risk, we look to see if there’s a way we can transfer the risk. And that’s what an insurance policy is a risk transfer vehicle. And as such, I like to ask my guests if they can look at their own situation and identify what they consider to be the biggest risk and it could be Um, fed rates could be the, you know, the market could be the local laws or you know, jurisdiction, whatever, whatever it is that you consider to be the biggest risk. And again, for clarification, all I am an insurance broker, I’m not necessarily looking for an insurance related answer. And so if you’re willing, I’d like to ask you, Mike Merrigan, and Bo Kort, what is the BIGGEST RISK?

Mike Merrigan 45:32

I’ll go first, if you’re, because you’re an insurance, one of the best feelings I’ve gotten, as far as an insurance thing, and looking at risk is once I had it explained to me, once I did get some assets, an umbrella policy gives me a lot of comfort, never had to use it. But I feel like it’s a good investment. So if you’re talking about literally insurance, I like the fact that I have an umbrella policy to protect things that I might not be thinking of. So I love having that. And I think it’s a good value. And I’m glad to have it, and I don’t think I’ll ever not have it. On the other side of just generally speaking risk. One of the things that I learned, the biggest risk is not taking a risk, not taking the chance of buying real estate, I don’t care, then buying an index fund, throwing your 10% every year, or every month, or whatever. But the biggest risk in life is don’t take a risk. And guess where you’re going to end up. If you can draw a picture, you’re going to be just fine, you’re going to be 30 pounds overweight, you’re going to have a retirement that’s going to be small, and you’re going to just live this life, as opposed to take a few risks. Get a little older, take care of yourself, physically eat where you want, stay where you want, live, where you want, do what you want, it’s a lot happier life, don’t take a risk is the biggest risk and take in my opinion.

Bo Kort 46:48

I agree completely. Gonna be hard to follow that one because I wanted to so

Mike Merrigan 46:51

Drop the mic!

Bo Kort 46:56

I would say the other thing that I was thinking of is, is that in risk, and in real estate investing, is just staying disciplined and don’t get emotional over things. And I think partnerships help in that, you know, like Mike talked about, he’s good at one thing I’m good at another. Another thing that we lean on each other about a lot of times is we’ll come up with a deal, and we’ll have a feeling about it. We’ll be in the office, and we’ll spend hours just going over it and this and that. Okay, what do you guys want to do. And then one of us usually speaks up and goes, Let’s wait till tomorrow. Let’s wait till tomorrow. Nobody makes a decision that we’re supposed to call him tonight. So call them back and let them know, we’re not going to talk to him till tomorrow. You know, I mean, just let them know, something came up, whatever it is, and we sleep on it, we come back, and just make sure that we’re not being emotional about the decisions that we’re making. And because of being like that, and a lot of that is Mike’s good about that to hold us all accountable for for things like that. But um, it has saved us tremendously on not making mistakes. And mistakes are good, and you learn from mistakes. And that’s why you start small so that you don’t have the type of mistakes that crumble you. But you educate yourself from those mistakes and it keeps you to be disciplined and not get too emotional about things. And your old self will be thanking your ass whenever you’re whenever you got the money coming to you. Because you were disciplined, persistent and

J Darrin Gross 48:19

Well idea that that’s, those are two great things, you know, that kind of the emotional thing and I love that, you know, given an extra, you know, sleep on a kind of night kind of thing, because it’s, that’s, that is I can tell many stories about that. And, and it’s all about that reaction that I had I just like, backed up and check the check what I was doing there wouldn’t have made the mistake. So good words. Hey, Mike and Bo where can listeners go if they’d like to learn more connect with you?

Bo Kort 48:52

Best place to find us is if you go to Instagram, it’s at Mike and Bo spelled out a and d. An easy way to do it. And Mike and I are horrible about email. But if you text us, we can get right back to you. So if you text us at 928-605-4335. Again, that’s 928-605-4335 we will get right back to you right away. We offer a great coaching program. We love doing what we do. And we love sharing our knowledge with people. And so yeah, if you reach out to us on Instagram at Mike and Bo or shoot us a text, we’d be sure to like to get back to you.

Mike Merrigan 49:32

Or send us a deal. We’ll we’ll analyze it for you and help you with it or work with you on it. So we’re always looking for new deal.

J Darrin Gross 49:39

So Well, Mike Merrigan and Bo Kort, I cannot say thanks enough for taking the time to talk today. I’ve enjoyed it, learned a lot and I look forward to doing it again soon.

Bo Kort 49:51

Thank you very much. Appreciate the time.

Mike Merrigan 49:52

Absolutely.

J Darrin Gross 49:53

All right. For our listeners. If you liked this episode, don’t forget to like, share and subscribe. Number, the more you know, the more you grow. That’s all we’ve got this week. Until next time, thanks for listening to Commercial Real Estate Pro Networks, CRE PN Radio.

Announcer 50:12

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Las Vegas Midtown Mixed Use with Weina Zhang – CRE PN #442

Weina Zhang 0:00

Let’s break down the Matrix System. First of all, it’s a supply chain. People think about ground up construction brought up constructed was often the materials, right? We are supply pretty much all the material ourselves. Second, the ball, we pre engineer, pre fab, offside structure and a facade because that’s our background facade, all glass aluminum facade. And then the reason Mike matrix system so unique about is hard, you know, to scale like I can sell my product, because you still need that hand of ball subcontractors. Right? So that’s where the other part of vertical materials supply chains vertical. The other is a handful of sub who work with me the last 20 years in Vegas, they are just Institute insulation for me. This is triggered by you know, usually you cannot go find subcontractors that hey, you installed my Glass there’s no no no all the law to liability. So that’s another part of about Matrix System. We have vertical from supply chain to subs consultant. That yeah, that’s all vertical.

Announcer 1:35

J Darrin Gross 1:54

Today’s interview is sponsored by Building Insurance and Risk. When you invest in real estate it pays to work with a real estate investor protection specialist to protect yourself and your investment from catastrophic loss. The experts at Building Insurance and Risk focus on real estate investor protection. They provide you with multiple insurance coverage offers and a side by side coverage comparison. To learn more, go to Building Insurance Risk.com.

Today, my guest is Weina Zhang. Weina is the CEO and founder of the Z Life Company, a ground up developer builder based in Las Vegas. And in just a minute, we’re going to speak with Weina Zhang, about Z Life and the use of their proprietary model to develop mid rise projects that are changing the path for young adults to enter the urban housing market.

But first, a quick reminder, if you like our show, CRE PN Radio, there are a couple things you can do to help us out. You can like share and subscribe. And as always, we encourage you to leave a comment we’d love to hear from our listeners. Also, if you want to see how attractive Our guests are, be sure to check out our YouTube channel. You can find us on YouTube at Commercial Real Estate Pro Network. And while you’re there, please subscribe. With that I want to welcome my guest, Weina Zhang, welcome to CRE PN Radio.

Weina Zhang 3:42

Thank you so much for the time invited me to the podcast.

J Darrin Gross 3:47

You bet. I’m looking forward to our conversation. But before we get started, if you could take just a minute and share with the listeners a little bit about your background.

Weina Zhang 3:57

So my background, I’m a emigrate, I moved to New York 1998 I was 25 years old. Now 25 years later, I spend 20 years in brown the line of supply chain manufacturer and high rise construction. From 2005 to 2008. I was build a company from a 1 million revenue to 55 0 million revenue $8.3 million in here Las Vegas. With all the years of high rise, commercial construction, me and my partner and all n we create this system called matrix system, which is a solution for urban housing shortage. What our special tes me the rise all arise matrix system built with steel concrete glass aluminum, not wood structure. Our construction time from nine months to 12 months per project, we build English hotel in nine months. English hotel is four stars Marriott tribute program three months and the grand six months vertical nine months. The hotel style was cool was nice restaurant. So I arranged projects around the 12 months construction that magic about matrix system. We build fast also for the person less anyone else can do. So that’s why we call It’s a solution for urban housing shortage. We don’t need a lot of luck, either. We don’t need acres acres. English hotel, as hotel itself does not include the pool and the restaurant. Only 10,000 square foot.

J Darrin Gross 6:08

Wow. How many stories is that? The English hotel?

Weina Zhang 6:12

This hotel the full story stories? Because that’s the proof of concept for metric system. I have no investors all my own money. And I couldn’t afford the bill. My sender matric a story. Sorry, six stories. I only do four. But that’s enough for proof of concept.

J Darrin Gross 6:36

Yeah, got it. Well, that’s fascinating. I’m really looking forward to our conversation and learning more about all this. So let’s back up just a little bit here. You said in 98, you arrived in New York? Was that specifically to get into real estate or construction? Or was that something how did you end up in real estate?

Weina Zhang 7:02

I was growing up in Mongolia but China. So I was self Self Made Millionaires. 21 years old. So then I want to go to America. So I told my father, I said, I’m going to America. He said, Where are you going? I said, I’m going to the capital city, New York. My father, schoolteacher. He said my understanding capital city in America is Washington DC. I say, I don’t care, I go to New York. I really go for capital on the land at JFK, and to chase my American dream. No, nothing. I don’t know how big this whole lot of the podcasts are. Just to give you one example. I live in in Washington Square apartment for a month. I couldn’t find eggs in the market. So I asked my roommate. I said lawless. There’s no eggs in this country. So what are you talking about? He grabbed me to the supermarket. He grabbed up a case of eggs open, he said here’s eggs. I say, Oh, you put eggs in the box.

So this is how much I learned from Yeah,

J Darrin Gross 8:26

I love it. I love it. I mean the eyes wide open. That’s great. So when you before you came to New York, then what would you do to make your your money in Mongolia?

Weina Zhang 8:38

Not Mongolia. I grow up in Mongolia with me them are nowhere in between Russia and the China. It’s almost like no man life. They were it was no electricity, no running water until I was eight years old. Walk in the snow in the winter to three miles a day seeking for education. We were forced to be vegan the first 17 years or so poor. That was a very healthy life. Okay, let’s begin. Then. I was one get into college and China that time. It’s almost like a caste Assist system in India. If you were born with farm, your whole life farm, you cannot say Oh, I go New York for five job, whatever I can do. No, you’re the only way you can get out of Mongolia. It was get into college. I did it. So I was the one change my family’s life. I bought my mom. million dollar condo in shinjin. And she passed away three years ago. So yeah, I change to my family life then. From there, I met millions in China. 21 years old and then I came to New York for your sleep. either 25 years.

J Darrin Gross 10:02

So, again, I didn’t quite understand what did you do to make your money there?

Weina Zhang 10:07

Oh, that’s this is taking much longer to explain. I just do it as fast as I could. I, I was in tourism industry by then early 90s China still the money if we’re leaving on the stamp, right food stamp, whatever is that. So I was a tourist guide to taking the tourism gold gray the wall making make some tips. So one thing we do is we take the tourism to the art store or antique store. Then after tourists left, we always come back collect a 20 person kickback. So after well I realize because those are arts like there’s nothing for tourism, right? So then I call all my tourist guides friends. I said guys, I’m going to start my own store. You everyone come to my store, I will give you an 80% kickback i 20%. Commission commission commission. Yeah, guess what? I was a millionaire. Not only that long, Big Boss lined up front my store. Not only all the tourists guide, they came to me, they said, We know thank you so much because of you. I’ve been able to buy apartment in the city like shinjin that can bring my family here. Now we’re smelling right it was 100,000 by them. So that’s how they’re paid. We’re quick, I became a millionaire as 21 years old. So I have enough money that can move to New York.

J Darrin Gross 11:56

Got it? Can I was kind of curious how you did that. I mean, solving a problem, you see the opportunity and you you know made it work for you and others. I mean, you know, I’m guessing the fact when you when you change the pay rate all that’s why you had everybody lined up out the door they were gonna get they were gonna make money too. So that’s great. So you arrived in New York? How did you end up in the real estate business?

Weina Zhang 12:24

Not I started with New York. Three months in New York, I realized I couldn’t survive here. I need to learn language, learn everything, barely find the eggs in the market. So my I moved to California. So by year two saw that I moved to Las Vegas, I started working for the architect who built laxer MGM, I was assistant for him to help him build a casino 3000 rooms casino to source all the construction material from overseas, which is China. That’s how I started my construction material supplier. First business then became Glaser, contractor.

J Darrin Gross 13:10

Gotcha. Gotcha. All right. Well, that makes sense. There’s a the the path is clear. Now I understand it. So you’re in Las Vegas? And is that primarily where you you invest in and build right now? Or do you? Do you limit yourself to Las Vegas,

Weina Zhang 13:26

I moved Vegas here to Salvan participate in between. I moved back to New York, I was a contractor for Freedom Tower during the recession, then that moved to San Francisco. I was pretty much a 50% us contractor 50% market share in downtown San Francisco, I build a first sells Salesforce 350 mission, I built Transbay a bunch of a project in San Francisco, then I moved back to Vegas to soften 17. And to prove that matrix system gonna work. That’s how I started build a first English Hotel.

J Darrin Gross 14:13

Got it? Got it. So you’ve been on the material side of things. And I’m just curious, you mentioned the cost savings, the 40% Less is that primarily or I mean, you’ve got your your matrix system, but is it your connections to the materials and your ability to understand where and how to source the materials? That’s really the key to your savings? Or is it or is it truly your, your your system your your matrix system or or is that are they integral Are they are they one in the same?

Weina Zhang 14:47

Yeah, it’s okay. Let’s break down the matrix system. First of all, it’s a supply chain. People think about ground up construction. Right up construction was All in the materials, right? We are supply pretty much all the material ourselves. Second, the ball, we pre engineer, pre fab, offside structure and the facade, because that’s our background facade, all glass aluminum facade. And then the reason like matrix system so unique about it’s hard, you know, to scale like, I can sell my product, because you see with me that hand of ball subcontractors, right? So we’re the other product, vertical materials, supply chains vertical. The other is a handful of sub who worked with me the last 20 years in Vegas, they are just installed the insulation. For me. This is tricky. You know, usually you cannot go find subcontractors that, hey, you install my Glock, there’s no no all the law to liability. So that’s other parts of about matrix system. We have vertical from supply chain to SOPs consultant. That, yeah, that’s all vertical.

J Darrin Gross 16:25

Got it. So you basically have it all, all in house. from the, from the idea to the the sub or the subcontractors you brought in house, material you’ve sourced and all also sound like the the winter describing is the the materials and kind of your design is cost conscious to as well as the way that you’re proceeding my understanding. Right?

Weina Zhang 16:51

Right. The most important we we make the matrix system so simple, we only have a three type of a unit, a studio, one bedroom, one bath, two bedroom, two bath, that’s it will 3000 of them. Whether Marriott condo, sorry, Marriott Hotel Marriott apartment on the next phase, they are all going to same.

J Darrin Gross 17:19

No, I think it makes sense. It’s kind of the you know, when you keep the the menu limited. You don’t have to get involved in all the the outside noise you can kind of focus and keep it very, very narrow and very, very lean. Makes a lot of sense. So let me ask you, so you’re in the construction? Are you building these for others? Where are you? Are you building these for your own portfolio? Or what’s the?

Weina Zhang 17:48

Yeah, my own portfolio only. So mid town Vegas, we own, including the English hotel been open almost two years around the four acres. Midtown, because of the location in between City Hall and the strip, we’re inside of our district. So mid tower will be the first 15 minutes walking 100% electrical. So our matrix is 100%. Electrical. No gas, no gasoline. So we just get to see the Las Vegas proved our 300 units with nine parking only by this other problem of the salt. It’s cars, all the problems urban. Big problem is a parking. Right. So what I did was I told the city I said I build the city for 15 minutes walking. But we still need a car because we’re not like New York or San Francisco. I do have parking. Not only that, I also have Tesla as a manatee to encourage my residents keep up a car which is a financial burden. Because there’s a unit for people they can walk or bike in two or three blocks leaving the Midtown so the Tesla as a manatee the user have let’s say seven hours per week, for weekend whatever to use for free you only pay for the insurance per hour when they use that. So that’s how saving proof my non parking for 300 unit condo and Marriott apartment because I do have this Tesla program.

J Darrin Gross 19:57

Wow. So 300 units how many cars Was it required to to meet the need? 1.511 and a half cars?

Weina Zhang 20:07

Correct. Per unit? That’s yeah.

J Darrin Gross 20:11

So, wait, back back. So 300 units, correct? Yes. And you’re gonna have 1.5 car per unit? No,

Weina Zhang 20:23

that was that was the that was the call

J Darrin Gross 20:26

parking requirement. Code.

Weina Zhang 20:28

Okay, cool. The code. So city waived that, because I provide each five households share one Tesla. So

J Darrin Gross 20:41

555 units, there’s one vehicle available than than the usage and do they like calendar, reserve, whatever, when they they need a car? And they get up to seven hours per week?

Weina Zhang 20:54

Correct? Wow.

J Darrin Gross 20:58

That’s that is a that’s a first time I’ve heard that. And it makes a lot of sense. Because it seems to me like you’ve combined a lot of the kind of the apps that are available. I know like you can, in Portland here you can. At least it used to be I don’t know if he was still available. But there was a kind of a rideshare program where he like zapper or zippers app or something like that, where there was a car share thing where you could just basically go up on your phone and type in and unlock and you could start the car and drive off. But

Weina Zhang 21:29

it was easy. The Tesla program share that was caught on some times. And we literally have like, proof of PhD work in the on the simulation model. Because whatever I do is came from original idea. Yeah, it’s easy. There’s so but we got in the program.

J Darrin Gross 21:57

That’s awesome. And so the, the area you mentioned, you’re between the courthouse in the strip, or city hall, and then in the strip. So you’re basically in the middle of it where people can actually walk or use other means of transportation that don’t require them owning a car. That’s fascinating. How did you? I mean, I love what you’ve been describing so far as basically the speed in which you can put a project together. It sounds like you’ve, you’ve designed it well to it with a limited menu of options. You’ve sourced it well, you’ve brought in all of the the needed trades in house where you’re not relying on third party and whatever cost inflation that they can provide you you’ve contained all that. You said you’ve got how many was it four? Or 40? Or how many you said the acres there that you have four acres,

Weina Zhang 23:05

four acres? Okay. Last week as shortage for 4000 to 7000. Houses were this is how the shortage, right? Yeah, not for for middle class professional people, not for super rich people. Okay, so the four acres the phase one we’re doing is we call me Tom Plaza what new template that is on Phase one is all a manatee will be here. So the Phase One we build out all the manatee for two or 3000 Rest units outside Midtown Plaza.

J Darrin Gross 23:51

So we’re talking like grocery stores and and all kind of stuff or when you say amenities, what are you referring to?

Weina Zhang 23:57

So it’s, it’s mixed use. We have a second floor. Concrete our biotech companies. Ground Floor are my core. Size retails. We want to gravity we want to people come here to stop 50 Different hundreds were 300 local small business stores we make them affordable for small business while second floor are biotech company. So the other the other problem that I solved, be beside the parking and commercialize the amenity so reduce the HOA the condo buyer don’t have a paid dollar $2 For HOA because of standard construction here in downtown anywhere in the urban is you have the bill all the manatee. The roof does the pool on the roof or the gym The clubhouse usually cost the developer a lot of money to Bill and the residents have the P dollar I’ll pull out $2 and 208 to maintain them to what what I’m doing right now as I commercialize everything my actual is 20 cents a square foot right? So which is me if you want to use in gym you have to pay for I never even gym. I’m outdoor runner, I don’t have a pay for other people. So that’s a solution to commercialize a manatee reduce the HOA make more affordable.

J Darrin Gross 25:38

No I love it. I love it. It’s kind of the more than menu thing and and, you know, it is funny that that those amenities that you described, I mean that they’re clearly the brochure that everybody gets the you are but the actual usage, it’s, it’s in practice, I mean, you know the number of people that actually use it very, very few. So that’s, that’s, uh, that’s interesting. I was just doing a little bit of math so you took what was necessarily or what would have been a 450 car parking lot and reduced to what 60 cars is that what you have to have space for with it.

Weina Zhang 26:12

I have a two I have a 200 parking spot 100 are reserved for Tesla and the other 100 for whoever need and the retail business. So before I forget the most important other problems solve it’s the security so that’s a big

J Darrin Gross 26:36

What did you do for the security?

Weina Zhang 26:38

I did? We’re in the specials called Safe right? So with with English hotels good example. This place was homeless occupied before I started construction. I literally the day I broke a ground I gave all the fruit the chickens to the homeless campaign on my lap that please move. I’m gonna shove the ground tomorrow. All right. So now we’re almost two years this place become we manage four anchors, three city blocks and the Center for the criminals reduce the homeless everything it’s reduced. So this is what do we do for the whole Midtown the plaza and above to provide private security improve all the landscaping road?

J Darrin Gross 27:40

Yeah. So So basically, you you took a kind of a gentrified area. I mean, you you basically took a rundown place and gentrified it and made it you know, appealing. Now it sounds like I’m guessing. Is there a lot of attracting? Or have you been able to attract additional development around you? I would assume that would be the case. Is that not?

Weina Zhang 28:00

Was there additional development?

J Darrin Gross 28:02

Well, are there others seeking to develop around you? Is there more construction?

Weina Zhang 28:08

Oh, yes. Yeah. Everyone ever seen the run? There’s more restaurants gonna build because every business wants to be around me. And then finally the tech company city of Las Vegas try to track them for years. Now the tech company come to me that Weina what’s the boundary for Midtown? We want to be near you.

J Darrin Gross 28:31

Right right. That’s so exciting to see the transformation and so let me ask you your your your build schedule sounds phenomenal. I mean, nine nine months is is incredible. But what kind of red tape and tell me about that before you started building How long did it take the you know the powers that be the the city the permits all of that fun stuff? Before before you I mean when from the time you first engaged in the you know, you made the offer on the property before you turn the first shovel of dirt. How much time are we talking about there?

Weina Zhang 29:13

That’s where I have to promote my City of Las Vegas the they have been a phenomenal partner. So which is from entitlement right? Three to six month entitlement then six months for permit so well we waiting for the permit often tatelman Six months that’s where Matrix system pre construction. So all the material all that order structure which is our lead gauge steel structure will be pre engineered prefab on the side all the facade will be pre engineer prefab on side. So now you go whether nine months construction, autonomous construction, lay the lay Once we start rotate, will be every three to six months, I will handle the building 300 case 100 kids City Las Vegas very fast. That’s why I choose Vegas. San Francisco will kill me. Doesn’t matter how fast I can bill, I’m waiting for five years getting settlement. Right.

J Darrin Gross 30:19

Right now that seems to be a common theme when I’m talking to people and I know even here in Portland, they just laid off a bunch of people at the you know, the the planning commission because they’ve made it it’s become so expensive that there’s you know, people aren’t wanting to build is much even though there’s huge demand. The hurdles that they’ve put in place have made it prohibitive for a lot of the people that like to build. So you mentioned that the different or at least I think what I heard you say was so we’ve talked about hotels we’ve talked about apartments and condos are the is that basically the the three asset classes you’re in you’re you’re building?

Weina Zhang 31:02

Right. Unit 800 will be in this full acres call Midtown Plaza Midtown Plaza are two plus eight Mixed use Out 800 units in the Midtown Plaza 200 are Marriott 74 rooms Marriott Hotel and 129. Case Marriott apartment then the rest 200 condo for sale then the rest of our apartment then outside of Midtown Plaza remember we only need a very small lot 7000 square foot we can have a little tower with 100 units there are 50 Puppy units there depends on studio or one bedroom will be too solid.

J Darrin Gross 32:02

Wow. So on the the operation of the property do you manage that yourself or do you source out you mentioned Marriott? Or is that a lease? Are they a tenant then and operating their their hotel? Or have you sold that as a coffee condo and sold a portion of the project or how’s that?

Weina Zhang 32:22

We keep everything except a condo. So the ones that I learned from living in the city develop her after they built they have a third party manage when the third sort of the party charges through prison manage and that’s where the surveys have a problem right? So what I do is every single vertical we are manage ourselves we provide our residents our full stars Marriott level service talking about my hotel English hotel, we are pretty much always um sometimes top 10 Sometime like pub 15 It depends on the month the bathroom good review for customer service cleaning so that’s why we do ourselves if we stopped to other people it’s no point to build the brand the brand is not only you have a beautiful glass condo it’s all the other service constantly there the cleaning all the other service Yes, we manage ourselves.

J Darrin Gross 33:40

Got it. So is a Marriott D Do you have a franchise and for Marriott as well then that you you operate? A Marriott?

Weina Zhang 33:48

So the currently hotel it’s even the next phase is Marriott franchise.

J Darrin Gross 33:55

Okay.

Weina Zhang 33:55

And right now English hotel we have third party Hotel Management manage. But the next one we’ll do ourselves.

J Darrin Gross 34:04

Got it? Got it? No, I love the you know, top to bottom concept there. I think it gives you the most control. And like you said if you’re if you are trying to build a brand. Nobody cares more about their brand than you know than you. And so for you to do that. I mean, I That’s That’s impressive. It’s really impressive. I guess my question is I you you’ve commented that you all of this is under your brand, but it seems like your your building process would be very attractive to anyone that’s looking to build based on just the speed and kind of the cost savings. Is that anything you’ve ever considered either contracting your services out? To build for another investor,

Weina Zhang 35:03

I get this question all day long. The answer’s no. Because we are not a selling product. Matrix system is not a product like Tesla, right? You’re down model Y, you can sell millions run up construction. That’s why people spend billions 600 million to try to do prefab the other business, right? It doesn’t work that way, even in city, even in Las Vegas to building code. county and the city. Imagine you ever go Portland San Francisco, right? So but nature system, allow the knee, go to Portland go to San Francisco to build for ourselves, I cannot sell the product to other people.

J Darrin Gross 35:53

Right. Let me ask you, you clearly identified the benefits to being in Las Vegas as far as the way the municipality works with kind of the ease to work with them, and also the speed and you comment in San Francisco, you know, just the time have you been approached by other municipalities about saying, hey, come Come here, we’ll make it easy for you. I just feel like the the speed at which you move and the product that you’re delivering would be enticing for anybody that has a need for housing.

Weina Zhang 36:31

So let me give my vision, right. We just started I am legally just we’re having the email official announced the project yet. January 8 2024. We’re going to official launch the project. So yes, it will be other CDs either. Hey, we’re we are urban. We need you will be here. We’re just it’s a housing shortage. Right? But my vision is I’m a private community to help lift up middle class Oh, people work for me in the hospitality. They’re not really some are like not even middle class. Yeah, right. So my restaurant is employee on their on the revenue share, which is if there are lower than middle class or their middle class, I will leave them up they are going to become middle class. And other new middle class revenue share from $65,000 a year middle class Vegas was revenue share PEPRA clap clap today. Now they’re like 80,000 Already I call them new middle class AI cannot replace us. So my goal is help people work for me build up equity. So so they can leave them up to upper one more up class. So they can have the place where they work where they leave their kids can grow up. This is my goal. And then for the outside my company, other people I have say this, they work so hard, they have done payment they’ve been priced out of the market, right? They want to live in the city they don’t want to the car they just want to you know but nothing no product for them. I want to call for the ball in English a second language why is that affordable? Not me like really affordable, affordable is your working class. You have 20% down you want a home? This is where I’m providing I think were really we’re here already Las Vegas. We have like hundreds hundreds people on the waiting list for the condo. The first one the next one is condo, I have only 87 units pre sold the first family condo person are gone already. And there’s 100 100 people on the waiting list. Yes, I would go other cities. Depends on the city. If you want me to go there, you do what say the last week is doing for me? We have special team from Santa see the Las Vegas just work with us.

J Darrin Gross 39:25

Oh, no, I think you’re I mean your your your brand, your program. The fact that you not only are creating a special product, but the way you’ve invested in your people. And your commitment to your people is is very admirable. And I applaud you for that. Because that’s I think that’s that’s really the key to it, I think is to lift, lift everybody up in the process. In in in Well, profits are always the, one of the primary motives for investment. You know, there there is room for, you know, when it’s designed properly, there’s room for, to share the share of the wealth there. So that’s, that’s impressive. Hey, Wayne, if we could like to shift gears here for a second, as I mentioned, before we started recording by day, I’m an insurance broker. And as such, I work with my clients to assess risk and determine what to do with the risk. And there’s three strategies we typically consider, we first look to see if there’s a way we can avoid the risk. If that’s not an option, we look to see if there’s a way we can minimize the risk. And if we cannot avoid nor minimize the risk, then we look to see if there’s a way we can transfer the risk. And that’s what an insurance policy is. It’s a risk transfer vehicle. And as such, I like to ask my guests, if they can look at their own situation, and identify what they consider to be the biggest risk. Could be you’re the lenders, the you know, the city, the permitting the the Federal Reserve could be insurance. But whatever you identify as the biggest risk is what I’m looking for. And again, for clarification, while I am an insurance agent, I’m not necessarily looking for an insurance related answer. And so if you’re willing, I’d like to ask you, Xena, Wang. Er, to me, Xena, Zang. Excuse me, back up. Weina Zhang. Got my letters mixed up there. Weina Zhang, what is the BIGGEST RISK?

Weina Zhang 41:46

So the reason the we crave matrix system, like you said, was 20 years, his parents are from the line, we meet him lies, minimalize excuse the language. A lot of risk already. Right. But still our risk is. So like you said, the Fed. How can I give affordable housing for middle class? Right? The really the interest rate, right? So that’s, that’s I cannot control ever one problem I need to solve that. Right. So that’s the that’s really the biggest obstacle. The interest rate See, I solved the parking I solved the HOA, I solved the great location, beautiful glass condo, small, you know, not like super, like super 505,000 square foot. But there’s a fed? Yes. That’s the risk of I don’t know if you call feather risk. Other than that, I think. Yeah, I don’t think there’s a lot of risk on me. Other developer? Probably, but not me.

J Darrin Gross 43:03

No, I think the the Federal Reserve and their interest rate policies affect you know, they’re directly focused and they affect directly the real estate market. Kind of as kind of the gas for the engine. So I get it. Weina.

Weina Zhang 43:26

Insurance very quick insurance.

J Darrin Gross 43:28

Sure.

Weina Zhang 43:29

Insurnace always challenging for everyone. So we have to pay every single year the insurance but the one thing that by the Matrix system, my broker told me we not just keep doing what you do. You build steel, concrete, glass, aluminum building, no wood, right? You have the best price already. So other than that, I’m in the same shoes. Everyone else. Insurance wise.

J Darrin Gross 43:55

Yeah, definitely. The insurance market is a little cuckoo right now and and hopefully it’ll settle down. But, you know, we’ll get through it. Weina where can listeners go if they’d like to learn more connect with you?

Weina Zhang 44:10

Where follow us on Midtown, Las Vegas. We have a website. We have social media Instagram, Midtown, Las Vegas, Instagram, passed away. And the number one brunch. Oh, Pepper Club is the number one brunch in Las Vegas. We are from 7am to 4pm. Seven days a week. We’re never close.

J Darrin Gross 44:41

Well that’s awesome.

Weina Zhang 44:42

We have a one million hit on Tik Tok 1 hate.

J Darrin Gross 44:49

Great. Well, Weina Zhang, I cannot say thanks enough for taking the time to talk today. I’ve enjoyed it. Learned a lot and I look forward to doing it again soon.

Weina Zhang 44:59

I really appreciate the time Darrin, I wish I could have expressed myself was better English.

J Darrin Gross 45:09

Oh, you didn’t? You did great. You did great. I appreciate that.

Weina Zhang 45:14

Thank you.

J Darrin Gross 45:15

All right. For our listeners. If you liked this episode, don’t forget to like, share and subscribe. Remember, the more you know, the more you grow. That’s all we’ve got this week. Until next time, thanks for listening to Commercial Real Estate Pro Networks. CRE PN Radio.

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Multifamily Syndication and Development with Sridhar Sannidhi – CRE PN #441

Sridhar Sannidhi 0:00

Definitely this COVID and as well as this current slowdown in the economy indefinitely impacted during COVID People who are not sure in the initial phases, what’s going to happen out how it is going to impact a commercial real estate segment. But to our surprise, it really helped on the commercial real estate. So we had support from the government. And then we also had full occupancy on the property so we were in a better shape during the COVID. Post COVID The liquidity is tight in the current market, so the lending space has shrunk and the interest rates have gone up. So as a result, they’re slowed down so hoping that this current market condition is going to ease out soon. Once the Fed starts cutting the rates, I believe lending will accelerate, and projects will start coming to light again at a faster pace.

Announcer 1:00

J Darrin Gross 1:20

Welcome to Commercial Real Estate Pro Networks CRE PN Radio. Thanks for joining us. My name is J Darrin Gross. This is the podcast focused on commercial real estate investment and risk management strategies. Weekly we have conversations with commercial real estate investors and professionals who provide their experience and insight to help you grow your real estate portfolio.

Today’s interview is sponsored by Building Insurance and Risk. When you invest in real estate. It pays to work with a real estate investor protection specialist to protect yourself and your investment from catastrophic loss. The experts at building insurance and risk focus on real estate investor protection. They provide you with multiple insurance coverage offers and a side by side coverage comparison. learn more go to Building Insurance Risk.com.

Today, my guess is Sridhar Sannidhi. He is a 30 year IT professional turned full time real estate professional. And it just a minute. We’re going to speak with Sridhar about multifamily syndication and development.

But first, a quick reminder, if you like our show, CRE PN Radio, there are a couple things you can do to help us out. You can like, share and subscribe. And as always, we encourage you to leave a comment. We’d love to hear from our listeners. Also, if you want to see our handsome our guests, are you sure to check out our YouTube channel. You can find us on YouTube at commercial real estate pro network. And while you’re there, please subscribe. With that, I want to welcome my guest Sridhar Sannidhi, welcome to CRE PN Radio.

Sridhar Sannidhi 3:02

Thank you. Thank you for having me on the show.

J Darrin Gross 3:05

Well, you are welcome. And I am looking forward to our conversation. But before we get started, if you could take just a minute and share with the listeners a little bit about your background. Sure.

Sridhar Sannidhi 3:18

Hello, good morning. Good afternoon. Good evening, wherever you’re listening from, my name is Sridhar Sannidhi. I was formerly an IT professional. I worked in IT for 30 years. And I thought I should build something for future so as a generational wealth and down so in that process, I leapt into commercial real estate initially I thought of building single family portfolio which I could not do much. So then I went to commercial real estate. That’s where I started this journey six years back. And since then, I’ve been doing commercial real estate, particularly multifamily valuation, grown up constructions.

J Darrin Gross 3:59

Got it. So you mentioned your your career was in it and that you decided, in order to leave a legacy you wanted to do something different? How did you settle on real estate?

Sridhar Sannidhi 4:14

So being an IT professional, our first thought was to start an IT company. And I had a few ideas to do that. And then I started teaming up with a few professionals and they didn’t come a long, long way. So in the in the middle, we had to stop that endeavor. And the biggest challenge was like money at that time. So I thought I should build my own network so that I can pursue those kind of dreams. Initially, I thought I should do with a single family, buy one at a time and then build as a portfolio that can give me passive income so that I can focus on my IT company, but I couldn’t do any single family portfolio build up due to competition or something Then I decided to go big and bold. So here I am. So started buying multifamily syndications.

J Darrin Gross 5:11

So you’re starting multifamily. Were you were you a limited partner originally or how did you? How did you get into the syndication?

Sridhar Sannidhi 5:23

The first couple of deals I was a limited partner and just to test the waters whether whatever the syndicators have been promising is it really what data is transpiring or not? After getting couple of checks, I realized that it’s working, then I, at that juncture, I decided to take an active role. I said, if I do passively, it is a slow progression. If I do an active role, then the rate of growth would be much higher.

J Darrin Gross 5:58

Excellent. So how long was it between the initial limited partner investment in when you decided to go more as an active participant?

Sridhar Sannidhi 6:11

Six months, I waited until the first couple of checks to see that it is a standard pattern.

J Darrin Gross 6:21

All right. And so in the limited partner version, how large of a property where you invest in?

Sridhar Sannidhi 6:34

First a couple of properties for like 100 Plus units, limited partner in less than 200 unit type of properties. And then they sell it to come on to act to roll after that.

J Darrin Gross 6:50

And when you say active role, have you been a general partner? Or have you been the lead or our our view, our active review?

Sridhar Sannidhi 6:59

A couple of days have as a general partner, not the lead, but the general partner in the days after for this start started leading my own deals?

J Darrin Gross 7:10

All right. And as a general partner, were you more of like the capital? Were you? Were you raising capital? Or were you signing on the loan? Or what was your role in the

Sridhar Sannidhi 7:23

The first deal, it was mostly like a fundraiser from the second day onwards, I started taking responsibility of asset management, and passion, not all the duties. So for each deal, I picked up different different aspects of the asset management so that I will cover all the functions of an asset management and get familiar with. So that’s how the next four or five days have worked on it. After that, you do complete Asset Management.

J Darrin Gross 7:54

In the strategy for each of these, Have they all been a value add strategy as far as acquire, improve, and then increase the NOI? Has that been the

Sridhar Sannidhi 8:08

The first six, seven deals that all value add deals? After that we started ground up construction.

J Darrin Gross 8:16

All right, so tell me what, what’s different in the proach, from a value add as opposed to a ground up?

Sridhar Sannidhi 8:27

Yeah, these two are different segments for different type of investor base. One is for like, the value add is mostly for people who want a steady income based on their investment, that source for that type of investor. Whereas new construction is more like people who want to see net worth go up a bigger check at the end, they don’t worry about the cash flow distributions during the whole. So those are two different types of investors. Some of the investors were looking for a bigger gains. So that’s when I had to think and I had to jump in a construction phase. So just to capture my investors, when that that

J Darrin Gross 9:16

tell me your experience between the two. For your investors, what what’s kind of a range of return that you’ve you’ve, you know, historically I know you can’t project as far as what what will be but what kind of returns have you been able to achieve in the value add as opposed to the new construction.

Sridhar Sannidhi 9:37

So value add, we projected like 15 16% per year average rate of return for five years. So it says like 75 to 80% Return prediction, but we didn’t feel full cycles and couple of them we were able to achieve that 80% return in two and a half years and one property. We were able to exceed the average rate of return projected but we did not had to reach that 80% In one property. So, so the three full cycles I did, but as construction, we project 80% in two and a half years to three years versus five years.

J Darrin Gross 10:17

All right, in with the the 80%. In, in a syndication, it’s pretty much just return the capital and then the investors pay whatever taxes they owe and, and can reinvest or do whatever they want. In the development, is there any, any different tax situation created or an opportunity for the investors to reinvest? Or? Or Or is it basically just a one, one project, you know, raise the capital, do the project, sell the project, return to capital.

Sridhar Sannidhi 10:58

So, at the moment, we are not doing 1031 exchanges to give the tax advantages to investors from the construction projects. However, we launched the value adds so that value add project typically have a cost segregation that gives that tax advantage so they can bring the capital gains into the tax advantaged value add project that way they can defer the taxes.

J Darrin Gross 11:26

And tell me about the size of the property share developing.

Sridhar Sannidhi 11:30

So the multifamily projects we have right now one is 306 unit construction ground up. And another one is 330 units. It’s another one that’s going on at the moment. All right.

J Darrin Gross 11:44

And I believe before we started recording, did you say you’re based in Dallas? So I’m based in Dallas? Okay, and are your projects in Texas? Or do you whereabouts are you doing your projects?

Sridhar Sannidhi 11:57

Construction projects are mostly in Dallas and Austin. Whereas the value as I have in Houston, Austin, Dallas, which to Paul’s Memphis. So slowly, we are expanding to other central states.

J Darrin Gross 12:13

Alright, and raising capital Have you had Tell me about your your capital raising experience from the beginning to now? What? What’s kind of been the response from investors?

Sridhar Sannidhi 12:28

Yeah, when I started, I was not sure whether I would be able to raise funds or not. So I reached out to 20 close friends and told them that I’m getting into commercial real estate space. Are you interested in then they asked me, Are you putting the money? And I told them that yes, I’m putting so much money, then they said okay, we are also going to join you. If you have taken that much risk, then obviously it should be good. So let, let us also be part of it. That’s how it started the conversation. So all people, whoever I call this, so they all agreed. So that gave me the confidence that I can raise funds. So initially 1.2 million raise. So myself and another friend of mine, we raised more than million plus. So that is,

J Darrin Gross 13:17

So million views. A million was a property 4, 5 million?

Sridhar Sannidhi 13:23

96 unit, we bought for 3.2 million.

J Darrin Gross 13:31

Was there a heavy value add?

Sridhar Sannidhi 13:35

Yes. Close to 236 units were completely gutted. And around 48 units required heavy modifications or upgrades, including those statistics units. So

J Darrin Gross 13:51

Any How did what the accent look like on that?

Sridhar Sannidhi 13:55

So we did not exit with the investors money is more than doubled in last five years. We’ve been holding it for five years. We wanted to hold it for a few more months until the market turns around so that their returns would be even higher.

J Darrin Gross 14:10

Yeah, I think there’s a fair number of investors with that kind of mindset right now just based on kind of let the market reset here. I get it. So tell me the that was a value add. Project. Tell me about the raising capital for new construction.

Sridhar Sannidhi 14:31

So new construction, is mentioned that some of the investors were looking for bigger checks. I mean, they don’t worry. They don’t need cash flow or cash distributions as most of them are working currently. So they’re like they’re fine with that. So I thought it would be difficult to raise but to my surprise, I was able to raise a big check for construction. In fact, I raised More better deals per construction project and existing value adds.

J Darrin Gross 15:07

That’s, that’s impressive. That’s good. And on the new construction, are you? What’s your role in the new construction? Are you the lead? Are you be acting as a developer? Or you,

Sridhar Sannidhi 15:21

I’m a lead GP. Development, also you’re doing not as a full fledged construction manager, but as the lead developer from the asset management point of view.

J Darrin Gross 15:37

And so then you do you directly then hire the developer and construction or? Okay,

Sridhar Sannidhi 15:47

Yes, so we had the general contractor, we had the construction manager, and we oversee both of them, construction managers, and actual general contractor. We are working as a pseudo developer. In other words, so not 100% developer type of function.

J Darrin Gross 16:09

So did you partner with somebody with development experience? Or how did you did? Okay,

Sridhar Sannidhi 16:17

So we have a few other partners in the deal. So they have experienced construction experience.

J Darrin Gross 16:24

All right. So you, you partnered with some developers with experience, you brought the capital the projects underway, what how far are you from certificate of occupancy on on the burner?

Sridhar Sannidhi 16:37

Then nine months? We’ll be done with that first project?

J Darrin Gross 16:44

And will the exit be posted lease up? Or we’re I mean, I would assume that would be the case?

Sridhar Sannidhi 16:52

Yeah, post lease? That’s what our Yeah, we get buildings in phases. So as and when first phase is done, then we will place them out the second phase buildings already like that.

J Darrin Gross 17:05

And what is the projected timeline to lease up a building?

Sridhar Sannidhi 17:11

So by the time we get the third phase, we will be left with 35% of the units being empty. That’s our guess. So after that third phase is done, we are expecting within three months we will be stabilized.

J Darrin Gross 17:26

That’s that’s pretty fast. And what’s the build time on a on the project from start to finish?

Sridhar Sannidhi 17:34

It was projected to finish in two years, in fact, just construction piece, but so far, we are running late by six months due to weather and other related issues.

J Darrin Gross 17:46

Is that creating any issues for the capital or the lenders, etc? Or?

Sridhar Sannidhi 17:52

Yeah, we’ve had some hiccups. We are working on those hiccups like lenders, obviously, we need to extend initially to give the loan for two years, we are working on that lending extension on all that service. The current lending market is tighter. So that’s another thing that is creating a little bit of challenge with the lender.

J Darrin Gross 18:16

So with the market being what it is, I mean, the areas that you’ve described me, are you’ve mentioned Dallas, and, and Austin, and that my impression is that the demand is is high for the product you’re developing. Is there is that continue to be the case? I mean, I’m assuming that is the case if you’re you’re building there.

Sridhar Sannidhi 18:43

Yeah, suburb where we are building that when is experienced double digit population growth year over year. So it has, it is going in that passion for past several years. And it is projected to continue in that pattern. But at least next five years.

J Darrin Gross 19:01

Now it should should cover you for your exit sir. That’s That’s great. How, how do you go about identifying the opportunities for your development.

Sridhar Sannidhi 19:13

So we do have criteria to pick the project. Most of the time we see minimum 80 to $90,000, median household income that we see the tenant base to be resilient of any downtown’s and all that. Second thing is it should be committable to workplaces. The location should be comfortable to work places like that. So if we find a decent size project, typically we look for 200 Plus unit construction. If we find such a project, we will go for it.

J Darrin Gross 19:54

Yeah. And what about the developers and the other people pool that you’re gonna you’re having to bring on board? Is there any kind of a prior relationship? Or how do you go about screening or, or selecting the, the parties that you’re working with.

Sridhar Sannidhi 20:13

So in this project, the people who will partner that we know each other for a while. So that’s how we, we started. As far as the persons who are experienced in construction site, luckily, we have in the partnership team, we thought of bringing someone else also, even though we have some experience with other bring someone else but they didn’t work out. So we always look for somebody who has more experience than us in the construction space to bring them as a partner.

J Darrin Gross 20:48

And so, I think you said that the first project you’re, what are you about? A year out from having to complete?

Sridhar Sannidhi 20:57

Yep. Okay.

J Darrin Gross 20:58

So, your, your personal opinion, kind of sense of how things are going compared to the pace at which like a value add project can go? Do you, you feeling? Tell them? Well, tell me what you’re feeling, I mean, just just from the difference between the two.

Sridhar Sannidhi 21:21

So I mean, this Kelly, we did some rookie mistakes, but the first project made from the second onwards, we know what needs to be done. One such mistake is bringing the construction manager at the level is then the start time itself. So which we can have realized it. So from the second project on which we hired the construction manager in the beginning, that way, we have smooth execution of the project.

J Darrin Gross 21:55

That’s, that’s an interesting lesson there. The the construction manager, what is what is it? Did you find that they? I mean, as far as making it smooth, what are some of the challenges you found on the first one with with bringing them in later.

Sridhar Sannidhi 22:13

So the first thing is like a coordination of activities, right? Even though the GC has their own project manager, oftentimes, there would be a communication gap between the ownership team and the the general contractor, and we were not able to foresee how it would impact on the project at level state. So the construction manager typically has the vision, like what can be the consequence if we delay on certain things, right. So those are definitely the ones which we learn from the past project. And as we start to doing that, so we could have avoided some of the delays due to whether or not that we planned properly.

J Darrin Gross 22:56

Ya know, that keeping the project moving smoothly and making certain the, it all follows the right order, right, you don’t want the drywall guy showing up after the paint guy shows up, you got to have the paint show up after the drywall. But that’s the that’s, I mean, always appreciate lessons. You know, people learn and and, you know, and share them, because it’s probably, you know, plenty of people that that would not have considered that and may not have understood what the importance of that is. Appreciate that. So, given the the current market conditions, I mean, you’ve been doing this, what was the year you started investing? Is

Sridhar Sannidhi 23:41

2018. Starting? Yeah. Okay.

J Darrin Gross 23:44

So, from 2018, to now the market is, I mean, it’s done all sorts of crazy things. I think in 18, I remember people talking about the end of the cycle, the end of the cycle, the end of the cycle kind of thing. And then we had COVID and Natalie, like accelerated the cycle. And now we’re recording this in December of 23. How How have the the market conditions affected? Your because your your view of things and or your your your plans, expectations for the future?

Sridhar Sannidhi 24:23

Yeah, and definitely this COVID As well as this current slowdown in the economy indefinitely impacted during COVID People who are not sure in the initial phases, what’s going to happen out how it is going to impact a commercial real estate segment. But to our surprise, it really helped on the commercial real estate. So we had support from the government. And we also had full occupancy on the property so we were in a better shape during the COVID. Post COVID The liquidity is tight, so And the current market. So the lending space has shrunk and the interest rates have gone up. So as a result, they’re slowed down. So hoping that this current market condition is going to ease out soon. Once the Fed starts cutting the rates, I believe lending will accelerate, and the project’s gonna start coming to light again, at a faster pace.

J Darrin Gross 25:25

So what you just described, there’s kind of the the theme of everybody I think I’ve talked to is just kind of the, you know, the, the, the slowdown based on the the lending kind of thing. My question to you is with respect to your investors, and and how have you been able to communicate and, and I guess, manage their expectations? Has everybody remain calm? Or have you had to ramp up your communications with your, your investors to keep everybody you know, their expectations in line, or how’s that gone.

Sridhar Sannidhi 26:07

So prior to COVID, we used to do like newsletters ONLY on a monthly basis. And then, once a quarter or twice a year, we used to have a meeting, like Doom type of meeting, from the COVID time onwards, we started a monthly invested meet, irrespective of the project they are and we start to showing what’s going on in every single project of ours. And also, we started sharing how we see the economy is growing, and different indicators and all that. So we started discussing that with all the investors, they can ask any question from any property, and we have been transparent, in other words, so that helped us so very few investors are a little upset that we had to go throw in the variable interest rate loans. Other than

J Darrin Gross 27:04

the communication thing usually helps. You know, they know what’s going on and may not be happy, but at least they know, you’re still still there doing your thing. Is there any in the current market, given, you know, from 18, to now? Have you been raising money capital right now for any future projects? Have you what’s been the the, the attitude of the investors or the definitely

Sridhar Sannidhi 27:40

investors, many reservations now in investing new projects, due to several aspects, right in the last market, they see slowness. So everybody is worried about their current investments. So they wanted to wait and watch until things are panning out the way they wanted to. So we had to double down on reaching out to the investors. And then also, we had to get just out percentages of investor pool that would invest with us when we reach out to them. So we had to reach out to many more investors than what we usually do for a single transaction.

J Darrin Gross 28:23

Given the the greater number of investors you’re reaching out to have you had, have you been successful in meeting your your investment, or your capital raise goals? Yep.

Sridhar Sannidhi 28:34

Personally, I was able to reach all my goals. But my other partners, some of them have difficulty in reaching out to their targets. Then I had to step up and use different mechanism to fill in the gaps.

J Darrin Gross 28:49

Yeah. Well, if there’s one thing that I’ve come to recognize about the real estate market is it’s there’s the up and the down and, you know, interest rates, all that fun stuff. It’s usually the time is the thing that makes it all work. If you got if you have the time to wait it out. Usually everything works out or right. It’s if you lose the time, then you can, you can end up in a little bit more of a challenging situation. So Well, it sounds exciting. What would you know what you’re working on? Is there a favorite project that you’re that you’re working on?

Sridhar Sannidhi 29:33

So we are working on an entitlement project, but we will take it into phase two if the market condition permits. That’s like when the ACA document makes it use document like hotel townhomes retail space project, just leaping into the area. So again, it all depends on how the market is at the time. So we are going to entitle It means at this at this time

J Darrin Gross 30:03

that that that is what kind of separates the, you know, the men from the boys kind of thing and that ability to the time and then the ability to, you know, deliver a product when the markets receptive to it. That’s a hang on to it. That’s that’s one of those challenges of the development. But that sounds exciting. As far as your your investment strategy, do you do you find that your investors typically? I mean, we’ve talked a little bit about a visitor, is there any? Is there any sense of like long term kind of hold on to product your projects? Or is it most of it, get leased up and then sell and return to capital is that pretty much sure.

Sridhar Sannidhi 30:49

Now, we started working on long term strategies, also, now what we’re going to do is like, have a very limited number of investors will work with them to build and then hold the project for 10 plus years. So not everybody will be willing to do that. But there are some some subset of investors who wants like, stable income, they don’t need about like, top percentage interest or something like that, but they want stable income, at the same time, the wealth growth, right. So we do have some high net worth individuals who are willing to do that. So we are working on those projects. Next year, we will learn to adapt to such projects.

J Darrin Gross 31:33

Yeah, I think that’s, that’s one of the AHA, I guess I’ve had over the years is just recognizing that when you bring a bunch of people together, it seems like, you know, the reason why most of the investments are, are targeted for an earlier exit is, you know, trying to keep everybody on the same page or, you know, directing people. Whereas for a longer view, it takes a little bit of a different I don’t know, temperament for an investor or the ability, the ability to be in an investment that long. People need their money.

Sridhar Sannidhi 32:10

In that aspect, we are also giving the flexibility to liquidate their share at any point in time. So we are designing in such a way that those who want to continue for long term they can continue, but if their circumstances change, and they have they have to exit out the property. So we are coming up with a mechanism to compensate them and continue on the project for long term.

J Darrin Gross 32:38

Yeah, no, it sounds sounds exciting. And, you know, you’re you, you’re you’re living the dream there, you’ve got, you know, all the fun, you got the raising the capital and doing the projects and, and making a can you and your investors money and, and then, you know, the challenges that come with it. So that’s great. Hey, Sridhar, if we could, I’d like to change gears here for a second? As I mentioned, by day, I’m an insurance broker. And as such, I like to ask all my guests a question. And, except by my day, as an insurance broker, I when I work with my clients, we work to assess risk and determine what to do with the risk. And there’s three different strategies we typically consider. The first is we look to see if there’s a way we can avoid the risk. When that’s not an option, we look to see if there’s a way we can minimize the risk. And if we cannot avoid nor minimize the risk, then we look to see if there’s way we can transfer the risk. And that’s what an insurance policy is. It’s a risk transfer vehicle. And, as such, I like to ask my guests if they can look at their own situation, could be their investors could be the political winds could be the interest rates, the Fed, whatever it is that you see, and identify as to be the biggest risk. And again, for clarification, while I am an insurance broker, I am not necessarily looking for an insurance related answer. And so if you’re willing, I’d like to ask you Sridhar, Sandy, I’m sorry, Sannidhi, if you could identify what is the BIGGEST RISK?

Sridhar Sannidhi 34:32

So, it used to be property and casualty for this large projects earlier, but in the current lending market, it is the variable interest rate is the biggest risk for current projects. So we bought rate cap insurance to mitigate the risk or transfer the risk in other words so that we are protected from the rate, interest rate increases. That’s the biggest risk we have seen in the past. Latest market. And besides that, yeah, property casualty incidents that are tied to the projects we have in coastal areas. The biggest one is like Hurricane type of events, right? We had to protect ourselves, our investments. We had to take the insurance to cover all the costs that can arise from any damage that happens during hurricane season.

J Darrin Gross 35:28

Yeah, and I no matter of fact, that is wind insurances going up quite a bit. So I can appreciate that. I’m curious, in your experience with that, given the new construction, who are with these new construction projects that were more more challenging, or was it just the existing stock that you had?

Sridhar Sannidhi 35:55

Existing ones had this incidents challenge, suddenly the rates have gone? So good that then

J Darrin Gross 36:03

I say that’s kind of consistent with what we’re seeing is just the age of construction dictates a lot of the willingness or the ability for carriers to give a provide something that’s cost effective or, you know, affordable, I guess. So I can appreciate that. appreciate you sharing that. Sridhar, where can the listeners go if they’d like to learn more connect with you?

Sridhar Sannidhi 36:30

So they can go to my website, www. grow wealth. Number two retire.com. The Grow Wealth numeral two retire.com. http://www.growwealth2retire.com/

J Darrin Gross 36:41

So grow wealth. The number two retire.com?

Sridhar Sannidhi 36:45

Yes. Got it.

J Darrin Gross 36:49

Well Sridhar Sannidhi. I cannot say thanks enough for taking the time to talk to you today. I’ve enjoyed it. I learned a lot. And I look forward to doing it again soon.

Sridhar Sannidhi 37:00

Thank you. Thanks for giving me this opportunity to connect with your listeners. I hope this is useful to them in the real estate journey. Once again, thanks for having me on the show.

J Darrin Gross 37:14

You are most welcome. And again, appreciate you coming on. For our listeners. If you liked this episode, don’t forget to like, share and subscribe. Remember, the more you know, the more you grow. That’s all we’ve got this week. Until next time, thanks for listening to Commercial Real Estate Pro Networks. CRE PN Radio.

Announcer 37:37

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Nashville Commercial Development with DeLisa Guerrier – CRE PN #440

DeLisa Guerrier 0:00

It’s been not a not a linear journey. You know, we’ve, we’ve done a lot of different things, but the building the pocket neighborhoods allows us to help communities to continue to transform, you know, and there’s a lot of communities that want different amenities, but they can’t get them in less, you know, and so we’re able to help them envision that enlist and bring those things. And so, you know, from so for example, the development that we we did that was 16 units it was it’s not too far from the airport in this town called Hermitage, just 10 minutes outside of downtown Nashville. And the 16th were the first they they may record sales in the area and have truly impacted just the market value. But what we did in the meantime, while we were building those was we pull together a significant amount of acreage around those properties, and then took it through entitlements to develop another 250 units there.

Announcer 1:07

J Darrin Gross 1:27

Today, my guest is DeLisa Guerrier a of Guerrier Development, a commercial real estate development firm in Nashville with over 500 million and projects at various stages of development. And in just a minute, we’re going to speak with DeLisa Guerrier about how she dropped her first choice, her first career choice in medicine to pursue real estate with her husband.

But first a quick reminder, if you like our show, CRE PN Radio, there are a couple things you can do to help us out. You can like, share and subscribe. And as always, we encourage you to leave a comment. We’d love to hear from our listeners. Also, if you want to see how attractive Our guests are, be sure to check out our YouTube channel. You could find us on YouTube at Commercial Real Estate Pro Network. And while you’re there, please subscribe. With that on a well, I want to welcome I guess DeLisa Guerrier welcome to CRE PN Radio.

DeLisa Guerrier 3:15

Thank you. Thank you for having me.

J Darrin Gross 3:18

Well, I’m looking forward to our conversation. But before we get started, if you could take just a minute and share with the listeners a little bit about your background.

DeLisa Guerrier 3:26

Sure, yes. So I am originally from Oakland, California. And I moved to Nashville back in the early 2000s. So I’ve been in Tennessee for almost 19 years now. So I started off moving here thinking that I was pursuing medicine. I was biology pre med, headed to medical school, when I met met my husband took him three years, but he finally convinced me to give him a shot. And that, for me meant leaving the medicine, pursuit and starting off in entrepreneurship with him. And it didn’t necessarily mean real estate investment. I found that later, but that’s how how I started this journey. And I’m so happy to be here.

J Darrin Gross 4:20

Great. So you meet your husband. And you said it wasn’t necessarily real estate. But yet, you know, to go into business with him. How did you guys decide on real estate?

DeLisa Guerrier 4:35

Yes. So he owned a company at the time in the automotive field. And it was just getting started what he was doing window tints and customizations. And I had the choice to help him to grow that company or go to med school and so I chose to help him and we grew that company from doing about a 100,000 a year to just under 10 million a year in about five years. And so from while I was doing that, I needed something that would make me excited. I did, I don’t love anything about the automotive world, I don’t even like to put gas in my car. And so I, he said, you know, maybe you should get your real estate license, because it was, it was joyful for me to go look at model homes and do different things. And, and so I did, and that opened the door for this was 2010 2011, you know, this is right after the downturn, and people were in really bad situations, interest rates and, and that sort of stuff. And they have the ability to sell their home and make a profit, but they didn’t have the capital to invest in it, to make it worth that. So they were either having to short sale, or they were already in the process of foreclosure. So I went in, and really as a passion for our clients and helping them to get out of a bad situation, I came in and brought the capital and renovated their homes. And that started my real estate journey. And so that’s a no very different way to pursue it, but I didn’t see it coming, it was out of helping them that it was birth.

J Darrin Gross 6:24

I love that. I mean, the one thing I’ve come to know about real estate is that, you know, it’s kind of the Wild West, as far as, you know, there’s the the regular way where there’s a sign in front, you know, and there’s a broker and, and you can make an offer based on what the what the market allow. But then there’s the other side where you can be creative. And if you have a willing, seller, willing buyer, you can meet anywhere you want. Where we determine the middle is and you know, so that’s, that’s, that’s awesome. I so when you were doing that you had the and I assume these were residential properties, correct?

DeLisa Guerrier 7:02

These were all residential, and these were clients of ours in the automotive company. Okay. Okay.

J Darrin Gross 7:09

So they had properties that they were struggling to, they’re either gonna lose them to foreclosure or they could sell them short sale. That’s right. And you brought in the capital, fix them up? Did did you then split profits? Or how did you? How did I mean, who already did you sell them and you made a commission on the back end, and

DeLisa Guerrier 7:31

No, and so every situation was a little different. There were quite a few that we had to catch up the mortgage, we had to pay all the costs to move them out. And and in some cases, whatever stipend we gave them up front was enough to cover half of what the profit would be, or it was worth it to them to just go ahead and let it go. And so there were cases where we split the profit, there were cases where we paid enough upfront that we didn’t, but it really helped these families save their credit and dignity and, you know, and our development company.

J Darrin Gross 8:07

Okay, so let’s talk about this. So you start off working in the single family market, you’re helping clients, you know, essentially save their credit. That’s really what what that matters are when it comes to. And so but you’re also are you engaging, are you acting as a general Are you you know, for renovations? Are you kind of directing people getting bids and getting it all prettied up? Or do you How did you go about getting properties ready for sale?

DeLisa Guerrier 8:40

That’s such a good question. At the time, I was not a contractor. But because it was mostly cosmetic, you know, we had handyman around that we knew and trusted that. You know, what come in pain or come replace the carpets. And so it was minor things. It wasn’t big things that we needed to pull permits. And so I managed it. I even pat myself on the back. I even lay tile ones. But But no, from there, from there, we you know, we were able we had a customer client coming to us that needed to separate a partnership by selling a piece of land. This land happened to be in a prime location where a lot of development was happening. And we purchased that property. And we went to an architect it didn’t it didn’t have a functional house on it. And we were able to get four homes on that property. And we hired a builder to come and build for us that that development. And from there we did that a few more times before I realized, you know, there’s no need to pay another contractor when I can go and pursue this. You know, I like to pay for my own mistakes and learn and and that’s what we did. So I I became a licensed contractor for commercial residential and industrial construction, and started building our own projects.

J Darrin Gross 10:10

That’s awesome. So you, you basically, you know, the, the, one of the strategies, I think gets talked about a lot, especially with commercials, like value add come in, and basically a flip kind of thing, you know, you make it, you know, ready for sale, you or you buy it at a price, you add whatever you need to, and then there’s sale and there’s profit to you. But development is kind of like the original value add, you know, when you start off with bare ground, and yeah, and, you know, add the value and then sell it. So, so, in, you said about 2010, you started so at what point did you start your development career.

DeLisa Guerrier 10:51

Um, so 2015 is when we first went vertical on our first building. So, you know, in the meantime, we were doing a lot of other things, but I’m really getting a getting a foot in the door, when it came to real estate, helping families, flipping essentially, the market was, it was accepting of that at the time, and then Nashville became to where there were no more flips, you know, it was only new construction. And we were in that at the right time. So we grew into pocket neighborhoods. So we always used to say we would develop the properties that were too big for the small guys, and too small for the big guys. So it’s the 16 unit communities that 30 unit communities. And it makes sense for us, because not only are we the developer, but we’re the contractor. And so it keeps our guys working. And it keeps us keeps us busy.

J Darrin Gross 11:52

Yeah. So I’m curious, how do you distinguish between development and contracting? I think a lot of times people, you know, they, they assume it’s all the, or they don’t understand the distinction in there?

DeLisa Guerrier 12:04

Yes, well, I think there’s a lot of real estate developers who never touch the construction side. And that’s sort of how I was operating. Originally, there was a property that we owned, that I went through the process with the architects and the land planners in the city to create something there. But I didn’t touch the project, you know, the I worked, I hired a contractor to come in and build it. And so that, to me, is the difference. And those two can be mutually exclusive. I, I appreciate it, being able to be in control of how fast we move, you know, all of those things. And so I like to add in that layer. And I come from a world where my mother and my stepfather were both in construction. So I think it was a natural path for me.

J Darrin Gross 12:57

Cool. So you start off, are you in the development? Stuff you start off with? He said, The first one was a for home development. You mentioned 16 to 30. Tell me about the range of developments and kind of the numbers that you guys have done since 2015.

DeLisa Guerrier 13:17

Yeah, well, it, it’s been not a not a linear journey. You know, we’ve, we’ve done a lot of different things. But the building the pocket neighborhoods allows us to help communities to continue to transform, you know, and there’s a lot of communities that want different amenities, but they can’t get them in less, you know, and so we’re able to help them envision that enlist and bring those things. And so, you know, from so for example, the development that we we did that was 16 units, it was it’s not too far from the airport in this town called Hermitage, just 10 minutes outside of downtown Nashville. And the 16th were the first they they may record sales in the area and have truly impacted just the market value. But what we did in the meantime, while we were building those was we pull together a significant amount of acreage around those properties, and then took it through entitlements to develop another 250 units there. And so we we are at the point where we’re pulling permits now for that development. And we partner with a another development firm on a large project like that to be able to bring those bring those to life. And so that happened years ago, and it’s exciting because it started off with our 16 unit pocket neighborhood.

J Darrin Gross 14:52

And I love to hear that. So that’s so cool. So the the 16 seems manageable. And even your mindset 16 to 30? How did you guys? I mean, envision dream, you know, figure out that you could do the 250. When when, you know, just before that you were thinking kind of like the, you know, too big for the little guy, but not big enough for the big guy? Well,

DeLisa Guerrier 15:21

I think that we have grown into it based on relationships, you know, and we don’t ever want to bite off more than we can chew. We know what we can handle. And we, we really, there’s a lot of investments in this community in this, this market. And I’ll and so we’ve partnered on a lot of the big deals in the beginning. And we just closed on alone, actually, to build the first one ourselves with no partner. But we have several of those, we have a almost 200 unit development in another part of town and just finished entitlements for 599 units close to downtown. So there’s a lot that we have going on, not just that one, and we just we partner with the right people to make it happen.

J Darrin Gross 16:14

Oh, sounds like good. So So are you in these developments? Are they strictly single family? Or is there any multifamily or?

DeLisa Guerrier 16:24

Sorry, the larger ones are multifamily. Okay.

J Darrin Gross 16:27

Okay. And is that 200 200 unit properties at a multifamily property?

DeLisa Guerrier 16:33

Yes.

J Darrin Gross 16:34

Okay. So tell me, you started out in the single family, everybody kind of understands what that is? What’s different when you go into the multifamily for development?

DeLisa Guerrier 16:49

So we started off, I guess, it could be considered single family, but more, you know, they were in field projects, like duplexes or attached products. So not typic? Not, you know, exactly single family. You know, multifamily is a different world. You know, I’ve learned a lot, I think that the development side is the development process is the same is the capital structure, that’s a lot different. And so that’s why we, we brought in different partners that are really experienced in that side of things, at least in this phase of our of our career. But it’s, it’s a fun process.

J Darrin Gross 17:35

So when you say, bringing in partners, are they basically is it mostly capital? Or is there also some level of, of participation on you know, the, the actual development and the construction or,

DeLisa Guerrier 17:51

yeah, all the above. So for our construction company, I don’t build them, I don’t build projects, that big myself, our pocket neighborhoods keeps our guys busy, and that’s kind of in our wheelhouse, we will joint venture, and that’s the partnership that I mean, with the bigger contractor to build the multifamily. We will also partner with Capital Partners in order to finance the projects. Because there’s a lot of like I said, appetite in this market, or apartments.

J Darrin Gross 18:24

Got it. So with apartments, a lot of times the people I talk with on on this podcast, a lot of them are doing like syndication, whether they’ll go in and buy an existing property and maybe reposition it through value add and and basically then it’s a flip kind of sell to get the profit and return to capital to the investors. As a developer, are you is the strategy a sale upon, you know, lease up? Or are you is this something you’re building a portfolio to keep, you know, in your portfolio? Or are you what’s your, your vision plan with with the end product.

DeLisa Guerrier 19:07

So I’ll say first, we hadn’t participated in any syndication in that capacity because we like the dirt, we like to go in and work with the community to turn something you know, turn nothing into something. But on the on the long term investment, we have some capital partners that do not sail and so we will stay in the deal with them, you know, perpetually and then we have some others that the plan is to lease up and sell in five to seven years. And that that is okay for us too. Because of where we are, we bring the project to fruition and you know, whatever the appetite is that the partner we aligned with for this specific project. We at this phase, you know, will traditionally just work with with that.

J Darrin Gross 19:56

No, I love it flexible and little bit of both. That’s right. Yeah. So tell me on the smaller projects, your infill stuff? Are those that you retained? Or did you sell those properties?

DeLisa Guerrier 20:14

Most of those are sold. We, you know, we believe in creating homeownership, and a lot of times when you go into communities that are looking forward for, for development and bring more rooftops, a lot of them are very vocal about they want more people who live there and own their and, and so we try to work with that, and the market here has been good for us to structure them that way. We do, we do keep a, you know, a percentage of the units that we build in each development, to lease them for a while and, you know, hold on to a little piece of what we did.

Yeah, I and I think one of the fascinating things I’ve come to recognize, and you know, the years I’ve been doing insurance is my clients that are kind of 100 said, I have clients, I know they can make money in any market. They see the opportunity. Sometimes it’s, you know, flip, sometimes it’s a build new sometimes it’s, you know, buy low and, and Rent and Retain. And there’s always I mean, doesn’t matter where you are in the cycle, there’s an opportunity, and they’re always, and I don’t know, if it’s experienced, where they always have a little bit of foresight to kind of recognize what’s coming next.

You must have been talking to my husband.

J Darrin Gross 21:43

No, I mean, it’s to me is that is that kind of his ideas that that his way he sees it?

DeLisa Guerrier 21:48

It is and that’s how we’ve grown, you know, definitely learning from the past and, and what other developers have gone through in different market cycles. But positioning ourselves in every capacity to be able to think through and plan for market shifts, and making sure that we can still prevail in them.

J Darrin Gross 22:10

So in in the current cycle, it sounds like you you’ve invested a lot of effort and time in preparing the developments you’ve got ready to go. I’m kind of curious, what kind of timeline are you talking about from making an offer to where you’re ready to go vertical?

DeLisa Guerrier 22:32

It depends on the project. You know, this smaller ones are they move a lot faster. And I And honestly, because of all the development that has been happening in Middle Tennessee, the the county doesn’t move as fast as they used to, you know, used to be six months, you’ll have something out of the ground. And now you’re you know, you’re lucky if it’s 12 months from the time you tell the engineers to move forward to actually pulling the permit. So, so it’s taken time, but not because of not because of us just because of all the other factors. I say 12 months is fair.

J Darrin Gross 23:08

Got it. And as far as the, you know, kind of the development timeline, once you start going vertical, what’s the usual timeline to get a certificate of occupancy?

DeLisa Guerrier 23:23

It depends on the project. So I would say somewhere between eight to 10 months on a multi unit development, not a not an apartment, that’s a different animal, but on one of our pocket neighborhoods that’s attached product, you know, if it’s just a single family, that can be anywhere from seven to nine months, but but yes.

J Darrin Gross 23:54

So you’re based in Nashville, the the properties you’re developing, how close or how far away do you get from your base as far as opportunities and and where you’re developing?

DeLisa Guerrier 24:11

Well, primarily, most of our projects are in middle Tennessee, we have we have you know developments going on in Clarksville, which is 45 minutes away from Nashville, all the way to Smyrna in Murfreesboro. So that is a 45 minutes in another direction. So we typically stay within an hour but right now my husband has has been got looking at opportunities outside of Middle Tennessee.

J Darrin Gross 24:41

And when you’re, you’re identifying a property, what are some of the key things that you look for as far as an opportunity to develop?

DeLisa Guerrier 24:54

I look for what’s missing? You know, and I think that that is what has helped us to grow where we are, you know, in, in real estate I had, I had someone come and look at one of our homes, this is Agent feedback, you know, one of the agents called and said, Hey, this is the feedback. And the buyer said, you know, in this area, there’s no, there’s no grocery stores, you know, we’d have to drive 10 minutes, you know, we we want to get somewhere where it’s closer. And though that’s our type of development, because it’s opportunity. And that’s the reason why we develop, there’s because we know that by developing this project, and acquiring other land and working with the community that we could bring these other, these other these other needs. And so we, like you said, have a little bit of foresight and like to go and develop an areas where we can create significant impact in a community and that follow everyone else, you know, to where they it’s already done. And we’re fitting in. So

J Darrin Gross 26:03

Well let me ask you, so the what’s missing? That’s a, that’s a great question to ask, because that’s, you know, it allows you the opportunity to, to, you know, identify what, what would make the community better or what would be valuable. With that, like with the grocery store? Have you guys developed any kind of commercial occupancy type products like, retail, or?

DeLisa Guerrier 26:29

We have, we’re building a medical center right now and a few other little retail shops, and we own quite a bit of commercial property, and we have a really large project in the commercial space. But we’ll, we’ll get to that one day on another on another call. But But yes, we have some experience with commercial.

J Darrin Gross 26:53

Oh, that’s awesome. And in the again, that question right there, I think that could save everybody, you know, whenever you’re out looking for an opportunities to identify just what is missing. That’s, that’s, that’s great insight. appreciate you sharing that course. So let me ask you the current market conditions, we’re recording this here in December of 23. The get very varying opinions on where things are at. But clearly, you know, real estate’s influenced heavily by interest rates. Interest rates currently are significantly higher than what they were just a year or so ago. But they’re not at unprecedented rates, just different than where we were. How, how is the current situation affecting your strategy? Or your, your, you’re looking at the future here?

DeLisa Guerrier 27:58

Yeah, thank you. Great question. I think I think that’s a multifaceted thing, you know, it, it impacts us because banks aren’t looking at things the same as they did 12 months ago. You know, and we have a lot of great banking relationships that have not allowed us to slow down much, but in terms of buyer activity, that has significantly shifted, thankfully, because we build our projects, we are in a position to where if we leased them, because they hadn’t sold it doesn’t, it doesn’t impact us much. And so, you know, we have had to get strategic on what type of incentives whereas I’d say two years ago, I put a property on the market, I built this home, I sold this community for, let’s say, around 375, within 10 months, they were selling for 650. And I thankfully kept several of them. And I put that property on the market and had multiple offers one unit for 650. So it almost doubled in value. And had multiple offers, you know, and now, you know, you put something on the market, it sits for 30 days, and then you want to get creative. So so there are shifts and we and we and we shift with it. But we have been we we strategically presale, a lot of our developments. And so thankfully, before we ever start moving dirt, we have a lot of our units sold, we try to at least get 70% of them sold. And and so we have been able to retain all the buyers that we had from the beginning, and they were able to get extensions on their right locks. So, you know, we’ve just shifted with the market. You know, we’re it’s unfortunate, but, you know, we can’t control it. So

J Darrin Gross 29:58

Yeah, I think that’s that’s pretty much the healthy viewpoint is it is what it is and, and, you know, kind of kind of make lemonade. But so do you have a favorite project you’ve done? Hmm,

DeLisa Guerrier 30:16

I’m completed or working on you either. I have a project right now, outside of the the big project that we’re creating is a theme park. And it’s based on books and stories from all over the world to do. It’s designed to help children want to read again and right. And so that one, it, it’s a, it’s been a long passion project. That is, it’s very exciting. But outside of that we do a lot of work with churches. And we have this development that the church came to us they have 17 acres, and they said, We don’t know what to do with it. And we want to be good stewards, you know, can you help us so they wanted to rebuild the church, because it wasn’t in the best visual position from the street. And we worked with him for a year and a half, went through all the entitlements, and finalized all the approvals. About seven, eight months ago, and now we’re in the next phase of seeing 300 units come on at the ground, that will be three and four bedrooms designed for the workforce, and rebuilding the church and community center. And those are those impactful projects that you know, really make a difference in areas that that need it and need intentional development.

J Darrin Gross 31:48

No, I love it. That’s, that’s exciting to be able to make an impact. I didn’t ask are all the projects market rate projects? Or do you do any? Do you get involved in any of the low income housing? Like tech or tax credits, and all that kind of fun stuff? Or is it all are great.

DeLisa Guerrier 32:08

All of the ones that I’ve done have been market rate. But the one with the church, we did partner with a developer, another developer that specializes in low income. And that is kind of a tricky word that you use in some communities, you know, they want a fort, they want accessible, but they don’t want affordable and so but yes, we did do a strategic partnership there. Right?

J Darrin Gross 32:35

Well, and I think that it’s not fully understood by a lot of people, I think the label may not do it justice. But there’s a there’s an income gap, plain and simple. And in some communities, I mean, that the housing stock is, you know, pretty tight. And the demand for housing is greater than the supply and that just economically, you know, pushes up the price to make it unaffordable for the people that you need in the community to do the work. So that everything works. Yeah. And so, you know, it’s it’s a, I’ve talked to a couple of different firms or guests that have significant experience in that. And I’m, I’m aware of the terms to kind of understand a little bit of how it works. But I think that kind of what I’m seeing and just based on demand, feels like that’s going to be a subject substantial part of a lot of future development just based on, you know, just supply and demand. That’s great. But

DeLisa Guerrier 33:49

and I think that I’m grateful that there are resources out there to help to fill those gaps. And, you know, it’s heartbreaking when you hear the that police officers can’t afford to live in the areas that they serve, you know, and so, yeah,

J Darrin Gross 34:04

school teachers, I mean, nurses, I mean, it’s not it’s not unique, it’s and I think, you know, different time, longer conversation, but I think there’s a lot of, you know, the banking and just how available capital has, has become in the last, you know, 30 years has really kind of fueled that. A lot of the growth but a lot of the the, the well, I don’t want to get into that anyway, there’s there’s clearly it’s it’s more of a gap when I remember growing up, but

DeLisa Guerrier 34:40

now it’s a rabbit hole. You’re right. Yeah, yeah.

J Darrin Gross 34:44

So I got to ask you, you work with your husband. Are there any hurdles? working so closely with your spouse, right, well, what’s your secret? Oh,

DeLisa Guerrier 34:54

there’s hurdles every day. You know, I’d say blessed thing is, is that, you know, 15 years later, we don’t know anything else. We didn’t start off working separately. So we only know what it’s like to work together. So that that is in our favor. There. You know, people say you have to balance. We haven’t quite figured that out yet. So we’ll let you know when we do. But you know, it, there’s, you know, I think that the the biggest thing has been for us to understand what our lanes are, where we excel, and to respect each other in it. And that’s, I think, how we have gotten where we are.

J Darrin Gross 35:41

Well, whatever you’re doing, it sounds like it’s working really well. So my hat’s off to you. Congrats on all that.

DeLisa Guerrier 35:47

Thank you.

J Darrin Gross 35:49

The Lisa, if we could, I’d like to shift gears here for a second. As I mentioned, by day, I’m an insurance broker. And as such, I work with my clients to assess and determine what to do with the risk. And there’s three strategies we typically consider, we can avoid the risk. If that’s not an option, we can look at a way to minimize the risk. And if we cannot avoid nor minimize the risk, then we look to see if there’s a way we can transfer the risk. And that’s what an insurance policy is, it’s a risk transfer vehicle. And as such, I like to ask my guests, if they can look at their own situation, could be your clients, your partners, the community, you know, political interest rates, banks, whatever. But identify what you consider to be the biggest risk. And again, for clarification, while I am an insurance broker, I’m not necessarily looking for an insurance related answer. And so if you’re willing, I’d like to ask you to DeLisa Guerrier a, what is the BIGGEST RISK?

DeLisa Guerrier 36:58

Well, I think that there is a huge risk in what we do every day by, you know, investing capital into ever changing markets. And, you know, each project is different as to how much capital that is, and, and, you know, it is a risk. I mean, real estate investing is a risk in itself. And that’s what, that’s what ours isn’t, you know, I, I’ll tell you how, how I look at it, markets change, just like what we’re in right now. And there was this profound lesson that I learned when I was in college, and I’ll share it with you. My sister and I were driving from California to Nashville, we just got our brand new cars. It was my second year of college, and my mom was driving the car in front of us. And she and I were taking turns driving mine. And we came through some place in Oklahoma or something, and there was this huge, big storm. So we caught my mom and we said, what do we do, you know, do we pull over and she said, We’re gonna keep moving, we’re gonna move slow, we’re gonna move cautiously. But we’re gonna keep moving. And when we got out of it, she said, if we’d stopped, we’d still be in the storm. And that is how I look at market shifts. That is how I look at, you know, our risk taking it’s, we move, we move cautiously, we pay attention, and we, you know, don’t don’t make any sudden, sudden movements. But, um, you know, we keep moving. So

J Darrin Gross 38:48

That is, that’s, that is awesome. Just the, you know, keep moving. Otherwise, like you say, you’ll be you’ll still be in the storm. And that’s, that’s about the goal of the Lisa, where can the listeners go if they’d like to learn more connect with you?

DeLisa Guerrier 39:08

Well, our website will our new website will be launched very soon, which is Guerrier Development it is g u e r r, i e r development.com. There are a few social media channels that you can follow us and connect with us, Guerrier Development on Instagram and Facebook and LinkedIn. And then me personally, I am on LinkedIn as well. DeLisa Guerrier.

J Darrin Gross 39:39

Got it. Well, DeLisa Guerrier, I cannot say thanks enough for taking the time to talk today. I’ve enjoyed it thoroughly. Learned a lot, and I look forward to doing it again soon.

DeLisa Guerrier 39:50

Thank you so much. Thank you for having me.

J Darrin Gross 39:53

You bet for our listeners. If you liked this episode, don’t forget to like, share and subscribe. Remember, the more you know, the more you grow. That’s all we’ve got this week. Until next time, thanks for listening to commercial real estate pro networks, CRE PN Radio.

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Joint Venture Investing with Mandy McAllister – CRE PN #439

Mandy McAllister 0:22

What a syndication is basically is someone an active team, a general partnership buys an asset, then they sell off 70% of that asset as shares in a private placement memorandum. So, anyway, I did not like the idea of selling off 70% of the work that I was doing, because I have syndicated and in that syndication, I, you know, $12 million acquisition, I raised a million dollars, I did a ton of due diligence, I’m doing the exact same amount of work that I do on my joint ventures, but I own 5% of the general partnership. So 5% of 30% is 1.8%. I own of that deal. So if I feel like my syndicating friends who have a message of their, you know, 10,000 doors under management, you know, it wasn’t impressive to me because what was impressive to me was the dollars in my pocket, and I got more dollars in my pocket when I owned a larger chunk of the deal. So after that experience of only getting 1.8% of that larger deal, I decided to solely double down on buying from my own accounts or in joint venture where I own the larger percent

Announcer 1:36

J Darrin Gross 1:55

Welcome to Commercial Real Estate Pro Networks, CRE PN Radio. Thanks for joining us. My name is J. Darrin Gross. This is the podcast focused on commercial real estate investment and risk management strategies. Weekly, we have conversations with commercial real estate investors and professionals provide their experience and insight to help you grow your real estate portfolio.

Today’s interview is sponsored by Building Insurance and Risk when you invest in real estate. It pays to work with a real estate investor protection specialist to protect yourself and your investment from catastrophic loss. The experts had building insurance and risk focus on real estate investor protection. They provide you with multiple insurance coverage offers and a side by side coverage comparison. To learn more, go to Building Insurance Risk.com.

Today, my guest is Mandy McAllister, and she is a multifamily real estate investor, mindset ninja and connector. She spent the bulk of her career in medical device sales, chasing sales and commission checks. In 2021. Mandy left her W2 to lean on the financial independence she built through real estate investing, and he now serves as CEO of Go Bundance Women, a tribe of healthy wealthy, generous women who choose to lead epic lives. Her real estate expertise includes repositioning underperforming assets to increase cash flow and value. A portfolio is currently comprised of 373 doors of B class workforce housing, furnish student housing, and a motel reposition. She’s most proud to be a mama to her hilarious seven year old son Duncan, who coincidentally wants to be a real estate investor when he grows up. And in just a minute, we’re going to speak with Mandy McAlister about small multifamily investments, joint venture instead of syndication and the power of your tribe.

But first, a quick reminder, if you like our show, CRE PN Radio, there are a couple things you can do to help us out. You can like, share and subscribe. And as always, we encourage you to leave a comment. We’d love to hear from our listeners. Also, if you want to see how attractive Our guests are, be sure to check out our YouTube channel. You can find us on YouTube at commercial real estate pro network. And while you’re there, please subscribe with that oh and welcome my guest, Mandy McAllister. Welcome to CRE PN Radio.

Mandy McAllister 4:31

Oh, hi Darrin. I am so excited to be here with you. Thank you for having me.

J Darrin Gross 4:36

Well, I am delighted to have you and looking forward to our talk. Before we get started, if you could take just a minute and share with the listeners a little bit about your background.

Mandy McAllister 4:46

Sure. I originally was interested in real estate investing at the age of 19 when a friend explained her dad bought the house and she was renting the rooms to our friends in college and I thought and you get to keep that money Knee. That’s the best idea I’ve heard in my whole life. So the seed was planted as a must be real estate investor at 19. And then I did all the right things, I got all the right degrees, the master’s degree, I ended up working on the floor, the Board of Trade after a master’s in economics for some time, and then transitioned into medical device sales, where I just was chasing my tail, the new bar would be set every year on that sales quota. And I would make the same money even though I was selling, you know, 10x the product. So it became very clear that if I just double down on my investment strategy of buying these small multiples, that I could buy my way out of my w two, so I put my head down, starting at about maybe 2015 or so, and really work to buy my way out. And here we are now in a whole new world.

J Darrin Gross 5:52

Awesome. Well, I appreciate you identify and when you started, because I was kind of curious, I see you’ve been solo or not solo, but strictly real estate since 2021 2015. You started? Can you tell us a little bit about the what you did to get financially free or the financial freedom and felt like you could leave your W2 between 2015 and 2021?

Mandy McAllister 6:23

It’s such a nebulous idea, right? We all say financial freedom, and what in the world does that mean? I bought my first four Plex, at the end of 2015, beginning of 2016. And it was I was so scared. Like, I feel like you know, when you’re talking to people of Oh, wow, that person is financially free. They have it all figured out that that was not the case, just seven, eight years ago for me. So understand if you’re newer to commercial real estate investing or, or anything that’s new, in general, it’s gonna feel scary whenever you’re jumping into it. So I bought a four Plex. And because I had done all my homework, figuring out what the lowest possible returns would be and feeling good about that worst case scenario, I jumped into the four Plex. And it not only did I not die, I had $1,000 cash flow coming in a month. So I had been bitten by the bug, and realized that I wanted to continue to snowball that, so a four Plex, then a six Plex and an 11. And really started to snowball as many assets as I could. And you know, as I was growing, in this world of acquisition of commercial real estate, many of my colleagues were choosing to syndicate. And in the discussion of I want to leave my day job, medical device, multi $100,000 a year job, I had an I had a friend who was doing the same, but his play was in syndication. And I asked him, you know, what do you want to see, to be willing to leave your your day job? Because if that’s why we’re doing this, shouldn’t we understand what target we’re trying to hit? And he said, Well, yes, I’m going to just do get this acquisition fee and this disposition fee. And then all I have to do is four deals a year. And I thought, oh, my gosh, you have to do four deal. Like you’re you’re going to what are you going to do crappy deals, when the good deals no longer are in the market with enough force that you can do for per year. So in that moment, I realized I wanted to build a floor of income to support my life, and then I would be able to go do whatever I wanted. So all that to say Darrin, it just became a math problem, I was able to put pen to paper, figure out what I needed to live my life, and then built a flow of income of my investments, that to help support my life, and then was able to take the leap of faith.

J Darrin Gross 8:45

I love the kind of the process and how you know, everything from the fear and the first one to the recognition of it didn’t, you said it You didn’t die, I always think of it as it this one won’t kill me kind of thing. But just that, you know, even if it’s a mistake, it’s it’s not going to be something’s going to upset the world or, you know, which upside down but it’s it’s just that that willingness to go do it after you’ve been through all of the, you know, the math possibilities and, and then actually see it come to fruition. It sounds like you, you know you caught the bug. How quickly after the four Plex Did you jump into the 611?

Mandy McAllister 9:33

So what the the big downside of being this equity hog buying things from my own accounts and or just with a few partners is you run out of capital pretty quick. So it took me about a year to prove to myself that I knew what I was doing on the four Plex and to amass a little bit of capital that I was willing to go then do the six so probably about a year and I leveraged equity and another deal that I had a con though that I had lived in and I was renting out had a ton of equity goes to leverage piece of that, in order to take down the six unit and then the 11 came pretty quickly thereafter, three to six months after.

J Darrin Gross 10:12

Got it. So the next rental it sounds like is once you figured out how to do it. And capital is, is are you running out of capital? How did you decide the joint venture option as opposed to like you mentioned, your your colleagues, were doing the syndication.

Mandy McAllister 10:35

So in looking at what my goal was, I wanted to own something for the long term. I mean, in commercial real estate, sometimes it’s easy to make things feel super complicated as compared to single family investing. But the general principle of the people in single family investing, they get super wealthy, they buy and hold, they don’t flip properties, right. And in my vantage point, the people who were fixing up and making nice, making a nice NOI and flipping it, three years later, they were the flippers, not the buy and hold guys. So I ended up finding a couple of friends who wanted to invest in the similar way the buy in watch, I call it that if you want to offer me something ridiculous, I would be a willing seller of my property. But my intent is to hold for the long term. It made more sense to me, it felt more like the investing like a billionaire, then and then investing like a flipper. So one big reason I chose to syndicate was largely the type of debt you can get. So the the non recourse agency debt, that is the you know, 30 year amortization, very long term there, we had, I think we got six or seven years of interest only when we took down our first larger deal of 5253 unit in 2020 20. The chance to to take down these deals on non recourse debt, felt very insulating felt very risk management, belt and suspenders. So I couldn’t qualify for those loans on my own. So I found a couple of friends who wanted to buy the type of asset I wanted to buy, and we chased a deal that worked on one of those loans.

J Darrin Gross 12:23

Got it? So if I understand right, then you did end up syndicating, is that correct?

Mandy McAllister 12:29

No joint venture. It’s a three we’re three partners on the 53 unit, that we’re all active. We actually had an asset management call this morning that we got we took it down now we bought it with these a Fannie Mae loan. So government backed 15 year term, 30 year amortization, I think we’re at a three and a half percent rate.

J Darrin Gross 12:49

Well, those are some pretty attractive rates. And that by itself, I think is probably worth a lot.

Mandy McAllister 12:56

I look smart now. Yeah, it’s crazy back then.

J Darrin Gross 13:00

I absolutely. So talk me through how you decided against syndication as opposed to joint venture and kind of the structure difference between the two.

Mandy McAllister 13:17

So I call myself in equity hog. The end result I wanted was to own as much of the property as I possibly could, for a more buy and hold type attempt, rather than a three to five year flip. So what I saw happening, and this isn’t every syndication, but this is largely what passive investors in syndication have grown to expect, what a syndication is, basically is someone an active team, a general partnership buys an asset, then they sell off 70% of that asset as shares in a private placement memorandum. So anyway, I did not like the idea of selling off 70% of the work that I was doing, because I have syndicated and in that syndication, I, you know, $12 million acquisition, I raised a million dollars, I did a ton of due diligence, I’m doing the exact same amount of work that I do on my joint ventures, but I own 5% of the general partnership. So 5% of 30% is 1.8% I own of that deal. So if I feel like my syndicating friends who have a message of their, you know, 10,000 doors under management, you know, it wasn’t impressive to me because what was impressive to me was the dollars in my pocket, and I got more dollars in my pocket when I owned a larger chunk of the deal. So after that experience of only getting 1.8% of that larger deal. I decided to solely double down on buying for my own accounts or in joint venture where I own the larger percent.

J Darrin Gross 14:56

I love the comparison there and you break it down like that because I think, of similar mindset, my wife and I are, or both, I mean, buy and hold is, that’s what got me into real estate, I just I saw it is that if, if I bought this property, and you rented it from me for 30 years, you or somebody else, at the end of that time the mortgage was paid off, I’d have essentially another 401k that I didn’t contribute to. I thought, Wow, what a great deal. And never did I even consider the fact that you could have appreciation and or cash flow I was just thinking of, you know, it might cost are x and you pay X. You know, at the end of the day, at the end of the term, I’ve got all that equity built up. So I appreciate your, your processor. So tell me how, how do you go about screening or qualifying the investors that you choose to invest with through joint venture?

Mandy McAllister 16:06

So I’ve done a really great job in some occurrences, and I’ve done a really terrible job, and other occurrences,

J Darrin Gross 16:12

Sounds like you are qualified to answer the question that’s

Mandy McAllister 16:15

Uniquely qualified, Darrin. As a matter of fact, well, a lesson I learned the very hard way is, you know, past a behavior can tell you a whole lot about a person’s potential future behavior. So one thing that I do, I had a guy steal $110,000 from me, like he Long story short, I thought I had covered all of my bases in terms of the LLC paperwork in terms of what the properties had to offer. But end of the day, the LLC that I own 50% of own nothing, so I didn’t necessarily have a chance to to chase that money back. But regardless, I now do a background search on every single person that I’m going to potentially be investing with. So first off, it’s conversations of our do our ethos, does our plan of what we want to gain out of real estate investing online, do I believe you in my core, that you are a good human, and what you bring to the table, and then I do a background search on you. And in that background search, invariably, there’s going to be something strange. Like you had a you were you, Darrin, let’s say you were going 80 miles an hour and a 50 mile an hour zone in 1997, that will come up on your background search. And I’ll be able to say, hey, Darrin, what was happening in 1997, and you went 80 and 50. Now I get to see how you deal with an awkward intense conversation. Do you blow up at me for being you know, reaching into your your past in a way something that you might be embarrassed about? Well, I now know how you deal with that type of complex. So that has been the most tremendous way to screen out potential JV partners.

J Darrin Gross 17:58

That’s, that’s pretty good. Like I said, the your, your underwriting of your partners kind of thing. That’s, it makes a lot of sense. So 373 doors, tell me a little bit about the mix of properties you have now and kind of the smallest to largest as far as with your joint venture.

Mandy McAllister 18:19

Sure, well, the smallest is a six bucks that i The second property I ever owned, I still own that, it’s it’s gonna be hard to get rid of because it’s done a 4% loan, it’s in a state that I liked their landlord friendliness, and it’s very close to a hospital. So I have repositioned a couple of those units to be for traveling nurses. And that because of that play brings in a significant amount of cash flow. So the long term rentals I get about $800 a month, the mid term rentals I get about sometimes up to $2,000 a month or so that really juices cash flow and it’s it’s a six Plex is not 104 unit, but it’s a six like that throws off a large bulk of dollars. And the 100 unit is still that the 104 unit is still that indication that I’m a part of it’s a an incredible deal and I’m proud that I got to bring people into it. But it’s uh the reason I bought my way out of a W two is because I didn’t want to be answerable to people. And if I’m answerable to my passive investors then that kind of defeats the purpose though 104 and six are the book and

J Darrin Gross 19:30

Got it so on the 104 unit being a syndication how how long ago did you acquire and what’s kind of the estimated hold time on that?

Mandy McAllister 19:42

Are we are just about at our two year anniversary here on that one. We’re getting unsolicited offers, and we’re trying to figure out what the play is. So again, this is a buy and watch we underwrote for a five year hold. However, it’s on a really great loan. That’s assumable so if we get a chance to capture a lot of upside, not, we’re taking some chips off the table, then that’s something that we’re going to look to consider here and probably the next six months.

J Darrin Gross 20:12

Yeah, no, I think that assumable loan all by itself, kind of what I’m gathering is really, you know, an attractive option. And if you’ve got enough runway, you know, the, the buyer still has time to do or reposition or, you know, make something happen, that might be a good opportunity to exit there. What I’m just kind of curious, we’re recording this in October of 2023. And anybody’s looking on the calendar will recognize that the feds been driving interest rates up. And, you know, the the buzz is that activity is, is, you know, kind of pencils down, if you will, for a lot of investors just based on interest rates and stuff. I’m kind of curious, what are you as far as the the people that are reaching out to you is more about people with capital after Park at somewhere, or what can you describe any, any insight that you’re gleaning from people that are reaching out to you?

Mandy McAllister 21:20

Sure, well and in Go Bundance. there’s a large contingent that are commercial real estate investors. And one of our meetings, we call those micro tribes groups that talk just about one subject on multifamily there is this sentiment of interest in being pencils down, because the uncertainty of interest rates just, it’s all over the place, you don’t know what to assume is going to happen if there’s uncertainty on its face, right? So the bulk of people who are asking for help, right now it’s needing to park capital and needing tax benefits. And with the bonus depreciation, getting phased out here over the next few years, if you do, if you buy something in a cut cost second, then you can take 80% of that depreciation this year, gonna go down to 60 in the following year, so trying to take advantage of that still, sometimes makes a less than beautiful return really hit your bottom line well, so that’s one big thing. But one thing that I’m personally trying to do is I looked at my portfolio and decide, like, try to see how can I do more with what I’ve got, that’s where this midterm rental play was born. So Fannie and Freddie don’t love any anything shorter than a 12 month lease. So I knew all of my stuff that was on Fannie Freddie loans. I couldn’t touch with a midterm lease. But the I am achieving that in that six Plex. And that’s really juicing return. So those plays as well as I’m under contract to buy a carwash right now kind of a little bit of a pivot, a more business heavy real estate play. Because basically, if I’m going to buy at a four cap, let’s say right now, fours or five caps is probably what you’d find in a market that I want to buy in, I’m gonna buy at a four cap the math on that is thing I’ll it’ll cost me $25 for $1 of cash flow, right? If I buy a five cap, it’s $20 for $1 cash flow, if I’m going to buy that business that carwash, I’m under contract for gonna cost me $2.50 for $1 of cash flow, so I’m very interested in figuring out a way to create a larger engine for cash flow with fewer dollars in

J Darrin Gross 23:34

Yeah, it’s interesting, the and I don’t even think it’s, I mean, I guess it just kind of the market focus on you know, when real estate when when interest rates were so low, to where you could borrow money for less than the cap rate, you know, significantly less that the delta between there made a lot of sense and people are like, Oh, my God, you know, get in get out kind of thing and, and that, but what I’m finding is, there’s a a pretty strong interest for properties that have a business in them like a carwash or self storage or, or, you know, something, as opposed to just the the tenant aspect and managing the property kind of thing. So, I mean, I applaud you for for looking and finding something and, you know, kind of recognizing the other side of it is not just the real estate, but also the, the, the occupant and and the cashflow of the business, in addition to the real estate play there. So that’s, that’s awesome. So, the strategy if I understand right, did you primarily employees the value add, is that correct?

Mandy McAllister 24:48

I love a value add that is not contingent on rehab. So during COVID, the huge spikes of these inputs of supplies really, you know, there was a 38 unit reposition that we did that could not go online because we didn’t have the primary power switch. So I now have this play that my absolute favorite play is how do I find something where I can institute a rug that I can build back for utilities? How can I charge a pet rent or a parking rent that doesn’t exist already that that type of value add play is what’s most interesting to me to add just a little bit to my noi, what I think is kind of scary right now that I don’t think is getting a lot of airtime is if again, if you’re buying at a forecast, and the forecast will go to a five cap by the time you sell it to execute this value add strategy, think of what we’ve done to go from a four to a five, you’ve increased by 25% in that denominator, right. But the actual just truth math of the deal is if you want to increase that noi value, add that NoI just to break even if your cap rate has gone from four to five, you have to increase by 25% Your noi to break even on the value. So when it comes to working to value at in this atmosphere, it’s I’m more interested in what brings in a little bit more cash flow for a longer term hold than trying to flip a property based off of an increasing noi right now.

J Darrin Gross 26:20

Yeah, I have seen the wisdom and what you say there, you know, kind of the operational kind of things as opposed to the physical, which tend to have a fairly or can have a fairly heavy capex, a requirement to achieve and, you know, being being a little bit more savvy to recognize where the the operation is either lazy, or we’re not paying attention to what you know, the opportunities or the market will allow. Definitely makes a lot of sense on that. With your strategy, you can have the value add and the hold long term. Do you have? Are all of your JV partners? Or they have the same mindset? Or do you have any that have kind of a? Okay, I’m in but I want to be able to get out at a certain point or in that case? Is there any kind of a provision for buying a partner out? Or?

Mandy McAllister 27:27

Yeah, I’m actually working to exit that motel reposition right now. And that is something that we’re trying to figure out, do we sell it? Or do we buy one of us buy the other one out. So those are always written into the operating agreements. But but end of the day, it’s open communication, it’s making sure that upfront, the goal is the same. So the larger the 53, the 38, the larger deals that I’m a part of we all are interested in owning for the long term, but we do always have the conversation around what do we need to see to entertain a sale? So that is always on the table always opens lines of communication?

J Darrin Gross 28:12

So on the the joint venture strategy, kind of the structure, can you describe a little bit about what are the kind of the keys and then we’ve talked a little bit about screening partners and that but as far as just the actual come together, you know, the the the number of people involved and what’s required in order to, quote be a joint venture, as opposed to in a more of a passive syndication model.

Mandy McAllister 28:42

So if if you take someone’s money, this is my I am not an attorney, I am not an accountant, all of those things, talk to someone smarter than me, but this is your friend, Mandy’s read on these rules and how she plays this game. So if you take someone’s money, and you offer them a return with them doing nothing, then you have sold a security, right? If you are going to take someone’s money, even if it’s just uncle Joe’s and then offer him a return where he does nothing, you have sold a security and you need to work with the SEC to do an exemption a syndication exemption in order to do right by the law, in my humble opinion. So what we do in a joint venture, it is a requirement that everyone be active in the deal. So in the 53 unit, the first larger acquisition that I did, every single one of us are on every asset management call. So all three of us and the team we’re on today, asking questions about increases in rents. We’ve had a problem with the gate asking about the washers and dryers, things like that everyone is active everyone goes to look at the property. So that is one big thing. In terms of number of people in the deal. My little analogy I love to live life by analogy, Darrin, if I’m if I’m willing to cook in the kitchen with that many people Whoa, I’m willing to do a deal joint venture with that many people, if you’re doing it alone, adding another person is gonna get a lot more done, adding a third person is gonna get a lot more done. But once he gets about five or six, like grandma’s not making the pie at that point, you know, grandma’s just hanging out. So end of the day, you need to be reasonable, you need to be willing to prove to the SEC, if push comes to shove, that everybody has an active job, if you’re calling yourself a joint venture.

J Darrin Gross 30:28

And as far as the the talents or the skill sets, you know, that you look for and in joint venture partners? Is there any kind of a strategy? Or is it kind of who has capital to invest? Or how do you? How do you discern who you need on the team? Or, or, you know, skill sets needed? Or, or you know, how you put the team together?

Mandy McAllister 30:55

I think attitude and ethos matter more than anything else. So if if you are someone who’s toying with the idea of holding for the long term, I don’t think we’d be great partners, because I’m certain I want to hold for the long term. Right. And if I believe you to be a good, reasonable human reasonableness is the thing that matters most. And the only way you get to that is by working closely with someone. But end of the day, what I prize most in my business partners, I call this one guy, my favorite business partner. He’s a commercial broker, by by trade by background, he sees around corners that I wouldn’t think to see around because of his work experience. So I really lucked out having this man as my primary business partner.

J Darrin Gross 31:45

No, that sounds like a win right there. Let me ask you, for joint ventures, are you able to accommodate 1031? Funds? If somebody has a deal they’re selling is are you able to do tenancy in common kind of joint ventures? Or is it? Or is that not an option?

Mandy McAllister 32:10

That’s absolutely allowable, I was actually I had a failed 1031 into the 38 unit that we were working to do just because of timeframes. But you can absolutely 1031 into joint venture structures with a lot more ease than you can into a syndication.

J Darrin Gross 32:26

And I just got my mind thinking about a lot of opportunities based on just that little flexibility as opposed to the syndication is kind of a little more difficult there for that.

Mandy McAllister 32:39

I understand, though, you have to be active in that deal.

J Darrin Gross 32:43

Well, right, no but I mean, that’s but that’s kind of the the premise here, you know, you’ve you said, Hey, in order to be a joint venture, you’ve got to be active. So I mean, that’s kind of your your qualifying that. So I get it.

Mandy McAllister 32:54

One more point on that, if you don’t mind, my read of the accounting behind this is the percentage ownership that we do is usually commensurate to number of dollars in. So if you needed to bring in, let’s say, a million dollars to close this deal, and you bring 100,000, and I bring 900,000, I would own 90% of that deal, you would own 10% of that deal. Because my read of this is if we went 5050, then the government would think the FBI, the IRS would think that you would own you would have had a taxable event, to the tune of that. $400,000, if that makes sense. So talk with your accountant in terms of the ownership percentage before doing a JV.

J Darrin Gross 33:41

Yeah, that makes sense. And I second that, check with a professional, this is a conversation, but not advice. So that’s, that’s good. Let’s see here. So with your, your joint ventures, you you’ve mentioned kind of a variety of, of, you know, as far as size of properties and stuff, is the 53 is at the largest JV property you guys have done?

Mandy McAllister 34:13

It is yeah. And in my opinion, the 30 to 50 is really a sweet spot for that type of asset for a couple of reasons. So those reasons are number one, you’ll you’ll be able to get agency debt, that better loan that I’ve been chasing. And number two, you know many you know larger Property Buyers will convince you that buying 100 unit should be your minimum because then you can afford someone’s eyes on that deal. 24/7 365 right, you can afford afford a full payroll person. Well, what I’ve found is on that 53 on that 38 We don’t have that person on our grounds every single day but we have her on the grounds Monday, Wednesday, Friday, or Tuesday Thursday. So the real win when it comes to leveraging a third party manager is having one person’s eyes and problem solving abilities on your asset at all times. This is a gong show when it comes to the property management because I’m too small to get anyone’s attention. But if you can afford a 50%, full time person in my, in my experience that has really fixed that problem.

J Darrin Gross 35:23

That’s great. And you do utilize third party management?

Mandy McAllister 35:27

In every asset I have.

J Darrin Gross 35:29

Ok. Gotcha. So you mentioned you’re under contract, I believe you said for the carwash, is that right?

Mandy McAllister 35:37

I’m expecting the loan approval during this call.

J Darrin Gross 35:41

Oh, well, congrats. Hope that goes well for you. As far as just given, like we’ve commented on the market, and kind of the loan rates and and, you know, just kind of the general sense of where, where’s the market going kind of thing? Are you actively seeking additional opportunities? And then I guess a follow up to that is a carwash? Are you doing that as a joint venture as well?

Mandy McAllister 36:10

The carwash is just me, I had actually some 1031 funds that I was able to bring over to help I that the purchase price, we’re talking $500,000, for something that throws off $110,000. Net per year. So and that’s, it’s without efficient efficiencies in place. So end of the day, I’m looking for cash flow, I have run down the aisle with a number of these sweet spot 20 to 50 unit, apartment complexes. And what I’m finding is, when I go to get the loan, I’m getting quotes for 60% 55% loan to value. And so for this $2 million deal, I’m going to need to bring 900,000 to the table, which I just can’t make that work right now. So what the way I look at my overall investment strategy is I need an engine for cash flow, to be able to dump money into this apartment complex play that’s going to pay me forever. So my end game is always going to be these B class 50 ish unit on non recourse debt deals. But if they’re not presenting themselves, then I’m going to work on the engine for cash flow to be able to throw money into that end game.

J Darrin Gross 37:25

No, I love it. I mean, the cashflow is definitely, as my friend says, It’s not the king, it’s the ace. I mean, it’s the why, you know, it’s you gotta have and it’s and, you know, when interest rates are low, and the markets got lots of activity, and this and there’s lots of buyers, lots of opportunities, I think people kind of lose sight of the value of cash flow, especially if you’re, you know, you’re buying and flipping because your your payday comes at the sale, as opposed to kind of the ongoing cash flow. But I think as interest rates rise, and everybody has to kind of reevaluate and understand where the market is and how it works. Cash flow is by far, much, much, much more important, and really kind of demonstrating them the wisdom of seeking and making certain you have cash flow. So I get let’s see here. I think those are kind of the questions I had. Is there anything that I I did not ask you? I mean, I love the concept of the joint venture? Is there anything any any blind spots, you’ve had that, that you’ve recognized that, that anybody looking to do a joint venture should know?

Mandy McAllister 38:45

Um, you cannot manage what you do not measure. One thing I wish I would have asked early on in some of these subpar partnerships that I’ve had is a commitment to deliverables in terms of numbers. So really going through a mock one of my assets that I have, or one of that partners assets would have been tremendously helpful. When it comes to what numbers what metrics are you looking at on a normal basis, because we had very different viewpoints on what needed to be tracked. And the best way to to try to move things forward. So have a conversation around numbers because you can’t manage what you don’t measure. Yeah,

J Darrin Gross 39:29

That’s that’s great insight there. Again, kind of that like minds coming together and and then making sure you’re on the same page. A little more harmony that way. That’s good. Lipson. Sorry about that. Hey, Mandy, if we could, I’d like to shift gears here for a second. By day, I’m an insurance broker. And as such, I work with my clients to assess risk and determine what to do with risk. And there’s three strategies we typically consider We first looked to see if there’s a way we can avoid the risk. If that’s not an option, we look to see if there’s a way we can minimize the risk. And if we cannot avoid nor minimize the risk, then we look to see if there’s a way we can transfer the risk. And that’s what an insurance policy is. It’s a risk transfer vehicle. And, as such, I like to ask my guests, if they can look at their own situation, could be your clients, investors, the Fed the market political pressures, you know, whatever it is that you identify, to be the biggest risk. And, again, for clarification, while I am an insurance broker, I am not necessarily looking for an insurance related answer. And so if you’re willing, I’d like to ask you, Mandy McAllister, what is the BIGGEST RISK?

Mandy McAllister 40:54

I really believe that the BIGGEST RISK is doing nothing, that there’s risk all around us. And no matter. I’m a very risk adverse person, I have followed the script. I am a farm kid who does stuff the right way. And it wasn’t until I realized that no matter what it takes not taking a risk is the is a risk. It’s a choice boards, leaning into my money getting eaten by inflation. So there was a book that was kind of all the rage recently through governance women called the psychology of money. And my primary takeaway there is I don’t need to be perfect in my decision making. I just need to be reasonable enough. And if I’m reasonable enough in that risk mitigation, and the idea of real estate, everybody always needs a roof over their head. Maslow’s hierarchy of needs, tells me that this will have demand till the end of time, right? You don’t need to buy a Bitcoin, you don’t need to buy a stock certificate, you need a roof over your head. So how can I lean into the thing with the strongest demand ever? And be reasonable enough in the process, so that I am winning, rather than just leaning back in letting inflation eat away at my mouth?

J Darrin Gross 42:09

Now there’s a lot of wisdom in the you know, the biggest risks do nothing that’s that’s a good good insight there. Mandy, where can listeners go if they’d like to learn more connect with you? Sure.

Mandy McAllister 42:24

I’m on Instagram, Facebook. I’m official Mandy McAllister, or you can find me through our organization Go Bundance women.com

J Darrin Gross 42:33

Awesome. Mandy McAllister, I cannot say thanks enough for taking the time to talk today. I’ve enjoyed it. Learned a lot. And I look forward to doing it again soon.

Mandy McAllister 42:44

Thank you, Darrin. It was a pleasure to be here.

J Darrin Gross 42:47

Alright. For our listeners. If you liked this episode, don’t forget to like, share and subscribe. Remember, the more you know more you grow. That’s all we’ve got this week. Until next time. Thanks for listening to Commercial Real Estate Pro Networks. CRE PN Radio.

Announcer 43:07

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Recession Resistant Commercial Real Estate Properties with Mark Khuri – CRE PN #438

Mark Khuri: 0:00

When you start with mobile homes, J, it’s the if not one of the most affordable housing options in the US. And the amount of supply versus demand on this asset class is staggering the spread between the two. There’s simply not enough supply. And the amount of demand for affordable housing continues to grow. And we think that’s a long term trend. For the US, we’ll see if there’s anything that’s going to hinder that trend, but it’s been with us for a long time. There’s literally a lack of affordable housing in every single state in the US. So we love that asset class because of a few reasons, obviously, the supply demand disequilibrium that we’re noting, but you also have a moat to the asset class from new supply, which is quite unique that you don’t get in a lot of other real estate sectors. It’s very hard to build a new mobile home park in a desirable area. Most of the, I would say desirable locations that are zoned and allow it mobile home parks were built in the 60s and 70s. And so to to think about it from a supply standpoint, you have flat or even declining supply of this asset class while demand is going up.

Announcer 1:20

J Darrin Gross 1:39

Today’s interview is sponsored by Building Insurance and Risk when you invest in real estate. It pays to work with a real estate investor protection specialist to protect yourself and your investment from catastrophic loss. The experts have building insurance and risk focus on real estate investor protection. They provide you with multiple insurance coverage offers and a side by side coverage comparison. To learn more, go to Building Insurance Risk.com.

Today, my guest is Mark Khuri. Mark is the co-founder or co-founder SMK Capital Management in 2010. SMK is a boutique private equity real estate investment firm, focusing on recent recession resistant investment opportunities. Mark has created and managed over 65 Real Estate partnerships with investors. And in just a minute, we’re going to speak with Mark Khuri about strategies to create a recession resistant real estate portfolio.

But first a quick reminder, if you like our show, CRE PN Radio, there are a couple things you can do to help us out. You can like, share and subscribe. And as always, we encourage you to leave a comment. We’d love to hear from our listeners. Also, if you want to see how handsome Our guests are, be sure to check out our YouTube channel. You can find us on YouTube at Commercial Real Estate Pro Network. And while you’re there, please subscribe. With that, I want to welcome my guest, Mark Khuri. Welcome to CRE PN Radio.

Mark Khuri 3:34

Thanks, Jay. Happy to be here.

J Darrin Gross 3:37

I’m looking forward to our conversation. But before we get started, if you could take just a minute and share with the listeners a little bit about your background.

Mark Khuri 3:46

Yeah, I started in corporate America, Jay, working in finance and also operations management. Gosh, those two just meshed well for real estate investing. I started investing on the side kind of after work very active. The fixer uppers brr strategy, buy, renovate rent, and then repeat partnering with family really, for the first called five, six years of my real estate career while working full time. And then by 2010. J The economy had changed. Of course everything really changed right Great Recession. I left my corporate job and went in opened up our company SMK Capital Management to really expand on what we were already doing as a family but just dove in full time. And fast forward to today. We’re a private equity real estate investment firm we focus on really the relationships that we’ve built over the last 15 years or so Darrin with operating partners, they provide us with private investment opportunities. We live we love to diversify across asset classes. I’m sure we’ll dive into some more specifics as to which ones but also diversify and spread risk across regions. And people. And of course, duration of investments shorter term, medium term long term.

J Darrin Gross 5:11

Awesome. I appreciate you sharing your your background there. I guess the first question I have is recession resistant real estate? What are the specific asset classes? Is it specific geographies? Or how do you define or what do you consider to be recession resistant? Real Estate?

Mark Khuri 5:35

Sure, yeah, I’ll say this. You know, for us the way we look at the term Darrin has been a focus of ours for over five years now, we started focusing on recession resistance, we created a recession resistant fund. In 2018, we thought there could be some changes to the economy a downturn, there were some indicators in the marketplace pointing to that potentially happening. But what it means for us is investing in a strategy where we feel high conviction that the investments have a very high likelihood of continuing to perform through varying market cycles, and being resistant to a recession, of course, and continuing to perform what does that mean, it’s to us it’s maintaining or growing asset value, and continuing to provide distributions and cash flow from the the proceeds from the investments.

J Darrin Gross 6:30

Got it? So with that said, what are some of the asset classes that you are investing in?

Mark Khuri 6:39

Yeah, so I started investing in some recession resistant asset classes. Through 2009 1011, Darrin, when, you know, the largest recession in my life had been seen. And that included mobile, home parks, self storage, some multifamily, those are the top three, today, they remain a big focus of ours, we’re also invested in triple net industrial, and also tax exempt apartments, those are apartment communities where we don’t have to pay property taxes. Those are our main focus as far as asset class care, and that fall under the category for us.

J Darrin Gross 7:22

So with that, do you have a community size criteria? Or how do you define, you know, determine where you’re going to place your investments?

Mark Khuri 7:35

Yeah, as far as location down, I mean, we’re J, we’re pretty much we’re invested in about 40 states right now. Where we don’t focus on is the coasts and the Northeast, predominantly because of you don’t you don’t typically see cashflow in those regions. And we’re focused very much on cash flow and growth we like to see both in our deals. So we tend to stay away from those regions. But essentially, market agnostic depends on our operating partners experience in the market depends on the size of the market, you know, we try and stay away from very heavily, I would say high tertiary markets, J which don’t have a lot of jobs, very low population. Usually we’re trying to invest and say within a close proximity to a major MSA of 500,000 people or more.

J Darrin Gross 8:32

And in the different areas, how do you I guess vet your, your operators or your your equity, or your investment partners, how do you how do you go about vetting those?

Mark Khuri 8:48

Yeah, it’s a long process. So I’ll share with you how we got into vetting operators. But essentially, you know, when I left a finance job in corporate America and started our company, we were the operating partner J. we sourced vetted, operated the assets from A to Z by raising capital from our investors. And we did everything we picked the paint color, the tile, we decided went to sell refi, etc. But I left corporate America, I had a 401k sitting idle can invest those monies into your own deals. And so I opened up a self directed IRA and I started networking. Gosh, this is 2009 and 10 or so there, Jay, I basically found a couple meetup groups that were local to me at the time. Every week or two I was there shaking hands, meeting people taking notes, listening to operators that were specialists in other fields outside of what we were focusing on, that included mobile homes and self storage and apartments and several others and we started investing myself and my family as LPS into those deals. To diversify to get exposure to We spread our capital out personally, while doing our own deals predominantly in single family in the small multifamily space. And then by, gosh, I’d say five, six years later, we had built some really good relationships with some of these groups, Jay. And we decided to offer some diversification outside of our core competency to our investor group by creating syndications and partnering with our operators and negotiating better terms for our group. So we could raise capital and bring some equity to the deal, but also rely on our operating partners to execute on the business plan and to manage the asset and the residents and everything in between. And so fast forward today, just about all of our deals J come to us from relationships that we have with other operating partners, they oftentimes have acquisitions teams, in house can be anywhere from two to 10 folks on their team that are just scouring the market, trying to find investment opportunities that makes sense that they’re attracted to. And when they get one, they’ll share it with us, Hey, Mark, are you guys interested? Your family or your company, we’re under loi, or we will be soon. Here’s a pro forma, here’s a business model. And then we’ll look at that deal and see if it meets our investment criteria and if we like it. And one other thing to point out, Jay, it’s like we’re very much in the people business. So we’ve underwritten, vetted, analyzed over 130 different operating partners over the years. And so today, we invest with about 10 or so. And so it’s very much a people game first and then analyzing the opportunity, of course, as well.

J Darrin Gross 11:49

No, I’ve heard more and more recently, that that’s becoming, you know, the piece that is kind of the weak link in some of these deals where, you know, some opportunities are not performing as as originally intended, and creating a little bit of grief for the investors. So let me ask you, when when you’ve mentioned the mobile home self storage and multifamily is kind of the the three asset classes. What is it that you see that that makes these recession resistant?

Mark Khuri 12:29

Yeah, a few things. So you start with mobile homes, J, it’s the if not one of the most affordable housing options in the US. And the amount of supply versus demand on this asset class is staggering. The spread between the two, there’s simply not enough supply. And the amount of demand for affordable housing continues to grow. And we think that’s a long term trend. For the US, we’ll see if there’s anything that’s going to hinder that that trend, but it’s been with us for a long time. There’s literally a lack of affordable housing in every single state in the US. So we love that asset class because of a few reasons, obviously, the supply demand disequilibrium that we’re noting. But you also have a moat to the asset class from new supply, which is quite unique that you don’t get in a lot of other real estate sectors. It’s very hard to build a new mobile home park in a desirable area, most of the, I would say desirable locations that are zoned and allow it mobile home parks were built in the 60s and 70s. And so to to think about it from a supply standpoint, you have flat or even declining supply of this asset class while demand is going up. That really sit makes it stand apart from most any other real estate sector. And then you have self storage. You know, similar to mobile homes. during a downturn, you often see demand for storage go up. If there’s a correction in the economy or recession, people tend to make a change in their life, that can be to move to relocate to change jobs, downsize and anytime there’s that change, you often see an increase in demand for storage. So a little bit counter cyclical. You also have a 30 day lease, so it’s easy to adjust the rents and short notice on self storage, that concern with storage. Unlike mobile homes, it’s easy to build new and they go up quick and they’re very low cost comparatively to other real estate. And so you have a situation we just got to be careful about new supply in the self storage space. And then apartments. J for us. We focus predominantly on workforce housing, and affordable tax exempt departments. These are typically catered to folks that are Making the area median income or even slightly less, to think about a two bedroom with great access to transit, renting anywhere from usually $800 a month to $1,500 a month, that’s kind of the space that we like to invest in. And in the apartment sector, we’re not really investing in class a high rent, apartment buildings. So we find that similarily it’s an affordable option. And so going back again to supply and demand, it’s very hard to build, call it Class B $1,200 A month rent apartment communities in the locations that we’re investing in today. Just because the cost of the land, the cost of construction is very high, that you most likely your end product is going to be a Class A rent where you’re, you know, maybe at $2,000 a month, is the unit, compare the 212 1300 or so that we’re typically focusing on.

J Darrin Gross 16:00

So in the the multifamily you’re investing in existing, more kind of dated stock versus or are you investing in low income housing tax credit? Properties?

Mark Khuri 16:13

Yeah, so we focus predominantly on tax exempt apartments in the affordable space J. That is quite different than the Low Income Housing Tax Credit, all the residents have to qualify to, to get accepted and live into the property. The main play on tax exempt apartments for us is I’ll just describe what it is. It’s a essentially a partnership with a local municipality, it’s a public private partnership. And what our operating partners do is they allocate up to half of the units as affordable. That’s a def by definition, it’s tied to the area median income. And in exchange for keeping half of the units affordable, you get in 99 year, tax exemption, property tax exemption. And so you’re really creating a win win where you can invest in multifamily, you can create affordable housing, but also reap the benefit from a obviously a pretty large tax abatement in exchange for keeping half of the units affordable.

J Darrin Gross 17:16

Is that a federal opportunity or is that a like a state by state or local opportunities?

Mark Khuri 17:24

It’s state by state and local j. So it doesn’t work everywhere. If you think about the idea of keeping the rents at certain 50% of the units. Affordable by definition, you have to find locations where it makes sense financially, because a lot of times you’re going to be dropping your revenues in order to keep these units affordable. And if you’re able to get a tax exemption that greatly offsets that it’s a win win. But if you’re in a, you know, an Austin or a Class A apartment community where the rents are $2,500 a month, and maybe you need to keep the the area median income set at 60, or 80%, of area median income for those applying, you might have to drop your rent significantly, and so probably wouldn’t work in those areas. So there are certain places and locations and properties where it works very well. But it’s definitely not everywhere.

J Darrin Gross 18:23

Got it. So the mobile homes, it sounds like the supply constraint is kind of the big advantage. As far as the opportunity for new new properties. The multifamily I like that strategy where you’re you’re finding the the tax exempt properties. That’s that’s good. And then the Self Storage just mentioned that the demand typically increases when kind of challenging financial times. Are any of these sensitive to interest rate changes? Or, you know, what happens if the economy improves? Do they perform as well as they did? Or do they? Do they suffer any kind of, you know, drop if the economy improves? Or is it or is it just always been steady? And this is just kind of the base housing base base level of, of product and always in demand?

Mark Khuri 19:24

Yeah, I’ll answer the first question. So they’re all sensitive to interest rate changes 100%. I think all real estate is whether you use financing or not, assuming you’re buying all cash, the value of your asset is based on net operating income and comparable sales in the market. So a lot of those comparable sales jail, of course, have debt on them. And so if they become constrained and have issues because of interest rate spikes, which you’ve all experienced, that can hurt the local market, which could then hurt your asset and so, yes, they’re all sensitive to interest rates. Now with that There’s, I’ll give you an example of how we kind of combat that risk with tax exempt apartments J, you get very attractive agency like financing. So Fannie, for example, has certain programs out there for affordable housing, that are much more favorable than just buying a market rate property. And so put it into perspective, a deal we just closed on last month in Houston, tax exempt department community 532 units built in 2008 95%, occupied we we got 10 year agency fixed rate debt with tenure interest only at around 5.35%. And the going in cap rate on that deal, once you account for the tax exemption is around 6.8%. So very healthy spread between the cap rate and the interest rate, something we look at Jay very closely, and all of our deals today helps provide positive cash flow day one, right, if you buy the place, and don’t do anything, you’re earning positive income. And so that’s what we’re really looking for today. So I apologize. No, you asked about interest rates. What was the second part of the question? I think it was, if we,

J Darrin Gross 21:14

If the economy improves? I mean, ya know, I think the the go forward concern right now is if the economy, you know, stalls or or, you know, we go into recession, which are so we may be in r&d. And yeah, curious, how do these perform. As the economy improves,

Mark Khuri 21:35

They do very well, J. It’s kind of why we select these asset classes, we find them to perform well, in both market cycles up and down. And nothing’s perfect, there’s always risk. And so you have to be careful, especially if things are shaky and the economy went on an upswing, what you see in kind of, I would say, the middle income housing sector, is you have people essentially, maybe moving out of the mobile home park and into an apartment, maybe you have folks that were living at home that are now going to move into the mobile home park. So you have kind of that middle spot where there’s people still having high demand. The other thing with mobile homes, J is a lot of the parks that we invest in, the residents own their own home, and they pay lot rent to us. And so the average tenancy, this is just a national metric. But it’s usually over 10 years that they’ll stay in that community. So you have a lot of sticky tenants, which is great. And then in self storage, you you have a seasonality effect in that asset class number one, but during positive times, you can see people also moving and changing. It’s not necessarily just a downturn. So we find them to be in high demand across varying market cycles, which is why we invest in them.

J Darrin Gross 23:01

As far as your investment platform, your investors do you? Are you raising capital? What kind of minimum investment is required? If you are?

Mark Khuri 23:15

Yeah, yeah, we raise capital from accredited investors, J. Most of them are business owners, entrepreneurs, doctors, lawyers, CPAs attorneys, C suite executives, our minimums are typically 50,000 to invest passively through our own funds. And, you know, one of the things I think that a lot of them like is that we’re worth a group that if it doesn’t make sense to invest, we just won’t we won’t send out a deal unless we believe in it unless, almost always there’s a curry someone in my family writing a check and investing alongside so I personally invest in just about every one of our deals, because I think they’re great investments and, and it helps us align interests with our investors, they trust us to go out and find and source and create opportunities that they probably couldn’t find or do on their own and vet them. And of course, try and cherry pick what we think are the best risk adjusted returns.

J Darrin Gross 24:18

The property mentioned built in 2008. In Houston, you mentioned a financing of 10 year fixed interest only is that one you guys control directly or is that one through your one of your investment partners or?

Mark Khuri 24:34

It’s through it through one of our operating partners, we give up control on purpose to them, they’re specialists in this space. They have 25,000 apartment units under management and ownership. They’ve been focusing on affordable housing for over a decade, and specifically just in apartments predominantly just in Texas. And so that’s kind of how our business has evolved. Jay, you know, we were really good at one thing and wanted To spread out our capital and to other assets in areas where we could partner with those that were experts in those areas, right, so we don’t operate, I don’t operate mobile home parks, but I have several different operating partners. That’s all they do. And that’s all they’ve been doing for years and years. They have asset management team, property management team, in house, accounting, bookkeeping, admin, all of that many of these groups have 500 million or, or more in assets under management, several have multi billion dollars of assets under management and well built out teams j. So our philosophy has evolved to, you know, join, join him, instead of trying to go and create all these different investments and upgrade him yourself, we find that the risk goes up, because we’re not specialists and all that. But the returns can, of course, be very commensurate to doing it yourself. If you’re partnering with great people.

J Darrin Gross 25:57

Makes sense. Your fund, I can’t remember, how long has it been in existence?

Mark Khuri 26:06

Yeah, so we create a font usually about once a year, J Just depends on if we find deals that we think would go well together in a fund. Currently, our fund is alternative income fund three, and we open this fund, early in 2023, we’re talking near to the end of 2023. To date, we’ve made seven different investments into the fund j that includes mobile homes, self storage, apartments, triple net industrial, also, a were invested in ATMs, and a private real estate debt fund. So you have a a portion of the strategy of this fund is to invest roughly 25% of the equity into fixed income assets. And then the remaining 75% or so into assets that provide income and growth. And so that’s something we’ve been working on most of this year. And it’s very well diversified. And we’re really excited about it today.

J Darrin Gross 27:10

As far as the the funds, is there a, like an unwind date, or are these like perpetual how to how you set those up?

Mark Khuri 27:18

They’re closed in funds, so we raise capital for a period of time, and then we’ll close the fund. And that’s it, you know, we then manage the assets and the investments for the life of each investment. So to put that in perspective, we made seven investments, some of them were into single asset properties, like the deal in Houston I just talked about. And then there’s a couple of investments that are into portfolios, like the triple net industrial portfolio owns eight assets in six different states. And so when is it going to dissolve? Well, once the assets sell, we return the principal back to our investors, plus profits, of course, and at the point of disposition of all the assets than the fund is essentially closed. So going into that we know the projected investment duration of each investment J. Right. So it ranges between three and seven years for this fund. And we basically tell folks that you can expect to have the majority of your capital back by year five, some of it will come back sooner, but we think 70% or more will be returned by year five.

J Darrin Gross 28:31

And being the the the current fund is the third have any of your earlier funds had any liquidations or have you? Or is everything pretty well? in place and and performance?

Mark Khuri 28:48

Yeah, yeah, you know, we we created we’ve created funds since the beginning of our company, we just find that grouping properties together helps reduce risk. So even J. when we were focusing predominantly on single family and small multifamily, we would create funds and portfolios where investors could invest in multiple properties. And so over the years on the single family and small multifamily deals J we’ve bought, renovated and sold over 60 properties. Some of those were funds that included multiple properties. And on the commercial real estate side, we’ve had 16 exits to date for the asset classes that we’re talking about. And we currently hold an equity interest and ownership interest in Gosh, over 120 properties across multiple states and regions at this point two that are still actively invested in.

J Darrin Gross 29:44

Got it. That’s, you know, quite the portfolio you’ve got there and I love the strategy there with the the recession resistant real estate and I learned a lot about that tax exempt thing that’s have land. And I’ve heard other strategies. But that one, I’m curious when you with that being your strategy, are you finding properties that are already in that? Or are you finding the property and then approaching the the authority or the municipality, whoever has the tax exemption opportunity to put the property in the tax exemption? Or I guess, maybe the question is, are your operators the investors that you’re investing with?

Mark Khuri 30:31

Yeah, it’s the latter. So each tax exempt deal that we’ve done to date, J has been created while in escrow so the seller does not have the property tax exemption, it’s underwritten, and assumed that we will get that tax exemption. And then that’s confirmed before we close on the property confirmed with the local municipality, property tax exemption is in place. So it’s a cumbersome process takes a lot of time, you need to have several attorneys on staff working with the local municipality in order to be able to create these partnerships. But there’s obviously inherent value for that time and effort. Even just day one, you see, the appraised value, and a lot of these deals j is much higher than the purchase price that we’re paying. Because you’re essentially removing the property tax expense line item. And so your net operating income goes up significantly, day one. And so that’s how they’re appraised as well. So it’s a benefit. But yeah, it’s created predominantly in escrow.

J Darrin Gross 31:35

No, I love that strategy. I hadn’t heard that before. And, and with all the demand for housing, I could see that, you know, a real win for where the community have some solid housing stock available, but also then for the investors. Sounds like a definite win win. Hey, Mark, if we could, I’d like to shift gears here for a second. By day, I’m an insurance broker. And as such, I work with my clients to assess risk and determine what to do with the risk. And there are three strategies we typically consider, we first look to see if there’s a way we can avoid the risk. And that’s not an option, we’ll see if there’s a way we can minimize the risk. And if we are unable to avoid or minimize the risk, then we look to see if there’s a way we can transfer the risk. That’s what an insurance policy is. It’s a risk transfer vehicle. And as such, I like to ask my guests if they can look at their own situation. Could be your investors, your partners, the the political environment, interest rates, whatever that you identify and consider to be the biggest risk. And again, for clarification, while I’m an insurance broker, I’m not necessarily looking for an insurance related answer. Sure. And so if you’re willing, I’d like to ask you, Mark Khuri, what is the BIGGEST RISK?

Mark Khuri 33:04

I’d say today J, a lot of people think economy, recession, downturn, asset values dropping, etc. All of that is top of mind, but it’s not the biggest risk for us, the biggest risk has, for many years has been the same. And it remains today and its people. So we are a private equity firm. We are inherently trusting others to operate the assets that we’re investing in. And so people risk number one for us, Jay, and one of the hardest to, to mitigate against because people by definition can be mysterious and difficult and hard to understand and complicated. And so a lot of that risk for us is reduced by working with people for a number of years, it takes a long time to get to know them, see if they’re really good. And if the business plan wants you to go left, but the economy is telling you to go right what do you do? Do you have the right people that can steer the ship that can adjust in the middle of the the operation and continue to always have the investors best interest in mind? So for us, it’s definitely people risk.

J Darrin Gross 34:15

No, I think that’s that is well said. I remember a long time ago a car salesman telling me that money talks and Bs walks you know, kind of thing and you know, unfortunately, there’s a lot of BS out there. So having somebody that that does what they say they’re going to do is definitely worth a lot. So

Mark Khuri 34:37

I guess that’s it. That’s the name of the game. We’re nailed it. J. Do as you say you’re gonna do a period.

J Darrin Gross 34:42

Yeah. Hey Mark, where can listeners go if they’d like to learn more connect with you?

Mark Khuri 34:49

Yeah, our company name again is SMK Capital Management. Our website is SMKcap.com. We have a lot of information on there, J, some recent investments that we share with folks. People can can sign up and join our investor group to learn more. And you can also email me if you’d like at info at s and k cap.com.

J Darrin Gross 35:14

Awesome. Mark Khuri, I cannot say thanks enough for taking the time to talk. I’ve enjoyed it. Learned a lot, and I look forward to doing it again soon.

Mark Khuri 35:24

My pleasure. Thanks for having me. All right. For our listeners.

J Darrin Gross 35:29

If you liked this episode, don’t forget to like, share, and subscribe. Remember, the more you know, the more you grow? That’s all we’ve got this week. Until next time, thanks for listening to Commercial Real Estate Pro Networks. CRE PN Radio.

Intro 35:48

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