J Darrin Gross Podcasts -

People, Property & Capital; Raising Money for Multifamily Real Estate with Tenny Tolofari – CREPN #255

Tenny Tolofari 0:00

This guy that says they have big amount of equity to bring to the deal so because of that with the one the boys chasing everybody else that had maybe $50,000 on $100,000 which is a big mistake because if one of those guys said says, you know, at this point is a good time you’re completely screwed, right? So, um, we went ahead and you know started depending on one or two big decoder, big dogs and they disappointed us and at that point you and I said, Okay, let’s go ahead and start chasing the guys that have 1000 or $50,000 to invest in since the concept and every information that would show was new to them. A lot of them do find it find find it very appealing to put them on Institute. Welcome to

Announcer 0:47

CREPN 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.

Darrin Gross 1:06

Welcome to Commercial Real Estate Pro Networks, c r e pn radio, Episode Number 255. 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. Let’s get into the show. today.

My guest is Tenny Tolofari. Tenny is a co founder of Exide Capital Investment LLC, a multifamily real estate investment focused company based in Washington DC. And in just a minute we’re going to speak with Tenny about the myth of finding, find the deal and the money will come and before We get into that. Want to remind you, if you like the show CREPN Radio, there are a couple things you can do. And they’d be greatly appreciated.

One you can like, share and subscribe. And the other thing is you can always leave a comment. We love to hear from our listeners. Also, if you’d like to see how handsome our guests are, be sure to check out our YouTube channel. And that is commercial real estate pro network. And also please consider subscribing to that too. That’s funny how those numbers work. The more more you have, the more attention you get. So appreciate your help with them. With that, I want to welcome my guest Kenny, welcome to CREPN Radio.

Tenny Tolofari 2:43

Thank you very much Darrin. Thank you for having me. Ah, what a wonderful time to be on the show right now. Appreciate it..

Darrin Gross 2:51

I’m glad. Glad to have you and looking forward to our talk today. Absolutely. Before we get started, if you could take just a minute and share listeners a little little bit about your background.

Tenny Tolofari 3:03

Sounds good, I just think.

But um, yeah, I came to the United States in 2010 10. Um, my goal coming to the United States was to get my master’s degree. I had a bachelor’s degree in Electrical electronics engineering back in Nigeria. I was born and raised in Nigeria, to the family of seven kids. I’m a twin actually, with a sister back there. So I came in 2010. To get my master’s degree amongst all countries, I decided to come to the state because this is the land of opportunity. So I went to school I graduated from Boise State in 2012. And I, I go there with my my sense of cybersecurity instead of doing cybersecurity for companies like Boeing and presently have a global consult on to Deloitte and in 2016, I thought, you know, I was actually my American dream, I brought my mom here to visit, but my baby stay here as well to come and get my sister as well. But in 2016, at one point, I said, You know what, I don’t think I want to continue to do this rat race.

And that was because I had an injury. I just said, You know what, I think I need to do something differently. And I got approached by a financial services company. And I started learning about finance. And that’s how I got into financial services. So while I do my cyber security consulting, I have a financial services business background as well. So since 2016, I’ve been doing that. And then in 2019, while I was doing a presentation at at one of my clients office, I met my partner’s wife, which is Leslie. So my wife will give me audience session come to their home and Discuss to them about financial services. And I met this great guy, we had a wonderful conversation. I thought we had a conversation for a while about what I came to do. From there moved on to start talking about personal development, books, your reading, and then we just found a connection. And then from there, we said indoor, let’s meet up and start talking about the future.

So we started meeting up to have a conversation about money instead of playing the Robert Kiyosaki board game. And we started learning about money and one point to say no one, I think it makes sense to just venture into business together and that business I wanted to venture into his real estate. Business already had a lot of background in real estate before. Before I met him. Me I always had this philosophy by Robert Kiyosaki that says, you know, you create a business and you invest, you invested money in real estate. I’ve always had that philosophy and when I met Leslie, I was like, I know what this is the time to implement. So, Allison in 2019 opened up a company called excite capital, which is a real estate investment company focused on multifamily. Like you had mentioned in the introduction. So since then, you know, it’s been an amazing experience. I’ve met a lot of people. And now you know, I’m here talking to DarrIn. So that’s a little background about me. I don’t have to go to details more, but that’s it.

Darrin Gross 6:26

I appreciate you sharing that. So you and Leslie are partners and Exite Capital, correct?

Tenny Tolofari 6:32

Correct.

Darrin Gross 6:33

All right. And so tell me more. What is Exite Capital? What are you guys it is a basically an investment vehicle for multifamily. Are you guys principals, are you limited partners, how are you participating?

Tenny Tolofari 6:49

So the intention, why we formed the company at first was you know what we want to hold on to, to for real estate properties, right?

When we started thinking about investing, we said, you know what people should you buy single family homes and, you know, buy them and rent it. Because we feel like that’s one of the most stable asset class in investing in general. The most wealthy people in the world where they made their money wasn’t real estate. And we were like, you know, this is a good time for us to get in and just start buying properties. So in the process of doing that research, and doing a bunch of research about what asset class to invest in, we came across multifamily. It was understanding more about how multifamily works, how you know, you can come together as a team, or a group of people to buy a property. And we’re like, you know, this makes sense. Instead of we try to do it by own on ourselves on our own dime. We can come together with a group of people, where we all pull funds together to buy bigger property, because the more we’re able to scale, the more we’re able to win for everybody. So what excess capital was fund to bring a pool of investors together to go in there and buy apartment buildings and we manage the property. So we’re basically a principal in in acquiring these assets in great markets across the country.

Darrin Gross 8:16

Gotcha. So are you investing in any particular market center? Where were you investing?

Tenny Tolofari 8:23

Absolutely. So last year, we invested in 192 units apartments, we another group in Marietta, Georgia. Um, this is great class B property. That was what property we invested in. Right now. My partner, we’re looking at all the markets. The market we’re focused on right now like we’re locked in is in Charlotte, North Carolina. We’re also looking at the dorm Chapel Hill area in Charlotte, North Carolina. So the North Carolina, North Carolina market is one market out blue team and will heavily focus on the market right now.

Darrin Gross 9:01

Got it? And, and I just want to make sure I’m on the property 192 units that you’re in. Are you, the general partner? Are you guys limited partners on that? or How are you in that deal?

Tenny Tolofari 9:14

So we are limited partners. But we had an amazing opportunity to come in as general partners. And again, if the conversation going that line or some of the lessons I’ve learned in our journey, I’m able to share you give an example of how we had a huge opportunity to be a general partner in that property. But we thought fell short so but we’re limited partners that deal right now.

Darrin Gross 9:37

No, can you share with us I think it’s interesting, because I think, you know, a lot of people understand the terms. And it sounds like you had an opportunity to be a general partner, but now you’re you’re a limited partner. If you can share a little bit about that. I think it’d be a

Tenny Tolofari 9:54

Absolutely I love to share this story.

So Once I decided to go into multifamily investing, we did a lot of research, we did a lot of investing in ourselves. We invested in mentorship programs, we invested in beautiful relationships with people that are already in the industry that are doing good. In in that process, that’s one of the events that that one of the group we’re part of in terms of our mentorship program. I raised my hands one of these days and say, Hey, listen, you know, I’m in the DC area, and I’m looking for a key principle or a key sponsor in this area, and I’d like to have a conversation and before you know, somebody say, Hey, I know this guy. This group is a wonderful group and he will have a call with them. I can remember they give me about nine names of, of key players in the Maryland Virginia DC area.

And out of those nine to two of those guys picked up my call one of the company is Viking capital. And then the other guy said, You know what? I’m just gonna invest you guys up but I’m not going to be any key principle so I had a meeting with my Leslie had a medium with Viking capital on the individual matches. Vikram writer, grid wonderful guy was top sat on the table with him and had a wonderful conversation and he saw the passion that I literally have when it comes to this and he said hey, listen, if you guys are really interested we have a deal right now that we have on our contract we’re going to be flying to Atlanta to Marietta, Georgia to check out the property and your due diligence. If you guys want to be a part of it. Why don’t you come with us? See, we’re we’re in. We booked our flight ticket unless he couldn’t make it. I flew down, went with them for two days due diligence process on that property. And he said, Hey, listen, this is a great opportunity. If you guys can come in as general partners and raise equity.

That would be amazing. Sure. We got this. And I prior to having that conversation, we’ve met a bunch of people that say they’re interested in buying apartments. Remember our goal is how do we bring people together for us to go? buy property is apartment buildings. And we’ve met a bunch of people that say they have more than $1 million to invest and a whole bunch of stories, right? And I’m sure you’ve heard that where they say, you know, you find the money to deal find a deal, the money call, we had that notion, and we were busy, you know, looking for the deal looking for the deal. And now we have an amazing deal deal Class B property willman property cash flowing, the upside of that property was about $300 that they have throughout the lifecycle of the business plan in the company. So we’re like man, this is an amazing opportunity let’s take it out of there talk to the people that are interested in it now we have some opportunity to come in and GP raise equity and come in at GP now when that these guys that say they have all this money how conversations with them they said you know what, I have money. I’m gonna be ready. So he is you go is a form that you know, the accredited That’s the questionnaire go ahead and fill it out and send it back to us. And cricket.

Cricket

We started getting frustrated at that point, she started getting frustrated and started going to the people, probably our friends we know and started telling him about it. And they’re like, dude, I’ve never heard about this before for you. I know you as a financial adviser, a cybersecurity expert. What are you talking about real estate right now, it doesn’t make any sense to me. And at this point, if I think back, I really don’t blame them, right? Because if I’ve not come before and share with them what I’m working on an offer. All of a sudden, I come up with a $25 million property and I say, Hey, listen, I need to give me money. I’m like, dude, I don’t understand what you’re talking about.

So. So we learned a great deal from that experience. That you know, you want to make sure you do the relationship with people let people know what you’re doing. And then gradually those equity will come and then you continue to find those deals. And was you are you at the right position where you have equity deals, things are just magically Work, Work Work out together. So that’s one of the big setback we had. So we couldn’t raise the capital. And we ended up going in and just put in our own money since everybody else says, You know what, I’m not getting your money, money. So don’t worry, we have our own money, we’re gonna put it put it in as a limited partner. So that’s what we do as a company with that deal.

Darrin Gross 14:23

Got it. So you actually lived the myth of, you know, you find the deal, the money will come kind of thing.

Tenny Tolofari 14:32

Absolutley.

Darrin Gross 14:33

Yeah. So. So how many when you were presented the opportunity to be a general partner, in your mind, how many people did you think you had in your queue that that were available and willing investors?

Tenny Tolofari 14:50

Not a whole lot? Not a whole lot. Um, I think the big mistake that we made was we were looking for the big people that say they have big money so we have this lady, she she said, Hey guys, I see the passion we actually met her in Boston we went for a conference on there to say hey listen, I see the passion here. Let’s these eyes see you guys have integrity. I think I want to work with you. I have a couple of investors like to bring up to $2 million into a deal. So if you find a deal, bring it to our attention. And then we had another folk a lot of folks out there that said, you know, he has a bunch of investors he can bring it up to a million dollars so we have this this guy’s that that says they have big amount of equity to bring to the deal. So because of that when you want to buy that’s chasing everybody else that had maybe $50,000 on $100,000 which is a big mistake. Because if one of those guys said says you know at this point is a good time, you’re completely screwed, right?

So we went ahead and you know, started depending on what No too big, decoding big dogs. And they disappointed us. And at that point you and I said, Okay, let’s go ahead and start chasing the guys that have 100,000 or $50,000 invest in since the concept and every information that was shown was new to them, a lot of them to find, find, find it very appealing to put their money into the deal. So we didn’t have a whole bunch. So right now we’re doing something completely different. And we’re learning from experience and building out our systems and our processes in place to make sure we need to get that problem.

Darrin Gross 16:32

Gotcha. So what I also asked you a little bit about kind of the shock of your friends and family, the response of like, you’re doing what? Can you talk a little bit about that? I mean, you kind of mentioned about, you know, they had no idea that you were doing this kind of thing, correct Talk, talk a little bit about that and what you learn

Tenny Tolofari 17:00

So, um, in the last three years have shadowed my family and friends, you know how they can use advocate plan their finances, you know how they can put in different strategies to help them maybe minimize taxes particular ones and a whole bunch of different things that has to finance I’ve already shared with them real estate, so they must see me as somebody that’s really passionate about real estate. And when I went, you know, my partner, Leslie went to them and I said, Hey, listen, you know, we’re starting to open up this company, and now we’re looking to invest in 192 unit is about $25 million, blah, blah, blah, like, you must be smoking something.

When did you start talking about, you know, apartments, um, and at that point, I was kind of like, Dude is me man, you know, I’ve been talking about money for a long time now. You guys need to listen to me, you know? And all they said was, you know, I understand what you’re saying. standard way where you’re coming from but if you don’t do research you should this is a good asset class. Why do you think this is an asset class? We know you know how to deceive. As you’re doing this business you need to bring your partners you know, I share with them my partners, partners have about 2400 apartment buildings and environment I bought and sold the medical doctors blah, blah, blah, property management companies there’s that then I buy none of that. Like I know you and you’ve not been doing real estate for all this Why? And if you if you’re just giving this giving me these heads up right now you want me to give you my money right now. That’s not gonna fly.

So and you know, I was hurt. But I went back and I thought about it. I’m like, I don’t believe them. You know, if it was me, too, I’ll think about it as they did. They just you know, don’t understand where you are right now. So what me and my partner we’re doing right now is to make sure we continue to educate them on this Understand that, you know, our goal is to come together as a community, my community where I’m from, we have a limited mindset. Very, very limited mindset. People believe in doing their own thing. Like I want to be the best cybersecurity expert and or in the whole us, or in my whole community. And when everybody sees me, they want to see me as though but that’s not my philosophy. If we want to be wealthy, we can all come together and invest in the asset class is very stable, and that’s recession proof. You can buy it and you can maintain it and you don’t have to worry about it except that I got that you get the returns that you’re looking for the equity that you’re looking for. That’s ma’am a partner will find this vague was when they can use to help a lot of people have families and help the world the future. So So yeah, I hope I hope I see a question.

Darrin Gross 19:56

Yeah, so So tell me what are you doing now to To build the, I guess, the identity to where people do recognize you as an investor, how are you, you know, letting them know that you are doing this, and kind of educating them so that, you know, the next time or possibly the next time or maybe even the next time, you have an opportunity that they’re, they’re thinking in the mindset. Yeah, he’s been talking about that for a long time. He, he, I think he knows what he’s doing. How are you working on it?

Tenny Tolofari 20:33

Correct. Thank you very, that’s a good question. Um, so what we went back and did so man less than sat back, you know, after, you know, couldn’t make the GP part of that deal. Went back. I said, as I review what we did wrong. Admission, you know, people don’t don’t feel like we’ve been doing this long enough, even though we have all this team members that were brought to the deal. So right now we’re focused on beauty in our brand, cellular communication. Developed developing materials and sending it to these guys and just continuing to give them in conversations that we have continued to let them know what we’re doing.

Like, for instance, we recently went to Houston, Texas for a conference went to Keystone resort for that conference. Right? We’re going to be traveling sometime in April. Hopefully these home prices go down to market. While I do all of these, I have conversations with my friends and family and let them understand I’m still in the game. I’m still looking at this market. I’m seeing you in deals, I’m still talking to key partners to graduate education is one key component of it. We’re using social media. We have a meetup. We have a Facebook group. So we have all these different avenues that we’re using to send the message out gradually. And with time, that information is going to be viewed on people’s subconscious and they will do understand that I’m in it, not just to make a quick buck, but to build a business

To help a whole bunch of investors out there that like right now, you know, I was talking to one of my friends yesterday he said he doesn’t want to stop right now. And and that was a good avenue for me to share with him. You understand, hey listen, there are a vehicle out there that you can use to give great return rather than just defending the stock because he’s really hurting a lot of people like right now in America and new world.

Darrin Gross 22:27

Nope, that’s that’s a that’s a good idea. Do you have any kind of a census to the number of I mean, the for lack of a better word touches or kind of a timeline and do you have any kind of expectations? You know how long it will take to create this identity where people now think of you and are willing to respond positively to to your request, provided they have money.

Tenny Tolofari 22:58

Absolutely don’t have time. I think it’s, it gets to a point when somebody looks at what you’re doing. And they fall in love with it. And they like the idea. They want to be a part of what you’re doing. At this point, we’re not worried about people that we know anymore. I say, Hey, listen, you must join us. Because one of my mentors, you shouldn’t say, the people you know, don’t don’t hundred percent are supposed to support you when you get started. They’re supposed to self support you because they love you, they might think that you’re crazy.

They might think that the ideas you have a crazy, all you need to do is to prove to them that what you’re doing, you believe in it, and you’re doing it for the long term. And you have the interest of the people you’re working with to the interests at heart, right. So I don’t have a timeline, but I’m sure when you see that I’m in it. I’m not quitting. You know, I went back and so that whole bunch of boys that started this whole went to courses together, went to seminars together. Oh, But I don’t see them anymore. And a lot of the when the seals were still going on Leslie was going that, oh, man, you guys on fire. You know, I love what you guys are doing. I’m seeing your article online, I’m seeing the polls, man when you’re doing something that Senator Mitchell that we’re aware of. So I just think with time, you might be one year, it might be one month, maybe two years, maybe five years, maybe 10 years. Right now, me and my partner, I really don’t care. We care about making sure that we get the right set of information, and just put it out there. And whenever people are comfortable with being a part of our journey and being a part of what we’re trying to do, they will come on board.

Darrin Gross 24:37

You know, it’s interesting, you as you’re speaking, I’m thinking about it and just other conversations I’ve had with others about this. And, and, you know, I think that what I’m hearing from you is that now that you you two have committed you and Leslie have committed this is what you are doing.

Tenny Tolofari 24:55

Correct.

Darrin Gross 24:56

I think as you progress through that and people See that? And there’s not this sense of desperation when you’re, you know, you’re approaching people but they know that this is what you do. And if not this one then you know, keep us in mind next time or however that is that really transfers to you know the recipient of the message into kind of a trust and belief that you are committed to it and it’s not as risky. If I don’t know you and and all sudden you’re asking for money and you know, you haven’t got a track record or any kind of experience in in in doing what you’re claiming to do.

Tenny Tolofari 25:42

Correct.

Darrin Gross 25:43

No, that’s great. All right. Well, so you guys, you’re in your You’re the one deal with your own money as limited partners for it and long. How long have you been in that deal?

Tenny Tolofari 25:57

I think we’ve listed in September of the deal. Closing September of last year of 2018.

Darrin Gross 26:03

Okay. And was at a value add? Or they do an update or what was the what’s the plan with that property?

Tenny Tolofari 26:13

Yeah. So it was a value add on is a property that I’m the owner of the property has gone to, you know, his lifecycle and he’s trying to, you know, move it on to the next investor that we had about 46. Or that of the, for the six units that are required and upgrade. So basically what the company was, what exact capital was thinking about doing with Viking capital as partners was to go in, change rules, do some landscaping, do some painting upgrade for the six units that have not been upgraded yet, and then gradually increase the rate. As of right now, if you know if I can copy it and send it out, sending out statements we actually received our first quarterly payments from them recently in the Properties performance, you know, they’re beginning to increase the reins and and they’ve done the roofs of the of the the apartment building because the roof would not have never been changed or collect very well and a whole bunch of different amenities they wanted to add in the apartment complex syndicate better. So yeah, it’s definitely a value add.

Darrin Gross 27:29

And you’ve had kind of a front seat for the all the inner workings of the deal is that if you had that experience,

Tenny Tolofari 27:38

Yeah, during the the time that I played a key role was doing the due diligence. That’s why I’d pick you roll when I went there. And I met with most of the contractors that coming in, how do we put it in quotes and the property management company now we have a great relationship with them actually the other company that’s going to be managing our properties. Yeah, the Manage properties down in the south southeast region of the United States. So had a good relationship with one of the regional manager there and talked about how they can, how they are coming in to implement the business plan. What are some of the things they can do to make sure that the tenants and people that in the community are confident with what we say we’re going to do with apartments and stuff like that? So, you know, he’s a, this was an amazing experience being down there. And that visit alone opened up other opportunities as well. You know, which if we have time.

Darrin Gross 28:39

Now, what was that the loan? Oh, what what was that you said if you have time?

Tenny Tolofari 28:46

Well, I said that that distance, opened up opportunities as well.

Darrin Gross 28:51

Oh, gotcha, gotcha, gotcha. Gotcha. Yeah. No, I think plugging in the community and getting to know people that would be a strong opportunity for you. Well, this is this is great to me. I feel like, you know what you’ve done. And, and I think, you know, it’s there’s two thoughts coming.

One is the experience, the positive experiences you’ve had, even though it kind of came short of what you originally thought it would be. There’s you’ve been able to plug into and now you’re getting this firsthand experience, which I think will likely transfer to the people that you’re engaging with now sharing your experience and that will that will create credibility for you.

I think the other thing is just that, you know, how you were, you’re able to kind of attack and realize, you know, I think there’s, there’s a lot of people out there look at like real estate, it’s just as easy thing. It’s like, yeah, you just, you know, you just put the money in and you get other people’s money and they just make money. Yeah, that was great. You know, and, and, and, you know, but the reality is that There is a lot of work on this, you know, this is, especially if you’re going to be a general partner, and you’re going to be the steward of other people’s money, there’s a tremendous responsibility and you’ve got to have your you know, first you have to be connected with them.

Second, you have to have a clear through point as to how you’re going to take care of their money, make them money, and then you have to be able to operate and pull it off, you know, and you know, so it’s, it’s it is a process and I think that anybody that can what’s what’s the sad thing about most of life whether it be the stock market or real estate or whatever, is that people hear the highlight reel all the time for the people that bought after the 2008 crash and, and got all these just super cheap deals and they wrote them up and they made all this money. That that’s the story that resonates with People they all think I need to get into that. The reality is, those times are gone. Although as we speak today, there’s the pandemic. I mean, nobody knows exactly how the fallout is, but the economy is essentially running fast with the exception of this pandemic. And, you know, so there’s the, we’re in different times, and I think you just have to be that much more aware of the times and, you know, if you’re in it for the long haul, I believe that you will have success and people will see that and, and want to work with you.

Tenny Tolofari 31:35

Absolutely. That’s how I bought you know, to to make sure that I would time people would understand they were in it for the long haul and we have a big vision and as we go along, we share that vision with them.

Darrin Gross 31:49

Tenny if we could, I’d like to shift gears here for a minute. As I mentioned you before we get started by day. I’m an insurance broker. Okay, and As an insurance broker, we do risk management with our clients. Right? And there’s

Tenny Tolofari 32:08

Excuse me, all right.

Unknown Speaker 32:11

All right. There’s a couple different strategies we we consider when we’re trying to manage risk. And the first is we asked, can we can we avoid the risk? And if we, we recognize that that’s not an option, we look to see if there’s a way we can minimize the risk for And if that’s not an option, then we look to transfer the risk. And that’s what an insurance policy is. It’s a means of transferring the risk to an insurance company for exchange of premium and you get a contract kind of thing. Yeah, but so with that, I’ve been asking all my guests and like to ask, I’d like to ask you to, if you, you know, share with us what you consider to be the biggest risk and just to be clear, I’m not necessarily looking for an insurance related answer. Mm hmm. Because I believe risk is risk is everywhere. So, if you’re willing, I’d like to ask you Tenny Tolofari, what is the biggest risk?

Tenny Tolofari 33:20

Well, one of the biggest risks for individual investor houses is one is not getting in the game is seen on the on the on the sidelines, right? Because if at the end of the day you you’re thinking about getting ahead, and you are dependent on just one asset class to get ahead. You’re going to be disappointed from what we’re seeing right now. Right. The risk is depending on one particular asset class, like the stock market, to be huge wealth or for retirement purposes or for generational wealth, or for your family in general, because your family is dependent on You or you and your spouse are dependent on each other for the future. Right. So I think that’s one big risk. Another risk is speculation, right? Where people think that the market is going to perform at a particular rate. And people don’t not educating themselves about how if x Class A class work, you know, so I think that is one big risk I would think not gets in the game is one big risk outcome people are not taking.

Darrin Gross 34:34

No, like if you don’t, you don’t play you can’t win, right? Absolutely. You gotta get another game. Tenny, before we wrap this up, I’d like to ask you where can listeners go if they’d like to learn more or connect with you?

Tenny Tolofari 34:51

So one way to get in touch with us is you can visit those on our website. Our website is XSITECapital.com excited. capital.com excites people As X as in xylophone. S as in Samwell I as un indigo T as in Tango. E has an Edward capital.com. And we have a Facebook group, which is the Exciting World of Multifamily Investing. And we have a meetup group with the Xsite, Xsite capital Meetup group. So these are different avenues. If you’re in Maryland, Virginia, DC area, you can stop by our meetup is hosted every first Monday of the month. Fortunately for April, we’re going to be postponing that one for now, till this whole crisis settled down. But it’s a good community where a bunch of people that are interested in what I finally I relisted in general come together to have conversations. So those are some of the ways you can you can get in touch with us again, that’s except capital. They’ll come in on the exact to one of my family, Facebook, and exact excites Meetup group on meetup.

Unknown Speaker 36:12

Got it. And I’ll have all that listed in the show notes for the listeners. Tenny, I want to say thanks for taking the time to talk today. I learned a lot. And I hope we can do it again soon.

Tenny Tolofari 36:24

Absolutely there. And I really appreciate this opportunity. And thank you for this platform for you know, at least for us to share our story. Because we want to encourage people that are looking to get into game to get started. And if there’s any way we can be a resource who would love to, to be in a resource for them to at least get started and start learning about what we’re doing.

Darrin Gross 36:46

All right. For our listeners, if you like 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. commercial real estate pro networks, CREPN Radio.

Announcer 37:06

You’re listening to CREPN Radio for influential commercial real estate professionals. For more information on this or any of our guests like us on Facebook CREPN Radio

Flexible Workspace with Frank Cottle – CREPN #254

Frank Cottle 0:00

Flexible workspace is the highest level. And think of that as including all providers that combined people place and technology into a single bundled service and provide it with a highly flexible service agreement as opposed to a long term lease. That would include business centers, co working centers, incubators, accelerators, culinary centers now, media centers. It’s that combination of people place and technology with a highly flexible service agreement to support it. There are about 45,000 such facilities around the world today.

Announcer 0:44

Welcome to CREPN 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

Darrin Gross 1:03

Welcome to commercial real estate pro network CREPN Radio, Episode Number 254. 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. Let’s get into the show.

Today my guest is Frank Cottle. Frank is a futurist based in Southern California. And in just a minute, we’re going to speak with frank about the future of commercial real estate. But first, a quick reminder, if you like the show, CREPN Radio, there are a couple things you can do to help us out you can like you can share and you can subscribe. And as always, we’d love to see your comments. So if you feel inclined, please leave a comment. We’d love to hear from our listeners. Also, if you’d like to see how handsome our guests are, be sure to check out our YouTube channel. And you can find this on YouTube at Commercial Real Estate Pro Network. And also please consider subscribing there as well. With that, I want to welcome my guest Frank, welcome to CREPN Radio.

Frank Cottle 2:27

Thank you Darrin really great to be here. And I don’t want to add disappointment to your program right now. But if you want to see how handsome I am, you probably ought to look at a picture of me 40 years ago

Darrin Gross 2:39

I’ve always always humored by the the guests response to that but that’s all in fun. And trust me you’re you’re setting the you’re setting the curve on the positive side there so nothing to worry about. But, Frank before we get into our talk about the future, if you could share with the listeners a little bit about your Your background.

Frank Cottle 3:01

Well, I’ve, my career has spanned five decades. I started in the late 60s, early 70s as a commercial Diver of all things, working independently and also as a contractor to one of our federal agencies doing what was termed interesting work for a few years.

From there, I started racing yachts.

I spent a decade racing, large sailing yachts all over and working to build a yacht brokerage here on the West Coast based in Newport Beach in California. As I matured in that business a little bit, and we were quite successful, we got very lucky. I made the decision that I would never be an owner so long as I was a broker. As a result of which I had to leave the bad part of my work. I started in commercial real estate 1979 at time period. I come from a ranching and farming family. So the concept of land banking was appealing to me buying dirt in the path of progress, if you will. But I didn’t want to stay farming they didn’t want to go that route. So we would buy large parcels on the edge of masterplan commercial developments sponsored by Prudential land, Chevron land, mobile land, the Trammell Crowe Boston properties, the Irvine company, really big property master plan developers. We would buy a little piece of land out there on the edge of their master plan project. A biggest piece we could buy with the most entitlement and we put a small building out there 3040 50,000 foot building, but we had three, four or 500,000 feet of entitlement REITs to go up, if you will, but the timing just wasn’t right. So I had to figure out a way to hold the land. And we came up with this concept and watching what was going on. We figured out that these funny little things called executive suites generated the most revenue per square foot of anything in commercial real estate. They were fairly unknown in the late 70s, although just starting as an industry, and so we built dedicated buildings and hosted in house shared workspace back in the late 70s and early 80s. We built that portfolio for 10 years across the southwestern us, California, Arizona and Texas, sold the portfolio in about 1990 and started building classic What are referred to as business or co working centers today, myself and two partners, we built across the entire nation 195 projects. We were the largest private operator in the industry at that Time. And that portfolio was sold in 2000. Right at the height of the.com. Boom, good time to sell things. What the reason we sold that portfolio that I wanted to sell at least, is that I didn’t like the risk exposure of the lease liabilities on the properties. With landlords understanding real estate is a cyclical industry. And I wanted to own the customer instead of owning the center’s so we built the structure of the inventory control systems and the technology to do that. And today we have clients and I don’t know how many in 54 countries about 1100 facilities, but we don’t own the facilities. We just use those facilities in much the same way that Expedia uses the hotel Straight to service our customers. And it’s been a real fun ride, taking us down a lot of interesting paths. And today we’re considered to be one of the progenitors of the flexible workspace industry. And we still try and push the limits daily.

Darrin Gross 7:21

That’s fascinating to hear you talk about that and then just thinking back about you know, executive suites and how that was such a, like a trend setting concept back in its beginning there. And now you look at least workspaces is kind of a second. I mean, people know what you mean when you, you know, coworker or a kid was one that tronic complete blank. What’s the We Work said?

Frank Cottle 7:54

I think that’s one of the ones that while We Work, this is kind of interesting. debacle, they grew overly fast, not paying attention to some core fundamentals and got themselves in quite a bit of trouble. They’re referred to as the biggest deflated unicorn in the history of market. And SoftBank, who’s their primary financial sponsor has lost multiple billions, billions so far on the company, all through just too aggressive a business plan. Now they get not paying attention to the fundamentals. And one of the reasons I’m not in that business is they own to the centers, they were exposed to the leases, they had the huge capital expenses. Every time they wanted to capture another thousand customers, they had to build another center, and that costs them anyplace from 15 to 25 $30 million in the combination of capex and leasehold liabilities. If I want to do 1000 CAD thousand customers to my model have to pay Google some pay per click and then build them. That’s it. So it’s a technology driven company in a software as a service model, servicing real estate customers as opposed to a facilities based model. We use others the facilities that are owned by others.

Darrin Gross 9:20

So are you are you leasing space, enter, you know, sorry, my driving.

Frank Cottle 9:27

We basically own the customer and we place ourselves and our customers into other flexible workspace facilities around the world. Think of Expedia. As a good example. Were around when they started, some guys are Microsoft and knew them quite well. And if you run a hotel room, from Expedia, via Hilton or Marriott, you have a business relationship with Expedia, not with Marriott. They collect your money, but they do Give us a special deal they give you the loyalty program etc. And they have a deal a wholesale transaction structure with Marriott with a variety of hotels that allows them to put you in at a discount. So you may be paying $500 for that room. Expedia is only paying 350 or $400 for that same room. And so they work on that wholesale margin where they own the customer the business relationship, we do the same thing with commercial real estate, utilizing the flexible workplace sector as our core inventory model. So it’s very much like the hospitality structure.

Darrin Gross 10:43

Got it. So you’re, you’re basically the marketing broker arm for the the properties or the landlords or the property managers. Like I said, you you create the relationship with the occupant, a tenant that

Frank Cottle 11:00

That’s correct and and it’s really a scenario where a lot of times people don’t like to go direct, they feel they can get a better value by shopping across a platform like ours, or many times, they don’t want to have relationships, larger customers in particular, don’t want to have relationships with 20 different service providers, they want to have one contract with one aggregated service provider that can deal across multiple currencies, multiple contracts, multiple time zones. So in our models, you can come in and you can open 10 offices in 10 countries in 10 currencies in 10 minutes. It’s very simple to do. You just drop into a website and open an office. And we can do that globally. We we’ve been operating globally since the early 2000s and is a very effective structure especially for large customers. Our largest individual customer right now has over 11,000 separate accounts with us to put things in perspective,

Darrin Gross 12:09

said 11,000.

Frank Cottle 12:10

Yeah, one customer. Wow.

Darrin Gross 12:15

And what’s what’s a an average client, if that’s a very large

Frank Cottle 12:22

Average client in our model has about three to five offices or virtual offices, usually in multiple cities. And that’s why they come to us again, they it’s much more convenient to work with a single inventory aggregator than it is with five companies in five cities might be independently owned and operated with different types of contracts. All different types of billing cycles, etc. legal departments from large corporations love us because they have one contract reveal Especially when they start going offshore. Right, that makes a big difference in our industry is very well suited for companies that are global or international in scope. I don’t know how much you know about human resources requirements in Singapore, as an example, or maybe in Egypt

don’t know nothing.

Usually larger companies don’t either and it’s very costly for them to get into it. So they fall into our industry in general, large providers like ourselves. Another great provider is a company called international workplace group. They own the brand called Regis excellent company also. And they larger clients in the multinationals, falsies structures like us, as well as local, a lot of local business as well.

Darrin Gross 13:56

So do you. You work with Regis then Is that one of your providers?

Frank Cottle 14:01

We like Regis? Yes, they’re fine, fine provider. We work with them through our European offices, primarily. They’re headquartered in in Europe. And we also have our own structure and offices and technology based companies based in continental Europe, a company called flex.

Darrin Gross 14:20

Got it. So from a user standpoint, if I’ve got a facility needs and multiple markets, and maybe a Regis isn’t in those markets or whatever, and I go to you, you have contacts or relations with providers in those various markets. So I still just have the one point of contact as opposed to having to go to each market and

Frank Cottle 14:41

That is correct. That is correct. And depending on whether we’re using one of our directory structures and partnerships with various brokerages or our own internal inventory, we have between 1100 and 18,000 different facilities that we can access around the world.

Darrin Gross 15:01

Gotcha. And as far as the so you contract with the facility provider as a, is it like a referral type mark, are you actually

Frank Cottle 15:16

We’re a wholesale, wholesale warehouse. We have a pre determined contract and a pre determined discount rate with every provider that’s inside of our system. And so we know exactly, you know, what our margins are, what our costs are, etc. And it’s, again run very much in an e commerce and software as a service type model. We have reservation booking systems for meeting rooms, conference rooms, we have our own call centers, to backup the offices with live receptionists around the world, etc.

Darrin Gross 15:51

Got it. So if I own a a office facility, and I’m looking to do some sort of You know, what is what’s the the broad term for this type of space? Is it shared space?

Frank Cottle 16:10

Flexible workspace is the highest level. And think of that as including all providers that combined people place and technology into a single bundled service and provide it with a highly flexible service agreement as opposed to a long term lease. That would include business centers, co working centers, incubators, accelerators, culinary centers, now, media centers, it’s that combination of people place and technology with a highly flexible service agreement to support it. And there are about 45,000 such facilities around the world today.

Darrin Gross 16:54

Got it. So if I have a facility that I have space to lease? And is there a way to contact you? Or are you one that goes out and contacts me when you have a client that has a need?

Frank Cottle 17:11

A little of both? Generally, our inventory comes to us through our industry reputation. We don’t really have a big sales team that goes out there. We’ve been around for 40 years in those industries. So people do know who we are and what we do. And our websites are very easily accessed all over the world. So it’s a we’re more of a responsive marketing team than a outreach marketing team.

Darrin Gross 17:44

Gotcha. That’s that’s a interesting model especially as you know, space needs continue to change based on you know, the ability to work mobile or or

Frank Cottle 18:00

Well, right is right now, I think think about it. today. We’ve got about 1.8 billion mobile workers in the world. And yeah, look at what’s happening with our current pandemic of the month, I guess I’ll call it, you know, the Coronavirus? How many people have started working remotely and telecommuting just in the last 60 days, globally, right, millions and millions and millions, okay, they can do that because of technology. They can do that because all companies, all corporations and government itself knows they have to have flexible workplace plant plans if they’re going to win the talent war in recruitment right now, which is critically important. People are looking at looking very much at balancing lifestyle, with their work style. And so having again, a flexible workplace plan where you can work from an office you can work from a co working center, you can work from Starbucks, you can work from your home, all of these things blend into a new sort of real estate 2.0 or 3.0 I guess now, approach and the our industry, the flexible work sector is a core component to solving that mobile work issue.

Darrin Gross 19:29

Yeah, and let me ask you about just the, the, you know, the the use of space because I mean, obviously, the technology avails itself now to where literally you can work from home you can work from the coffee shop, you can work from wherever but the, the fundamental need of a space that has certain attributes, features like an office hmm Do you ever see that like I mean, have you seen it change? And in the time you’ve been in, in engaged in this?

Frank Cottle 20:06

Oh, yeah, market? Absolutely. Um, number one, we all need a place to work. We need a place to work where we can focus. So it’s usually not the kitchen table isn’t the best place. And it’s certainly not Starbucks, good coffee, bad place to work.

Even though you see a lot of people have laptops in there.

See people with laptops and tablets everywhere. You know, it’s like an appendage these days, right? And I’m as guilty of that as anybody. But But we all need places to work and we like to work around people. We, as human beings, we are gregarious, we enjoy being around others and sharing with others, etc. So you have to find environments that combine the technical Which today bandwidth is like air to oxygen to all of us. We have to have massive amounts of bandwidth and has to be secure bandwidth. We have to have a productive workplace. It’s not too far from the house because we’re very environmentally conscious now where we want it to be near public transportation. They shouldn’t we want to have amenities around that. I forgot about our interview this morning and didn’t know was on video. So I’m dressed because I’m going to the gym right after this. So we want to have amenities around this good restaurants, health clubs, etc. And all of those things that need to be combined into that perfect location. But most importantly, we want to be around people that we like. So when I say people place in technology, I’m not just talking about the support services of clerical secretarial and administrative support that facilities provide.

When I’m talking about the community of people that are working in the facility as well. 10 years ago, people would look up an address, and they’d say, Oh, I want to be on that street at that address. And they would see pretty pictures of a nice facility and say, Oh, that looks like a great office. Today, they’ll go on to Facebook. And they’ll, they’ll, they’ll find that address. But before they really looked at that, locations, pretty pictures, they’re going to go on to Facebook and see who’s there, what’s happening there, what sort of activities are going on there. And then they’ll come back to the website. So the community that you surround yourself with is as important today as the facility within which you work. And that has to do with everything from communities that are focused on social responsibility and charitable structures. Profit structure is on up to highly technical communities where all of the most brilliant programmers from Google are going to end up doing their spare work. So, that’s a very important component now in in office selection

Darrin Gross 23:18

Yeah, it’s interesting, you know, I in one way I feel like people have essentially isolated as much or more than ever before but connected virtually like what we’re doing right now. So there is that that the virtual connection but still the the physical, you know, proximity to be in amongst people and be able to have a community of whatever that space looks like or whatever that you know, your requirements are recognized that is still being a there’s still some sort of social, although

Frank Cottle 23:56

They’re very important, very important aspect to that. Again, we’re, we’re working remotely because we can but today I’ll be in this type of a meeting, I’ll be in a workplace environment that has other people, as well. And I’ll be socializing like to say, I’m going to the gym in an hour. So that we have different patterns that we need to involve to have a balanced in our lives. And it’s not just sitting in a room with a headset and a microphone on 24 seven, that right, that’s a little lonely. And if you look at mental health, loneliness is an epidemic as a result of some of the technology isolation that we’ve we’ve used today. So having a place to go, where you have a community that you enjoy being with is elemental to that work life balance.

Darrin Gross 24:55

Wow, I definitely agree. You know, as you mentioned, With the the corona virus, and all of its, you know, just amazed just how the tentacles keep reaching and just how you like Italy currently centrally shut down and just this just trying to minimize the spread, we’re trying to minimize the movement of people and minimize the movement of the germs or whatever. Are you seeing any kind of an uptick and in space demand because I you know, like even I think like Amazon and other other companies have kind of restricted travel for their employees. has that affected your business?

Frank Cottle 25:42

We don’t know yet. From a January in February, we’re both record months. So we don’t know whether it’s affecting us on the positive side or whether there’ll be a whiplash effect on the negative side. I think in our sector Whereas a lot of people use our type of space as secondary or tertiary space a lot of large corporations do. While we’re used very strategically, when people aren’t in the office all day long every day, we like virtual officing. We like workstations, drop ins, hot desking. We like all of these factors. And that seems to be part of a solution.

Overall, if you look at large corporations and the way that their facilities are laid out with big cube farms oftentimes or big open workspaces with a multitude of people, that’s what people are trying to keep away from right now. So we again, we aren’t seeing a negative aspect but I think it’s too soon to tell whether people will just stay at their home? If so, there’ll be using our call centers. So, you know,

Darrin Gross 27:10

we’re even just kind of curious if not so much of a, you know, a negative is as a potential for, you know, positive a guy as, you know, there’s a group of people in a certain region that are used to traveling but, you know, for the short time or, you know, looking not to and they’re saying I can’t work from home, I gotta get, you know, someplace, I could see that. Some sort of a,

Frank Cottle 27:36

We are seeing a little uptick in the hot desking. The drop in type business right now. But it’s not. It’s not large enough to call it a trend reaction. But we’re seeing a small uptick in that. I think, for a short issue like the face it Coronavirus is is got a label, it’s got Name, etc. But it’s the flu. We have the flu every year. And this seems to be a little bit more virulent. And it seems to get a bit getting a lot more press. But people go through this type of a structure every year. And so the normal reaction is you go home and work for a few days. Or you work right. You know, you just stay away from all offices for a few days. But it doesn’t seem to affect the occupancy rates or the migration in occupancy for real estate in general.

Darrin Gross 28:37

Right, right. So, we’ve talked a little bit about kind of the, I guess the from where you started to where things are evolved to do you have any kind of a sense of how things will continue to progress as far as this you know, this class of real estate And how it’s used and your business?

Frank Cottle 29:02

Well, if I go back to the way it was originally used in the early 80s, we had the predominance of the clients. We refer to them as members now. We’re legal accounting financial services professionals. They were used, they were the biggest users in most stable users within the classic old style executive suite environment that migrated to small technology companies, marketing and media companies, etc, coming in, but it was primarily smaller companies. In the early 2000s, the migration started shifting to larger companies. They recognized through the.com and then dot bomb issues that went on in the late 90s through the early 2000s. That flexibility was Key, you had a lot of large companies, particularly large tech companies that built massive campuses during the.com. Boom, only to have them sitting 4050 60%, empty three or four years later. And their balance sheets reflected a tremendous amount of debt. That went on all over. So flexibility. And today, the CEOs and the CFOs that are running larger corporations, they’re looking at their employee lifecycle, which is around seven and a half years for the average employee in most large fortune 1000 companies. And they’re saying, Well, our lease cycle or our debt cycles should match the life cycles of our employment base. That only makes sense. Otherwise, you’ve always got a lot of excess and they’re trying to carve that excess off of one way they balanced their portfolios and shed a lot of lease liability which is debt on the balance sheet is by utilizing our industry and running with 1015 20% of their employment base in the flexible workspace, it has a rolling one year contract and that never hits their balance sheet. So they get two benefits. First, they win the war for talent by having a good flexible workplace program. Second, they shed debt from their balance sheet which improves all of the valuation ratios and ultimately the stock price for all of the stakeholders.

Darrin Gross 31:31

Yeah, no that that the balance sheet. I wonder if you could take a minute and just expand on that a little bit because I you know, I think is most of the audience I think just from people I’ve talked with and you know, had a chance to talk with our either investors themselves, or professionals or somebody who’s looking to get into commercial real estate and You know, one of the things that I don’t know that it’s fully understood is the value of not having that long term lease on your, on your, your balance sheet. If you’re a you’re a tenant, you know, if you have whatever your company is, can you speak a little bit to that is how they they look at that and why that’s

Frank Cottle 32:24

That that it’s a critical issue. Let’s assume that I am a large technology company with an employment base in the United States of 100,000 people. And I lease on a 10 year basis, my space to house and host those people. I so I have a 10 year lease. Well, the first year is expensable. The years two through 10 are debt lease is nothing but a debt instrument. I mean, it’s just like a loan right? Just say I have an agreement, you have an agreement to provide me a certain amount of space over a specific period of time and in a contract actually, based on my agreement to pay you and that contract creates a debt. And that debt becomes a liability on the balance sheet. Well, if you have extreme liability, extreme debt on your balance sheet, you’re not as good a credit to the banks. That means you also not a good credit to the bond markets, or your stock value has more exposure and risk. So anytime you can reduce the liabilities in your balance sheet, that’s a very good thing. And if you can do it simultaneously, while still being able to grow, that adds flexibility and agility that we talked about. What’s the big term for CEOs these days? Oh, he’s a real agile or she’s a real agile CEO. Well adding agility to your business model through a more flexible workplace program and a series of one year rolling contracts rather than 10 1520 year leases or even a debt on owned properties is a much more agile style structure and that creates a better stock value ultimately

Darrin Gross 34:24

Yeah, no I I appreciate you going into that a little bit. I think the thing that’s always kind of caught my attention is how I think some of these like Walgreens and these other I think a lot of it seems like it’s drugstores have gone out and built out a large footprint, you know, everywhere. And then after the the buildings up and they’re operating, they’re looking to sell that and, you know, the opportunity to, to buy in or, or, or buy or however that is but just you know, As somebody who looks at Real Estate as an asset that I’m wanting to own because I want the, the tenant You know, sometimes you forget the the flip side of that, how they, how they view the debt and how it affects and put, you know, kind of a drag on their performance. And you know how it doesn’t make them as attractive to like said the investors or bankers or, you know, bond market?

Frank Cottle 35:26

Sure. Well and look at Oh, it’s not real recently, but look at the large retail models, such as Sears. Yeah. Okay. What killed Sears facility. They had massive, massive investments in facilities, and they couldn’t generate enough revenue from their retail activities to support those facilities and ultimately, that brought them down. They also didn’t change to an e commerce model. It’s funny, you know, as the first catalog sales company, they should have been the first day commerce sales company as well, but they just didn’t make it. They’re kind of stuck in their own history. But that’s a simple example of, you know, that being a problem at one point in the one was, it was in about in the late 90s IBM’s real estate department, actually, because of the growth of the market in general during the first phase of the.com era. They actually put all their leases purposefully into their balance sheet, which they didn’t have to back then. But they call them an asset because they had leased space at under market values, and they were claiming the Delta as an asset in their balance sheet.

That kind of got wiped out by their auditors A few years later. But people have always played games with the balance sheet and really estate on both sides from an investor’s point of view, and I’ve owned a lot of investment properties and both residential and commercial. Obviously, you want to buy the property. Hope you have a tenant or tenant group that supports positive cash flow. So really, your debt side is your balance sheet side, it’s just a matter of what your courage is with leverage. You know, are you going to go on a 90% leverage or zero percent leverage? myself, I’m a very conservative person when it comes to debt. So, you know, I think less is better and cash flow is is good. I’m very much a cash flow investor.

Darrin Gross 37:52

Well, definitely, there’s some some people that forget those, those good lessons every now and then and and Why the cycle continues? I guess. So if you were to I guess point anybody that was either looking into it, let me ask it this way is that the world continues to get smaller from the standpoint of of technology and the ability to be anywhere and work from anywhere. Do you find that your type of the facilities that you guys are placing clients in? Are they do they still tend to be in your larger metro areas? Or do you find that they’re going into the tertiary markets or were

Frank Cottle 38:43

The original concept started the central business districts of major market cities. About in the late 90s as technology started to evolve and allow more distributed work, We started seeing secondary cities come up. And today, the smallest village in Germany or Italy will have a business or co working center. And they’re all equally successful relative to their costs. So I can build a center in Manhattan and I know that the dirt underneath the building is very, very expensive. Okay, but I know I still need to make a certain margin. I can do the same thing in Kansas City, or the same thing in Hutchison Kansas, outside of Kansas City. And it’s the my margins will be about the same, maybe even a little bit better in those secondary markets. And it’s all based on the cost of the dirt under the building. I mean, look, location has a valuation model and you just have to deal with that.

One of the reasons we like our model, which is technology based is it doesn’t require much of that thought process. We have a wholesale margin, we know what it is, doesn’t matter where it is, we don’t have risk side for marketing and customer management. So we’ve mitigated the risk through technology. And by changing our business model, even though we still serve the needs of a global real estate client base.

J Darrin Gross 40:24

No, it’s fascinating how you guys have kind of inserted yourself in that and now the market. You know, I guess I’m just trying to think of, you know, back in the day when everybody went to downtown to do work, and here we are really working. I mean, people are, people are choosing more of their place where they want to live and employers, like you said, are being more flexible about that. And, and so this demand is, is.

Frank Cottle 40:51

That’s really important, and I’ll use our own company as an example our senior executive team is is distributed globally. We have a corporate headquarters here in Newport Beach officially. But it’s a tiny little. I mean, we’re in one of our own member buildings. We practice what we preach when it comes to flexible work.

Our chief marketing officer lives in Lexington, Kentucky. He likes horses. He likes that lifestyle. That’s her his family is. Can you imagine if I had to move him or my CFO lives in Las Vegas, or my chief administrative officer who’s Monterrey? If I had to move all of them to Newport Beach, how disruptive that would be to their families, how costly it would be to the company. And I know our gentleman and Lexington. He would say sorry, I’m going to get another job. I think that I think each one of them were would they have families they’re so the old way of centralizing A workforce was very disruptive to lifestyle and families, and very, very costly. And again, we’ve been working remotely like this since the 90s. And totally paperless as a company since the early 90s. As well, I’ve always been embedded in technology and it just makes sense for the whole team and, and everybody’s lifecycle and lifestyle is exactly the way they want it.

J Darrin Gross 42:29

No, I it’s fascinating, fascinating, just to think about it and just think about the, you know, historically just the disruption and and, you know, people having to pick up and move and, and all to be in a physical place. You know, even though their work may not necessarily be local. And just the kind of the, I don’t say the cost, but Well, there’s a cost. I mean, obviously there’s there’s monetary costs, but just in the relationship costs and stuff and you know, And I guess it’s for every Ying there’s a Yang kind of thing, but, but it is, I guess the flexibility from the, the talent side of the, the equation to be able to, you know, make a make a choice to work for a particular company or provider, whoever, and still choose where they want to be located is, is, it’s just fascinating. I remember the first time I was meeting with a customer and, and all of a sudden his laptop laptop started making some noise, he opened it up and he was looking at a guy from, you know, across the world, and he said, Hold on a meeting. Let me call you back. And I’m looking at my, what was that, you know, basically the Jetsons right there and, and it was Skype and he’s, you know, Skype, like, new and, but it’s it is fascinating, just how it’s really, I mean, in in and I don’t even think that that much about it. I mean anymore. I mean, here we are on a zoom call and, and, you know, everybody’s got FaceTime or whatever it is on their phones and, and, you know,

Frank Cottle 44:10

It’s well, it’s, it’s gonna it’s gonna continue to progress. I mean right now we’re working with a couple of the larger video gaming companies. So you talk about where things go and how does that all work progression in real estate. If you look at the video companies, they’re starting to lose market share, not in terms of number of of people, but in terms of numbers of hours because the marketplace is maturing. And the kids that were on video all the time are going to college or they’re going to getting jobs, etc. If you look at that industry, they’re also the best rendering companies in the world. They can create the most virtual reality environments better than anybody else. And they’re already set for that. When you look at their distribution, at any moment in time, you can have 5060 100,000 people playing the same game at the same time. Globally, the crossing all borders.

So what we’ve been looking at is the creation of virtual reality offices where instead of going into a facility, you simply put on your headset, and now you’re inside of that facility. And you can interact directly with people on a fully rendered basis, beyond the old style avatar structures that we see. And what that means is when you talk about central business districts and major markets take Manhattan as an example. You know, across the bridge, office space in Brooklyn, it’s a lot cheaper, but it’s a lot nicer Manhattan until you put on your headset. Now, my, my office in Brooklyn is the same as if I was in the Lipstick Building overlooking Central Park. Okay, and I’ve got a 2000 foot office with my own conference room in it, etc. Well, I can create all of that with technology now and with Microsoft’s new HoloLens technology, I can actually just invite people directly into my office to meet with them physically, even though they’re not there. So, when you think of that, then you think of real estate and you think of investment.

If that comes to play, which we think about 2023 it will start will be started with at least the repurposing of commercial real estate is going to be massive. And the repurposing of that commercial real estate is going to radically change the way that cities are managed and it could have a huge impact on residential costs are going down and the way transportation moves around, etc. So it’s We look at flexible workspace. Ultimately, having that capability is the beginning of the next advancement in technology that we’ll see will have a major impact on commercial real estate. Virtual reality officing instead of physical offices.

J Darrin Gross 47:18

Do you have any sense of how that’ll affect valuations? I mean, I’m just thinking if people don’t necessarily need to be in a space,

Frank Cottle 47:28

It’s going to happen. In fact, it’s going to impact valuations primarily in the highest density markets first, because that’s where the biggest costs are and that drove the migration will be from and what you’ll also have is density compression. If I have a nice office, in a in a high quality building, it’s going to be 300 to 600 square feet.

But in this environment, I can be in a room relatively small cube with a headset and a pair of haptic gloves on. I’m done. Okay, so I don’t need to have an equal quality office now will I still want to go to an office? Sure. I want to go to lunch with my buddies. I want to workout after I want to go get a beer or something. So I’m still gonna want to be with other human beings. But when I’m slipping into my work mode, I’m gonna have a different experience. I’ll still be with people. It’s just gonna be I mean, I’m gonna be experiencing them differently.

J Darrin Gross 48:37

Yeah, no, it’s fascinating to think about how, you know how the future looks like is gonna play out and, and, you know, compared to the cartoon, the Jetsons and what we all were presented back, you know, back when and, and how much of that is actually somewhat here and, but the this virtual thing is, it’s kind of fascinating. I think so.

Frank Cottle 49:02

Well by but 2033 it’ll be normal.

J Darrin Gross 49:07

Right, right now. Yeah.

Frank Cottle 49:10

It’ll be a standard just like I had my first video conferencing set in our offices in 1981. Okay, wow. So now it’s standard, right? 80s through the mid 90s, even up to about 2004 or five. It was sort of a rarity.

J Darrin Gross 49:31

You were definitely a trend setter.

Frank Cottle 49:34

Yeah, we spent more money doing dumb things with front of everybody that I can imagine. But but but the technology works. So you have certain early adapters, that pioneer stuff and Pioneer ways to use the technologies. And then you have the market. Right? And usually there’s about a seven to 10 year lag.

J Darrin Gross 49:56

Right? Well, but those early early adaptors are ones that kind of helped shape it, you know if there’s not adoption,

Frank Cottle 50:04

you know? So my dad always told me says, you know, pioneers get stuck full arrows. Yeah. So don’t be Don’t be a pioneer. He said build railroads instead, you’ll be off a lot better off.

J Darrin Gross 50:19

Good. Hey, Frank, if we could, I’d like to shift gears here for a second, as I mentioned to you before, and I think we talked a little bit about risk, but just by day, I’m an insurance broker. And one of the things we do is try and manage risk with our clients. And there’s a couple of different strategies we consider when when doing so. The first strategy we look at is can we avoid the risk? If we can’t avoid it, then we look to see if there’s a way we can minimize the risk. And if we can’t avoid or minimize the risk and we look to transfer the risk and that’s essentially what an insurance policy is. I like to ask my guests and I would like to ask you, if you can take a second and and consider what you consider to be the biggest risk. And just for clarity sake, I’m not necessarily looking for an insurance related answer. But with that, if you’re willing, Frank Connell like to ask you, what is the BIGGEST RISK?

Frank Cottle 51:25

Well in in our business, which functionally is commercial real estate, I think it’s cyclicality getting caught on the wrong side of the cycle. And you’ve seen a lot of property investors overall and market timing is always crucial. So cyclicality is probably the biggest risk and the protection from that comes with debt management. You can be highly you can deal with it. As much more effectively if you have a debt, a debt management program. So that comes back to what we were talking about with leasehold liabilities being a part of that cyclicality, exposure, not just physical buildings that you own. And the debt cycle of flexible workspace as opposed to a fixed workspace, where you have a fixed lease versus a service agreement is the most effective way to manage the cyclicality in real estate and the cyclicality in business.

J Darrin Gross 52:40

That’s, that’s interesting. Well in it definitely, I think that the debt and the cycle thing is is something that we all should be aware of. And, and clearly, if you forgot the lessons of the last cycle, you’ll get a chance to

Frank Cottle 52:55

know the hard way in many cases in many cases. Exactly.

J Darrin Gross 53:00

So, Frank, where can listeners go if they’d like to connect or learn more?

Frank Cottle 53:05

A couple places. First, would be Alliancevirtualoffices.com. Alliancevirtualoffices.comm, that’s one of our primary sites overall. And if, if you want to just learn more about our industry, we also manage a publication called Allwork.Space. And Allwork.space is the by far the largest focused publication on flexible workplace sector. We have, you know, two and a half million people on social media reach and about 100,000 articles read a month and that sort of thing. So it’s a very active publication that we do as a service. It’s not appropriate to an unintentional nonprofit. We do publish that as a service to the industry and just in general so that people can learn more about flexible work and all the things that are involved with it.

J Darrin Gross 54:11

Got it. I will be sure to list that in the show notes for our listeners. And, Frank, I want to say thanks for taking the time to talk. I have enjoyed it. learned a lot and hope we can do it again soon.

Frank Cottle 54:25

My pleasure. I look forward to it.

J Darrin Gross 54:27

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. CREPN Radio.

Announcer 54:46

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Lease Purchase Commercial Real Estate with Chris Prefontaine – CREPN #253

Chris Prefontaine 0:00

terms of the answer it’s buying property I don’t care if it’s commercial residential retail a boat a car doesn’t matter it buying things on terms without banks in my case lease purchase owner financing to name two and people say over and over and over I don’t know if I can do that Mary I don’t think sells it no they do because I not just I don’t feel any company here with my son and son in law. We buy homes every month, but in in properties and multis in our own office building, okay, so I know it works. But we’ve got about 80 what we call associates now around North America, mostly us that also do it.

Intro 0:37

Welcome to CREPN 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 0:57

Welcome to commercial real estate pro network. CREPN Radio, Episode Number 253. 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. Let’s get into the show. today. My guest is Chris Prefontaine. He’s got 25 plus years experience in real estate as a builder, developer, a realtor, real estate investor and also a best selling author. And just a minute we’re going to speak with Chris about one of his his books and just the basic topic, real estate on your terms. But first, a quick reminder, if you like the show, CREPN Radio, please let us know. You can like you can share you Subscribe. And as always, if you leave a comment, we would love to hear from you, our listeners. Also if you’d like to see how handsome our guests are, be sure to check out our YouTube channel. And you can find us at commercial real estate pro network. With that, I want to welcome my guest, Chris, welcome to CREPN Radio.

Chris Prefontaine 2:23

Thank you, Darren, pleasure to be here, my friend. I am looking forward to our talk today.

J Darrin Gross 2:30

Before we get started, if you could take just a minute and share with the listeners a little bit about your background.

Chris Prefontaine 2:36

Sure, the risk of day myself I’ve been at this in some shape form or another since 1991. Actually, so going on almost 30 years. It’s pretty scary.

I did some spot building I called it back then single family homes, way back when he really understood understand what terms meant and we never took out bank loans we would build on someone else’s land and then we would pre sell the home and then at the very end

When the buyer cashes out everybody got paid including contractors did that for a while, then bought a realty executives franchise put my broker hat on had never done that as a realtor ultimately built that and sold it to Coldwell Banker in 2000. And then from 2000 until the lovely crash, we were doing our own properties. We were coaching people throughout North America and thenlike so many people in the US anyway at least got beat up with the crash and that caused us to re engineer everything we do and we have.

J Darrin Gross 3:29

So your your experience definitely from ground up It sounds like as far as of construction and then into sales and and coaching. Maybe the good place to start. It would be the the how deals are financed, pre crash. When you were an investor, how are you negotiating or how are you structuring the dealsYou’re doing

Chris Prefontaine 4:01

Yeah I can remember specifically so so let’s take it from like after I sold my company called bank I was doing what everyone I still think to this day considers to be the conventional way either borrowing hard money you know from some sort of other investor who just has money to put to work or bank loans. And and both of those meant I was signing personally on him. And so I thought nothing of it credit was great. Morocco was great. They’re giving up money Thomas anyone wants a good credit. And so we ran with that. The problem was when things come rolling down when they come knock and whoever signed personally right they don’t care why the market came down or whatever they’re going to go into whether the personal signature is not that was the big problem.

J Darrin Gross 4:43

Right now and in that mess when when everybody was caught I will you know, you weren’t alone.how willing were the the banks to work with you on that?

Chris Prefontaine 4:56

Not to know the we we had like 22 Two or 23 properties back then and they were either going through by force, short sale, some sort of liquidation or foreclosure. We two or three of them had to go foreclosure. So it was pretty ugly. It was, it was a part time job, if not full time. I remember like it was yesterday, my son had shared an opposite. He’s like right next to me. And he learned a boatload do that for those times.

And so it’s very interesting. So they, they weren’t I mean, creditors were because you can call a creditor you can call a credit card, you can call it call a collections, you can call them and you can negotiate. banks don’t care. As long as they know you have assets especially they’re coming. Right. So that yeah, that took me a better part of probably eight or 10 years to be totally done. But but four years it was pretty busy just doing workouts.

J Darrin Gross 5:46

Gotcha. And, and in that you mentioned is kind of a full time job. We’re where the properties that were in question, were they all investments or were these some conStruction projects?

Chris Prefontaine 6:00

Good question. Let me think. I mean, I had I remember specifically I had a six unit construction project going on. I gave that back to the bank amicably. They were they were fine because it was, you know, their costs were low. I had a boatload of my cash investor cash in it. So the bank was good. Had a six unit has a good story, a six unit building, we were doing condominium conversions back then because you could buy a six unit let’s say in this case or three. And before you get the condominium, Doc’s drafted and engineered attorney, an engineer, haven’t pre sold. I mean, it was crazy. So here’s some numbers for you. We had a building six units in Rhode Island, first two, or three. So it’s like 172. I remember like it was just full price, the fourth, third or fourth, whatever the next unit was, it was like a light switch was thrown, we couldn’t get 50 grand. So that’s two thirds in this particular area dropped in Providence around and if our life depended on it, like I remember the owners, the other owners when you touch them for 50 grand and so on.

That’s okay. So what do you do? You got a construction loan you got, you know, bank loans. It was crazy. You couldn’t get out of those no way around it.

J Darrin Gross 7:08

Well, so when those were you basically just selling them out of Florida then or what were you? Did you

Chris Prefontaine 7:14

we couldn’t even sell them at the on the floor at that point. So that, that that one in particular was a hard money lender that to this day, we’re super good friends, because instead of hiding, one of my good friends said, Look, this is back when this happened. He said, Look, you didn’t take the national market down call who you can call and tell them why I’m here. I’m not going anywhere. I’ll work with you. If it takes me 10 years. And I said that to the Sky News. 2020 years, my senior we had lunch. And to this day, I may do with them. And he’s made other deals with us since then. But it was because I communicated. So you said What did they cooperate? Well, he did. But he was private.

J Darrin Gross 7:47

Right? Right. No, it’s kind of a lesson that I think, you know, hopefully we haven’t forgotten. I think sometimes I wonder if things don’t kind of inch back but I think that everybody. Every market has its own dynamics. And clearly back then the money was, you know, cheap and there was a gold put people on houses. And, you know, there was, rightly or wrongly that the lending got got a little loose. And I don’t think anybody was anticipating. You know that as bad as it could be. I mean, we have always had corrections. I mean, it’s part of the cycle. But anyway, there’s a lot of a lot of stories, a lot of lessons learned. So yeah, so all right, so prior to the crash, you’re doing the traditional thing, hard money and bank finance financing, you’re signing on the line there. And as the situation developed, the signature became worth more kind of assuming you understood more of what you were signing up for.

Chris Prefontaine 8:58

That’s a good way of saying it lightly. The identity Thank you.

J Darrin Gross 9:00

Well, I, you know, I think there’s a lot of things you know, anytime you go sign up alone, there’s How many times are you signing and the volume of paper kind of prevents anyone from Really? I mean, I shouldn’t say anyone I know some people that sit there and will read the whole thing.

Chris Prefontaine 9:14

Or their attorney super shocked, maybe, you know,

J Darrin Gross 9:16

yeah. And, and, and to their credit, at least they have some sort of essentially lease, they’re taking the opportunity whether or not they understand everything they’re signing. Whereas now, I’m still kind of just perplexed by how much like DocuSign and all that is basically, yeah, sent me a PDF and told me to sign that they one time and click the button and, you know, it’s, yep, I’ve signed for everything.

So it’s, I don’t know that the more signatures and all that stuff is improved anything. I think it’s just adding more more layers of, you know, an opportunity for somebody to, to welcome into this way whoever’s authoring the contract is, it’s protecting them. It’s not protecting you, the guy Yep, but sweet well let’s roll forward then so you you you got caught and you know as did many and lessons lessons you learned what what what are the takeaways from that and how have you changed your? Your yeah forward financing

Chris Prefontaine 10:19

So that the same answer right because everything that happened then caused us I got to the point where it’s like I even gonna like go into real estate that’s how spent I was and then it’s okay. So So what could we do if we were to go aggressively? Stay in aggressively real estate well, terms is the answer. It’s buying property. I don’t care if it’s commercial, residential, retail a boat, a car doesn’t matter. It buying things on terms without banks. In my case, lease purchase owner financing to name two. And people say over and over and over. I don’t know if I can do that. Mary I don’t think sells it. No they do. Because I would not just I don’t feel any company here with my son and son in law. We buy homes.

Every month, but in in properties and Maltese in our own office building, okay, so I know we’re spot, we’ve got about 80 of what we call associates now around North America, mostly us, that also do it. So we’ve, we represent a lot of different states now. So that was the lesson was don’t sign personally. So do it by using those vehicles I just said, and don’t use your own cash or leverage your own cash here. As recently as yesterday, my CFO said to me in a meeting with two other employees, did you know instead of doing one of those SBA loans for your company, you could you could take on Ecuador in your house be really cheap. And I said, Absolutely, absolutely knocked does not happen. It’s never gonna happen again, because I did that pre op. And so I said my debt to equity 17% Not, not the inverse, like I like I always was doing it’s next to nothing, and it’s never gonna be higher than that. So, all that to say the lesson was the personal signature, Darren and then when I say no personal I also mean no investor money. Unless we’re doing something really special when we’re taking a seller out or doing something unique. We’re not we’re not going to borrow and signing anything.

J Darrin Gross 12:10

So where I guess let’s back up here. So I get basically the simple answer is it’s not your money. You’re looking at a lease or seller financing. What are some keys that you’re that you look for some tells? Because, you know, I think that anybody is looking on the MLS or through loop net or a commercial broker. The first choice or the first thought that that goes through everybody’s mind is, you know, conventional financing that the seller is going to get cashed out. Mm hmm. So what what is it that you do? Is it just would you go to any deal and ask us or is there a specific type of deal that you’re looking for that makes sense for this kind of thing?

Chris Prefontaine 12:59

Yeah, good question. I’ll give a few answers about a third of the properties in the United States are free and clear. Different pockets, different percentages, but roughly speaking, and so that’s a great Ponte efficient, so to speak, because if they need to cash out, presumably they would have yanked it out. And they’re usually the ones that will be open not only open by inviting people to structure something on terms, and I alluded to it earlier, but this office building is exactly the case. He want is 70 years old or 71. He wanted terms. He wanted 20 year terms, we usually do like three 510. He wanted a long term. In fact, he he forgot to write it in a do on sale. He said, I don’t want to be cashed out on you make sure you’re clear on that. In other words, he doesn’t want me to refinance and never pay him off until 20 years, even though he’s 71. So that was more of an estate and tax issue, I’m sure. So they’re out there. So you got a niche and find them. I’ll give you another example. We bought a six and a four unit in the same town.

How do we buy them? We said Hmm, we’d like to add a multi or two more to our portfolio and we’d like it to be 40 to 10 units so we literally mailed 326 and it was small pieces of mail and we mailed them three times three tweak the letters little differently regular number 10 envelope we bought those two homes for that now what was the criteria four to six units free and clear both of those are free and clear both was structured owner financing no money down and here’s the key for the recession resistant principal only payments no interest no interest they got their price they’re happy to do that and I’ll pay the price for a premium as long as I get my term and principal only payments they both did that

as an example three examples coming office building two

J Darrin Gross 14:37

Principal only? Hmm So that just seems to be kind of counter I mean basically it’s this year you’re reducing every payment goes direct to principal hundred percent. And what so tell me why is it more of just like you said, l ike the tax issues I would primarily one of

Chris Prefontaine 14:56

The taxes of it, yet some of its ego Not they want their price and that’s that’s stuck in their school, their brain no matter what you do. So I gotta get my price. Okay? So if you give me four or five year term, I’ll give you a price. If you give me longer, I’ll give you more than your price. Because let’s just give you an example. One of the houses I did, it was a four year term principal payments, I’ll use round numbers weren’t 1000 bucks a month. Each year, I went to them and said, If I pay 6000, more down on the principal, I’m putting it down expensable will you extend my term? 12 months? Did it two years in a row? They said sure. So I got 12 grand and principle pay down by prepaying some principal.

And then now here’s the twist. So so you know, I’ll do i do incorporate interest if I have to. So this year, it would have been the third year there would have asked for that. I said, they said, Hey, you didn’t do that thing again. And I said, well, instead, why don’t we extend it 15 years, you’ve been getting no interest and I’ll add 4.5% interest in and we’ll amortize it over the next 15 years. And their accountant loved it. So we took a four year deal and made it into a To extension, so went to six years and then 15 went to 21 years.

J Darrin Gross 16:04

So you’re doing combinable paid down there for the first. I mean, the in the front end there. That’s, that’s huge.

Chris Prefontaine 16:10

Yeah, that’s what does it. And now he is a quasi combination. This guy this building said, I want 5.5% interest old school loans, a lot of land big investors. That’s what I want. Okay, well, I usually buy principal only. So let me structure something I think you’ll, you’ll like what I did with him, as I said, we put more cash down as our office. But I think we put like 30 something down, we broke the mold on that we usually don’t put cash down when we do like 30 something grand down. But then when we did heavy principal payments, I think was like 2000 bucks a month, all the way for almost the first full year and then we amortize it at 5.2%. He was happy and I was happy. We hammered the principal right away.

J Darrin Gross 16:46

No, that’s that’s really, I mean, that’s the secret the bank doesn’t want you to know. Right? And I look at, you know, most loans. I mean, it takes you about five years really before you start at that point, you know, at least five years. Feel free to really start, you know, hitting the principal? For sure. Yeah. And to be able to do that on the front end there. That’s, that’s beautiful to get really kind of a running start on your your pay down.

So, you know, you mentioned, like a third of the properties throughout the US are free and clear. Does it matter on the market? Do you find there’s any is it Do you find it more plentiful and in you know, bigger markets smaller markets is just

Chris Prefontaine 17:34

Terms in general lease purchase owner financing subject to existing financing, those are you have to talk to a little a few more people, extra people if the markets hot, hot, hot, right. Even as hot as the markets been with our students spread out where there are some pockets that have been flat since 2012. And it’s great. It’s great to buy in that market. It’s great to buy in a slightly downward trending, but when it’s screaming straight up, it’s a little harder. You just have to talk to more people because the people that are free and clear. They’re not desperate any shape form or fashion they want their number.

J Darrin Gross 18:04

Right, right.

Chris Prefontaine 18:06

That’s the key.

J Darrin Gross 18:07

So it’s kind of a numbers numbers game but you’ve got your parameters figured out. And and you said you market how many how many postcards Are you mailing out?

Chris Prefontaine 18:19

We didn’t do a lot we don’t do a lot of mailings when teach our students so we only mailed out one batch of 300 something and we did that three times and we got two properties out of it.

You know, it’s crazy to each one of those. We profited over 100 each, we’ve already flipped them, just improving the noi

J Darrin Gross 18:35

Got it, and you’ve demonstrated it works for single family and commercial multifamily

Chris Prefontaine 18:41

Works for all the above have done all the above. Now we teach on a broader scale, mostly single family. They can make it pre recession proof that because they can pound down principal and they’re always sellable. You know, so we do teach that and we own a lot of those. We own we carry like 50 or 60 of these at any one time in our portfolio, not counting our

Students, and we’re not on one single loan as to my earlier point. So, you know, I go to bed at night knowing I mean, we our contracts are set up properly, where the loans are never in our name on a lease purchase, for example down the loan stays in the sellers name. So I know that’s a no brainer.

J Darrin Gross 19:17

So let’s walk through a lease purchase for a second. So you’ve got you identify a seller and you say the seller has financing already in place.

Chris Prefontaine 19:29

Yeah, so I’ll give you a scenario as if there’s obviously many customer upside down some are debt free. Well, let’s do like a standard. We get all our leads on the single family side from for sale by owner for rent by owner and expired listings that relatives can’t sell, I didn’t sell. Let’s take a let’s use real not round simple numbers. Let’s take a house for 300 and they’ve got 250,000 equity, I’m sorry, 250,000, mortgage 50,000 equity, and for whatever reason that didn’t sell or didn’t sell in that timeframe.

So we come in and say, Okay, Mr. Mrs. seller, provided you don’t need that 50 today, because you didn’t get it, then sell in the market. If you can wait on that I’ll protect the entire 50 you probably weren’t gonna get 50. They agree, yeah, we’re gonna go lower, I would pay some fees, realtor, whatever. So we’re going to protect your 50,000 chunk. But we’re going to do that honor before the end of the term of the lease purchase. Usually, it’s what’s used three years for this one. And at the end of that term, we’re going to give you your 50. And we’re going to pay off the underlying debt. Now it’s 250 today, but it’s not going to be 250 then so that helps us.

So though, that if a silicon wait for that and wants to protect that number, it’s a great way for them to do it. And on our end, what are we doing the single families, we fill it with a buyer that needs more time, or we call it a ringtone, but it’s basically a strong buyer that just needs time to get financing, credit, downpayment, whatever.

J Darrin Gross 20:55

It is there a sweet spot for that kind of operation. tendency for you I mean, you know, the assuming somebody is further along in their mortgage would be more attractive than somebody who just just finance yesterday.

Chris Prefontaine 21:12

A more attractive for us Yes, but another good point efficient just because you brought that up is I have one of my students who’s having a real successful time with buys a list tiny list again a few hundred he buys a list that is little to no equity bought in the last two to five years. Who are they’re looking for debt relief, they’ve got to move out of the area and they can’t sell the thing because it’s no spread. Those people are typically giving us the long term so we can hedge against the market. And we either do a lease purchase or buy it subject to that existing loan staying in the sellers name. That’s another good list. Like there’s all these you know, sub lists, not just those categories. I said that we just listened to our we caught our wicked smart community but we we listen to our students and they we know it’s working in every market.

J Darrin Gross 21:56

So in the lease purchase basically you’ve got a couple of paydays and you get the obviously when you sell, there’s the the cash out. And I’m presuming that’s between the the amount you’ve pre negotiated with the seller plus whatever the pay down of the mortgages that that spread. That’s where you’re going to get that.

Chris Prefontaine 22:15

Plus the markup.

J Darrin Gross 22:16

Yeah. Right. And then are you? Yeah. And then you obviously sell for more than what they what you agreed to? And then are you able to make some more on like a rent spread between what your mortgage payment and ran to that?

Chris Prefontaine 22:32

Yeah. Yeah, we call that payday, too. So what you said for us, we call it payday. 352 is the difference between the outgo and the income, right? It could be the bank or the owner, whatever. But there’s a spread there. We average, we’re lower than our students. Actually, we average like 310 bucks on that one. The back end we average like 3540. And then on the front end pay day one. That’s when a buyer comes in and has to put down a non refundable down payment. And that range is like 2627 grand for us. So our deals are like 75 grand deals. cash out between 18 months and 10 years. So you get this cool spread of here’s my predictable cash flow saying a dozen deals, stop, scale it up, you know you got flexibility versus one flip or one wholesale or one rehab, you know, it’s it’s three paydays.

J Darrin Gross 23:16

Yeah. No, definitely. There’s no lack of capital. I mean, that’s that’s a very appealing, you know, benefit here strategy there. Can you talk about some we talked a little bit about the the benefits I mean, the the sellers or the tax and the the ego are kind of the two things it sounds like you’re you’re appealing to any any challenges explaining this to a seller? I mean, is there any resistance or is it more? Is there a kind of a longer cycle to getting somebody to agree to it or is it more like you, the people you’re finding they’ve been hoping somebody like you would come along?

Chris Prefontaine 23:55

Many of them. good way of saying it fireside too, but many of sells. It’s not difficult to explain it to them if you just use the proper scripts up front and the proper script up front is, hey, Darren, if you got your price I see here. Are you open to doing that on lease purchase or owner financing? Or do you need your money today? If they say, No, no, no, I got to fail me, I need my cash or I got this building. I got to do a 1031. Tomorrow, you know, if they have to do it now. Then I say okay, no worry. I’m not the buyer. if anything changes use me as a plan B. It’s that simple. If they say, Hmm, interesting. I I’m open to that great when it comes to property, I’ll give you the different options. So it’s just that initial conversation and then finding out why they’re selling because if I can fix whatever it is, I want the best price. I can’t talk them upside down. If I can fix that. There is no explaining. I’m just giving them a solution.

J Darrin Gross 24:46

What’s the largest type property you’ve done on a lease, lease purchase?

Chris Prefontaine 24:50

I’ll give you Austin. I’ll give you a student. So we have one currently. We actually did it on our financing 950,000 waterfront at Cape Cod. Massachusetts, we still have it we keep renegotiating extending the term out, which is great. Largest lease purchase for us. Probably around 1.1 million. I have a student in DC who the 800 to the one four is like the norm. So he’s done like a one eight to 2 million. It’s just, you know what the answer is it’s the sweet spot is the median price range in any market and then the higher end item, you know, look for those but don’t like bank on those because they’re slower to cash out. Sometimes they’re slower to find there’s less of them. When the market softens. I was gonna hit you know, all these reasons, don’t do a ton of them. But stick stick to median. You’re safe.

J Darrin Gross 25:43

That’s awesome. So for somebody looking to get started, what would be some some keys that you would suggest they consider how to get started?

Chris Prefontaine 25:57

Well, I would answer this Way regardless of whatever show this was like literally it could be a show about restaurants and I’m gonna answer the same way pick a pick a niche in this case in real estate that you can get excited about just you know so many of them does does Airbnb is apartment there’s all kinds of niches once you find that then find someone so your company go this is it I can get I can get behind this then find someone in that niche that’s like doing it not did it 20 years ago not wrote a book about it not as a really good marketer because just they’re still doing it. They’re in the trenches. Then once you find that, you here’s the big challenge people get like all these shiny objects, I watched it late night commercials and get rich quick. So number three is commit to it. I don’t care whatever it is commit to it for 36 months have blinders on like whatever that group person board of directors or mentor or coach says you do you be with that for 36 months and don’t look left right or backwards. And I don’t care again what business you’re in restaurants, hot dogs in real estate, you’ll have a phenomenal experience.

If you do that simple form, it’s the third piece. It’s so hard for people to manage expectations and patience. And finally, you know, sticking with someone.

J Darrin Gross 27:08

That’s that’s a, you know, I found in my own experience, the three years is really kind of a proven. I think it gives the market a chance to see that you’re still there. You know, I think

Chris Prefontaine 27:21

That’s a huge point. Actually, I don’t you said but that you’re right, because there’s some credibility there, but also not bought and also, like, they’ll do a deal as much sooner than that. But I know if mentally they’re committed three years, they’re not going to waffle on a curveball comes their way, which it will,

J Darrin Gross 27:36

Sure but even that I think even more to be ultimately successful, and it is at that traction, you build the traction along the way. But in three years, everybody’s gonna know that you are the guy that’s still there that’s doing it. Oh, yeah. And whether it be your your reps, I mean, you’re you know, you’re getting plenty of practice to where, you know, you know, the deal. You’ve done deals where it’s going to be around I would think the year

Your long term successes really you know be really strong as opposed to you get any you get the you get the one hit right away and you think is easy and then find that yeah there’s a lot of work and it’s not as easy and and.

Chris Prefontaine 28:15

Ya know well said

J Darrin Gross 28:18

I do have a question about tax so for since you’re not taking title to the property is basically the income just treated as ordinary income then or is there any Do you get any depreciation or anything like that with any of the

Chris Prefontaine 28:34

Okay gets it gets even better but but to answer that direct question, no depreciation or anything unless you’re buying it subject to existing financing and taking title you are correct, it follows title that’s what I tell people follows the deed. However, here’s what’s really cool. So let’s say I one of our students asked me this this morning from Florida. He said what do I do what I tell my accountant, he did his first what we call sandwich lease deal where he didn’t take title, it’s just in the middle is what’s neat pay day one that we got up front to pay the The non refundable down payment that’s payday one.

You when you get that you don’t have to you can the IRS would love you if you report it, but they don’t have to report that until and unless the exercise the option is exercised, they’ll default it, then you get to claim it. So I can take a deal where I get my 26 grand up front and doesn’t cash out for three years I get that 26 grand to pay tax until year three. Now, you may want to I’m not an accountant. This is what I do in my accountant we picked a formula so that we don’t get whacked if we had a whole bunch that were turned out the same year we don’t get whacked. So we picked a formula that every deal we do report a percentage of it and the other goes on our books as a deposit. So a the IRS loves us because we’re actually pre reporting income and be we’re not gonna get stuck at some point and be behind. So you just got to plan that out with your accountant. So if you said it’s essentially like an accounts receivable then is that what the mean because it hasn’t you haven’t it hasn’t been recognized until the sales completed and we actually Put on like you were a conventional sale, we put it on as a liability deposit even though it’s non refundable. That’s how he holds it on my books. You know, again, I’m not an accountant. Sure, but and then so let’s take a 20 grand, we put 10 of it as income that year. So it goes to we literally have paid a one on our on our income statement for income coming in order income, and then the other half the 10 will sit in deposit liability paid in one account.

You can spend it, but it’s going to sit on our books as that.

J Darrin Gross 30:28

Sure. And then as far as the installment, it’s just ordinary income and as far as it comes in, or

Chris Prefontaine 30:33

Yeah, because all you’re doing then you don’t have the loan. So all you’re doing is lease income in and lease expense out when you pay it online debt and that difference is you’re just sharing comm Yeah,

J Darrin Gross 30:42

gotcha. Gotcha. But it’s certainly a creative way and I don’t even see creative way because I think that what I do recognize just like you pointed out to there’s so many people out there that you know, they they’ve owned the property forever. How are they going to get out of it? This is an attractive term, it keeps them they don’t have to mess with the property more, they’ve got income coming in. So, definitely a win win for the, you know, for the person that that has this as an option. It seems like a definitely a good solution.

Chris Prefontaine 31:22

And if you’re doing but if you’re doing single film is it’s a win win win because the buyers, I mean, we’ve had some buyers Darren in tears thinking man, because of my bankruptcy because of my divorce. I thought I never could buy again, and we give them this pathway. And so it’s super healthy, in my opinion, energy wise to be win win win. That’s not easy to get, especially these days.

J Darrin Gross 31:39

No, absolutely. Absolutely. Hey, Chris, if we could, I’d like to shift gears here. By day, I’m an insurance broker. And I work with clients to assess risk and try and manage the risk. And there’s a couple of different strategies we typically use.

Unknown Speaker 31:58

The first is we looked at

Unknown Speaker 32:00

See, is there a way to avoid the risk? If we can’t do that, then we look and see if there’s a way to minimize the risk. And if neither of these are an option, then we look to see if we can transfer the risk. And that’s what an insurance policy is. And so, I like to ask my guests

Unknown Speaker 32:20

if they can identify what they consider to be the biggest risk. And just to be clear, I’m not necessarily looking for insurance related answer.

Unknown Speaker 32:32

But with that, if you’re willing, Chris Prefontaine, I’d like to ask you, what is the biggest risk?

Chris Prefontaine 32:41

I don’t want to sound like a redundant broken record, but in my world so comes right to the top of my brain when you ask that is you signing personally and exposing your personal assets to anyone or anything?

Unknown Speaker 32:55

Got to be the number one in my world.

Unknown Speaker 32:59

That’s it.

J Darrin Gross 33:00

That’s definitely is you’ve witnessed. If everything goes bad and you’ve got, well, it is a risk. I mean, that’s just point blank it is it is a risk. And if if the payments aren’t made, as agreed by or as expected by the lender, they’re coming to you, right?

Chris Prefontaine 33:21

Yeah, and I do make I make one exception just to be clear and just full disclosure, and that is a personal residence. But using my methods, my son in law and daughter bought their own house on terms but I wasn’t able to I do mine conventionally. But if you can do that, make that in extremely, extremely excuse me low loan to value. That’s all. I need to get it that way.

J Darrin Gross 33:44

Chris, where can listeners go if they’d like to learn more and connect with you?

Chris Prefontaine 33:51

Simple then go just go to the website. Smart real estate coach calm or smart real estate coach podcast is a show. But what I had said too often

Unknown Speaker 34:00

And I’ll offer everybody is we have a hardcopy, you know hardcover, in hardcopy, Amazon bestseller real estate on your terms that we sent you. And if the listeners go to this link I’ll give them and just say they want they heard us on your show. We’ll go ahead and ship one out to them physically ship it out not electronic, and it’s not one of those Hey, put your credit card in. You gotta pay 10 bucks for shipping. We will ship it out. It cost me a little over six bucks plus the book and we do that as long as they say they’re on your show. The link is free. s r EC stands for smart real estate coach. Free s r ec. Book. calm.

J Darrin Gross 34:38

Got it? s r ec book.com. no free s r e c book.com.

Unknown Speaker 34:46

Gotcha free. Got that on the front end there. Okay.

J Darrin Gross 34:51

Awesome.

Chris Prefontaine 34:52

I’ll give them a lot of what we talked about.

J Darrin Gross 34:54

Yeah, no, I appreciate that. And I’m sure you’ll get some requests for that. appreciate you doing that.

Chris Prefontaine 35:01

Yeah, no, probably my team will be maybe not so psyched with me. But away we go.

J Darrin Gross 35:06

All right. Well, Chris, I can’t say thanks enough for taking the time to talk today. I’ve enjoyed it and learned a lot. And I hope we can do it again soon. Yeah. Thanks for having down. Appreciate it. 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. CREPN Radio.

Unknown Speaker 35:38

You’re listening to CREPN Radio for influential commercial real estate professionals. For more information on this or any of our guests like us on Facebook CREPN Radio

Decision Making for Real Estate Investors with Gleb Tsipursky – CREPN #252

Gleb Tispursky 0:00

But what happened was that they were letting their intuitions lead, letting the gut reactions lead and their gut reactions told them that we can’t afford to lose. We can’t afford to lose our social status in the eyes of the tribe, in the eyes of our peers, and therefore, we’ll make these bad decisions, which will prevent us from losing social status.

Intro 0:20

Welcome to C R E P N 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 0:39

Welcome to Commercial Real Estate Pro Networks CREPN Radio, Episode Number 252. 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. Let’s get into the show. today. My guest is Gleb Tispursky. He is the CEO of Disaster Avoidance Experts. And he’s on a mission to protect leaders from dangerous judgment errors, known as cognitive biases, which devastated bottom lines and bring down high flying careers. He’s authored hundreds of articles and written multiple best selling books, including Never Go with Your Gut, The Truth Seekers Handbook and his newest book, Blind Spots Between Us. He received his PhD in History of Behavioral Science at the University of North Carolina Chapel Hill. And in just a minute we’re going to speak with Gleb about decision making for your business. But first a quick reminder. If you like the show, CREPN Radio Please let us know. You can like, share and subscribe. Also, if you’d like to leave a comment, we would love to hear from our listeners. And if you would also like to see how handsome our guests are, be sure to check out our YouTube channel. And you can find that at commercial real estate pro network on the YouTube. With that, I want to welcome my guest Gleb Welcome to CREPN Radio.

Gleb Tispursky 2:29

Thank you there. It’s a pleasure to be here.

J Darrin Gross 2:32

I’m delighted that you were able to join us today. And looking forward to our our talk this afternoon. Before we get started, if you could take just a minute and share with the listeners a little little more about your background.

Gleb Tispursky 2:48

Sure. So I’ve always been fascinated with decision making ever since I was a kid because the typical way that we are taught to do decision making. The way you’ve probably heard a lot is to go with our gut, follow into Question. That’s the most typical advice about decision making. everyone hears that. Well, my parents were very much gut oriented decision makers. So they felt something was right. Their intuition told them it was right. And they did it. Unfortunately, often their intuition opposed each other’s intuition. So for example, my mom liked to buy nice clothing, and my dad was kind of a cheapskate. So she’d go out and she’d buy a $50 sweater, and she’d come home and he’d yell at her say that, you know, sweater shouldn’t cost anything more than $20 and stuff like that. And then they’d be off and fighting and so on. And already as a kid, I said, that was kind of dumb. It wasn’t really helpful. The question wasn’t resolved, and they still kept fighting and fighting and fighting wasn’t good for their relationship. So and it impacted me as a kid, obviously, to hear my mom and dad yell at each other. But the worst time was this one time when my dad so my dad was a real estate agent, and he had a variable salary based on commissions. And there was a period of about six months where he made a lot of money, but he hid it from my mom. So he made Available money probably didn’t want her to spend on sweaters. And so she bought an apartment elsewhere and leased it out to some folks. And about a couple of years, my mom found out about it. And she was so mad. She was so pissed there was a huge big blowout fight actually end up separating for a while. And so I lived with my mom and didn’t see my dad much in that area. They eventually reconciled but you could never really trust them again. So I saw that my parents make terrible decisions about financial matters. And so that really impelled me to try to figure out why do we make such bad decisions? Why does nobody see set us down? Why did nobody sit me down? And tell me now Hey, kiddo, here’s how you make decisions that my parents didn’t do that. I wasn’t taught how to make good decisions in school, or even college. Once I got to college, nobody taught me to make good decisions. They taught me math. They taught me geography but not decision making. Even though decision making is so fundamentally important. Everything, everything, everything we do in our lives, from business, to personal lives to relationships. I mean, Let’s not even talk about relationships. I mean, there’s a reason there’s a 40% divorce rate in this country. So, I decided to study decision making, how we make decisions badly and how we can screw up our decisions and how we can fix the screwed up decision making that we tend to make. So I studied this topic and I started as I started studying this topic, people became interested in what I had to say. So I became a trainer, consultant and coach, which I’ve been doing for about 20 years and working in this field. At the same time, once I exhausted the very slim pickings that were on how to make good decisions and popular media, I went decided I need to actually study this formally. So I went in Taka Jima, and that’s where I got my PhD in history of behavioral science, looking at the cognitive neuroscience and behavioral economics of decision making. So cognitive neuroscientists and behavioral economists, they spent about 15 years in academia, including seven years, Ohio State as a professor teaching about this stuff and researching it. And so that’s where my the book never goes. Got how pioneering leaders make the best decisions and avoid business disasters came about combination of by consultant coaching experience, plus the actual cognitive neuroscience and behavioral economics of decision making. So that’s what my background is like. And of course, all my other books also touch on various things. The blind spots between us talks about professional personal relationships, and the true secrets handbook talks about decision making in personal life.

J Darrin Gross 6:26

Got it. That’s fascinating life story from a standpoint of being a something that affected you in your childhood, how it made such a big impression and kind of a drove your, your career that’s, that’s really cool because I think so many times, people, especially if there’s any kind of pain involved, but you hear about more people trying to avoid something or, or and I guess in a way, maybe that’s it, that’s what you’re trying to do is avoid the pain of your childhood by understanding it better.

Gleb Tispursky 6:57

That not so much the pain of my child output, but I really care about people. I’ve always been someone who care who has a value side of utilitarianism, meaning wanting the most good for the most number. You know, it always hurt me to see people suffer. So the fact that so many people suffer, I mean, I suffered as a kid. And you know, I learned a good decision making by myself, but it didn’t have to teach to others. The reason I got interested in teaching about it to others in popularizing it and helping leaders make better decisions was that this professionals and so make better decisions because I see all the suffering that comes from it. I mean, think about, let’s say, the fiscal, you know, I grew up during the.com, boom and bust when in 1999, I was 18. When all the tech leaders were partying like it’s 1999. And then just a couple of years later, there was the.com bust, when the people who are the heroes of the Wall Street Journal suddenly became zeroes. And so many people lost their life savings. So many people. It was a tragedy. I mean, I knew people who really suffered in that period. And so just seeing that was was terrible. For me to just to go through that, and even worse for the bad malicious decisions taken by the leaders of Enron, WorldCom and Tyco to hide their losses of these companies using fraudulent accounting methods. And so seeing the kind of bad decision making terrible decision making by these leaders really made me realize how important business leaders are to the lives of everyone around them. So that made me really passionate and fascinated with how I can make a difference by popularizing good decision making for everyone and especially for business leaders.

J Darrin Gross 8:34

Well, it’s interesting, you know, when you think about some of the examples you cited there, I’m kind of curious. Do you have any kind of an insight or a Have you have you come up with a reason for any of those that you cited like the Enron and these others that the reason for the bad decisions?

Gleb Tispursky 8:58

Yes. So with Enron Main bad decision making came from actually what drives us to make decisions. So we talk about our gut, we talk about our intuition. But what is that? Well, it’s about our emotions, our feelings. And what the research and decision making shows is that our feelings, our emotions, our intuitions, drive about 80 to 90% of our decisions, so when we just go ahead and let them drive our decisions. Now, unfortunately, our feelings our intuitions, they’re not adapted for the other environment. They’re adapted for the savanna environment, when we were living in small tribes of 15 people to 150 people when they were hunters, foragers and gatherers. And there are lots of things about the savanna environment, the tribal environment, that are not a good fit for the modern environment, but we’re still have the instincts of going forward and making the decisions as though we’re in the tribal span. So for example, for survival and thriving in the tribe, it was very important for us to climb the tribal hierarchy. We are the descendants of those who climb the tribal hierarchy and then fry them survived and spread their genes because the people at the top of the tribal hierarchy were the ones most capable of spreading their genes. There is a reason about 5% of us on the earth are descended from the great conqueror gang discount according to extend to recent research. So, there’s a reason for that. So we are very strongly pushed to try to climb the social hierarchy to stay at the top of the tribal hierarchy. And the leaders of Enron, WorldCom and Tyco, you know, the burning embers of the world and so on. What we now know about them is that what drove them to make their terrible decisions to hide their losses was fear of failure, fear of being seen as losing social status among their peers. Now, the decision to use fraudulent accounting didn’t really delay the reckoning by more than a year or two. And what they got a year more of bonuses for an exchange for what 1015 years of prison. And how much money did they lose while they were in prison compared to what they could have gained. It was terrible decision making on their part, because look at how much they lost. And it’s not like they want they actually really seriously lost for using fraudulent accounting methods. But what happened was that they were letting their intuitions lead, letting the gut reactions lead and their gut reactions told them that we can’t afford to lose, we can’t afford to lose our social status in the eyes of the tribe, in the eyes of our peers, and therefore we’ll make these bad decisions, which will prevent us from losing social status. So the fear of failure that drove them is actually when I do consulting and coaching for business leaders. I see it very often I see the fear of failure, the fear of loss, especially the fear of losing social status, you know, the top level when you have plenty of money. What really drives people a lot is not wanting to be seen as a failure or wanting to be seen as a success, and they often make really bad to say Because of that,

J Darrin Gross 12:01

So how can you guard against making decisions based on the fear of failure?

Gleb Tispursky 12:09

What you want to do is distance yourself from this social status seeking recognize that, hey, social status seeking is just an inherent part of what we do as human beings. It’s very natural, it’s very intuitive, in the same way, that it’s very intuitive for us when we come across a source of sugar, you know, to eat as much as possible because in the savanna environment, you know, think about what happened if you came across some grapes or some bananas or some apples, it was very important for you to eat as much as possible in order to survive and thrive. We are the descendants of those who are able to do that, because the other people didn’t the other answers the other people who are not ancestors because they died. So we are the descendants of those who were able to do it. Now when we come across a box of Krispy Kreme dozen donuts. We want to eat the whole dozen donuts. That’s the intuitive thing. That’s in natural thing for us to do that because we’re driven to have all that sugar. Now you hopefully have learned over time and develop the mental habit that it’s important to not eat a dozen donuts, you know, you want maybe one doughnut, you know two donuts, but you got to stop at the third donut. Don’t eat more than more than two don’ts. Not everyone learned that which is why we have the obesity epidemic in this country. But still, hopefully you understand that that’s a bad idea. Even though you might end up doing it. Sometimes we have low willpower and and not that I ever did it. So you want to make you want to understand that this is a bad mental tendency that comes around bad reactions. And you have learned to in to restrain yourself from eating all the sugar that you can. In the same way. You need to learn to recognize what are all the dangerous judgment errors called cognitive biases that our brain pushes us to make that our gut reactions, our intuitions when we just tell people to go with their gut pushes on To make, because of how our brain is wired, you need to learn about all of them. And you need to restrain yourself from falling into. And there are specific techniques for doing so. And the social status seeking is just one of those you need to learn to recognize when you are falling into that social status seeking mode, when you’re afraid of losing steps in the eyes of those around you, and when that’s driving you to make some terrible decisions that will hurt you and others going forward.

J Darrin Gross 14:32

So, you know, it’s funny, you bring up the social status seeking mode, which makes me think of all of the social media kind of stuff where you know, most of it’s like a highlight reel about everybody winning and, and, you know, I know there’s been numerous studies done about just the dopa mean that you know, when you see the reactions to your post or whatever the that gives you a certain pleasure. So, If if that is, and I don’t say that’s that that’s the the tell. But But if the from a decision maker standpoint, you know that you mentioned, you want to try and discipline yourself for not seeking that or be be wary of that fear of failure that that need for social status. So but but if you’re somebody that’s that’s looking at potentially investing with somebody, are there ways that you can identify somebody that potentially may have this kind of fear of failure? You know, that you should be wary of I mean, if you were working, working with or investing in Enron at the time, was there anything that you could have identified or were, you know, things that you could have done to prevent or so you could have gotten out ahead of the crash.

Gleb Tispursky 15:56

So what we know what we know we have some research So I’m going to speak up from what the research shows. We know that leaders, CEOs, whether you know, leaders or financial firms, or other sorts of firms, when you see them appearing often in the media, that is a strong sign that they are overconfident, and that they are displaying social status in a way that’s going beyond where they should be. So we know that, for example, we know that leaders who appear, the more often the CEO appears in the media, the more often the more they tend to overpay for a company that they buy. So if you’re thinking about like a merger and acquisition, if the leader of a company that’s about to do a merger and acquisition appears often in the media, there this is likely to be one of those many, many m&a is that fail. Now, m&a is failed rate of very high rate, they fail at a rate of about 80%. So about 80% of all mergers and acquisitions fail to create value, they destroy value, and the more A leader tends to appear in the media, the more of a failure will be, the less likely it will be to be a success and the more of a negative impact it will have. And there’s many other so leaders who tend to appear more often the media who have if you look at the sentiment analysis of the kind of language that they use, which you as a potential investor can certainly look at the language and see if the love language is fluffy if the language is excessive, if the language is hypee, if it’s hyping it up, then you’re likely to see that later, the company will be worth less than it should have been worth compared to other companies where the leaders don’t use the sort of hyped up language. So there is definitely tells that you that we know very clear tells based on the research in cognitive neuroscience that you can use to predict which companies are going to have leaders who make bad decisions, because of their excessive overconfidence, excessive over thing. So these are things that you want to really be careful about and watch out for. Now, leaders who tend to be in the background, those leaders are not don’t get nearly as much credit as they actually should. So if you look at the kind of leaders who have the company result in the highest profits, it’s very often leaders who are less grandiloquent who speak less, and who actually do more. And those are the leaders. The funny thing is those are not the companies that get the initial investment. They don’t get the not kind of the Elon Musk Tesla going through the roof, but they are the companies that get the most profit, so they get the most revenue per share. And those are the companies that value bets that you want to be confident will actually earn you the most money. So that is, those are something those are just some of the many things that I talked about in my book. Never go with your gut. How pioneering leaders make the best decisions and avoid business ancestors. If you want to make smart financial decisions.

J Darrin Gross 19:01

And I appreciate you kind of going through that the majority of the audience is either real estate investor or looking to invest in real estate. And, you know, a lot of the deals that they’re I mean, they’re constantly making decisions, whether it be on a market or a, you know, a property underwriting a property, maybe be the team that they select property manager. On and on it goes. And, you know, it’s funny because you you mentioned this and I think that there’s a natural awareness sometimes of of what’s presented or, or just the need to, you know, you have to do your homework, whether it be if you’re dealing direct with the seller, or if you’re looking to invest in a syndication or whatever, you’ve got to, you know, kind of lift the hood and and, you know, question The information and make sure you get an answer on that. Based on that, I’m just kind of curious if Is there a, like a strategy that you would recommend or, you know, suggest that people like real estate investors consider when investing?

Gleb Tispursky 20:21

Yes. So the book talks about strategies that are relevant, very relevant for investors. And for anyone else looking to make a good business decision. Of course, people who are making a decision in business about which vendor to select, and which whether they want to which clients to work with the client decide making a decision on whether to buy something, you have to make the same sort of decision as an investor. And I described two methods in the book which are fundamentally valuable in addressing a lot of cognitive biases at once. One for casual decisions, meaning casual decisions, which you don’t want to screw up but you don’t want to maximize where you want to get a satisfactory Good enough decision. And this is a method that takes only a couple of minutes. And it is something that you want to make sure you use multiple times throughout the day for any sort of moderately important decision that you don’t want to scrub. There’s also long and this is involves five questions. There’s also longer eight step method that you want to use for more major serious decisions, when you’re actually deciding on whether to take the big deal or not. Whether you’re deciding to enter into a partnership or not something that really makes a major impact on your bottom line, and where you want to get the perfect answer or as perfect as possible, rather than a good offense. So but for the good offense. Let’s talk about the five questions you want to ask about anything that you don’t want to screw up. Let’s say you’re thinking about writing an email to a potential business partner, and you want to work out a nuanced issue as part of the email. So that’s an email the serious email, you don’t want to scroll down but it’s not going to make her very pure bottom line. First question, you want to ask about five questions. What important information didn’t I get fully consider? So what evidence didn’t you take into account? Let’s say you want to influence your business partner to take a certain decision? Now, have you considered all the reasons why they may not take that decision? That’s often evidence that we don’t take into account. So we just write the email hoping they’ll ignore all the evidence, all the information that they that you would not want them to consider. However, the email would likely be much stronger if you think about their perspective. And if you take it into account and addressing in advance of their concerns, so that’s information that you haven’t considered now if you do consider it, you could revise your email to take those issues and count and be much better able to influence your business partner to make the decision that you want them to make. So that’s the first question and that’s an example of high implied second. What dangerous judgment errors Haven’t I addressed in this situation? So What cognitive biases might be playing a role that you haven’t considered? There are very many cognitive biases. My book talks about the 30 most dangerous ones for investing for deal making, for business leadership for all sorts of things. So you want to take a look at the 30 most dangerous ones, take a look at my book, never go with your gut. And if you want to look at the ones for the relationships, in particular, look at the blind spots between us but for business decision making, never go with your gut. Next one, what what a trusted objective advisor telling me to do so think about someone who’s a trusted objective advisor to you, what would they tell you to do? What would derron tell you to do? What would that little angel on your shoulder tells you to do? We got about 50% of this benefit by just asking the question taking out ourselves outside of ourselves. So what would you tell a friend to do about this email in an objective situation, and you get the other 50% of the benefit by actually asking a trusted objective advisor. So call this person or for your millennial text this person. Next, how have I addressed All the ways this decision could fail. So think about the email, let’s say your business partner happens to be in a bad mood when they read the email, and they misinterpreted and they get upset. And then whatever you want to see happen doesn’t happen. How can you address that events? Well, perhaps read it, read the email, so your business partner receives it when they’re in a bad mood, and then address all the ambiguities and uncertainties and lack of clarity in that email. And that will help you address all the sorts of the problems that would happen if the business partners about finally, what would cause you to change your mind about this decision. So what would cause you to reevaluate your choice? For example, with an email, you could say, hey, if I don’t get an answer from my business partner, within a week, I will give this person a call. And now once you make this decision, you can just send the email and you can let it go knowing you have a revision point in a week, whereas otherwise it’d be kind of thinking about it all the way. In your mind, you know what? Why is your business partner not responding? Should you send another email should you call whereas right now if you make a decision in advance that if if then if you don’t hear from that person in seven days in a week, you will give a call, you just let it go. And you got just go forward. So that those five questions are very effective for addressing a whole range of bad decisions that we tend to make on everyday level, minimizing risks. And this again, is for minimizing risks, not for maximizing rewards, for minimizing risks for anything, but you don’t want to screw up.

J Darrin Gross 25:35

So I got a question. If you apply that five step process, how many emails do you write up that you’d like not to send?

Gleb Tispursky 25:47

Yes, that will definitely happen. You’ll realize that, you know, maybe that’s not the best, the best email for you to spend. So yes, I

J Darrin Gross 25:55

I was going to say, I know I have unnecessary thought of him in those, the one through five there, but I can tell you numerous times throughout the day, I’ll start an email or a text or something. And then I realized, you know, what’s the point of this kind of thing? It’s not gonna, you know, is there going to be any benefit from this? Now, that’s I appreciate you taking us through that. And especially I think just the asking these personally, as I’ve listened that, you know, what, what would a trusted advisor tell me to do? You know, because I think that’s that right there is, is making me think outside of just the one to one. Now, if there’s any kind of emotion involved in the, in the, you know, the reaction, if it’s a reaction especially, I think there’s, there’s, there’s power in waiting, you know, as opposed to reacting like that. So I appreciate you taking us through that. I got I got a question for you. You referred to, a couple of times through, you know, the information about how This is like a historical way we’ve been been wired, I want to say, No words.

Gleb Tispursky 27:08

Our brains are wired. Yeah. But

J Darrin Gross 27:11

is that is that? Do you find that that’s at a cellular level? Or is that more of like, your grandparents did it that way your parents saw it. And it’s just kind of a transfer of behavior based on the experience,

Gleb Tispursky 27:27

isn’t it? It is at the cellular level, meaning biological meaning genetic in this case. So if you look at babies, you can see that these traits already exhibited in babies, you will can see that babies are things do things like loss aversion, they exhibit things like tribalism. So I talked a little bit about tribalism, so tribalism, one of them is status seeking one aspect of tribalism status seeking another aspect of tribalism is that it was very important for us in the Savannah environment, to be very strongly attracted to people who are like us meaningful like and trust the people who seem to be like us who have our values, who seem to like the things that we like, you know, like the same flavor is right. And to not like people who don’t seem like us who seem different from us. So that was very important that environment because if we’re going to be kicked out of our small little tribe who would die, and if our tribe fell apart, because we weren’t supportive enough of our tribe, we would also die. So we’re the descendants of those people who didn’t die, because they were very tribal. And we they opposed attacking tribal members, hostile tribes, which wanted to claim their territory. So that’s why I don’t like other people who aren’t like you. So you can see already those sorts of things, those examples. So again, babies were babies, if you show a baby, someone who likes the same thing that they do, and the baby will like that person more will be more attracted to that person. So these are not things that the babies haven’t learned about these things yet. They are ingrained in us from when we’re actually pretty, that our genetic innocence things. So they’re instinctive and that is why they’re very dangerous because they’re instinctive, but not something we learned from my parents. They’re just part of who we are. They’re part of our genes, and they are ingrained behaviors. And that’s the danger of following these ingrained behaviors that they’re not a good fit for the modern world.

J Darrin Gross 29:18

No, it’s good. Hey, I want to ask you a little bit about the you mentioned it, this fear of loss, or loss aversion. Can you speak to that and just kind of expand on that a little bit for us?

Gleb Tispursky 29:37

Sure. So here’s the really interesting study that was done by a large bank, I won’t name it looked at its best investors, people who had it’s a, it’s accounts for the best people which grew the highest and found that there were two categories of investors that were the best investors, one people who forgot about their accounts and two people who died

J Darrin Gross 30:01

Really?

Gleb Tispursky 30:02

Yes,

J Darrin Gross 30:03

You got it, you got a chance or if you’d if you die, you could be one of the best investors.

Gleb Tispursky 30:07

There you go. Exactly. So because there are so many people who on average tend to, on average, investors tend to buy high and sell low. And that comes from various dangerous judgment errors. One of the biggest cognitive biases that causes this is called loss aversion. So loss aversion is our tendency to want to avoid losses, even at the expense of getting much higher gains. So this is it’s a really fascinating phenomenon. If you there’s been studies done showing that asking someone hey, here’s a coin flip experiment. I’ll give you $40 right now, and in exchange, not exchange so you have the $40. Now, will you give me that $40 for a flip of a coin where if you get heads, you get hundred dollars or if it’s tails, you get zero. Now, if you get that experiment to people, you’ll see that about 80 to 90% of the people choose to keep the $40. They don’t want to go to the coin flip. But the coin flip, the equivalent value of the coin flip is $50. It’s 50% of 100. So think about what happens with a coin flip. If you do a coin, flip 100 times 1000 times do it 100,000 times 100,000 times, that’s a difference of 40 million versus a 4 million versus 5 million. That’s the difference between the $40 equivalent and the $50 equivalent, but we are very much so if you if I say that when I say that to people, they say well, you didn’t tell me about the repeating scenario. You told me just you know this one time scenario. If I thought about it differently, if you told me it was a repeating scenario, well, our gut reaction tends to see anything that we do as a one time thing. It doesn’t see the broader context of the story. veterans that we tend to make, it doesn’t go toward that high gain the 50% chance of $50 of the 50% chance of $100 instead of the $40, I can keep right now. So this is one of the biggest problems that we tend to go for, we tend to want the bird in the hand instead of the two in the bush, even when we have a pretty strongly guaranteed chance of getting the two in the bush. And because in the savanna environment, think about it in the savanna environment. We were in a very precarious environment where it just we didn’t have banks, it didn’t make sense for us to gather resources. It’s not like we know we, if you kill the mammoth, you can put all the food in the fridge, right? You can’t store up your resources. So in the savanna environment, it made a lot of sense for us to go for the immediate short term gains and to ignore the larger potential gains from investing these resources and to avoid losses because in the picture So in environment, if we, for if we risked our resources, the $40 for the pretty sizable chance of winning $100, then maybe there would be a drought or something like that, and we would die. So that sort of precarious environment, it makes sense to go to avoid losses to make sure to preserve as many short term resources as possible. In the modern environment, it really doesn’t. We have banks were pretty well protected from immediate short term losses. And it’s so if you make a short term loss of $40, not a big deal, you will still win out over all over a million flips, coin flips and give the $50 million equivalent. However, that’s not what our gut tells us. So we tend to when we are faced with the short term loss when we see stocks falling, we tend to immediately want to sell them, even though it might not be the right time to sell. And when we see stocks as going high. We want we experienced FOMO fear of missing out, and we tend to want to buy them, even though it may not be the best time to buy even though they might have peaked. So these are times when we are falling into that loss aversion, we want to avoid the loss of not getting into a good thing. And we want to avoid the loss of

more pain from stocks going down. And we make bad decisions. And of course, this applies to not only stocks, this applies to commercial real estate deals, this applies to all sorts of deals, this applies to our general way of thinking and being in the world. So you need to be very careful and know that, hey, this is a tendency in which we human beings fall into a need to be constantly aware of this and scanning your environment for this tendency, just like you’re scared of scanning your environment for the and making sure to not eat a dozen donuts because you know, it’s very easy for us to eat a dozen donuts if we’re not full. If we’re not paying attention to it. It’s very easy for us to you know, just come home and play down on the couch and watch Netflix, instead of going out to the gym, which, you know, ideally, you want to do about 30 minutes of exercise a day. But in the savanna environment, you want to preserve all the resources, all the calories that you could and not do exercises. So we’re not we are wired to serve at home and watch Netflix all day, you know, the equivalent of sitting in the cab and by the campfire and you know, doing that all day. So this is a problem for us. And we want to make sure to be watching out for all of these sorts of problems, cognitive biases, loss aversion, you know, and all of these status seeking and so on. And so that’s loss aversion is one of the biggest ones that investors tend to fall into that causes them a lot of pain like this big bank discovered

J Darrin Gross 35:46

No, it’s it’s interesting you know, when you think about it based on the the two best investors, the those who forgot about the account or those that died. It sounds like sometimes not making a decision is one The best decisions that you can make.

Gleb Tispursky 36:03

And that’s why I was giving the example of when stocks are going up, that may not be the best time to buy these stocks. And when stocks are going down, that may not be the best time to sell these stocks. And that’s one of the just one of many reasons why people who do that are often the ones who lose.

J Darrin Gross 36:21

Well, I think it also, especially in real estate, I know I bought at the high and at the low end. But over time, if you if you have enough time, it all works out. It’s a matter of you. I think if if maybe the first decision would be can I afford to lose this money? Or can I afford to not worry about it? or How much time do I have? That kind of thing? Because if you start from that standpoint and understand you may need a longer horizon to get to your goal, but you will make your goal maybe just not on such a short horizon and I think right Now especially where we’re at, with the cycle of the market. When, when people look at and realize just how low the market was, you know, and the crash does and how far up it’s come. There’s this natural tendency to think and I think it kind of plays on what we’ve been talking about here. Is this kind of the fear of the next crash? And then in the news, recently the Coronavirus and you know, other things that suggest you know, there’s there’s like the antenna or up looking for looking for the next shoe to drop as opposed to, like you’re saying the long run is things you know, you flip the coin enough times, or if you buy and stay in enough deals. It sounds like to me that that you know, you’re probably gonna be alright, it’s more a matter that if you’re trying to time it, kind of thing that you might not. He might know when. So,

Gleb Tispursky 37:57

Yes, so you want to make sure that’s why valid Investing is a good pretty good bet. You want to make sure if the deal makes sense over time, rather than trying to time the market and time trying to time the market, whether it’s the real estate market, or the stock market is usually not going to win out, especially because you’re competing against others who are trying to time the market. And when you’re competing against the big firms that are trying to time the market, they’re often going to be better at timing the market than you are. And so you can actually get the best chance for smaller investors, according to research on this topic is to try to do value investing, whether in the real estate or elsewhere, so focusing on the fundamentals, rather than trying to time the market.

J Darrin Gross 38:42

Got it? Gleb, if we could, I’d like to shift gears here for a second. As I mentioned to you before, we started recording by dam and insurance broker. And as such, we we try and work with our clients to manage risk and There’s a couple of different strategies we consider when when trying to manage risk. The first is we ask, can we avoid the risk? If that’s not an option, we look and ask, can we minimize the risk? And that’s not an option, then we look in and ask, can we transfer the risk? And that’s what an insurance policy is, is a risk risk Transfer Tool? and, as such, I have been asking my guests, if they can identify what they consider to be the biggest risk. And just for clarity, I’m not necessarily looking for an insurance related answer. You know, I think some people they think because I have insurance. So that’s, that’s what I’m looking for. But it’s not because I realized that risk is, you know, far reaching. In fact, everything we’ve been talking about here is kind of managing risk from the standpoint of decision making. But if you’re willing, I’d like to ask you Gleb Tispersky. What is the BIGGEST RISK?

Gleb Tispursky 0:06

So what is the biggest risk for me? You’re asking?

J Darrin Gross 0:09

Yeah, you are however you you know, you can identify you personally. Or if you see investors or how you see people making decisions or however you want to, however you want to frame the question.

Gleb Tispursky 0:21

So for me, and for me, and for many other people who are like me, the biggest risk, I would say is coal is a cognitive bias called the optimism bias. So I tend to be very optimistically biased. What does that mean? It’s one of the cognitive biases where people tend to see the future as always bright. As always great. As you know, the grass is greener on the other side of the hill, everything is going to be wonderful, tend to be risk blind and tend to be have exaggerated expectations. So I tend to systematically underestimate the risks for my future for myself, and this is a huge problem. I’ve run into many, many mistakes and many problems.

That I wouldn’t have to run into if I was not risk intuitively risk blind if I was not just focusing on the opportunities instead of the frets. So I’ve had to really work on myself and train myself and how to get some outside advisors and help to who are pessimistically oriented to run my ideas by because I just don’t see the inherent flaws in them, which are many, you know, the kind of first was 28 years before breakfast, and thinks they’re all brilliant. Now, to my bitter experience, I’ve learned they’re not, but this is something I know I have to deal with. And this is something that I’ve learned to mitigate by both calibrating myself better and knowing that I tend to be way too optimistic, and getting outside help from people who are pessimistic who I trust, who I can run ideas by, and who can tell me that hey, you know, these are 20 have baked potatoes and you know, 17 of them don’t make sense but maybe these three you could work on and you know, finish baking them into fully baked potatoes.

J Darrin Gross 1:55

That’s great. I love you explaning what you were talking about what’s just the five questions there is kind of bouncing your ideas off of somebody else there. That’s a lot of power now. So, all right, so Gleb before we wrap up, where can listeners go if they would like to learn more or connect with you?

Gleb Tispursky 2:17

Well, my books are available in bookstores everywhere. They’re published by great traditional publishers and never go there got this published by courier press, the blind spots between us as published by new Harbinger. The truth seekers handbook is published by intentional insights. So they’re available in physical bookstores everywhere. You can check them out in Barnes and Noble indie bookstores, university bookstores and whatnot. And of course, online on Amazon, Barnes and Noble and elsewhere. My information is going to be on disaster avoidance experts.com. And again, disaster avoidance experts.com. There’s going to be blogs, podcasts, video casts, guides, decision maids, manuals, services and consulting coaching and speaking and training and so on. You want to especially Make sure to go to disaster avoidance experts.com forward slash subscribe. There’s a free eight video based course on making good decisions. So that includes as the first step of the course on assessment on the 30 most dangerous judgment errors in professional decision making, whether business investing and so on. Again, it’s disaster avoidance experts.com forward slash subscribe, and I’m very active on LinkedIn. So if you have any questions about anything you’ve heard, connect with me there and ask me any questions. Doctor gloves support ski, GLEB TSIPERSKY.

J Darrin Gross 3:35

Got it. For our listeners, I’ll have that listed in the show notes. So if you’re driving and unable to right, find that there. Gleb, I want to say thanks again for taking the time to talk. I’ve enjoyed it, and learned a lot. And I hope we can do it again soon.

Gleb Tispursky 3:54

It was a pleasure. Thank you so much for inviting me.

J Darrin Gross 3:58

All right, for our listeners. If you like 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. CREPN Radio

Qualified Intermediary Monetized Installment Sale with Ben Mandel – CREPN #251

Ben Mandel 0:00

That 1031 transaction can be recharacterized into a Qualified Intermediary installment sale. And simultaneously the lender is notified and the money is wired to the seller into an account of their choosing. And that process generally takes between 24 and 48 hours.

Intro 0:19

Welcometo C R E P N 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 0:38

Welcome to Commercial Real Estate Pro Networks, CREPN Radio, Episode Number 251. 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 banks. professionals who provide their experience and insight to help you grow your real estate portfolio. Let’s get into the show. today. My guest is Ben Mandel. Ben is a partner at Capital Appreciation Strategies. He’s also a 35 year finance and real estate professional. And in just a minute, we’re going to speak with Ben about an alternative tax deferral process to the 1031 exchange known as the Qualified Intermediary Monetized Installment Sale. But first, a quick reminder, if you like the show, CREPN Radio, please let us know. You can like, share, or subscribe. And as always, if you leave a comment, we would love to hear from you, our listener. Also if you’d like to see how handsome our guests are, be sure to check out our YouTube channel and you can find us on youtube ad commercial real estate pro network. With that I want to welcome my guest today Ben, welcome to CREPN Radio.

Ben Mandel 2:03

Hello, Darrin, thank you for having me.

J Darrin Gross 2:06

I’m so glad you’re able to join us today. I’m looking forward to our our talk today. And but before we get started if you could take just a minute and share with the listeners a little bit about your background.

Ben Mandel 2:19

Sure. I started my career in a family real estate business and spent 12 years working with the family pretty much developing and selling land parcels and also doing a little bit of homebuilding. Following the real estate business. I became a financial adviser practiced in that realm for 20 years. And for the past two and a half years I’ve been working on educating people about our process a Qualified Intermediary Monetized Installment Sale and helping to facilitate this process for those people who wish to employ when they sell their capital asset.

J Darrin Gross 3:09

Got it. Well, maybe a good place to start just for orientation a 1031 exchange, would it be helpful to at least identify what that is and when it comes into place we can orient as to what what a Qualified Intermediary Monetized Installment Sale is as different,

Ben Mandel 3:39

Certainly certainly. So the 1031 exchange is a section of the IRS code, which was amended in the last year and a half used to be able to be used for all capital assets. Now is only able to be used for real or real property real estate. capital asset in the process allows the seller to defer their tax capital gains tax on the sale of the asset. And what it requires that the seller do is replace the real estate with a lifetime property, which is a very broad definition, they can essentially replace the real estate with any other piece of real estate. They have to identify the piece of real estate that they want to replace what they’ve sold within 45 days from the closing of their sale. And then they must close on that identified piece of real estate within six months from the close of their initial sale. If they fail to do either one of those and the 1031 exchange essentially fails and the seller will have to pay the capital gains tax that was due in the year of sale. If they do identify and close then that deferral can Go on, all the way until they pass away and they can keep utilizing the process to buy and sell real estate current law up until the time they pass and when they pass, the their heirs actually inherit the property with a step up in basis.

So with a 1031 exchange, if utilized correctly, the individual who is selling their real estate will never have to pay the capital gains tax, it will become an obligation of the errors but since the IRS received a step up in basis in the value of the asset if they sell it rather quickly, and they’ll pay very little if to no capital gains tax on that asset. So that’s what a 1031 exchanges is.

What our process does is allows people who want to sell their real estate and any capital asset for that matter. We’re not confined to the real estate capital asset, but it allows those people selling real estate, to not have to reinvest in real estate again, they can reinvest in whatever they choose. There is no light kind requirement utilize our process, and it helps the real estate professional. Sorry, it helps the real estate professional or investor who doesn’t want to identify a property that they want to replace the sold property with within 45 days or close within six months. They’d rather hold on to the cash from their sale, and then reinvest in real estate on their own timeline, rather than on the timeline that the code requires in the 1031 exchange. Example being in a market where people feel that a correction is coming. They may choose that there they may not really want to reinvest, sell at the high point in the market and have to reinvest at the high point in the market. They’d rather hold their own asset and reinvest at a correction at a more favorable cost than they would have gotten if they had had to do the 1031 exchange. So it’s an alternative that allows flexibility with the reinvestment of the proceeds from the sale of the property.

J Darrin Gross 7:18

Got it? So a couple of questions come to mind. In the the 1031 process, you have to identify a Qualified Intermediary. And as you marched on that 1031 process, you’ve got identify three potential properties. Where is it that the Qualified Intermediary Monetized Installment Sale is inserted in the process.

Ben Mandel 7:47

Actually, it’s done prior. While the property is in escrow. The paperwork is set up to create the transaction, the Qualified Intermediary actually closes a transaction as a 1030 Want to exchange and then as soon as the funds reach the intermediaries title company that triggers the intermediary, notifying the independent third party lender who actually monetizes the installment sale to fund that monetization, and then the seller receives most of the money less fees in cash at at typically between 24 and 48 hours after their initial close of escrow.

J Darrin Gross 8:31

Okay, so, example here we’ve got a property we’ve held for a long time. It’s now we we sell it. If I understood you, right, the the sale still goes through the Qualified Intermediary. And then you mentioned the bank or a lender. Can you kind of walk us through that? with that?

Ben Mandel 8:57

I’ll expand on that. The way the training transaction is set up begins while the property is in escrow. The Qualified Intermediary will communicate with the seller and structure a 30 year interest only installment loan. Simultaneously, they’ll arrange for an independent third party lender to monetize that installment loan so that the seller actually receives the majority of their money immediately following closing. And I say the majority of their money there is a six and a half percent fee. For this transaction 5% goes to the Qualified Intermediary 1% goes to the lender. And then 50 basis points actually goes to a long term escrow company that we employ to administer the transaction during the entirety of 30 years. So in other words, the long term escrow company will receive the payments from the intermediary on the installment note, and then make the payments to the lender for the benefit of the seller on the monetization loan. They’re essential. essentially equal payments, both being interest only. And they don’t create a current tax, the escrow company supplies the seller with their 1099 and 1098 each year. And those, those two amounts will offset give an interest income and assuming that the money’s been invested as it should be the investment interest expense so there’s no current tax due. And then finally, at the end of 30 years, the balloon payment is made, which ends the process the balloon payment then is sent to the lender and everything is complete. And the individual or entity receives constructive receipt at which time the taxes are due in 30 years. So that the paperwork is set up wall the sellers and escrow then immediately following the close of escrow, upon receipt of the proceeds by the title company of The Qualified Intermediary, the transaction is recharacterize to a Qualified Intermediary Installment sale, which is allowed for in the 1031 code section that a 1031 transaction can be recharacterized into a Qualified Intermediary Installment Sale. And simultaneously the lender is notified and the money is wired to the seller into an account of their choosing. And that process generally takes between 24 and 48 hours to complete.

J Darrin Gross 11:31

Got it? So when the money goes to the Qualified Intermediary, and then the lender makes the loan, what kind of percentage would would a seller expect to get from the proceeds?

Ben Mandel 11:50

93 and a half percent of the proceeds Okay,

J Darrin Gross 11:53

So it’s just the six and a half percent.

Ben Mandel 11:56

That’s correct.

J Darrin Gross 11:58

All right. And then For the life of the loan for 30 years, the there is a payment due for the interest only.

Ben Mandel 12:07

Correct. And that’s administered by the long term escrow company. Remember, the long term escrow company receives the installment note payment from the intermediary, and then makes the payment to the lender for the benefit of the seller. So there’s no administration obligation for the seller. And then there’s there is an annual $300 fee to the escrow company for their service.

J Darrin Gross 12:32

All right. And the interest only so will the the seller have a an ongoing mortgage essentially or is there is that pre funded or how’s that work?

Ben Mandel 12:45

Yeah, the the, they’re going to have a note receivable and a note payable and and the interest income on the note receivable and the interest expense on the note payable actually offset each other from a tax perspective.

J Darrin Gross 12:59

Got it. Is that something that the seller has to take care of? Or is that part of the process of the Qualified Intermediary in the lender structure that the the escrow company handle?

Ben Mandel 13:15

That’s all part of the process, the seller doesn’t have to take care of any of the administration of the transaction. The only thing that seller has to do one is received the proceeds from the loan and then invest how they choose when they choose. And they’ll need to use the 1099 and 1098 for their annual tax.

J Darrin Gross 13:34

Okay. So the 1099 to 1098 cents to offset the tax liability. All right.

Ben Mandel 13:40

Correct.

J Darrin Gross 13:41

And so we get down the tracks we get to the 30 year mark, and the loan is due in full correct?

Ben Mandel 13:51

Yes. Correct. Both loans are doing okay.

J Darrin Gross 13:54

And interest as well? Or is the interest been paid all the way through? I mean, that’s, that’s been As we’ve been going, right, that’s the interest only loan. It’s just the principal we’ve got to pay back now. Correct?

Ben Mandel 14:05

Exactly, exactly.

J Darrin Gross 14:07

Gotcha. Gotcha. And the percentage of the interest is, what’s the percentage rate?

Ben Mandel 14:16

It varies from time to time, given the prevailing market rates. It’s essentially lately it’s been anywhere between five and 6%. But it’s not it doesn’t impact the seller at all because the the interest income and interest expense offset each other and they don’t, they don’t actually receive or pay the money. It’s all done by the escrow agent.

J Darrin Gross 14:41

All right, but that but at the on the front end, though, the seller is going to get the 93 and a half percent of whatever their their sale price was. reckoned take receipt of that because it’s alone. It’s not. It’s not the proceeds of the sale. And so now, they’re free to Go invest with whatever they want. But they they do have this note that comes up 30 years in the future and if they’re they’re alive to pay it, then they have to pay it. What it what happens if you pass before the 30 years around?

Ben Mandel 15:19

That actually is that is the planning risk. The there are several different methodologies that we help our sellers with, in conjunction with their financial advisors and professionals to plan for that event. Many many sellers, purchase insurance life insurance policy. Second died or survivorship policies typically, if some sellers will, will insure a spouse who is significantly younger rather than the older spouse to save money given that the older spouse would have a longer a shorter mortality. There’s a lot of ways to accomplish that. But in addition they don’t have to purchase insurance they could put a certain percentage of the money typically we will recommend the advisor utilize five to 6% of that 93 and a half percent and put it in a conservative interest bearing type account, municipal bonds treasuries whatever the case may be, that could be utilized to pay that tax when the owner if the sellers word of past there are a lot of different methodologies and there have been some

J Darrin Gross 16:56

All right. Okay, so We were talking about the the 30 years in the U turn with the 5% or take take a percentage amount and put that in a interest bearing account or something to kind of prepare for that. Okay.

Ben Mandel 17:21

And there’s also another another aspect of this process is the seller does not have to actually wait 30 years to pay the tax. If at any time for tax planning reasons, reasons, it benefits the seller to advance a portion of the principal or all of the principal, they can do that in any time during the 30 years to take advantage of whatever advantageous tax planning may occur. For instance, you know, a times some of our sellers or investors experience a large loss in a given year, well, they can advance a part of the principles To be offset by the loss, thus not paying any tax on that portion of the principal, there could be a significant tax increase in a given year that creates concern for the seller, and they would rather pay the taxes before that tax increase goes into effect, they can advance the entire amount and pay the taxes. Prior to that tax increase going into effect, we do caution our sellers don’t understand the huge advantage of this process is the opportunity regained over the 30 year period with their money to earn money, so it would have to be a large tax increase or have a short duration left on the 30 years to really make sense to advance the entire amount. They could advance a portion sure and pay the taxes on a portion of it if they were concerned about tax.

J Darrin Gross 18:52

So the the the two elements that are in play though is the taxes still do it just you’ve deferred it till this the end of this receipt of the the money, which is basically the loan and then also you’ve got the loan to to be repaid. If I’m understanding right.

Ben Mandel 19:13

correct the loan will be repaid by the proceeds from the installment note. So it’s not ever a burden to the individual seller because there’s an offsetting note that will pay.

J Darrin Gross 19:28

Gotcha, gotcha.

Ben Mandel 19:31

Limited recourse. The loan is a financial based loan, and the lender doesn’t hold the seller in any type of recourse if the loan were to default. For instance, if the Qualified Intermediary absconded or went bankrupt, the individual wouldn’t have to pay back that loan because of that reason. So they’ve got very limited, almost no recourse on that one.

J Darrin Gross 20:00

So as I’m thinking through this, I’m assuming that the the the ideal prospect is somebody that’s owned a property for a very long time that has a substantial gain, probably has substantial depreciation recapture. Is there kind of a sweet spot where you’ve seen that dollar amount make more sense where majority of your clients take advantage of this.

Ben Mandel 20:30

Typically, you’re looking at somebody having held the property for seven plus years. If it’s, if it’s sooner than seven years, unless there’s been some unbelievable appreciation. If it’s sooner than seven years, when you look at the fees of the transaction, it kind of limits the benefit from from doing

J Darrin Gross 20:49

Is there any kind of $1 amount where you see kind of a mean seven and a half years is one thing for kind of the depreciation recapture. I would think but as far as dollar amount or desert? Can you point to that or is there a threshold?

Ben Mandel 21:08

The only the only impact $1 amount has in our processes, we have a minimum transaction size of $500,000. But really the dollar amount has to if you if you analyze the sale and analyze the tax and look at the cost of the transaction, it has to make enough sense that there’s a big enough spread between the cost and the tax, that it makes sense to take the cash and reinvest and you regain the opportunity. Basically, you don’t you don’t have to pay the tax. So you get to hold it and make money on the tax rather than then just paying the tax when when you sell the property. There really isn’t it just every deal you have to analyze and take a look at and if it’s something that the seller is interested in Looking at, well, then we go through a process of analyzing Well, what happens if you pay the tax? What happens if you utilize our process? And even you know, some people aren’t convinced they don’t want to do a 1031 exchange. So we look at what happens if you do a 1031 exchange, and and we’re 100% supportive of them doing the best thing for them. I mean, I look I, we offer this process, not because we feel like it makes sense for everybody. And likewise, we also offer this process because we understand that the 1031 exchange doesn’t make sense for everybody, nor does a deferred sales trust which is another methodology to defer the tax there you know, as many different options as you can have for the investor, then then the best service that the investor invent or the best serve the investor is in terms of being able to identify what the best solution for them.

J Darrin Gross 22:54

Got it. So the real benefits from understanding this is that you have access To the the proceeds. And you can go invest as you as you wish. You You don’t know the tax today, but the tax is still it’s owed, but just you deferred it for, presumably 30 years or shorter if you choose. But it gives you basically the flexibility to to do other things. Is that my understanding that pretty much you’re

Ben Mandel 23:26

correct, it’s it’s the biggest issue with our process over the 1031 or the deferred sales trust as it gives you complete control over how you utilize the process.

J Darrin Gross 23:37

Gotcha. Ben, if we could, I’d like to shift gears here for a second. As I mentioned to you before we get started by damn an insurance broker. And as an insurance broker, I work with clients to assess risk and determine what to do with risk and we typically look at one of three different strategies when we’re trying to manage risk, and the first question we ask is, can we avoid the risk? If that’s not a, an option, and perhaps we can minimize the risk. And if we can neither avoid or minimize the risk, then we look to see if we can transfer the risk. And that’s essentially what an insurance policy is. And I’ve been asking my guests and I’d like to ask you, if you’re willing, if you can identify what what you see is the biggest risk. And just again, for clarification, I’m not necessarily looking for an insurance related answer If your answer is that. That’s great. But again, if you’re willing, Ben Mandel, what is the BIGGEST RISK?

Ben Mandel 24:55

Well, the biggest risk actually has two cards. Initially, the biggest one Risk is, as compared to the 1031 exchange, you, you will end up having to pay the tax at some point in the 1031. Exchange if you hold the property until you pass there’s no tax ever pay. So that’s that’s part A of the biggest risk. Part B of the biggest risk is, if you were to pass prior to the note being or the time period being completed on the transaction, then the heirs would have to choose whether or not they wanted to actually leave this open in the estate of the decedent or if they wanted to pay the tax early. We never suggest leaving it open in the state of Tennessee. The idea with estates usually is that you want to close them as quickly as possible. So those are the two biggest risks that last or risk we utilize, or we recommend to the sellers advisor. If they consider utilizing a survivorship insurance policy to transfer that risk of pre deceased in the 30 years, and having that benefit available to the heirs so that they could choose to just pay the tax when the individuals passed away. Otherwise, the biggest risk is if the if the individuals do not pass, there has to be some sort of plan that would allow them to pay that tax in 30 years. Theoretically, if you invest your money and you do well, you’ll have plenty of money to pay the tax. But what we suggest to the advisors in the event that they do outlive the 30 year period, that they set aside a certain percentage small percentage of the asset or the dollars that they receive into a conservative interest paying account, treasury bonds, municipal bonds, that would help to defer or or assist in paying that tax when it comes to you in 30 years.

J Darrin Gross 27:05

Got it. Got it. I just want to ask you, are your services are you able to take care of customers? Is there a limitation as to where somebody has to be located? Are you able to work nationwide?

Ben Mandel 27:22

Any any, any state in our country can utilize this process. Now, there are some states it’s more beneficial than others. For instance, California, when you look at the taxes that are paid on an appreciated asset, totals approximately 37% of the gain is paid in tax when you consider all of the state and federal taxes. And if you look at a state, such as Texas where I am or Florida, or any state that doesn’t have any state capital gains, if all you have to pay is the federal capital gain, then there’s no not as big of an impact as there is in a state that has a capital gains tax on the sale of an asset. That doesn’t mean that it’s not beneficial. And it can be very beneficial if there’s a large gain. But the tax isn’t as large obviously in states that don’t have state tax.

J Darrin Gross 28:20

Got it. Got it. Well, this has been enlightening Ben, I appreciated you taking us through this. Where can listeners go if they’d like to learn more or connect with you?

Ben Mandel 28:34

They can, they can call me at my on my cell phone number is the best way to call me and that that is area code 210-387-9728. Obviously, since that is my cell phone number. They can also text me if they have any questions, or would like to communicate with me about how the process works or how it might better To fit them. They also can email me My email address is macro350@gmail.com. Those would be the best ways to contact me. If they would like to get information on the process itself, they can go to my intermediaries website, which is initial SCROWCollateral.coms.

J Darrin Gross 29:36

Got it.

Ben Mandel 29:37

I said CR o CR, O w, I’m sorry. collateral com.

J Darrin Gross 29:42

Got it. Got it. Then, again, I can’t say thanks enough for taking the time. I’ve enjoyed it. and learned a lot. And I hope we can do it again soon.

Ben Mandel 29:54

Absolutely. I appreciate it. Thank you very much for having me.

J Darrin Gross 29:57

All right. For our listeners. If you like this 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. CREPN Radio.

Intro 30:16

You’re listening to CREPN Radio for influential commercial real estate professionals. For more information on this or any of our guests like us on Facebook CREPN Radio

Multifamily Asset Management with Anna Myers – CREPN #250

Anna Myers 0:00

So these are all very important things you need to know because if you’ve got a unit that’s down for two months, because they took two weeks before they even got in there after the lease ended that took them two weeks to even get in there to start renovating. And then there was some type of a delay. And so instead of 14 days when you’re tracking it, you’re like, wait, it’s not taking you 14 days it’s actually taking you 57 days What is going on here? That’s money last

Intro 0:25

Welcome to C R E P N 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 0:44

Welcome to Commercial Real Estate Pro Networks C R E P N Radio, Episode Number 250. Thanks for joining us. My name is J Darrin Gross. This is the podcast focused on commercial real estate investment. 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. Let’s get into the show today. My guest is Anna Meyers. Anna is an apartment syndicator with Grocapitus based in the San Francisco Bay Area. They currently have over 1800 units. And in just a minute we’re speak with Anna about asset management. But first a quick reminder, if you like the show, C R E P N Radio, please let us know you can like you can share or subscribe or and subscribe, you can do it all. And as always, we’d love to hear from you. If you want to leave a comment. We’d love to hear from our listeners. Also, if you’d like to see how attractive our guests are, be sure to check out our YouTube channel and you can find us at commercial real estate pro network. With that, I want to welcome my guest. Anna, welcome back to C R E P N Radio.

Anna Myers 2:06

Well, thank you. Thank you for having me back. I really enjoyed our first conversation. It’s a lovely place to hang out with you and your Zoom Room. And I’m glad to be back.

J Darrin Gross 2:16

Well, and that makes two of us it looks like I’m glad to have the chance to talk to you again. Before we do get started in the topic, if you could take just a minute and share with listeners a little bit about your background.

Anna Myers 2:32

Sure, so so my family is a commercial real estate family. Three generations My grandfather was started out flipping and became a developer in a commercial developer in Southern California. We had a commercial real estate office, we had shopping malls, etc. So that’s kind of how I grew up in that era. My my father’s an architect, so I grew up in that but I did not pursue it myself. I actually went into it as my first career. I was the program And then worked my way into becoming a systems architect, like my dad and architect but different type of architect and back and then ended up at this later in life going back to commercial real estate because I really saw based on my, my grandfather’s evidence that real estate is really what scales, especially commercial real estate. So I did different things in life had a couple different careers. I always was an entrepreneur, by the way, I always even when I was a programmer, I had my own S corp and ran ran it through my own company writing off as much as I could along the way, just like any good good grandchild of my of my grandfather. So, so yeah, so I’m back in commercial real estate, I see it as the the way to scale my future and give myself the life that I want for myself and my own grandchildren.

J Darrin Gross 3:49

Awesome. Well, before we get into the topic, I also want to just comment to the listeners. If you are not aware of Anna and Grocapitus I highly encourage you to come in and check them out. I’ve had the pleasure of attending some of their online presentations. And before we wrap up here at the end we’ll give you guys the how to connect and you know find out more about them but but be sure to stick around for the end of that and get all that because I cannot encourage you enough to check out and Neal’s presentations

Anna Myers 4:37

Thank you very much for that we we take a lot of pride in that and we really enjoy it.

J Darrin Gross 4:42

Well in there’s a couple that I I have notes here that I remember watching one was the one with Jay Scott about the economy.

Anna Myers 4:52

That was a good one.

J Darrin Gross 4:53

It was very clear. And so if you are concerned at all about the kind of What is the what is the state of the economy? And how’s it going to affect real estate and all that? I encourage you to check that out. And, you know, because I think there was a lot of wisdom and insight and reasons for, or, you know, support given as to why the current situation is expected to continue as a

Anna Myers 5:23

Yeah, very interesting conversation because Neal was on that one, too. So lots of interesting back and forth between Neal and Jay Scott, and just throwing in there that Neal does a new presentation every year brand new rock presentation called real estate trends, which is all about macro and micro economics. And then he predicts, and then they talks about markets and make some predictions about best markets, so that all new presentation is coming up. You don’t want to miss that one. And if that one’s coming up in early February, I’m not sure when this is going to, or sorry, first of March. If if this is posted later, it’ll be up on the site and you can watch it. And I know you don’t want to miss that one. I look forward to having you in the audience. Hey, Darrin,

J Darrin Gross 6:05

No, I will be there. And then the second thing I wanted to point out, or the other presentation I saw was one you guys did about a new construction that you’re doing in Utah. And one of the things that struck me is unique, and I haven’t heard anywhere else is the opportunity for 1031 exchange money to invest in that that project. And if you could, I’d love to just talk a little bit about that before we get into asset management is how that opportunity plays and if you could just speak a little bit to that.

Anna Myers 6:45

Sure so so I, you know, again, based on my family being strong commercial real estate family, I have done a lot of 1030 ones myself. In fact, I just completed my seventh 1031 and when I was going to sell some stuff Small condos I didn’t want to just 1031 into another like duplex or multiplex, because I have now as a syndicator. I’m an asset manager for large complexes. And I was like, I want to come into the big projects. I don’t want to be, you know, messing with a property managers on the small. It’s just a headache. So I said to Neal, I want to 1031 into our syndications. He said, I don’t think you can do it. I said, Oh, yeah, Neal, I think I can. He said, Well, if you can figure it out, then you can do it. So I figured it out. And I connected with, you know, lawyers and did a lot of research and yes, you can 1031 into a syndication. If the 1031 structure in addition to the LLC or LP whatever the entity is, that investors are buying shares in, you have to add another structure as well. And that structure is a tenant in common structures, often called a TIC structure. Once you have a TIC structure that is an eligible replacement for a 1031 person And to come in and what they do is they 1031 in and they sit under that TIC structure. And they they so in our projects, they are the opposite just like passive investors. So they are, they’re, you know, not doing anything active, they’re doing everything just like the passive investors are, but they get the huge advantage that they get to 1031 out of the project at the end, because they’re in that tick structure. So they come in, are avoiding paying the taxes on their gain, right. And then on the exit, they’re again, avoiding paying to exit the taxes on their gains. So huge advantage to people that are 1030 wanting in now, we, we can’t lenders aren’t in love with having a lot of 1031 participants or TIC participants on a syndication project. So because of that we have to limit the number that we can bring it so we’re not looking at bringing in 20 people, we pretty much are looking at bringing in five to six Because we don’t want to limit our potential lenders in the future on the project by overburdening the project with 1031 participants, now we still have our LLC participants. So that means that the 1031 part is, you know, not not a very large part, it might be 2 million $3 million out of a, you know, 12 to $15 million raise. So it’s not a huge part, but it is a piece of it. And it’s a great advantage to those people that get in and are able to 1031. So the way we do that is we have a process where people connect with me and my team, and these are people that know they want to do a 1031 in the future, or they’ve got one going on. And they connect with us to say, hey, do you have anything coming up? That’s 1031 eligible, because not all projects are going to be 1030. When eligible. For example, we just did a self storage project. We didn’t do 1031 on that one. We tend to do it on new construction, not all value added. So it’s just going to be the right mix. And it has to support you know, we have to have the time. Add the extra tick structure, etc. So because of the timing and timing, so specific on 1030, once you’ve got a, you got 45 days to identify 180 days to get in, we have what I call my 1031 Club. So these people engage with me and my team and get into our list and we let those people know because we understand their timing and then we let them know when we’ve got projects coming up that meet their timing. So it’s pretty good, pretty good deal for them, they that it’s their choice if they want to, you know, come in or not come in, but it’s a great opportunity to scale from you know, many people are selling like a single family or condo in the Bay Area. They’ve got all this equity, they know they should go multifamily, but they don’t have time. They don’t you know, they don’t know how to get there. So this is a really great way to leverage a professional asset management team, professional team sponsor team that’s taking care of the asset full time and you get to be you know, passive on it and still get your tax advantages that 1031 give.

J Darrin Gross 11:01

Yeah, no, I in the whole 1031 thing, I just think that the, the, the opportunity for anybody that’s held a, an asset for a long time is so much more appealing.

Anna Myers 11:12

Yeah.

J Darrin Gross 11:13

And you know, maybe they’ve thought, Well, I’m just gonna go buy another, you know, small property or something like that as opposed to turn it over, or get into something more professionally managed and larger scale. I just really, you guys kind of presenting that.

Anna Myers 11:29

Yeah. And to find out more about that just if I could add, you could go to Grocapitus.com and we have a 1031 page that has a lot of information on it as well as a webinar that I did with our lawyer that explains how to 1031 into a syndication. So it’s all the nuts and bolts how to 1031 whether you’re 1030 wanting into a value add which is existing apartment building, or new construction because it’s different, and we’ve done both, and there’s nuances and so we talked about what the documents are that are required, what the process is like it A very you know, like you were saying our presentations are very fact filled and we believe in deep rich content. So that is there for anybody to go and check out and then they can you know if they want to proceed, they can go ahead and set up an appointment with my 1031 team.

J Darrin Gross 12:15

Awesome. So let’s move past that just for a second here and and talk a little bit more about asset management. At Grocapitus, you guys find deals analyze raise capital acquire dispose of the asset.

Anna Myers 12:37

Eventually, yeah, eventually.

J Darrin Gross 12:38

Yeah, that’s that’s the eventual right there.

Anna Myers 12:41

Yeah.

J Darrin Gross 12:42

And in the in the middle of that is managing the asset.

Anna Myers 12:46

That is right.

J Darrin Gross 12:48

And I think that, you know, so much of the the talk and the energy that I find in most conversations has to do with finding the deal. You know, I can’t find any deals. I can’t find any deals are looking for the deal, the broker relations, the financing, and then Congratulations, you’ve got the deal. And at that point now you’ve got time to put your plan to work and

Anna Myers 13:14

That’s right

J Darrin Gross 13:15

And make it work. Can you talk a little bit about where Asset Management begins for you? Is it is it as soon as the properties identified you can or you start or is it once it’s acquired or?

Anna Myers 13:34

Yeah, that’s a that’s a great question. First of all, you know, I as the lead underwriter for the group, I you know, I always say that underwriting is an iterative process that, you know, never really ends and some people think, Well, once you underwrite a property and you buy it, then the underwriting is over. Right? Well, no, now the underwriting becomes your asset management plan, because that is your business plan. You said this is what you’re going to do when you create When you do underwriting, you’re you’re putting together projections, you’re, you’re creating assumptions about rent growth, and you know, various, you know, various elements, how you’re going to renovate, how you’re going to be able to push rents. Those are all projections that you made to create a business plan. Well, now once it’s acquired, that business plan is what you need to put in motion. So as part of that business plan for likely at the end, you were working very closely with your property manager to establish budgets. So you are going back to your operating expenses and narrowing it down and saying, Let’s get this right. Let’s make sure you know, what, how much are we going to spend on repairs and maintenance or what’s payroll, all that? So you come into the asset with a really good sense of your budget, and now it’s time to run it to your actual so asset management, you’re now taking that plan? And on a monthly basis? We’re looking at budgets versus actuals to make sure are we off? Are we on us, you know, the very first important thing about finance right? Once you’ve got a plan, you got to stick to that plan or understand if you need to pivot, right? If you’re wrong on some areas, and you’re saying, you know what, we didn’t realize that insurance was going to get raised, we did our best job we could we did our best due diligence, but the insurance is going to cost us so much more than we thought. So where else are we going to find it? Where Where are we going to dig in this plan to make it up? Because we want to still follow this plan, but you do so. So in order to to really stay on top of an asset, you’ve got to dig deep and you’ve got to dig regularly. So we have Asset Management meetings are every week with our property managers. So we meet with our partners.

First. We have a meeting with the the sponsor team, the partner team, and we collectively look at the data for that week. And we identify what we want to address with the property manager because you can’t just go in there and spray shot everything you need to go in there focus we want to go in there with a common message and Make sure that we’re all on the same page. So all the partners, we’re not, you know, we’re all together, then we have our regular property management meeting with the partner, that then we’re driving these ideas that we that we want. We’re looking at certain trends and driving them of course, there’s things we look at every week regardless, you know, like occupancy, physical occupancy, economic occupancy, delinquency. We look at the leads that are coming in. So try incoming traffic, and what that’s how, you know, what, how are those converting? So definitely, we have we have a whole spreadsheet again, we’re very data oriented, right. So we’ve got a magnificent spreadsheet, that is called the Monday morning report, otherwise known as the MMR. I think our property managers have different acronyms we call it but we require them to fill out this data and they get the data out of their software, their property management software, whether it’s AppFolio, or yardie, or rez resume in or whatever it is, they pull their reports and they fill in our data. So it’s a it’s actually it’s an Excel spreadsheet, but it’s like a Google Sheet. So it’s easy for us to share online that all the partners can look at it. And each week is a different tab. It’s the same same data format, but a different tab. So we can easily look back through the tabs and see the trends. So we can just tab back through time. And then the other thing we do is we have a charts tab at the beginning, which is pulling data from all of those tabs to create charts so we can see the trends. We can clearly see what occupancy doing what occupancy, economic, winter delinquency, all of these trends were all about data. And data does isn’t that good. If it’s just sitting on a spreadsheet, we’re always trying to bubble it up to a visual format that we can say, Aha, this is look at this. You know, and notice where things are going right and notice where things are going wrong.

J Darrin Gross 17:58

I love that that you are Actually, you know, make the picture out of it, you know what settled saying a picture’s worth 1000 words, the Yes, just the ability to get the concept instantly when you can see, you know, trend lines.

Anna Myers 18:13

Yeah. And because we’ve got that consistency of the consistent MMR that we’re using, we’re able to have that across all of our projects. Many people say to me, Well, your your property managers are all using different software. So how do you do that? Well, we do it by having them input into a consistent, you know, vessel, which is our MMR. And then people say, Well, how do you get them to input that? I mean, I don’t think my property manager would do that work. And we say, you know, if my property manager is not going to do that work, then I’m going to get a next property manager. It’s it’s not optional, because we have to have data to make decisions. And if the property manager is not willing to put the data in the format that we need it then we are looking for another problem. Manager. There’s no two ways about it.

J Darrin Gross 19:02

So, you know, you mentioned that the consistency is the report that you guys produce, or that you provide your Monday morning report that the property managers can use whatever software they they are, you know, subscribed to,

Anna Myers 19:18

yeah, best best practice. There’s several really good ones out there.

J Darrin Gross 19:21

Right.

Anna Myers 19:21

Don’t mind which one

J Darrin Gross 19:22

Right, but it’s not it doesn’t require that that everybody you work with Have you already or make it they can use different programs. But you mentioned I think the questions worth revisiting there just a second is the the property managers. Have you found much pushback or most of the property managers recognize, you know, the importance or do they need to be encouraged or

Anna Myers 19:49

We’ve had, we’ve had one property manager that specifically that couldn’t wrap their selves around the data that we were asking for and We ended up replacing that property manager about, you know, we worked with them for about five months trying to get them to provide us the data they needed that we needed. And it didn’t happen. So we replaced them. And I also want to say that in the interim, that they weren’t providing us the data that we needed to do our job. It turns out that there was things happening that we weren’t aware of one thing we haven’t talked about, yes, yet is our CAP X tracker, which is another very important tool for us. That’s a weekly tool as well. So because we weren’t getting the data, we had no visibility to the data that we were asking for. Things were that there was way too much money being spent on the unit, the unit turns, but we didn’t have the visibility to it because they weren’t filling out our trackers. So So let’s talk about that for just a second. We’ve talked about the Monday morning report, which is you know, occupancy and all that type of stuff. But what’s really amazing And Donna value also is tracking your expenses related to unit turns and the exterior improvements that you’re making. Again, you created a plan when you were coming into the project to say this is how much it’s going to cost me, this is my budget. And this is the rent bumps I’m going to get when I do this. So now on a weekly basis, or in the cap x tracker, again, it’s the property manager for each unit that they’re turning. They’ve got lines on the cap x tracker to say what’s in progress. And they are inputting what how much they’re spending, actual spending on each item. So they’ve got the budget broken down by you know, the kit that’s coming in, how much for the vanity, how much to resurface the bathtub, this is the budget for it, what was the actual cost, okay, and then the cap and then we also have date so they say, they say okay, it’s gonna cost again, this your property manager from the very beginning. They said we’re going to turn the unit it’s going to be $6,000 to renovate for the Premium renovation for this two bedroom, two bath, and it’s going to take us 14 days. And we’re going to get $175 rent bump or $200. Rent bump. Okay, that’s what you hold them to. Now when you’ve got a tracker, you’re able to see it because they’re putting in the data. And because they’re putting in the dates, we’re looking at the dates. When did the unit become available? When did they start renovating? When did they finish renovating? And when did a new lease occur? So these are all very important things you need to know because if you’ve got a unit that’s down for two months, because they took two weeks before they even got in there after the lease ended, it took them two weeks to even get in there to start renovating. And then there was some type of a delay. And so instead of 14 days, when you’re tracking it, you’re like, wait, it’s not taking you 14 days. It’s actually taking you 57 days. What is going on here? That’s money last right. And then you tracking the budget to say you said it’s fixed. thousand dollars. Now sometimes you’re going to have, you know, of course, we’re going to average it. But if you’re looking over time in something it’s costing you 80 $200 to turn these units, and we’re not getting a $200 rent bump, we’re getting a $75 rent bump. Now we need to pivot, this is too expensive. We need to pivot. Let’s look at other options related to our unit turn and see what makes the most sense. Should we do a modified upgrade? If we’re not getting the rent bumps we need? Let’s modify it and try and take the the budget back from 6000. Or you know, the over you’re spending too much, but let’s try and take it back to 2500. What can we get for 2500 on a rent bump on a renovation? And can we get the same rent bump that we’re getting? So you see by having the data, you’re able to see all these things very clearly. But if you just let your your property manager just go and be like, oh, they’re just like, yeah, we’re turning units. We’re getting people in there. It’s great. How do you know if it’s great?

J Darrin Gross 23:57

Ya know the if you Don’t inspect here, your, you know, be careful, you’re gonna get what you’re gonna get kind of thing.

Anna Myers 24:06

Right? And then there’s the physical inspection, of course, but then there’s also tracking the numbers. Right, right, and making sure that they’re holding true to it. And sometimes it’s not their fault, the cost went up, right? It’s not, it’s not like property managers are evil. I mean, many of them all, you know, they’re just doing their best. But by looking at the numbers, we’re able to make decisions as the asset managers, as the sponsor team, to make the best decision for the asset. So we don’t get you know, six months into it, and then get a surprise and go like, Oh, my gosh, what happened to the CAP X budget? It’s like gone.

J Darrin Gross 24:40

Right, right. No, I think that the other thing that that’s kind of ringing loud and clear for me is the the fact that if, if you are paying attention to this on a on a regular frequency, not just random, you have that that opportunity to pivot. Like you said, If They said can take 14 days and it’s 57 days. Well, if at the end of two weeks, and they still haven’t got the thing turned ready for rent. In worst case, you should be two weeks away from having it done. If you’re paying attention, if you’re not asking the question, you know, you may be waiting till it’s done and find out it is 57. Like, so do you get 75 when you were promised 175 that’s math doesn’t work there.

Anna Myers 25:27

That’s right. That’s right. So we talked about that every every meeting as well. We always visit the cap x tracker for the interior renovations and then looking, of course, there’s, you know, at the first year or so of a project, there’s exterior renovations, whether you’re painting or rebuilding fences, or there’s always things and so you’re looking at budgets for that and timelines for that anything related to the lender when you first buy a project. The lender often has many requirements that they need you to complete within a certain timeframe. So you’ve got to stay on top of those and make sure that you deliver are the items that you are, you know, legally required to do to your lender, you don’t want to get in trouble with your lender. So the cap x tracker helps you keep on track track on top of those projects as well.

J Darrin Gross 26:13

No, that’s great. You know, the in projects, I mean, there’s there inevitably there’s some sort of a surprise, you know, clearly in what you’re talking about just turn in units and stuff. It seems like it should be fairly routine. Can you can you speak to a surprise that you’ve had and how that was addressed based on you know, the your ability to be so focused and in regular communication? Is there one that stands out in your mind here and well,

Anna Myers 26:46

In general, and I would say that that there’s, you know, a lot of us asset managers have been talking just across the board. The price of renovations is definitely higher than many people are underwriting for And so don’t let that one surprise you. Many of us were underwriting renovations at you know, 5500 6500. But the actual renovations are coming in these days more like 7500 to 8500. So that’s, that’s definitely something that people should be aware of is in labor as part of that, and construction prices are part of that. But I just encourage everybody to really look at the numbers and underwrite correctly. So we’ve had, you know, because of that we’ve had our cap exposures were challenged on one project because the the renovations the assumed renovation wasn’t correct. So we had to start doing some other things. Fortunately, the property’s performing magnificently. So in that case, but you don’t want to be in that situation with an underperforming property and you don’t have enough cap x budget. So that’s definitely something to Look out for. I say another thing that is interesting is, you know, there’s just things that happen, you have roofs that you weren’t aware of, you know, at the time you you bought things happen. We had one property where we knew we had some leaks in the ground, there was some underground water issues going on. But once we actually acquired the property, it turned out we had to make the decision about replacing all of the underground pipes. And we did not expect that we were going to have to do that. But that was a decision that was made because it was a 10 year project, it was a longer loan loan on that one, and so it’s a longer hold. So things are going to happen along those lines. And then sometimes rodents can surprise you infestations of different types can definitely come into play. And again, if it was actually the same, same set of partners, same project. We have issues with rodents encroaching into the galaxy. In the building, because they’re trying to like get out of outside and then getting trapped in the walls. And that’s not a very nice thing to have happen if you’re a tenant and there’s like a rodent in the wall. But so so we learn things all the time. And there’s a cost to that it’s not cheap to get rodents out of your walls, people, you know, and then you have to block off. And these are these encroachments, these areas that they’re getting into are gaps in the building that are made to let the building breathe. So it’s not like it’s a mistake, right? It’s just that particular style of building was more conducive to rodents getting into so now there’s a whole How do you prevent them from getting in? So lots of interesting things happen with asset management?

J Darrin Gross 29:45

I was gonna say I’m assuming those are lessons that you carry forward as you go to the next property that yes,

Anna Myers 29:52

You look at that style of building and go now I don’t think I want that style of building anymore. There’s something about just the way the roofs are set and stuff that’s like yeah, That one gets pricey.

J Darrin Gross 30:01

Yeah. But and you mentioned that the underground pipes was that unique to a vintage of property or have you?

Anna Myers 30:11

Yeah, I think definitely the older properties. I mean, that one, that one’s a 1970s property. So, you know, there’s there’s good value that you can get out of them, but they’re, they’re expensive. You know, we’re, we’re actually looking more at Class B properties now. And I clearly work we’re actually constructing Class A, so we’re doing about 50% of our portfolio is new construction in the white markets right now.

J Darrin Gross 30:38

Right. Now, I think that, you know, most investors that I’ve talked with the lessons they’ve learned on some of the early properties and and, you know, they’re they’re valuable because you didn’t, you wouldn’t have learned them otherwise, where they didn’t seem as valuable when you might have read or somebody inferred Do you on doing Your underwriting now, are you getting like a hard cost estimate from a contractor on your terms are you relying on your property managers for those numbers,

Anna Myers 31:09

We typically rely on the property manager for those numbers because they’ve got the connections in the market. And, and sometimes they’re using in house, right, they’re just getting the material and we’re using in house staff to do to do the term so but if we want to do a lot of turns at once, then that will bring in an external person cuz there’s, you can’t just have your one maintenance guy turn 16 units, you know, so so you have to make that decision. Usually, if you’re bringing somebody in from the outside, you’re gonna be paying more though. So there’s a trade off on on how fast you want to move and and get it done.

J Darrin Gross 31:46

Right now and just is kind of a reference point for scale. And like you said, if it’s just kind of a gradual thing, and you’re doing it internally makes complete sense. But if you want to do kind of go fast, it might take some external.

Anna Myers 31:58

Yeah, I guess there wasn’t Another thing that that actually came up recently with with ordering materials for the turns, we have one partner who’s been very successful at ordering materials, you know, outside of the United States to order these, you know, beautiful courts and cabinets and has been able to control their costs and they order containers of them and get them on site. And it’s been a magnificent thing. So we were working on that on another project on the other side of the United States and we said hey, let’s let’s get our granite and and our cabinet doors front, you know, from an outside source outside the United States. This was about nine months ago before the whole trade wars was going on. So you know, there it was better pricing them. So that was all kind of you know, the pricing got a little wonky, right. But what happened is they delivered the granite and the cabinet doors, and the granite wasn’t measured right not by us. We’re not the ones that did the measuring that their company did the measuring the granite Wasn’t measured, right and it all of its off by an inch. All of this one particular style is off financially. So now they have to come in and modify, like, you know, 70 granite counters that we’ve ordered that are in this container. So, you know, to the best of your intention sometimes you’ve tried to get something that’s like cost effective and efficient and get containers that you can have on site so that you can scale and things happen but you know what it where they say, you know, you always have to measure you know, measure twice, measure three times once. Yeah, yeah, cut once. Now, that’s not our that one was not our fault. So they have to eat that one. But it adds to our timeframe because every time we do one, they have to come out and modify it. So it does have an impact on us. Be careful when you’re buying materials off, you know, offshore, it’s it can be not a good thing.

J Darrin Gross 33:55

Well, and just it kind of highlights just how You know, whether it be the political or even though the local rules or whatever I mean that, you know, operating a property, you are susceptible to a lot of things beyond just the, the physical property and the rent, the tenant, the property management, there are other influences that that can come into play that may not be so obvious up front. Yeah, so, definitely, I’m hearing more of that just, I mean, you know, based up here in Portland, Oregon, we’ve, we’ve certainly got our fair share of new rules that are coming on board with rent control, and all that, but it’s, you know, it’s, I think, as much as the the fear of it is I think more of it’s just a an adoption of and, you know, continuing unless you’re planning to get out of the market and go to a different market, you know, kind of thing but if you’re, if you’re committed to the market, you have to pay attention and, and, you know, get your wits about you and have an answer. Action Plan rather than find out in court how you’ve, you’ve lost because you weren’t, you know, taking care of things properly.

Anna Myers 35:07

Yeah. And well, and speaking to that, we we really try to pick our markets carefully. Because it does affect your asset managing related to landlord laws. So you can be in a state that’s landlord friendly, but in a county that’s extremely slow with delinquency with evictions. And the net result is it takes you 90 days to get a tenant out even though you’re in a landlord friendly state. So I do always tell people that don’t just look at the landlord friendly state part of it. Look at the county level and find out what is the timeframe it takes to evict because we were in Georgia and multiple multiple apartment buildings in Georgia, in Atlanta in this particular DeKalb County. It’s at least 60 days to get a tenant out that isn’t paying your rent and in The same state, not very far away 45 minutes away in Dalton, Georgia, it takes two weeks. Hmm. So that’s a huge difference. And that can make a big difference in your bottom line, because you get a bunch of people in there that are basically professional tenants that are, you know, hey, I can be here for First of all, they’re going to be late for months. So it’s basically like a 90 days, 90 days, they can just be sitting on you know, sitting there and not do it. But when you’re in a place that there’s no advantage to you, because you’re going to be on the street in two weeks. You don’t play that game. Run. And Arizona, I will say that we really like Arizona, they’ve got very friendly, landlord friendly laws, and they’re very quick. On the leases, you can change over time. So if you come in to stabilize a property, and you want to add rubs or you want to add pet fees, it’s a very quick process. You don’t have to wait until the lease cycles out. It’s more of a notification process. So I really like Arizona the way we’re able to turn our property much quicker and implement our stabilization plan. So I would say that, that as an asset manager, make sure you choose your state and your county very carefully because you will have to live by those rules and it will impact your business plan, especially delinquency. You always want to look at delinquency and understand your market. And what is the the expected delinquency for that market? Don’t just look at a property and say, that property’s got so much delinquency, I’m going to do so much better at it. They’re just bad at it. No, don’t look at it like that.

J Darrin Gross 37:37

Yeah,

Anna Myers 37:37

There is potentially a demographic issue going on and you might not do any better than the previous person in managing that demographic and dealing with delinquency, but delinquency is a huge, huge issue. When we’re asset managing buildings in certain areas, and it just eats away at your bottom line.You know?

J Darrin Gross 37:57

Yeah, no, the the goal is The rents due on the first and that’s the end of the conversation. If you’re spending a lot of time chasing people, it’s it’s his money lost.

Anna Myers 38:06

That’s right. So try to invest in places where you don’t even have to have that discussion. That’s the best cure. Right? invest carefully. Invest in the hyperlocal. Look at your hyperlocal area and understand the unemployment, the poverty level, the delinquency trends in that area, so that you know, what you’re buying into, and what are what you can expect from the tenant base, and they’re just who they are. Right? So you, you It’s your choice of where you buy,

J Darrin Gross 38:35

Right, you’re not going to change the neighborhood by buying one property.

Anna Myers 38:39

That’s right. So to me, we’ve got to buy used data to buy the right way.

J Darrin Gross 38:44

Right, right. Hey, you’d hinted at and I would hate to not touch on this because I know you guys have the secret weapon for driving traffic.

Anna Myers 38:56

We do.

J Darrin Gross 38:57

Can you speak a little bit to that and how How you as an asset manager, you know, are involved with that and how your property management responds to that.

Anna Myers 39:09

Sure, so, so at grow capitis We have a team that we call the efficiency center, and that is a group of offshore team members that are under my, my side of the house. And what their job is, is to create campaigns to create advertisements for our apartment buildings on across various sites and and sources online, to to drive traffic to the property to create demand and to create appointments is what we’re trying to get to we want to show the property as much as possible.

So we have, you know, Neal is known as the mad scientist of multifamily for very many reasons. One of them is because early on when he was trying to figure out how to dry property, he hired people to figure out how to get legally get around systems. How do you get the best out of each of you know, Craigslist and Google and Zillow and Thumper? How do you keep up at the top? So that’s the strategies, we’re looking for their strategies, not hacks, but their strategies. So with this knowledge, we then implement our campaigns across various platforms. And we have this army of people doing it. So we’re driving traffic to our apartment buildings. I’ll give you an example. In these softwares, you know, yardie, AppFolio, etc. there’s typically a button that the property manager can push that pushes up advertisements and they push that button and they say, I’m done. I’ve advertised my apartment building. Let them all come now. So we are looking at traffic every week. And so on this particular project, we had an average I think was like 18 leads 18 incoming leads per week.

Once we turned on our growth capital efficiency center, it went from eight 18 to 190

J Darrin Gross 41:02

Oh my god.

Anna Myers 41:03

Yes. So 190 leads Well, that is so many leads that the property managers like I can’t handle this, this is too many leads coming in. So that is our, our efficiency center team also handles the leads. So they are now taking the leads and following up with them, whether it’s over email over Facebook marketplace over text, they’re interacting and engaging with these leads at the platform level, and that with the intention of booking appointments, so our team members are trained in the software that the property managers using the portfolio yardie va, and they actually have accounts that they are able to go in and book the appointment for this lead to come on site to see the appointment to see the the, the the unit that’s available.

So they’re always aware of the units that are available to book or to rent and then they’re booking appointments to fill that need, okay. So by using this and then and then it’s up to the property manager, right to show and to bring home beliefs, right? By using this strategy, we feel we’re able to probably increase the occupancy by anywhere from three to 5% across our projects, because we’re driving traffic to them. That’s huge. So yeah, it’s really nice. The other thing that our efficiency Center does is they can help our property manager to do things that they never have time to do, like delinquency calls. These You know, this is something that takes time there’s a lot of communication that goes out in certain markets related to delinquency. Well, our team members can can play a role in that. We also play a role in improving the tenant satisfaction and resident satisfaction and increasing the surveys online increasing the feedback and the you know, the scores online by reinforcing Good, good, you know, people getting good Scores give me a

J Darrin Gross 43:00

Good review.

Anna Myers 43:01

Nice. Yeah, so it’s all about good review that takes time, it takes people that are dedicated to move that needle on your online reviews. And our efficiency center helps with that, as well. Finally, what we’re also dedicated to is improving the community experience. So property managers don’t always have time to be planning events and doing that type of thing. So our off offshore people are very skilled at, you know, finding catering and coming up with ideas for how to plan plan events, that to make it easy for our property managers to create, you know, just little small events and do things that improve the community, make the community a better place to live, make people appreciate the efforts that are going. So I would say that at first, our property managers are maybe not so much in into the growth of the efficiency center, but once they get the full effect of how we’re plugging in and and really helping them do their job. They really love it. So that you know, we’re there to do the things that they never have time to do and to provide leads like handheld like, here it is on a plate here’s here’s tenants potential tenants showing up at your door potential residents showing up to see to see units.

J Darrin Gross 44:20

Do you guys tie any kind of incentive compensation for percentage full or is there anything that

Anna Myers 44:31

Well there’s I mean, there usually is for the property managers, there’s there’s leasing commissions and that type of thing that’s always built in.

J Darrin Gross 44:39

Okay, let’s just say yeah, but but you know, I love the model in as much as that, you know, and I know there’s some science behind it about you know, a task if you’re in, if you’re doing one thing in you have to leave that task to do something else. And then when you come back to at the time last type thing, whereas in this model, they’ve they’ve got people Showing up, they’ve just got to keep showing up, you know, showing appointments as opposed to then having to do the do all these other things, they can stay on that one task and just it makes a lot of sense.

Anna Myers 45:11

And the lead side of it is also true, the property manager doesn’t have that much time in their day to be constantly doing the emails and constantly following up with the leads. Well, what happens when, when you are I are interested in finding an apartment and we place you know, we’re submitting our inquiry. If we get called right away or emailed right away, and we book an appointment, we’re like, oh, good, I did that for the day, I’m going to go off and do something else. So we’re trying to stop the prospective tenant in their tracks. And by having ready staff that’s that’s there, day in and day out, booking booking, booking booking, we’re hoping to turn that tide we can also drive traffic between our properties if we’re in the same Metro. So that’s also another advantage is being able to take advantage of that.

J Darrin Gross 45:57

No, that that’s awesome. I You know, just that staying on task like that and like said, The lead is hot. If somebody is clicking around on your website and they they click it and and they book right then all the other opportunities have kind of like, you know, fallen by the wayside, you’re in the lead there. So that’s

Anna Myers 46:18

Right and usually they’re on Zillow or Craigslist or Facebook. So they’ve got lots of choices. They’re not necessarily on your website yet. Right?

J Darrin Gross 46:26

Right.

Anna Myers 46:26

So it’s so easy for them to just go to the next advertisement, the next listing, so that’s where we really want to stop them in their tracks.

J Darrin Gross 46:36

No, that’s great. You know, and, and I appreciate you kind of going through all of the different aspects of, you know, what you guys do in asset management? Is there anything that we haven’t talked about that you feel like asset management is, uh,

Anna Myers 46:52

Well, I will say that on a monthly basis, we do a really deep dive into the financials, which obviously are very important. So we’re looking, we have our week. meetings and then once the financials are closed, we have a finance meeting every month and we bring in our we call our financial controller Loretta. And so she’s a big part of that. So she receives the financials to go through with a fine tooth comb, you know, a few days before the meeting. And then she comes into the meeting, as a, as an expert in the apartment industry is she’s also an expert in new construction contracts and everything related to that. And so she’s able to, to look at the trends and look at the financials in a way that I don’t even know how she does it. I mean, she’s just a phenom.

She, then well, the the accounting team has to be on that call, also, not just the property manager, because she’s asking very detailed questions and diving into things and saying I want to see the supporting reports under this section of the balance sheet or under this section. I need more detail under here to understand these transactions. And her job is well she’s got a few jobs. Want us to make sure that when it comes tax time that our books are clean and ready for the CPA, because if things are in the wrong place within the within the books, it’s very expensive for the CPAs team to fix it. So that’s a bad cost that the investors have to bear. Basically, it impacts the bottom line, I should say, if we end up having to spend a lot of money with a CPA to clean up our books, because things were put in the wrong place. So she’s making sure that’s done.

But a very important job is she’s making sure that there’s no financial mischief when our property managers know that we’ve got Loretta on the call every month. They they stand up and take notice. I mean, Loretta asked very detailed questions. She asked her very detailed reports and she doesn’t just take simple answers, like you got to really come correct with Loretta because she knows her stuff. So I’m really proud to have her on our team. I learned so much from her and she’s there You know, to help people understand the higher the fine levels of finance that we all need to be, but she’s there to protect our investors equity. That’s what she always says is, that is her number one role is making sure the investors equity is is is in is protected. And she takes that role very seriously. And she’s a great team member.

J Darrin Gross 49:18

Well, it’s great. I love the team concept and the team of experts. Mm hmm. That’s, that’s pretty powerful. Anna if we could, I’d like to shift gears here just a second. As I mentioned you before by day, I’m an insurance broker. And as such we do some risk management with our clients. And we typically look at one of three different strategies. Well, we usually end up on one of least one if not more, but there’s three different strategies we look at. The first is we asked the question, can we avoid the risk and Second, we look at if we can avoid it, is there a way we can minimize the risk? And then the third option is can we transfer the risk and that’s what an insurance policy is, is a risk Transfer Tool. And so, I’ve been asking my guests, if they could take a look at their current view of the investment situation and their situation, and see if they can identify what they consider to be the biggest risk. And just for clarity, I want to make sure you understand I’m not looking necessarily for an insurance related risk. You know, people don’t want you to feel like that’s, that’s the goal of this. It’s more of just like, you know, looking out what do you see is the biggest risk. And if you’re willing, I’d like to ask you, Anna Myers, what is the biggest risk?

Anna Myers 50:54

What is the biggest risk of well I’m going to tie it back to a To Asset Management because there are, there are risks with investing in real estate. And I think it’s a risk if if people aren’t watching the bottom line and keeping track of their investments. So I think that, that you need to have your handles hand on data and keep on keep on, you know, keep on task to make sure that to mitigate the risk of things going wrong. So the risks are, you know, occupancy could could go way down because you’re not watching the issues, you could have a lot of delinquency coming in. Of course, you could have a lot of natural disaster come or something like that. But there’s a lot of things you’ve got to keep your eye on, on on an asset. And those are the risks that I believe the asset manager like like you know, the asset managers responsible for under Standing those risks and mitigating them and and seeing them before they happen so that we can pivot. And we do that using data and always being on task I, in 2019, I spent over 450 hours in Asset Management meetings, just Asset Management meetings, I’m not talking about meetings, Asset Management meetings 450 hours, it is something you have to be very dedicated to. And it’s you know, it’s a team of people so I do believe that the job of the of the asset manager is to mitigate risk for the investors.

J Darrin Gross 52:37

I love it. And again, kind of reiterating the value of of paying attention to the numbers so that they all add up and are what you expect them to be.

Anna Myers 52:50

Eyes on the Prize and eyes on the trends. Okay. Always have your eyes on the trends. We create glorious dashboards. I love creating dashboards and Tying everything together because, you know, you see those trend lines and you’re like, Oh yeah, that’s where we are.

J Darrin Gross 53:07

Yeah. No and like so the the pictures are just so easy to to interpret you don’t have to deep dive into the, into this the story you can see it on the picture there. That’s just That’s awesome. And where can listeners go if they’d like to learn more or connect with you?

Anna Myers 53:25

Well, I’m going to tell you about two places because we actually have two businesses we have the syndication side of the house which is grocapitus.com. And and so that’s where you can find out about the projects we’re working on. You can connect with me at Anna@grocapitus.com that’s the two ends if you want to hear more about 1030 ones, or upcoming projects. But you also mentioned Darren about multifamily or multifamilyu.com platform and that’s our education platform. And we’ve got lots of free webinars that we do. You’ll hear my voice a lot. I’m the host of these different webinar. Ours that we put on, and we’ve got some fantastic ones coming up. They’re all free. So it’s we love putting out education for people. And we are all about quality, quality quality information. So that’s where you can find me. On weeknights. I’m often doing webinars on multifamily calm. And on weekdays I am asset managing our portfolio and buying more of the same syndicating syndicating away.

J Darrin Gross 54:28

Awesome. And for anybody that hasn’t, I highly encourage you to check out both the grocapitus and the multifamilyu you’ll you’ll definitely find it very, very worthwhile. And I can’t say thanks enough for taking the time. I’ve enjoyed it and learned a lot. And I look forward to doing it again soon.

Unknown Speaker 54:50

Thanks, Darrin. It’s been wonderful being here with you.

J Darrin Gross 54:53

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. C R E P N Radio.

Unknown Speaker 55:10

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PACE Financing for Commercial Real Estate with Mansoor Ghori – CREPN #249

Mansoor Ghori 0:00

What PACE does it allows them to look longer than one year allows them to look through, you know, 2, 3, 4 years down the road down the road, and pull all those ECM that they’re going to do over that time period into one holistic project that they can do day one, because of the fact that there’s long term financing. It should be net positive from day one.

Unknown Speaker 0:22

Welcome to C R E P N 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 0:42

Welcome to Commercial Real Estate Pro Networks CREPN Radio, Episode Number 249. Thanks for joining us. My name is J Darrin Gross. This is the podcast focused on commercial real estate investment and risk management strategies. Where we have conversations with commercial real estate investors and professionals who provide their experience and insight to help you grow your real estate portfolio. Let’s get into the show. today. My guest is Mansoor Ghori. Mansoor is the co founder and CEO at Petros PACE Finance. And in just a minute we’re going to speak with him about PACE financing, what it is, and how it can help commercial real estate investors. But first, a quick reminder, if you like this show, CR e pn radio, please let us know. You can like, share or subscribe. And as always, please leave a comment we’d love to hear from our listeners. Also, if you’d like to see how handsome our guests are, be sure to check out our YouTube channel. And that’s a Commercial Real Estate Pro Network on YouTube. With that, I want to welcome my guest Mansoor. Welcome to CREPN Radio.

Mansoor Ghori 1:57

Thanks, DarrIn. Appreciate it.

J Darrin Gross 1:59

All right. Well, I’m really Looking forward to our chance to talk today. And before we get started, if you could take just a minute and share with listeners a little bit about your background.

Mansoor Ghori 2:10

Sure. So I’ve been in the in the commercial lending venture capital and structured finance world for over 30 years now. We founded our firm Petros PACE Finance in 2011, actually. And really what it is Petros says a structured finance shop and really what we do is we create fixed income instruments that we then get rated, securitized and sold to large institutional investors. pace is one of those products that we create and we started the pace part of it, probably 2013 2014 to really kind of get into the industry and are now the largest commercial pace provider out there.

J Darrin Gross 3:02

Great on the PACE. I think that’s kind of the main, you know, interest as far as what led me to had to reach out to you. And it sounds like you’re clearly if you’re the the largest, you’re the right guy to talk to about this. For the uninitiated, can you explain what it is just as an overview what, what is PACE stands for?

Mansoor Ghori 3:25

PACE stands for Property Assessed Clean energy. And what it does is allows people like us to enable commercial property owners to either retrofit or build new properties with more energy efficient upgrades. And it allows us to do that over a period of time, which is much longer than they would get if they got a bank loan. So we can actually do these pace. Assessment financings over a period of up to 30 years, the left Have 30 years or the weighted average life of whatever’s being put in. So when you think about that from a commercial real estate owners perspective, historically, there has not been a lot of rent and energy upgrades to properties because the cost benefit just never made any sense. Right. So you know, the payback periods on a lot of these upgrades are anywhere from, you know, 10 to 20 years or maybe even longer. But the financing that they would get for it from a bank would be anywhere from three to five years. So the project was always underwater. Now with pace, it allows us to do this, where the project is net positive from day one, because we’re doing it over the extended period of time. And it’s much cheaper than using your own capital and a lot of these commercial property owners want to use their own capital for for higher return items and commercial pace improvements is not a higher return items, so they’d rather go out and buy new properties or, or do something else with their money. So this is a great mechanism for them to be able to retrofit those properties and actually be net positive from day one can net cash flow positive from day one,

J Darrin Gross 5:18

or cash flow positive from day one for a capital improvement project. That’s, that’s unique. I mean, that’s not that’s not exactly the way the conversation usually goes. Right. So talking about energy, is there an audit? Or how do we determine, you know, what we’re what our baseline is, is there a need for a measurable improvement?

Mansoor Ghori 5:45

Yeah, so first of all, every deal that we do, there’s an energy audit that’s completed, whether it be a retrofit project, or whether it be a new construction got rehab project, so that energy otter will go out there and for retrofit project will look at what’s currently in there. And they will then look at what is going to be put in there. And they’ll do the analysis to figure out what the difference in savings is going to be with the new ECS on a new construction gut rehab project that’s hard to do. People use as a baseline typically code and then they’ll look at code and and and look at ECM that are either above code or add code to figure out what you know the potential energy usage is going to be on those new properties. Okay, there’s a but every but every project does have an energy audit that’s that’s completed.

J Darrin Gross 6:39

Got it. On the retrofits, if we start with a baseline and the projected improvement is, you know, whatever it is, is there a time period for monitoring to confirm that we’ve met that or is it just a one time we did the calcs and and we’re good to go?

Mansoor Ghori 7:00

Yeah, that’s a good question. And it depends per state and per program. So there are some programs that require that you continue to do the monitoring to make sure that savings are there. And there’s one program in particular, I think it’s the Michigan program where for a smaller transaction, so that’s typically less than $250,000. Actually, I’m sorry, if it’s greater than 250 thousand dollars, and there’s an energy guarantee that the contractor has to actually give the borrower or the property owner. And what that does is it guarantees that the savings that the energy auditor actually projected are going to be there and if not, then he’s coming out of pocket to make that difference up. But so there are specific programs that make you actually monitor the monitor your results and others that don’t necessarily monitor that From a year to year basis, but you know, the borrower’s are actually watching to make sure that those savings are there.

J Darrin Gross 8:07

And so in the spectrum of energy savings, and I guess my my first thought would be like heating and cooling are, you know, windows in your water? Is there a defined list of projects that are eligible?

Mansoor Ghori 8:29

So it’s not a defined list of projects. But there are a defined list of ECMs. And once again, that changes by program and by state, for instance. In California, there’s there’s seismic upgrades that are allowed under the PACE program. And since California is really kind of the only state that has the issues with earthquakes, that that same allowance is not used in other states like Texas or Florida or whatever. But in Florida there’s there’s hurricane resistance measures that are included in the program which are included and which are not included in other states. So it is more program specific but in generalities are a lot of the similarities are things like water, things like renewable energy, whether it be solar panels wind or some other renewable energy. There’s also lighting, lighting controls, h max chillers, boilers, Windows, Windows tinting, and other other energy saving upgrades. So there’s a big list that that is similar and then for specific states, there are some some differences, some nuances

J Darrin Gross 9:51

Got it. So if I have a project that we’re gonna, you know, or tha’s got elements that are that are qualify that we can do through PACE. You mentioned kind of the weighted average as far as the length of the payback. So if I’ve got something that’s 20 years and I’ve got something that’s maybe seven years and, and on and on, do they basically just take all those up and come up with an average and that becomes my, my length of, of the payback or the

Mansoor Ghori 10:26

Exactly, so not meant to the payback, but the length of the assessment. So, you know, we’ll we’ll figure out exactly what that that length, you know, the average average life is of everything being put in, and then that will be the length of the actual assessment. So if it’s 17 years, our assessment will be on our property for 17 years. So that that what that does, is it enables the net positive from day one feature of pace. You know, the The reality is, if If you had, you know, a 20 year, weighted average life of ECM is being put in yet your, your 10 or was 10 years, then once again, it’s the same concept of getting a three year loan for a 10 year payback type issue when you’re underwater. So now this kind of stretches it out so that whatever is being put in, you should be able to be net positive from day one because the length of the assessment is the same as what the weighted average useful life is.

J Darrin Gross 11:34

Are there like some sweet spot kind of items that you typically see on? I mean, you mentioned kind of California and Florida being unique with their environmental, you know, issues that they have there but is there kind of a sweet spot of things that you typically see as a kind of lighting and water and

Mansoor Ghori 11:56

I think the majority of what we see is lighting, lighting controls. CH fax we see chillers. We see boilers and we see kind of like window envelope type deals. We have not seen as much solar as we thought we’d see. And that’s primarily I think, because solar so far is a really nice to have, but it’s not a half to have. And these guys are looking at their their ECM, they’re looking at their capital budgets over the next three to five years and saying, Okay, well, what do we actually have to change out? Right? They have to change out the H bucks because they’re going to go bad. And if it’s in a warm state, guess what happens in the summertime. You know, same thing with the boilers up in a cold region, they have to get those changed out so that they’re not freezing during the during, you know, the winter in Minnesota. So look at the things that they absolutely have to change up first, and then eventually they’ll start going and looking at things that will be nice to have As we see more mandates like what’s happening in California right now, for solar. So recently, there was a law that was passed where all new construction of commercial buildings have to have solar on them. And those I think start taking effect, maybe 2021 and 2022. But as we see more of those those mandates that are spread across the country, then I think we’ll probably start seeing more solar projects. That make sense.

J Darrin Gross 13:29

Yeah. Where did you say that was that was mandated for California. Yeah. That would certainly drive the demand for, you know, more installation of solar, which sometimes that’s what it takes is some sort of a governmental rule like that, right. So, so let’s talk a little bit about the money. We’ve talked about the length of the payback. You you introduced in your in the introduction there about how you raise capital and and I didn’t add on but words in your mouth but basically that the the the mechanism I guess for the financing for the long term financing for this if I have a project and I’m seeking financing for it Am I is it do you go to the originator of the the PACE program or is it? Is it available to through different mortgage brokers or How’s that?

Mansoor Ghori 14:41

Yeah, actually, you can come directly to us. So there’s, you know, you can come to us directly and there’s, you know, a handful of others that are more national, that we’ll be able to do deals for you but we’re the we’re the actual lender, right? So if you come to us and there is no fee In between, you know, the commercial property owner and us where the property owner has to pay the broker typically a fee. So if you come to us you kind of skip that that routine. And we actually do the structuring the underwriting and the funding of the transaction.

J Darrin Gross 15:19

Okay. And can you also do like if it’s a new purchase, and I’ve got, you know, essentially just for round numbers a $1 million building and and traditional financing to require that I come up with 250 or 200 to $250,000 worth of downpayment. Can you do the, the balance of the financing.

Mansoor Ghori 15:46

So, the way that it works in PACE is we’ve got limitations so we’re typically not more than 30% or 25% of a of the market. The value of that property if there is a mortgage on the property, and we can go up to 35% if there’s no mortgage on the property, so let’s just say it’s a $10 million building. We can finance and there is a mortgage on the property we can finance up to two and a half million dollars on that property. Okay.

J Darrin Gross 16:19

Okay. And, and how to this would tell me on the the capitalist stack, is that now is that a lien against the property? Or how does that how does that work in there with

Mansoor Ghori 16:37

Yeah, so that’s, that’s a great question because that’s kind of comes to the essence of what PACE so that PACE is actually considered a property tax assessment. So when we close the the transaction, what happens is it gets recorded at the county recorders office, and it is a property tax lien against that property. Okay. Now, that does not restrict any senior lender from doing what they need to do on the property. So if they’re delinquent to the senior lender, the senior lender has all the remedies that are available to it to take the property back, go sell it and get their money out. Our pace Tran our pace, money stays on that property. So it transfers from one owner to the next automatically, and it stays there as the pace assessment so so for any one year our payment is looked at as a property tax. So it’s included with the property tax at the the borrower pays normally, right? So that’s how it works.

J Darrin Gross 17:49

So I’ve got my normal property taxes. Now I’ve added some PACE financing would I guess what Would that payback view essentially just the amortized payment of whatever the length of term of the amount of financing that I collected from the for the pace?

Mansoor Ghori 18:12

That’s right. So if it’s, you know, if it’s a 20 year loan, that assessment is fully amortized over 20 years, okay? And every year the payment stays exactly the same. So that does not change that does not change unlike the the normal property property tax which may go up or down based on the value of the property. The property tax assessment for PACE stays exactly the same over the life of the assessment.

J Darrin Gross 18:45

Okay, so so the PACE is a separate assessment from my from my normal property taxes.

Mansoor Ghori 18:51

Yeah, there’s is two line items one will be your normal property texts. Then the second of all say, you know, PACE assessment.

J Darrin Gross 19:00

Okay, so the PACE assessment is frozen for the life of that payback, correct? Correct. And is that independent than of the balance of my property tax is that that’s still subject to whatever. Okay. Yeah. Gotcha. On the you talked about the return this does using the PACE and you talked also about how the the lenders view it in that, that it’s kind of separate. Does that lessen my need to bring capital to the deal then if I’m, if I’m utilizing PACE financing for, like on a on a, like we’re just illustrating like on a typical deal, if you had, say, a million or $10 million, and you needed to bring 20% down payment, to get to get into the property in the bank lends, you know, 70 Over 80% of balancer. Can you mention you could go up to 25%? Is that is it? Is it possible to that could be my down payment or equate to my down payment?

Mansoor Ghori 20:13

That’s a good question. So PACE is generally used to replace either equity or mezzanine debt or some other types of financing. So in a situation like you just mentioned, it wouldn’t replace all the equity. I mean, I think everyone wants to make sure that there’s at least some skin in the game by the property owner, whether that number is 10%, or a little bit more, a little bit less, you know, that’s, that’s something that’s has to go through underwriting, but everyone wants to see at least some money in there. But if you’re looking at a situation where you have to come up with 20 25% equity on a transaction with a senior lender, PACE can certainly replace some portion of that. So you would come up with less Money and use pays for that difference.

J Darrin Gross 21:03

Got it, got it, but certainly sounds a lot more attractive than the traditional whether it be a bridge loan or or you know, some sort of construction financing.

Mansoor Ghori 21:14

And the other aspect of PACE is that it does not accelerate, and it is non recourse to the property owner.

J Darrin Gross 21:23

All right. You know, we talked about these, these different kind of line item projects and stuff. And my hunch is, is that or I guess my my thought is, is that there’s likely some of these projects that could be partly PACE, partly non PACE. You know, if you’re doing a rehab of a property, and you were upgrading you know, the certain elements or it still be a balance of things that were outside of the PACE that is that typically the case

Mansoor Ghori 21:59

Yeah, we’ll see. on almost every project we do, there’s a portion that’s PACE as a portion that’s not PACE. So in a situation where there is a senior lender that’s doing the non PACE and the PACE lender doing the the pace portion, there’s draw schedules that are agreed to upfront on the items that are PACE eligible, and the items that are that are non PACE eligible. The senior lender then does the draws based on the on the items that are non PACE, and we do our draws based on the ECM, our PACE eligible.

J Darrin Gross 22:37

Got it? Is there a minimum amount or a maximum? You mentioned a percentage of the market value, but is there a minimum amount that that PACE works for

Mansoor Ghori 22:54

you? So there’s a minimum amount for us we typically will not do a transaction below a half million dollars. But there are other PCAE providers that will go below the half billion dollars. On the upside. We don’t necessarily have any limits. So we’ve got transactions that are out there with term sheets that are, you know, couple hundred million dollars to $500 billion so that the upside is unlimited as long as it fits the ratios that we talked about.

J Darrin Gross 23:36

We talked a little bit about the transferability of the PACE financing. If I have PACE financing in place, and I’ve got say 10 years left on my my PACE financing and let’s just say for round numbers that the balance owed is a million dollars. How How is that reflected in a in a sale and subsequent sale to a new buyer?

Mansoor Ghori 24:08

That is a question that really has to be negotiated between the buyer and the seller. So the what I’ll tell you is that the that million dollars will have a cost to it, which is the typical, which is your PACE assessment cost every year. But putting those retrofit ECM is in there should give you also a reduction in utilities. So theoretically, the savings from the utilities should offset the additional cost on the assessment. And so you know, shouldn’t really affect your noi. So your property value should theoretically be the same or maybe even higher. But there’s also deals I’ve seen where they take the assessment went into consideration as part of reducing some portion of it in the in the, the purchase price. So it’s all a negotiation based on what’s kind of put in and what it does today, and a why and cap rates and those kinds of things.

J Darrin Gross 25:17

Well, it still seems like though the, from a performance thing, if, if the improvements are done right away, and I’m getting the benefit of those right away without going negative for multiple years waiting for the payback, that the the project owner, the seller is had and I would assume that the buyer would recognize that if there can unless they’re at the tail end of these things, and they’re nearing the need for replacement again, kind of thing, but I would think that there would be some sort of recognized benefit there

Mansoor Ghori 25:57

Yean, and I’ve seen transactions with that. concept for sure. And that makes a lot of sense because that’s that’s the way that we look at PACE. Look, because you’re actually saving more than you’re paying that should not negatively affect NOI, and why should be positive to your NOI. And so your NOI should go up. And if you play attach a cap rate to your at your increase, NOI, your valuation on your property should go up. Right? So that’s, that’s certainly one of the arguments there. And, but like you said, if you’re down, you know, 10 15 years into this thing, and you’re kind of at the very tail end, you know, maybe more of the savings were at the, the front end versus the tail end and not may not be the case at the very end.

J Darrin Gross 26:44

Got it. What have you, have you seen any resistance to PACE financing, or?

Mansoor Ghori 26:57

So that’s a good question. So In the early years of PACE, there was a lot of resistance from senior mortgage holders primarily because they’d never seen PACE before. This was a, you know, kind of a new concept. They didn’t really know how it works. And they didn’t really understand, you know, what the remedies were in a situation, whether it was, you know, issues from their perspective with the with the property owner. And over time, over the last three or four years, what we’ve seen is there is a lot more now understanding of what pace is and how it fits and how it works with a senior mortgage, and we’ve seen less and less and less resistance. So other than that, we’re seeing, you know, a lot of eyes opening from a commercial property owner perspective, because they’d never heard of PACE. And they’re now looking at this saying, Wow, that would be great in our cap stack. Especially The guys that are doing the new construction got rehab projects, because as you know, banks are getting tighter where it can kind of at the end of a cycle now. So loan to cost ratios from banks are tightened. We’ve got the EB five program that’s not as robust as it used to be due to political issues. So there’s more, there’s more gap and the cap stacks for those new projects that need to be filled and PACE as a perfect kind of, you know, step to put in there to kind of fill that gap and I kept stuck.

J Darrin Gross 28:39

You know, I’m an insurance broker. And and, I mean, the capital improvements are just ongoing as far as what insurance companies are looking at. They’re recognizing a lot of the claims that they’re paying or are related to these older systems. And has such a lot of the a lot of the carriers are Kind of narrowing their view of what they what a what a desirable risk is. And they’re usually saying something that’s, you know, 30 years or newer. And, and this is, to me, this is like just the the opportunity for somebody that has a property that not only are they I mean, if they don’t take care of it through something like PACE, we’ve already talked about the the ongoing costs, and they I, the negative return or the you know, how many years it takes to pay it back. This could, this could have multiple benefits, as opposed to just the, you know, you’re a you’re getting your system to replace B, you’ve got long term financing, which makes you cash positive, and now you can make your insurance company happy. So, all

Mansoor Ghori 29:44

That’s right. So I mean, I think you hit on some some key points here. So, you know, one of the things that property owners do is they’re looking at either their deferred maintenance that they’ve got to do, or and they’re looking at the capital expenditures for In each year going forward, and they typically don’t like to go beyond one year at a time, because it’s just a lot more capital that they have to kind of invest. What PACE does it allows them to look longer than one year allows them to look through, you know, 2, 3, 4 years down the road down the road, and pull all those ECM that they’re going to do over that time period, into one holistic project that they can do, they won, because of the fact that there’s long term financing, and it should be net positive from day one. That’s grateful all of a sudden, their properties are getting improved much quicker than, you know, three, four years down the road.

J Darrin Gross 30:39

Yeah. Are you trying to try to finance it out of you know, cash flow and you basically are in zero or negative or are waiting for everything to be done, and it’s just ongoing because you can’t get it all done? Oh, yeah. It’s great. Any advice to a real estate investor, that’s looking to get Started and are looking for PACE? Or is there something that you should they should look for? Be aware of? Um,

Mansoor Ghori 31:10

You know, I think I think the way they should do it is, you know, they should get ahold of people like us and walk through what they’re trying to do. We have folks here that can kind of help them through what a project would look like and what they have to do what have to pull together to at least get an indication of whether that’s a deal that can get done through PACE or not. And if it’s not, then what what are the things that are missing? But that would seem to be the easiest way to do it

J Darrin Gross 31:39

Got it. Mansoo, if we couldn’t like to shift gears here for a second. As I mentioned you i by day, I’m an insurance broker. And we work with our clients to assess risk and try and manage the risk. And there’s a couple different strategies we typically consider. The first is we ask Can we have avoid the risk. The second we, if we can’t avoid it, we look to see if we can minimize the risk. And if that’s not a possibility, then we look to see if we can transfer it. And that’s what an insurance policy is. It’s a risk transfer mechanism. And so I like to ask my guests, if they can take a look at, you know, their environment and how they are working with investors and what they see and if they can, in that identify what they see is the biggest risk. And so if you’re willing, and just be be clear, I’m not necessarily looking for an insurance related answer. Kind of a blank slate. You can define it however you choose. But again, if you’re you’re willing, I’d like to ask you Mansoor Ghori, what is the BIGGEST RISK?

Mansoor Ghori 32:55

So I’ll kind of dress this from a PACE perspective because I think from For more of a higher level perspective in terms of the economy, etc. I don’t necessarily see a downturn in the economy as a risk to the PACE in which you actually think that is an opportunity. Because all the rest of the money in the capital is going to get tighter. And PACE will provide an opportunity for them to help them get projects done even in a downturn. I think from a PACE perspective, the thing that I worry about most is that we have to make sure that the way that PACE deals are being done that are being done with with diligence underwriting they’re being done in a way where these things can get rated, securitized and sold to investors. If there are people that come in and don’t do it correctly, I worry that there could become issues in the pace industry or it could be deals up below. up, you know, if you think about PACE in general historically, there has hasn’t been any major blocks and PACE in commercial pace. And since the history of PACE, right, that’s on the commercial side. I’m not saying that. So on the residential side, but on the commercial side, they’re being underwritten, like normal commercial loans. And so they’re being that they’re a lot safer from from that perspective. Our worry is that people are going to come into the space as it becomes more active and starts growing, and they do it incorrectly. So we’ve tried to find ways to mitigate that. So we created something called a C PACE Alliance, which is an industry group of pretty much every major commercial pace lender, the service providers that are working on that are part of the PACE, the commercial space area. And what we’re doing is we’re creating templates templates on how to underwrite templates on how to administer templates on what the statute for these programs should look like in each new state, so that there is a box that everyone can play inside and not go outside the box. That makes sense?

J Darrin Gross 35:16

That’s absolutely genius. Because, you know, just like what you were describing there is, is it hasn’t blown up. It only takes one rogue operator to see the opportunity and exploit something that wasn’t intended and run roughshod over it. And before you know it, it’s blown up and it’s not available for anybody. So That’s right.

Mansoor Ghori 35:39

That’s right. So

J Darrin Gross 35:40

That’s, that’s, that’s really, why is a view and I applaud you and your efforts. Let’s see PACE and, and I think that that also, you know, definitely keeps you at the forefront as far as the thought leadership goes as far as the PACE financing and I would continue to make you guys noteworthy resource and that so that’s, that’s great.

Mansoor Ghori 36:05

Yeah, absolutely.

J Darrin Gross 36:06

So yep. Mansoor, where can listeners go if they would like to learn more or connect?

Mansoor Ghori 36:13

Sure. So our website is www.petros-pace.com.

J Darrin Gross 36:22

Got it

Mansoor Ghori 36:22

And go there. There’s a lot of information about PACE, how it works for different types of projects, different types of properties. We’ve got case studies there, we’ve got phone number, you can get ahold of us, we can kind of walk you through what it looks like. You can see what our background is. It’ll give you a good perspective on what PACE is and how it works.

J Darrin Gross 36:44

Awesome. Mansoor, I can’t say thanks enough for taking the time today. I’ve enjoyed it learned a lot. And I hope we can do it again soon.

Mansoor Ghori 36:53

Sounds great. Thanks, Darrin. Appreciate your time.

J Darrin Gross 36:55

All right. For our listeners. If you liked this episode, don’t forget to Like share it 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. C R E P N Radio.

Outro 37:13

You’re listening to C R E P N Radio for influential commercial real estate professionals. For more information on this or any of our guests like us on Facebook C R E P N Radio.

Raising Money for Multifamily Syndication with Dave Morgia – CREPN #248

Today my guest is Dave Morgia. Dave is raising money for multifamily syndication. He’s based in the Big Apple, New York City. And he’s also the host of the podcast Making Money in Multifamily. And in just a minute, we’re going to talk with Dave about raising money for syndication. But first a quick reminder, if you like the show, C R E P N Radio, please let us know. You can like and share, you can subscribe. And as always, we’d love to hear from our listeners. You can leave a comment I also want to remind you if you’d like to see how handsome our guests are, be sure to check out our YouTube channel. And that’s Commercial Real Estate Pro Network. With that I want to welcome my guest, Dave, welcome to C R E P N Radio.

Dave Morgia 0:56

Darrin, thank you for having me really appreciate having me on and excited for the time. today.

J Darrin Gross 1:01

I’m looking forward to it. We had a chance to talk a little bit ago on your podcast. And it was a good time. And I’m delighted to have you glad you you agreed to come on today. Before we get started, if you could take just a minute and share with the listeners a little bit about your background.

Dave Morgia 1:23

Yeah, absolutely. So I guess my story starts, it’s probably a little bit shorter than yours there and you have a lot, a lot more years under your belt than I do. But my story starts, I guess, in real estate about a year ago. Back at my previous job, I have experience in power plant operations, nuclear back where I’m from home and a swig of New York, upstate New York and then I recently moved down a year ago down here in New York City, do natural gas combined cycle now. So once I moved down here, I was kind of getting the itch to get real estate. I was a little bit before I moved down here, and I decided that I wanted to get into the space and it coincided really well. I found three like minded individuals just like myself. similar age, similar ambitions, similar mindsets. Travis, Tony and Forrest and the three of us have founded a syndication company. And it’s been pretty exciting journey. so far.

We’ve grown a lot. I’ve met a lot of fun people. And like you mentioned, I run a podcast. And it’s just like you’re doing there in a great way to meet a bunch of new high quality people, a great mindsets, great knowledge to share. So it’s just an just great learning journey so far, and to get into the real estate experience, and we’ve kind of grown in with our company. We started out with this thesis, right, where we see a lot of these syndicators kind of just jump into things, and maybe not necessarily put, you know, the cart before the horse, but maybe they should be figuring out what their abilities are before they get too invested in these types of deals on the sponsor side, at least. Right. So our idea was, Well, why don’t we see our capital raising abilities because at the time we thought that our capital raising might be one of the weaker points that we had just because of our lack of experience and network in this industry. So we said, Why don’t we try to test our wits with this capital raising.

And we did that by basically taking three deals of a sponsor, and I’m not going to name names just to kind of keep it kosher today, but a sponsor that we trust, and you know, like the deals that they put out, we think, you know, as a, as a sponsor, their quality and the deals are putting out obviously, quality and these deals, we’re not going to go in without backing ourselves. So we took these three deals, and we raised for these three separate deals. And you might ask, why didn’t you just try to raise for one deal and get a share of the equity. And we just kind of wanted to repeat success instead of just maybe claiming it as a one off. So instead of saying, I think the total end up being Darren around 200,000, something like that, it was, you know, into the six figures. So instead of saying why put 200 into one deal and get a piece of the pie. We wanted to kind of repeat and see if this thesis was true that we could, you know, continue to raise and attract investors to come along with us on this journey, and it’s worked out so far. And then obviously we have a lot going on outside of that those three deals, we kind of stopped that thesis. We were comfortable with that raising, but I guess I’ll leave it to you to maybe pick it that for a second.

J Darrin Gross 4:10

And I appreciate you kind of sharing with your, or sharing with us a little bit about your background there. I guess the The first thing I would want to back up to you mentioned that the four of you are like minded, what was it that attracted you to real estate?

Dave Morgia 4:27

What attracted me was probably a similar journey to a lot of people here, Rich Dad, Poor Dad as the Bible. Yeah, I did read that. And then, you know, I was always diligent, growing up, putting money away into retirement accounts, all that good stuff, trying to max that out as much as I can get pretty good at that. And I just saw myself needing to get to that next level where, okay, I can just continue to max my retirement accounts or do all this good stuff, you know, IRAs, yada, yada, but where am I really going to take it to the next level and try to create wealth that I can use today not, you know, 30 years Now and have to rely on having a job for 30 years. So I just, you know, research research, it’s kind of one of my things just I get really heavily into something and real estate was what stuck for me. It just made the most sense to me. And yeah, it just happened to coincide with when I moved down here. I happen to meet my three partners, like I mentioned, and yeah, we just kind of hit it off the relationship grew naturally. And yeah, we just we all wanted to get into syndication because we thought the scale was really attractive for us at our age and our ambitions, we wanted to, you know, really dive into this business and kind of, you know, jump jump a little bit instead of maybe dealing with a single or duplexes, something like that. So,

J Darrin Gross 5:37

Got it, so instead of doing the one Z’s, you you recognize the power of the multiples.

Dave Morgia 5:44

Exactly, yeah. And then I think a lot of it that attracts us to is not even the scale but just the well I guess what comes with scale is the consistency of the underwriting and everything like that. I mean, when you have a single or a duplex or triplex, you have one vacancy and your numbers get you know, torn apart for the month. They’re the few months that you’re recovering. So to be able to, you know, put a couple zeros behind those numbers and say, yeah, we can, you know, estimate a little bit more exact on, you know, our future analyze and expenses and all that good stuff. It was just really attractive for us.

J Darrin Gross 6:17

So you mentioned that you, you and your your partners made the decision to focus on capital raising. Was there a process prior to that? Had you guys been underwriting deals? Had you been looking at possibly doing a deal was there you know, any any? How did you arrive at that this decision to raise capital?

Dave Morgia 6:44

Yeah, so I think just to clarify, yeah, we’re always looking for our own deals, right. We invest in Florida, namely Tampa, Jacksonville, Orlando. And these deals, were not in those markets. But it was in Dallas, which is still a market we enjoyed, but that’s not where we’re going to invest. A sponsor. And I guess the theory was the bandwidth wouldn’t be too much more for us to handle raising for a deal outside of our own while we work on our own business, right. So we said, yeah, we can, we can attract investors and raise money for these three deals. And meanwhile, still grow our actual syndication business where we’re going to, you know, try to find our own deal and find our own partners, whether it be PMS, you know, brokers and all that stuff where we grow on our own. And then with that capital raising, that just further proves that we’re going to have that last piece of the puzzle to be able to fund the deal on the equity side. So, you know, it’s just one of those puzzle pieces that we wanted to shore up a little bit more to make sure that we were ready to do that. Because I mean, there and what would happen if we found the deal of a lifetime, and we didn’t think we could raise? I mean, that would just be awful. So, yeah, that’s kind of where we stand with that.

J Darrin Gross 7:49

So we made the decision to raise capital. What was your process? What was your thinking? Take us through from the decision To raise and deploy the capital,

Dave Morgia 8:04

I guess Could you just ask the question again?

J Darrin Gross 8:06

Well, so you made the decision to raise capital were you? Did you go straight to friends and family? Were you? Did you do a lot of meet and greets? Were you How were you? Who were you raising the money from?

Dave Morgia 8:21

Okay, yeah. So I guess I guess it would be a mix of both right. So we do have a couple of friends and family and those deals. But then we also have people that we’ve grown with our network. Along with the podcast, we have a meetup with the same name. In New York City every Tuesday, we do weekly, it’s pretty small, but it’s intimate. So the people that come there’s a, you know, a close group of us that come often and it’s kind of a little more friendly, and not that other meetups are not friendly, but we just have a little more laissez faire, we get a little more intimate with what we got going on and kind of less pitchy, and just more of just like a fireside chat mastermind II type meetup. So we enjoy that. We like to give that to investors who might be less experienced than us, right? So we can just tell them what we have going on. And I think that just naturally attracts some people because they can see that openness that we have, you know, week to week, that consistency that we’re still here, you know, we’re still doing our thing. And so there’s a couple of people like that in the deal as well. So I guess, you know, it’s a little mix of business and friends and family. So.

J Darrin Gross 9:20

Gotcha. So building your, your list of prospective investors. Is it primarily been through the meetup and the podcast? has that kind of been your, your way to grow your, your list?

Dave Morgia 9:34

Yeah, so I think the list Yeah, definitely grows a lot through, you know, interactions, whether it’s through the podcast or networking through there, or we started to really kind of ramp up our in person networking, just went to a conference recently, trying to go to more trying to really fill up our schedule, because there’s four of us and we’re trying to leverage that fact by maybe saying not all of us have to be at the same place at the same time, but you know, kind of spread those branches out and see Everybody meet everybody. So yeah, I mean, it’s just a concerted effort to make sure that we are meeting the right people and and it’s it’s pretty fun to do that. I mean, I’m sure you can attest to it to kind of reach out to people and learn about them. It’s a lot of fun it’s it’s really more almost I’d rather just meet them genuinely and intimately and then any benefits that come with that are just an added bonus. I mean, we haven’t done anything together professionally yet as far as the deal goes or anything there but I mean, I’ve enjoyed our couple week relationship already. I mean, you went on my show now I’m on yours. And then we’re going to be you know, bouncing back and forth when our shows come out. So it’s just fun to kind of create and learn and grow with people as we go. So see, I guess, going off the tangent there it’s it’s a little bit of both a little bit of the podcast a little bit of the branding and then a lot of it’s you know, the handshakes and meeting people in real life.

J Darrin Gross 10:49

So if most of the people already been in the orb of real estate investing or have you attracted people outside of the the real estate world But perhaps hadn’t thought of real estate.

Dave Morgia 11:03

Yeah, so I would say, going back to that meetup, a lot of the people that we attract to this group, a lot of them are kind of newer to real estate, or at the very least syndication and that model, so it is fun to kind of show them the ropes a little bit and bring them up to speed as to what this model really is. And a lot of the verbiage I mean, a lot of it is just a different language, right? So you’re talking about shortening words, and, and all this other stuff, these acronyms that people might not understand and scare them away. But it’s really just kind of learning the rules of the road. And it’s, it’s not overly complicated. So it’ll be able to bring those newer people in to see that as fun. And then in person, a lot of them are kind of in the space already.

Because if you happen to go to a conference, say there and realistically, most of the people there are trying to grow their business already, or at least that’s what I’ve experienced, is a lot of them maybe seven or eight out of 10 kind of have something going on already. Even if it’s like a smaller business. You know, just Some smaller multifamily or single families that they’ll have something going on typically, and you find people that are completely fresh, and that’s awesome for them. I mean, it’s a great way to accelerate is to get to a conference when you’re new. But um, yeah, it’s almost it’s almost more where if you’re in a more kind of intimate setting, smaller setting, then you might see the newer people but in the bigger scale, that’s when like, the fear is over when you’re kind of growing, and that’s when kind of the big hitters show up and start to mingle and talk trade basically.

J Darrin Gross 12:29

So from from the, I guess, more like the meetup, the the new people that you’ve, you know, Matt, or kind of mentored or, you know, worked with and kind of brought in and like you, you talked about, you know, explaining some of the lingo and and what it all means, if you found that there’s a, a an appeal to them. I mean, is it about Future is about tax advantages security, cash flow, appreciation, you know, leverage it. Is there anything that or is it just kind of all of the all of the elements that are the power of, of investing in real estate?

Dave Morgia 13:14

Yeah. So let me as what these people are trying to get out of the meetup that we host is that what you mean, what they’re attracted to it for?

J Darrin Gross 13:21

Yeah. When you’re talking to somebody new that, you know, that’s coming to your meetup, and they’re looking at it, maybe they’re they have heard of real estate, but they don’t know all of the, you know, all of the potential.

Dave Morgia 13:33

Sure. Yeah. So I mean, for a lot of people, right, they see real estate, it’s, it’s got a lot of benefits to it. Obviously, we could have a whole episode about that. But I mean, there’s there’s tax advantages. There’s the leverage you can get. And then just you know, leveraging business partners is a great way also just to kind of really ramp your success up. And I could just go on and on. But I think the common theme between all these things for the people that are attracted to say my meetup Or anybody else’s meetup or just learning in general is the fact that most people just kind of have this itch, this drive to take more control of what they have in their life. Kind of like I spoke about previously, right, I was talking about my retirement and wanting to kind of switch that to today and improving today.

So I think a lot of people just want to use real estate as that vehicle. And I mean, it just makes sense, right? There’s, there’s a lot of advantages, like I just spoke up where you can take advantage today of these rules in real estate and kind of take more control of your life, whether it’s you want to get out of your nine to five, whether it’s, you enjoy your nine to five, but you want to, you know, just have options and be more secure in your life where maybe you’re not earning as much as you like, but you’d like to earn some more on the side. I mean, there’s a dozen, multiple dozen reasons why people kind of get into it. And I think in our meetup, specifically ours, they see the value in the intentional behavior that we have at the meetup. They see that we care to share our story, they see that we want to grow along with whoever comes through the door.

I mean, we have people that do single families, we have people that do stuff completely unrelated to syndication, and that’s fine. We, we talk it out, I’ve offered multiple, you know, types of advice to anybody with any type deal, because I mean, we’re pretty decently versed and other stuff too. So if you have something that’s, you know, problematic for you, and you come through the door on Tuesday, we’ll hear that story. And maybe we know somebody or maybe we have an idea for you. I mean, I’ve mentioned seller finance to a couple before and they’re like, Oh, I didn’t even know that was a thing. So it’s just really simple stuff that like, why not open that door and let people kind of come in and solve problems together. So I think, just in general, that problem solving and taking control your life mentality is what gets people in the door.

J Darrin Gross 15:50

And I think there’s always power and in sharing your ideas and understand what matriculates or you know, comes out of that when you expose it to somebody else. That’s great. So a couple of questions on on the the decision to raise money. One is, how did you pick the sponsors? What were some of the things that you look for? How did you get to know or trust a sponsor of a deal that you’re going to be investing your investors? Money? And

Dave Morgia 16:23

Yeah, of course, so So like I said, way back in the beginning, we wouldn’t have gotten in a deal with our investors that we weren’t comfortable putting money in ourselves. So that’s step one, whether it’s, you know, this specific deal or any deal that we’re going to raise on and sponsor is having that alignment of interest, right. So we’re not afraid to go in it, we will back our dollars leader dollars and say, I believe in this so. So that’s a big thing right there. And I guess to get to that point is to say that I believe and hit that button just like the investor is this sponsor, we know we’ve communicated with Bob before, you know, several times. They have a good history, they have good experience. And they actually do a lot of teaching just like us.

So there’s a lot a level of trust there where you can see that exposure, that kind of raw personality that raw I here I am type of vibe. And then just that’s just sponsor specific, right, so then there’s the deal side of it. And all their deals are pretty well underwritten. Anything they’ve underwritten and gone through a business plan with is nine times out of 10. Well exceeding expectations or, you know, doing at least on par with the expectation. So that to me just means right there that their underwriting is accurate and conservative, right, because if you are bullish on your underwriting, and you over promise you can under deliver, and that is going to cause, you know, a huge mess of expectations and bad communications because you’re going to have just a misalignment of what should have happened in the deal. So you just see that with the sponsor, and I mean, this is all kind of stuff that we try to emulate too. And that’s why we like to sponsor is because we see Sponsor as someone we want to try to be also not only just work with, but try to emulate and kind of mirror is someone with these attributes, right? It’s kind of just right there in your face not hiding anything, and just, you know, diligently underwriting deals, going through the business plan and executing. So I guess it just kind of the whole package is, is what we see in the sponsor and the deals that they back themselves up with. So

J Darrin Gross 18:24

to know make sense that you There’s got to be something you’re looking for just kind of a history, it’s like more than anything kind of a, you know,

Dave Morgia 18:32

Yeah, there is a relationship there for sure. Yeah.

J Darrin Gross 18:35

Got it. I want to ask you, how do you structure the in me pack everyone’s saying, what I’m assuming you’ve created an entity that your your investors invest in and then you make the investment from the entity is that how you’re the structure of how you’re doing this, you’re not taking, you know, individual amounts from everybody and then placed a bunch of individual investment All

Dave Morgia 19:00

Right, yeah. So, so typically on these deals, Darrin, and I’m sure, you know, the listener might not know, but there’s going to be some type of minimum 50,000 $100,000 minimum contribution to equity on these deals. So yeah, like, like I said, if not all the investors were willing to pony that up, and it’s just not the way we wanted to do anyways. But it might not even been a real estate, if you want to do it that way. So yeah, like you were kind of hinting at you pretty much nailed it. On these deals, syndication deals, you don’t actually own a piece of the equity in the property, you own equity in the LLC, that owns the property. And there’s a big difference there. So you don’t own the real estate, but you own the company that owns the real estate.

So what happens then is the depreciation, all the tax advantages and all that good stuff can be passed on to that LLC. And at the end of the year, you’ll get what’s issued a K one, it’s called, and that’s basically where you get your tax advantages that everybody preaches. And so with that model right there, we basically just took a one step. Further and I copy and pasted. Like you said, that entity right below the LLC that owns the property. So we will have that long view sub entity under the entity that owns the property. And we have that share of you know that pooled money and to take a percentage of that deal. And then we will take the key one and disperse it accordingly to who has shares in our company. So pretty straightforward kind of cookie cutter. It’s not a lot of math. I mean, it’s really just taking our numbers and giving it up to who owns what and yeah, it’s pretty simple. And we didn’t want to overly complicate things because this wasn’t a matter of proving our business Wits as far as systems it was more just seeing our capital raising abilities, like I said, so we didn’t want to make a huge, you know, crazy ordeal or anything. We just wanted to, you know, see what we could do as far as the raising side goes.

J Darrin Gross 20:48

Right. Now, I think on on a larger scale. This is essentially like a fund of funds. kind of thing if I’m not from thinking clearly. I mean, you’re raising money for yourself. Creating a fund of sorts or are you raising deal specific?

Dave Morgia 21:05

Yeah. So it would be it would be deal specific. Yes. So that’s why it’s not. Yeah, exactly. If when the fund is not any type of thing like that, yep. Yeah. So in this case, we’d have three separate companies that people will put their money into.

J Darrin Gross 21:20

Gotcha. And then as far as the are you guys compensated for any of the the money raising that you’re doing? As far as the sponsor of the, the LLC, you’re, you’re creating or is it more a matter of just trying to prove your ability to raise money and, and go forward in that direction?

Dave Morgia 21:41

Yeah, so we we’ve actually talked about that way back when and we thought it might be a good idea to you know, charge a management fee for this process, because we are, you know, taking the burden of some risk and then some just managerial and I guess desk work, right. So we thought about taking A fee and in theory, we’re going to do that, but we just haven’t really gone through that because we don’t feel like those pennies are worth it to kind of, I guess soil not that you would soiler relationship but it just kind of is a little bit more of an annoyance to to charge that little fee and it wasn’t gonna kind of make or break our bank. So we just decided to kind of keep it a little more kosher and just focus on you know, making everybody happy. And like I said, it wasn’t gonna really change our lives too much. And we didn’t want it to be a bother to anyone else. So so we were just kind of moving forward. And yeah, just it’s fun now we’re just really distributing checks every quarter. So it’s pretty easy game now.

J Darrin Gross 22:40

Yeah, I would think that in the beginning, you’d be is wise not to just as a matter of kind of prove some concept and and get some sort of positive, you know, traction have have people say nice things about you as opposed to dollar money. All I got Murphy’s. Yeah, exactly. So that’s, that’s great. So you’ve, you’ve raised money for three specific deals. Do you have anything in the pipe that you’re working on?

Dave Morgia 23:16

Yeah. So Florida specific, like I said, our markets, we always are turning out, you know, deals to look at, we’re trying to open up the funnel for us. We’re figuring out systems, which are gonna help benefit us and kind of help with the bandwidth issues we’ve been having. So that’s a whole other conversation that we could have today there. But But yeah, so I would say on average, we look at 50 deals a month, which is, we’re always hoping to get that number up to kind of see more stuff. Just because in today’s market, it’s a little tougher to get a deal. It might be a conversion of one. One deal per 200 deals across the desk versus it used to be maybe a few years ago 100 or 100 change across the desk. So so that hit rate is definitely lower now.

There’s, you know, a lot of money out there, we come close on a couple offers, and then a couple deals fell through just because of some crazy terms that we are not willing to match. So yeah, it’s just about patience for us, we are not going to do a bad deal. We’re not going to be impatient. It’s not who we are as a, as a team. And we want to be able to feel comfortable pitching this deal to investors that we’re going to be partnering with. And if I can’t sleep at night, it’s just not gonna work out, let alone the deal, but just my conscience and everything like that. So. So yeah, we are still working towards our first one. I’m getting close on a couple. And then like I said, hopefully one on one will come through the pipeline, and we’ll be able to kind of spread our stuff for real this time. But

J Darrin Gross 24:43

So let me make sure I understand what we were just talking about as you guys are actually looking at a deal to to be the the key principle.

Dave Morgia 24:51

Yes.

J Darrin Gross 24:52

Got it. Yep. Got it. Got it. Got it. Got it.

Dave Morgia 24:54

Yeah, so I mentioned those 50 a month. Yeah, that’s all for us being at least you know, a partial sponsor of the deal. Where Yep,

J Darrin Gross 25:01

Got it. And how long goes been that you did the last raise.

Dave Morgia 25:09

So the last raise? Yeah. So like I mentioned earlier, the three deals we did, we kind of decided after three that we didn’t want to do anymore Just because we felt good about our abilities. And not that it was distracting us to be able to raise money for these other deals. But it wasn’t the focus, right? The focus is not to raise money for someone else’s deal. We’d rather raise money for our own deal. So we put a halt to that. I think the last one was I’m spitballing here, but it was me anywhere between four to six months ago. So we’ve kind of you know, put a pause on that. And we’re enjoying the fruits of that labor where everybody’s, you know, getting their checks, all happy. And now we’re going to be like I said, moving forward to raise it for our deals for real or maybe we joint venture in someone else’s deal for real this time where we’re actually getting a piece of the equity. So

J Darrin Gross 25:57

Got it. So I guess Where’s Trying to go from that question was how do you stay in touch with your potential investors? You know, when you’re in between deals or you don’t have something to present?

Dave Morgia 26:11

Yeah, sure. So like I said, a lot of the people in those deals, at least specifically, we are, you know, pretty in touch with whether it’s family friends, or whether it’s those people at the meetups. But just systems wise in general, keeping in touch, that’s actually something we’ve been working on as a team, a lot of the systems and I just mentioned bandwidth. We use Monday comm now we’ve been using that for a little while. There’s a lot of similar things out there. It’s just a preference thing. There’s Monday, there’s Asana, some people use Trello. I mean, there’s a bunch of things to kind of make sure that you have everything in front of you. But Monday in any of these other programs, you can do a bunch of stuff, whether it’s use it as a CRM, you can use it for workflow testing.

So we are doing better improving on making sure that we’re having a regular cadence with these people and not just you know, keeping in touch to make sure they’re ready to be on a deal, but just seeing what they’re up to, to, because maybe there’s a situation outside of real estate that we can help each other out on or maybe it isn’t real estate. So you never know. And like I said before, I mean, a lot of this is just kind of fun to get into and meet people with anyways, like, I’m sure we’ll be in touch after this there. And anyone else that we’ve met, I mean, we just try to stay in touch with just to say, so.

J Darrin Gross 27:22

Yeah, no, I appreciate that. Because it is a you know, it’s easy to be forgotten or, or think you’re pestering somebody. I mean, yeah, definitely done. And then I think I every day, I look at my inbox and there’s all these emails that I don’t say, take me off your list, but I, you know, you know, that kind of thing, but it’s just so it is kind of a balance kind of thing. I think that there’s but as long as I think you have something of value, whether it be something, you know, deal you came across as Hey, we came in close on this one, but, you know, this didn’t work out or here’s what we’re up to or You know, just something that kind of keeps them interested, I think is kind of the key. Secondly, when the opportunity does come you still have a, you know, a base to draw from? Is there been a biggest challenge, you know, when you’re raising money that you You came across, or you can think of it was, or was just the concept of raising money.

Dave Morgia 28:28

Um, the challenge was, I guess the raise wasn’t too bad. We stayed within our wits as far as our abilities and I think we did well on that side, logistically, making sure it was all kind of ducks in a row and making sure we could do it in the way we wanted to do it. That was probably the biggest thing. But just kind of learning from how the business works and learning you know, kind of the proper way to go about things. We made sure that everything is kind of lined up the way it needs to be. So I That’s just that learning curve was the biggest thing but that was also the reason why we wanted to do it was just to kind of see that those details that you can’t really get until you do. I mean, you can read about it but you can’t really you know, learn that until you actually try something out so that’s a little reason why we did it too is why capital raise for the first time on a big huge deal on your own when maybe you try it, you know, a little bit on different deal and see those details in real life.

J Darrin Gross 29:25

Yeah, no, there’s no no substitute substitute for experience.

Dave Morgia 29:29

Definitely.

J Darrin Gross 29:30

Any advice for prospective of your listeners that that have considered raising capital that that haven’t quite yet gotten to that point?

Dave Morgia 29:41

Yeah, raising capital um, I would say the biggest thing you have to do for some of you want to do it is just be a real person. People are gonna see that and when I say real person, it’s really just more believing in yourself and believing what you’re backing. So Like I mentioned, not only do I like to deal but I was in a deal. So I want to show that to whoever I want to partner with, whether it’s in a limited partner investor or a partner, co sponsor, whoever, I want to see that intention with whoever I partner with. And I try to give that back to them so that everyone is on the same page and comfortable. Because there are numbers, all these deals. Of course, Darren, and I’m not saying get into any deal as long as you like a person, but a lot of it is knowing the person who’s backing this deal. So if you’re going to cancel the race, make sure you’re a person that can be trusted and don’t do that maliciously, is a big thing.

J Darrin Gross 30:40

Dave, I’d like to shift gears if we could. So as I’ve mentioned to you previously by day, I’m an insurance broker. And daily I work with clients to do risk management. And a couple of the things we look at when we’re when we’re considering risk management. There’s a couple of strategies we look at first one is can we can we avoid the risk? And then if we’re not able to avoid the risk, we we look for ways that we can minimize the risk. And if neither of those are options, that’s when we look to see if we can transfer the risk. And that’s what an insurance policy is. So what I’ve been asking my guests as of late, is if they could take a look at what they’re doing in their business. And if they can identify what what the biggest risk is. And just to be clear, I’m not necessarily looking for an insurance related answer. But if you’re willing, I’d like to ask you, Dave Morgia, what is the BIGGEST RISK?

Dave Morgia 31:52

Yeah, so thanks for the prep before the show because I gave it some thought. I’m going to interpret this one as the biggest risks to myself. And my pride. And basically that I have now over the last year exposed myself into this field and made it public through these channels, whether it’s a meetup or a podcast or, you know, Instagram, whatever social media. So the, the fear that goes along with failure is the biggest risk to me because I pretty much don’t want to be able to say that I didn’t do it. I don’t want to have my tail between my legs and say that I failed. And I think there’s you know, some healthiness to having some fear. But then also, to kind of mitigate that risk, like you talked about is the thing that I’ve done is just go in further and double down because I mean, what else is there to do but just to try even harder to make sure that I do what I say I want to do.

So for me it was Yeah, just just keep going. I don’t know your experience with podcasting, but I didn’t have any and I just kind of figured it out. I didn’t know anything about syndication. You know a little while back. It’s been more than a year obviously for that, but um, but I didn’t know any thing, you know, at some point in my life and just learning and absorbing and doing as much as I can today and this week and this month to get to the point where I won’t have that fear ever and I might have, you know, some type of fear. But to know that I made it that was the biggest risk for me and is the biggest risk for me is to make sure that I now get that first deal done and, and get success in this industry. So I guess that’s how I took it.

J Darrin Gross 33:26

No, I love it. The fear of failure is pretty powerful. You know, and that that’s, I think a lot of people, myself included, definitely can identify with that. I appreciate you taking us through that. Dave, Where can the listeners go if they would like to connect or learn more?

Dave Morgia 33:46

Yeah, so we have a website. We have social media. We have a podcast. website is LVARE.com. That’s in Longview acquisitions arias in real estate. So LVARE.com and then you can find me on pretty much Any channel that you can think of LinkedIn, Instagram, Facebook, and that’s just Dave Morgia. If you search that, you’ll find that and then last but not least, the podcast that you mentioned earlier is Making Money in Multifamily. We’re doing the same thing you Darrin is just having fun people on the show to talk about what they got going on. So any of those ways you can find me and definitely say hi.

J Darrin Gross 34:22

Got it. Well, I will be sure to list all that in the show notes. Dave, I want to say thanks again for taking the time to talk today. I’ve enjoyed it, and learned a lot. And I hope we can do it again soon.

Dave Morgia 34:35

Thank you again, Darrin, for having me on. It was a lot of fun today.

J Darrin Gross 34:38

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. C R E P N Radio.

Multifamily Value Add Investing with Lee Fjord – CREPN #247

Today my guests at Lee Fjord. Lee is a multifamily real estate property manager syndicator real estate investor and he’s based in the arch city, St. Louis, Missouri. And in just a minute we’re going to speak with Lee about finding value add deals in your local market. But first a quick reminder, if you like the show, C R E P N Radio, please let us know you can like you can share subscribe. And as always leave a comment we’d love to hear from our listeners. Also, if you’d like to see how handsome our guests are, be sure to check out our YouTube channel and you can find us at commercial real estate pro network. With that I want to welcome my guest Lee Welcome to C R E P N Radio.

Lee Fjord 0:50

Awesome. Thank you Darren, how’s your day going?

J Darrin Gross 0:53

It’s great. I’m I’m delighted that you and I are able to connect and do this today. We We’ve talked a little bit here recently. And I think this will be a valuable for the listeners and the viewers. But before we get into this, if you could just take a minute and share a little bit about your background.

Lee Fjord 1:16

Absolutely. So I started in 2012 as a residential property manager leasing agent down in Florida, built a property management division of a real estate brokerage from 20 doors to 220 doors in four years, all simultaneously selling about $5 million dollars a year in real estate down there. God inspired by some of my clients and decided to pursue investing relocated to St. Louis, Missouri, where I have family and felt like it was a great city to be able to invest in, specifically multifamily, which is my primary focus. So moved to St. Louis. Sign up with a property management company here to learn the market, dabbled in duplexes and houses in four families for about 18 months while doing that, then linked up with my now partner and we, in October closed a 38 unit apartment building. And I decided at that point it was time for me to step away from managing other people’s properties and helping other people purchase their properties and focus my primary energy on adding to our portfolio. Since then, we have put under contract a 42 unit apartment building, and we’re working on the due diligence aspects another over 240 units in total, and we’re in the middle of a heavy value add heavy lift on that 38 unit that we just closed back in October.

J Darrin Gross 2:53

Well, for a guy that sounded like you were just about an hour of work there when you said you were going to stop Done, the property management sounds like you filled your plate that’s pretty full.

Lee Fjord 3:06

You know, overseeing the heavy lift is probably 50% of my time over at the 38 unit. You know, when you’re when you’re taking down a value add deal and you’re focusing on turning over the units and knowing increasing the value of the property, improving the property as a whole. It takes a lot of time if you’re a really hands on and that’s what my role is in my team is I’m, I’m the hands on boots on the ground guy that, you know, makes it happen.

J Darrin Gross 3:38

All right, well, let’s let’s jump into this and talk a little bit about let’s talk about the market. And then let’s talk about your local market. You mentioned you’ve you’ve had experience in Florida. And I’m wondering if you can kind of you know, step back, maybe Have a 30,000 foot view give us what you see is the current overall market. And again, that’s kind of a more of a a richer media personified deal as opposed to a local market, but just as a kind of a glimpse into what you see as the market and and then we can dive deep into local market.

Lee Fjord 4:27

Yeah, so the multifamily commercial multifamily investing market is really competitive right now. I think that’s changed for a number of reasons. And I don’t necessarily think it’s just based on the overall economy. I truly believe that, you know, 10 years 20 years ago, 30 years ago, 40 years ago, 50 years ago, people were still doing exactly what we’re doing today buying properties, moving tenants in increasing the value. So what I’m saying so forth. It was just, it was kind of a good old boys network or something that was behind the curtains that people didn’t really know about. And they were, you know, in a given MSA, you probably had a dozen wealthy families that owned the majority of their real estate in a given market.

And now with the, you know, the expansion of the internet and the ability for people to do business, not just nationwide but worldwide, a, you know, the ability to be on a zoom call or video chat with someone and be able to have a conversation about it, across the country changed the game. Now investors who are in other states and other locations, can they can readily invest in deals across the country and people around the world and now more easily and readily invest in properties where they never would have been able to 10 or 15 years ago, you know, people from China and Brazil and the UK and places where costs are so high and money is readily available, and it’s a great shelter for their money here in the United States and buying commercial real estate, it makes sense for them. So that in addition to the guys from New York and Florida, and California can invest in a property anywhere they want, you know, that makes the competition pretty stiff. And that’s what I think has led to that and I don’t think that’s changing anytime soon.

J Darrin Gross 6:32

No, I think you’re right, the the disruption of the economy and all segments segments.

It continues and and, you know, brings the world closer. I mean, just like you were saying, you got people I mean, just like this, you and I are on a zoom call. In Portland, Oregon, you’re in, in St. Louis, Missouri. Not exactly, you know, in the same room, and just the color cost of the you know, not just the fact that the technology exists, but that the cost. This is, you know, other than our time. This is a free call. And it is it really is kind of mind blowing when you think about it.

Let’s talk a little bit about what you as an investor as a syndicator. And when you’re talking with these potential investors from afar, what are what are some of the things that you look for? And maybe we can start with like a market describe what what a healthy market is. And then maybe we can dive into St. Louis and talk about what’s going on there.

Lee Fjord 7:46

Yeah, so there’s dozens of ways to evaluate individual markets and then you know, it’s it’s kind of in a triangle shape where you have you know, you have the overall MSA, which can be you know, a couple million people and across many different counties in many different areas. And then you have, you know, a city or a suburb. And then you have a neighborhood. And then you have a specific section of a specific neighborhood that might have the absolute best opportunities. And since I’m here every day, I’m experienced and the more I can identify those individual sections of individual neighborhoods within as a county or a city that is overall being in a larger MSA, that might be a little, you know, overlooked or under recognized.

You know, St. Louis has a population MSA of 2.8 million people. The average job growth is about 1%. Population growth is about 1% and That’s not breaking any records, if you compare it to, you know, markets like Atlanta, Orlando, Dallas, you know, so on and so forth. Jacksonville, you can keep naming them in there. You’ve got great, great amounts of population growth in those areas. And St. Louis doesn’t necessarily have that from a large MSA. But you know, we do have a great amount of job changeovers jobs are changing here in St. Louis. So we may only increase the number of jobs by 1%. But we’re losing 10s of thousands of jobs in areas like manufacturing. And we’re replacing those jobs with biotech employee jobs. Medical employee jobs, tech tech company jobs, we have a large growing tech business here in St. Louis and those jobs are much higher paying then, you know, then your car part manufacturing factory worker that you know those jobs are going away and now we’re bringing in jobs like biotech and those guys are making six figures plus

J Darrin Gross 10:09

Got it so that the the transformation while it’s not like just a mass movement to St. Louis but like you’re describing it’s just the the kind of the economy within St. Louis it sounds like it’s it’s changing from a more of a like a blue collar labor you know the manufacturing jobs as opposed to some of these more white collar tech jobs that is it. Do you feel like the the numbers are one for one or is it

Lee Fjord 10:45

You know, so we are growing by 1%. So it is growth in the number of population and growth in the number of jobs and addition to those jobs changing over from lower income paying jobs to higher income paying jobs. And then you look at the demographic of the people that are the new higher earners, and you look at where they’re choosing to live. And now I’m seeing a large increase in in population in the South City and inner city of St. Louis, where it was, you know, 1020 years ago was a much core area of town. And now those areas are now being populated by millennials and you know, younger families that want to live in the city that want to walk out their front door and go Reeboks over to the local coffee shop or local yoga studio. And very, they have a higher income so they’re able to afford higher rents. And that overall increases the intrinsic value of the properties that I choose to invest in those neighborhoods as the rents grow.

J Darrin Gross 11:57

Right. So are you seeing Like pockets that are gentrifying, that are mean changing from, you know, previously abandoned, possibly crime to new investment and the place to be here.

Lee Fjord 12:14

Absolutely in several different areas throughout the city, you’re seeing a lot of, you know, gentrification, a lot of cleaning out of the old and bringing in the new, lots of dumpsters everywhere. You know, cleaning out these places and homes that you never would have thought would have been opportunities for, you know, let’s say a flipper to come in and buy it and turn it into a quarter million dollar house. These are properties that 1015 years ago were worth, you know, $50,000 and now, you know, they’re selling for 250 $350,000 all day to young newer residents in those neighborhoods. And then you know, my strategy is to not only be looking in those neighborhoods that are already gentrifying, but look at the neighborhoods next door, or within a short distance away because you have displacement of the current tenants in those already improved areas moving to the neighborhood next door. So I buy in the neighborhood next door that still hasn’t quite improved that well. And then I see a large influx of the tenants that are moving from two neighborhoods over one neighborhood over and then I provide a nice, clean, safe, affordable housing option for someone that can afford you know, 678 hundred dollars a month in rent, and the previous rent might have been as low as $400 when I purchased that property.

J Darrin Gross 13:49

What what are you seeing now the if you you know, 400 was the prior rent what what are you seeing as far as a rent bump and something like that?

Lee Fjord 13:59

My reposition that I’m doing right now we are the average rent was approximately 400. We had some in like the, you know low 500 range of units that were slightly improved in the property. So when we bought it the average rent across the board was 425. And we’re you know, we’re now relating the units that we have gone in and improved you know, paint cabinets, flooring, window coverings, light fixtures, plumbing fixtures all the above and we are relating those $400 a month rental units for now $580 per month, so almost a about a 40% increase in rent by simply investing you know, less than $4,000 per door so $180 additional rent income per month per unit are 20 $200 per year for an investment of products. 30 $500 per door so we’re getting that money back in less than two years.

J Darrin Gross 15:04

No, that works and I’m assuming the, if the movement is a foot, and there’s a, you know, it’s attract to the neighborhood’s attracting more, more renters higher quality runners I’m assuming Are you seeing a red cap compression as well.

Lee Fjord 15:23

You do you see that cap rate compression in the neighborhood as it transitions from you know a d d plus neighborhood to a c c plus neighborhood, the cap rate will go from an average of you know, 8% at purchase we bought it as about you add, so we paid seven and a half percent cap rate. It was like 10% cash on cash return of purchase and then we believe that at appraisal that we will be able or within the next year or two will Have a neighborhood and have some comparables in the neighborhood and the sixes so we will see not only increase in overall net income from rent increases we’ll also see some cap rate compression in that specific neighborhood.

J Darrin Gross 16:15

Well, that works perfectly definitely better than the reverse, you know, buy the six and sell ta Yeah, that’s that’s good. So I wonder, you know, if you can talk a little bit about you know, being the boots on the ground as opposed to someone that’s looking at the lagging online information, whether it be a census, because honestly that the not being familiar with the market. You know, you may not have as granular of a picture of something and you know, there may be a distorted view Have a, an MSA or have you know, what’s really what’s really happening? Can you talk a little bit about, you know, the, what you’re, you’re able to see and and, you know, the opportunities that maybe you could get in front of that, that others from afar would not,

Lee Fjord 17:21

Of course. So, you know, when you look at the statistics, population growth, job growth, when you look at crime statistics statistics in St. Louis, I can really only speak to St. Louis, but it’s a broad spectrum for certain areas where you know, you, you have to look at the statistics, you have to look at where those crimes are happening. You have to look at where the changes are happening and you make strategic choices on your property purchase based on that. I can see it on a more granular level because I’m actually driving the streets. I’m actually meeting the tenants and I Seeing the transition from one property to the next one neighborhood to the next. Were someone that looks up, you know, St. Louis as a whole, they are going to probably pass it up because they don’t see a lot of job growth.

They see high crime they see, you know, that, you know, they read the news and they see bad things, you know, when when someone from outside of St. Louis thinks about you ask him or what do you know about St. Louis, Missouri, oh, Cardinals baseball, Budweiser beer and crime. So and you know, that’s not necessarily it, you know, people think back to, like Chevy Chase’s summer vacation when they drive through St. Louis, and he actually parks and someone’s trying to sell them something or and then they jack the car up and take the wheels off the car. I mean, that was back 90s you know, or before and it’s not like that anymore. It’s a much better community and are we? I don’t I didn’t live here then. But just like New York City’s changed in the last 2030 years St. Louis has changed in the last 2030 years. It’s just a smaller place. And now you have to know where you’re buying

J Darrin Gross 19:16

Right. No, and I think that’s, that’s kind of the thing that I can I see is it you know, when I think of a marketplace, and clearly, I grew up back in the Midwest, and in Kansas City, it was the, I think I’ve been to St. Louis maybe once or twice. But I remember there was like, you know, there were some there’s some neighborhoods to be aware of, kind of thing, but that was about all I could, I could speak to but but I think all cities have an element of whether you call it less desirable or just there’s there’s a concentration of and and then I’m kind of curious, can you speak to or are you wherever you seen any sort poured from the local government to kind of affect this change. Is there any kind of incentives for investors? Or is there is there, you know, are they attracting any new jobs? Or I mean, you mentioned some of these new technology companies coming in as are is there an effort to really, you know, track these types of opportunities and then

Lee Fjord 20:24

100% You know, it starts at the top. And, you know, in order local governments do this all the time, they give credits, tax credits or bonuses or will offer you know, a, you know, some sort of bond or something like that for a new company to move jobs to their city. It’s a common thing and St. Louis absolutely promotes that. They are great about recruiting new companies to add to their current workforce by offering Additional, you know, tax credits or so on and so forth, or they’ll offer free land to developers to develop office buildings in many cases are subsidized there that there’s tax credit opportunities for, for restoring historic properties. That’s a very big help to the, the advancement of the neighborhoods that are, you know, not, you know, that are not as desirable.

Of course, you know, the federal tax plan for opportunity zones is a big effect on St. Louis because a large swath of St. Louis is considered an opportunity zone. So, those areas where a large scale development can be drastically, you know, changed over because it requires the seller or the owner, the new buyer, to invest equal to the amount of business purchase price of the property into the property over the course of I believe the first 18 months of ownership. So let’s say someone buys a million dollar apartment building, they have to invest a million dollars into that apartment building in order to take advantage of the tax benefits of the opportunity’s own. And Matt many, if not, most of those sections of the city that I just described are considered opportunity zone. So that’ll benefit. You know, the guys that are smaller, you know, the guys that aren’t full developers like myself, so if I own the apartment building next door to that one, and it’s getting a facelift, it helps benefit us all.

J Darrin Gross 22:38

Yeah, no there’s nothing nothing wrong with being in the path of progress. You know, that’s, that’s a good place to be. So you mentioned we’ve kind of talked about jobs and stuff. And you mentioned six figures. What is the medium income of the areas you’re investing in

Lee Fjord 22:59

As a whole All last I remember checking, I want to say the median income in St. Louis is in the, like, 50 ish thousand range. Okay, for the higher MSA that’s I believe off the top of my head when I was looking at City data last it was in the in the mid 50s something along those lines.

J Darrin Gross 23:20

All right. And then as far as housing supply you know, I one of the things that the least having lived in a couple of areas, I mean, the Midwest that I’ve experienced has not really been restricted by any kind of physical, you know, limitation as far as expanding moving out now, but it sounds like what I’m hearing you say is that the jobs and the some of these new employees and the just the want to be closer in is kind of driving this gentrification which to me would be kind of, there’s a restricted area there that’s not like they’re they’re wanting to go You know, 50 miles outside of the city, they’re looking to go, they’re looking to go in, which is a, again, kind of an area and I’m assuming, is there a lot of new construction? Or is it mostly gentrifying existing stock?

Lee Fjord 24:15

All of the above. So, one interesting thing about St. Louis is it is in essentially a You are a bell shaped separated from the state of Illinois by the Mississippi River. And a lot of people who live and work in Missouri choose not to live in Illinois and would not cross over the river because the state income taxes are quite a bit higher over there. The property taxes are as well. So there is a barrier there. So there’s not a 360 degree expansion of the MSA. It’s only in this direction. You know, they’re only expanding to the to the west and the south. And the North is restricted as well, but Because it is bordered by the believe up there, it’s the Missouri River or the Illinois River.

This the reason why St. Louis exists is because of the intersection of the Missouri the Illinois and the Mississippi River. So, anyway, so that is it is landlocked, separated by the rivers that divide the state of Missouri and the state of Illinois. And, yeah, so and there’s an area of town where, like you described is very crime ridden, and very few people would choose to live there if they could choose otherwise. And that is towards the northern section of town. So that area is receiving, you know, there’s like a barrier right there that stops people from wanting to live or move to that area. So the greater you know, growth is in the south of downtown areas or what we call South City. Those areas are experiencing the, the urban growth, you know, the central corridor, and The South City area are expanding or growing in population have higher net worth people are higher income earners.

And then you have towards the west a further expansion into the more what would have been more rural counties and suburbs of Jefferson County and St. Charles County in St. Louis County. That’s where, you know, the new homes or new tract homes are going up all the time. And you have that we just only have it in one direction, which is great for being able to see where the growth might be. And my newest acquisition that’s under contract is in that direction. It’s further out in Jefferson County, where I believe over the course of the next decade, there will be a lot of growth in population in that particular county in that particular town because the schools are good, and you can get to work downtown in less than 30 minutes.

You know, so you just watch that path of progress. And once you figure out where it is, it’s pretty easy to do Able you’re able to discern where discern where the where the growth will more than likely happen.

J Darrin Gross 27:08

Is there a lot of new construction for multifamily properties

Lee Fjord 27:13

There is so in the central corridor and in the South City area of St. Louis. They are building a lot of new construction developments of apartment buildings and condos. You know, they have to house these six figure earners somewhere and a lot of those six figure earners are choosing to the ones that are renting or choosing to rent apartments and newer apartment buildings. And there’s a lot of new development going on where they’ll tear down you know, a couple smaller three story tall buildings, let’s say and then come in and build a brand new construction 12 story tall, you know, a couple hundred unit apartment building with a parking garage and a pool and all the amenities that are you know, six figure earner millennial would want to have

J Darrin Gross 28:03

Right now. And I think the more I talk with people that have kind of accepted or, you know, come to the conclusion they like running, there’s not this sense of need to race out and buy a house in the suburbs and cut their grass on the weekends and all that kind of thing. So, I think, you know, we’ve talked a lot about kind of, like the migration or the, you know, the workers and stuff, but I’m kind of curious, can you speak at all to just the, the demand? You know, in St. Louis, specifically, are you seeing who are the people that are that are choosing to rent?

Lee Fjord 28:49

I see it as three different groups. So first of all, you have the person who wouldn’t necessarily you You know, the blue collar worker or working class person who lives paycheck to paycheck to paycheck, those people will always be renters. Those are the people that they’ve probably always rented most likely, or maybe they had an opportunity to own their own home for a period of time and then fell on bad times during the recession and then, you know, lost their home to foreclosure and they’ll probably never go out and buy another home again.

And then you have the millennial person who or you know, the other like the millennials and the baby boomers who are decent earning people who have good jobs and like you said, don’t feel the need to add the, you know, four bedroom two and a half bathroom house with a three car garage in the suburbs with a white picket fence. You know, not a lot of people. A lot of people are deciding that you know, Living in an urban environment, being able to walk to the coffee shop is perfectly, you know, perfectly reasonable.

And that’s why a lot of that’s where a lot of those quarter million dollar remodeled homes are selling to are those people, or they’re choosing to rent, and they’ll choose to rent and they’ll pay, you know, good rates for their rents in a neighborhood where you can walk to coffee shops and restaurants and pubs and yoga studios and, you know, craft donut shops, like it’s, it’s great. You know, it’s really great for the urban urban suburbs of St. Louis, because they’re seeing a lot of growth. And other cities too. This isn’t just as St. Louis, you see the same thing in Cleveland and Indianapolis and you know, all the other cities as well. It’s just finding more of those pockets are and trying to get ahead of the Did the rest of the guys if possible?

J Darrin Gross 31:02

Yeah, no, I think there’s definitely a move for the lifestyle. And I’ve talked to more and more baby boomers that have that are downsizing, you know, they’re, they’re out of everybody’s out of the house, it’s just one or two of them. They house in a lot of maintenance and, you know, saw that move into an apartment and, and happy, you know, happy they made the decision. They can lock the door and leave and don’t worry about anything. So it’s all good.

Lee Fjord 31:34

Life isn’t just about mowing grass every you know, Saturday or Sunday. It’s not like my grandparents age where everybody wanted to have the house in the suburbs. Now it’s, instead of spending the time and money on that it’s spending time with your friends and family and doing activities. A lot of people now are focused on entertainment. Entertainment is a big portion of their budget. And where do you get the most entertainment? It’s living in Living in the area’s you know, urban environment where you can walk or go to a movie really easily, or the symphony or a baseball game or any number of those things, and people will make living expense sacrifices and choose to live a less expensive lifestyle when it comes to their housing expense, or owning a large home, and they’ll choose to rent and then they’ll choose to spend their time and money going out to dinner or go into the symphony or go into a baseball game.

J Darrin Gross 32:31

Yeah, no, and I think it all starts with the job. So I mean, if you’ve got there’s good paying jobs, you can have, you know, a nice place, rent a nice place and have the discretionary income to go out and enjoy all that. So it’s, it’s always important, pay attention to the jobs and be aware of them. You mentioned doing a heavy lift when you’re looking for a property are there any kind of things you look for as far as an opportunity goes?

Lee Fjord 33:00

Absolutely I look for properties where I can come in and spend money on strategic upgrades that will increase the rental ability of the apartment or the overall aesthetic feel or you know the rental rate. So things like cabinets and vinyl flooring and modern paint scheme and brush nickel hardware and a you know a modern floor plan you know with an open kitchen living dining space, all improve the repeatability you know, large closets, that that helps a lot as well. Those all add to the rent ability of the apartment and will increase the overall demand for the apartment and increase your rental rates. Of course, you know, you have to look at the other comparable rentals in the community and see what other people are offering and other people are doing. But one with you know newly painted gray walls white cabinets and all new vinyl flooring throughout. You know that will demand a slightly higher rent and the other comparables in the neighborhood. And I look for a property that has 20% or higher increase and rent ability. So if I’m buying it for you know it’s put around number of $1,000 a month, then I want to be able to know that after I go in and improve the common area spaces as well as apartment that I can rent that partment for 1200 dollars or more per month.

J Darrin Gross 34:39

I appreciate that that’s kind of some you know, easy to think of things when you’re when you’re out looking can run your numbers and, and having some sort of a benchmark that makes you know, give you a tell if you will that says hey look, this is worth digging into. I think those are always good to have Do you have any advice for investors looking to get started in their local market?

Lee Fjord 35:08

Absolutely. I’m a big believer in the power of partnerships, especially in this larger scale size business of multifamily. It’s a lot easier to get a lot more done when you have, you know, at least one if not two or three partners that you that all rely on each other to be able to execute the business plan because this is a business it’s not you know, just an investment. It’s not just a you know, one z two z house or whatever, this is a business, you know, they’re each each property has its own business plan, and when I can rely on someone else to help me take, you know, take action items off of my to do list that it frees me up to be able to do things that are that I’m more productive at things like Finding the next property, making sure that each unit is turned over properly interviewing new subcontractors renegotiating the contracts that we put on the places.

So the power of partnerships is invaluable. I see very few people that can really, you know, really grow this thing on their own. And if they do, or they’re able to, it takes them decades, you know, takes two or three decades to accumulate, you know, two or $300. And you can now with the power of partnerships, I have partners across the country. My primary partner is in California. And then I have partners in Minneapolis and I have partners in Hawaii and I have partners in Pennsylvania, and they all help me. Make sure to execute the business plan. I just happened to be the guy that is the only one here in St. Louis?

J Darrin Gross 37:03

No, I think you’re here, you’re spot on. You know, it’s one thing to say I’m gonna do it myself. But the, the rate of accomplishment is going to be limited by your capital. And, and I think the thing that that is really woken myself up to the need to partner is just when you consider that real estate to leverage play. And I mean, really what you’re trying to do is get into the biggest number you can and you know that leverage is the whole, the whole number increases in value, then your, your percentage of that will increase as well. As opposed to getting into the smallest thing you can and only having a smaller number and and the percentage of smaller numbers still going to be a lower number than the percentage of the bigger number. So

Lee Fjord 37:52

It opens up your ability to further diversify your portfolio. So for example, you Portland You if you were a the only guy on your team, you would probably have a difficult time purchasing evaluating finding properties outside of Portland. But if you found a partner in Atlanta, that now opens you up to opportunities in Atlanta or your New York partner could open up, you could open up opportunities to a new york partner in Portland. So yeah, especially now that the you know, the ability to do video chat and internet and send emails back and forth, execute contracts electronically and wire funds within hours and have it be across the country in hours. It’s so much easier to partner and find people that are strengths you know, that are strong and finding a partner that complements your strengths and or offsets your weaknesses is absolutely key. So having a partner that let’s say you are the boots on the ground, guy who As experienced in property management, well, where where are you probably going to need the most assistance with capital, you know, raising capital and bringing capital the table, maybe a net worth, or bookkeeping or something like that. That’s where I get a lot from my partners is bookkeeping and capital raising, and I focus my time a lot on finding the deals and executing the business plan.

J Darrin Gross 39:25

Now, nope, there’s definitely power in the in the partnerships there, and I couldn’t agree more. Hey, Lee, if we could like to shift gears for a second. As I mentioned you before, and we’ve talked a little bit about by day, I’m an insurance broker. And as an insurance broker, I work with clients to assess risk and determine what we can do about the risk. When we’re trying to manage risk we there’s typically three strategies we’ve we consider. The first is can we avoid the risks? The second is can we minimize the risk? And if neither of those are an option, then we look to see if we can transfer the risk. And that’s what an insurance policy is. And so, I’ve been asking all of my guests, and I’d like to ask you, if you’re willing, if you can consider what the biggest risk is. And just to be clear, I’m not necessarily looking for an insurance related answer. So, with that, if you’re willing, Lee Fjord, what is the BIGGEST RISK?

Lee Fjord 40:37

I would say the BIGGEST RISK in our business in this business of commercial multifamily is is interest rate risk. I think right now. We are at a wonderful place in time and economy with respect to our ability to get low interest rate loans with very, you know, high value to purchase or low downpayment purchase properties, low interest rates, and I think that you know, cap rates in the valuation of commercial property is directly associated with those. So, if you know, if interest rates rise to eight to 10%, then which they have been in the past before, then we’re and your loan comes due, then the cap rate on your property is going to increase which is going to decrease the value of your property and you’re going to be in a hard place. So, I try to mitigate that by first of all as quickly as possible, I try to return the initial investment back to all the investors, first of all, and then whether it be through cash flow distributions or refinancing the property so that removes their initial investment into the property and after that, Everything should be, you know, should be considered, you know returns.

So after that, so that’s my number one goal. So, I try to remove the risk by removing their initial, you know capital from the deal then we try to refinance our deals into long term debt options 10 years if possible or longer at the lowest possible interest rate, of course, and then you can offset that risk by either having a higher higher down payment or, you know, loan to value ratios, you can take out loans, and as opposed to 15% or 85% loan to value you can do you know, 75% loan to value leave a little bit more money on the table. And, you know, those are really the, and then also, I guess the last and final option for that, that you can remove risk is by putting your properties under non recourse to So then you’re removing the potential risk of having any other assets that you as a, an owner or partner or an investor on a deal for potential loss if the property were to, at one point in time be, you know, faced with a, you know, needing to be repositioned or refinanced during the worst of times, then the end of the day, the worst thing that can happen to you at that point, if it’s a non recourse property, or non recourse debt is the bank will take the property from you.

They can’t seize your personal income, they can’t seize your personal home, they can’t go after your retirement accounts. So that’s our goal. Our goal is to return the initial investment back to our partners and investors as quickly as possible and refinance into a long term debt solution at the lowest possible interest rate. That is As a non recourse loan

J Darrin Gross 44:03

No, that sounds like a good strategy, you know, like set interest rate is definitely something that that makes the real estate world go round. And, you know, all sorts of things can happen when it changes. So, appreciate you taking us through that. Lea, where can listeners go if they’d like to learn more or connect with you?

Lee Fjord 44:26

Absolutely. I love when listeners reach out to me directly. I’m happy to give my direct phone number out to anyone. So my phone number is 850-797-1307. They can email me at: lee.fjord@gmail.com. Or they can find me on Instagram Lee.Fjord and I’m also on Facebook, LinkedIn, but Instagram Direct phone calls and emails are going to be the best way to reach me. And if I don’t have an answer, just shoot me a text and I’ll call you back as soon as possible.

J Darrin Gross 45:08

Awesome. Hey Lee, I can’t say thanks enough for taking the time. I’ve enjoyed it. learned a lot and hope we can do it again soon.

Same Darrin. I really appreciate your time and your listeners time as well. Have a great day.

J Darrin Gross 45:23

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. C R E P N Radio

Real Estate Syndication with Gene Trowbridge – CREPN #246

Today my guest is Gene Trowbridge is a commercial real estate broker, CCIM, syndicator. An author, he wrote the book, it’s a whole new business. He’s a speaker, a real estate attorney, and a founding partner at the corporate securities law firm Trowbridge, Sidoti LLP, and an expert in real estate syndication. And in just a minute, we’re going to speak with Jean about syndication law, and the issues with regulation, the private placement. But first, a quick reminder, if you like the show, CR e pn radio, please let us know you can like, share and subscribe. And as always, you can leave a comment we’d love to hear from our listeners. Also, if you’d like to see how handsome our guests are, be sure to check out our YouTube channel. And that’s commercial real estate pro network. With that, I want to Welcome my guest, Jean, welcome to see our CREPN Radio.

Gene Trowbridge 1:05

Thanks, Darrin. I’m happy to be here.

J Darrin Gross 1:08

I’m so glad you were able to join us today. And before we jump into our conversation, if you could take just a minute, and share with the listeners a little bit about your background.

Gene Trowbridge 1:21

All right, well, I really had three, three careers. And that that’s amazing given I’m only 27. But I’ve had death. Three careers. I had a career as a commercial real estate broker. I had a career as a real estate syndicator, where I put together syndications, concentrating primarily and building self storage facilities here in Southern California. And then when I was 45, I went to law school. And my third career now is being an attorney. And my practice is really specialized in commercial real estate securities. And that would be my third career. And I’m still working on my fourth one. I’m going to keep that a secret.

J Darrin Gross 2:10

Oh, yeah. Got a surprise. Is it gonna? Is it something real estate related?

Gene Trowbridge 2:15

You know, I don’t even know. So it’s a secret to me but you know it’s

it’s a it’s it’s it’s a

it’s a shame if you don’t try new things once in a while.

J Darrin Gross 2:25

I love it. A seeker constantly seeking good stuff. Gene I’m just curious based on your experience, and you know, having been a broker and also a syndicator. And now, being a part of a law firm that specializes in syndications. have you kept count, you have any sense of how many syndications you’ve you’ve been a part of in one way or another?

Gene Trowbridge 2:56

Totally No, but Since 2014, since the the formation of this law firm, we do keep track of that. And we have about all 550 clients, individual clients, we have almost 900 offerings. And we’re over the $4 billion mark in dollars raised in our offerings, not the value of the real estate, but the dollars raised. So for a bowtique firm, right now, we have five attorneys. That’s a pretty strong, pretty strong record.

J Darrin Gross 3:42

Definitely does sound like you’re just trying to figure it out. We’ve kind of worked out some of the kinks, I suppose. Hmm.

Gene Trowbridge 3:48

Yeah, that’s right.

J Darrin Gross 3:49

So for the uninitiated, could you define for us what syndication is

Gene Trowbridge 3:57

sure.

That’s Very good question because that’s one of the most common questions I get someone’s calls me in the off on the phone and says Jean, I want to put four or five people together, we want to buy a piece of real estate, but I don’t want it to be a syndication.

Well, that’s the wrong question.

A syndication is anytime two or more people combine their money and their expertise to do something. Some of the examples of syndication that you see are when you go to the movies. At the beginning of the movie, it probably talks about three or four different companies who have come come together to make the movie. I talk about

insurance.

long term health care insurance for an old guy like me, that’s really a syndication. We all pool our small amounts of money and then the big pile of money will take care of us hopefully. Other syndications are when you fly an airplane, you don’t have a plane. You don’t have that. management expertise, you 140 of your best friends climb into the, what I call the flying petri dish. And, and fly somewhere. That’s a syndication. So simply, a syndication is when you and other investors get together to buy some real estate. Now, that’s not a legal entity. That’s not an anything. It’s just a definition. The real question is, is it a security? That’s the issue because when people say I don’t want to do a syndication, they’re asking the wrong question. They’re using the wrong language. They’re saying, I want to put these people together and buy something, but I don’t want it to be a security. Because with the security, you work, you walk into a whole different world. And you know, that’s the title of my book. It’s a Whole New Business. The securities world is totally different than the real estate world. Okay, it’s different. So that’s That’s my long winded answer to that question, Darrin?

J Darrin Gross 6:03

No, it’s a it’s a perfect starting point, I think for today. And you mentioned that it’s not an entity, but it’s more of a kind of a coming together. And actually, it’s a security to that kind of the distinction as opposed

Gene Trowbridge 6:18

to syndication. And the question is, Is someone going to manage the money? For the other people? Are there going to be passive investors? And in there, is there going to be an active investor. So the government has an interest in protecting these passive investors. So the government long time ago set rules that apply to the syndicator, who’s going to take the money from the passives and run it I mean, the definition of a security Darren is if there’s an investment of money in a common enterprise, the investors expect to profit what’s Someone else is doing the work. So you’ve got passive investors, and you’ve got the syndicator. And there’s a reason for the government to regulate what the syndicator does to protect the passive investors. So you can have a, you can have a group who come together in a syndication three or four people and go out and buy something. And they all decide that they will all be active managers, and that they will all vote unanimously on the big decisions. And I’d call that a member managed something or other probably an LLC. And if it’s just member managed, then one of the four parts of the definition falls apart. The fourth prong is managed by someone else, what’s not managed by someone else, it’s managed by them. So there’s no one in charge of the passage money. In fact, there are no past All the investors are active. So that’s not a security and we don’t need to regulate that. But the minute they put Darrin Gross in charge of the money,

it’s a security. Right.

J Darrin Gross 8:14

Gotcha. I appreciate you making that distinction, because I think sometimes people, you know, speak of more like a joint venture or some sort of little partnership where there’s, you know, the, everybody’s active, like you said, and just the distinction there seems too straightforward.

Gene Trowbridge 8:31

Well, that’s the hot topic, one of the hot topics today, and I’ve heard some united troll alive lot of podcasts and I listen to a lot of other people’s podcasts. And I always hear this well, gee, you can do a joint venture and you don’t need to make it a syndication. Well, once again, that’s the wrong use of the word. A joint venture would be two people or three people or a number of people getting together to do something. Well, that in itself is indication, but a joint Venture isn’t a legal entity. It’s just an explanation of how people are coming together, you drive downtown, and you see a big hole in the ground downtown and you see a fence all around it. And you see First National Bank is providing the construction financing. Some big companies is funding the permanent financing. And ABC contracting company is doing the building the contracting company as the bulldozers, the permanent financing as the permanent financing and First National Bank as the construction lending expertise, and they call it a joint venture.

Well, that’s not how it’s owned.

It’s probably owned in a general partnership. There’s no entity. There’s nothing in a joint venture that takes title. That’s just a description of how the people who take title aren’t coming together to do the work and if it’s a true joint venture Everyone is making all the decisions are made unanimously. Okay, you could say it’s a joint venture, but if it’s actually an LLC with 10 people, then you’re managing member. It’s a security.

J Darrin Gross 10:16

So, I mean, it becomes a I think at some point, just physically impossible for the like said everybody coming to the same decision and stuff as a matter of just efficiency and moving forward. Just as a matter of if you have more than X number of people, I would think that, you know, syndication would be the natural way just based on just efficiency that not

Gene Trowbridge 10:39

Well, that’s right. For the last podcast, I heard the first question that was presented to the attorney like me who is speaking is how many people does it take before you haven’t syndication? Well, wrong question. The answers two.

That wasn’t the answer that was given, but that’s the answer. It’s two. And then the question is, well, how many new people would have to take before it becomes a security and and you hit it right on the head. I don’t know how you’re making, how will you make a decision? How many people is too many to have unanimous votes on decisions, and the minute one person takes control. Let’s say we put together an LLC and the members can vote on all the day to day stuff, and it’s all unanimous voting, but gene Trowbridge can make a decision when you sell the property, or gene Trowbridge can make a decision when you refinance the property. You’ve got yourself a security

J Darrin Gross 11:37

Got it. That the decision making and like I said, the somebody else’s trusting or that I am placing my money with you and I’m trusting and have an expectation of some sort of economic gain.

Gene Trowbridge 11:54

Well, yes in the world in the law and securities without getting too deep as it is If gene Trowbridge is a sponsor, Gene Trowbridge has to give all the investors all the material information they need to make an informed decision before they vote. And that’s a securities law issue.

Full disclosure.

And so that’s to protect the investors. Right? Then there are other rules in the securities, which, you know, maybe we go into or maybe not, how much money can be raised, how many investors can there be? And all those are ways that the federal government is regulating risk.

You know, if we say that there can only be so many people in a deal well, there, that’s their attempt to regulate risk. Right? If we say there can be as many people in the deal as you want, they’re probably going to come back and say, well, that’s going to be people who come who are smart, and who are rich, who can make their own decision and maybe we don’t need to predict them.

J Darrin Gross 12:59

Okay. Right. So, just for clarity here that so you stated that the syndication is not an entity itself, is that correct?

Gene Trowbridge 13:09

No, because the syndication could be, it could be today almost everything is a limited liability company. It could be a limited partnership. It could be a corporation. You know, Google, everything on the New York Stock exchange’s is a syndication Tesla’s a syndication Tesla with their thousand dollar a share stock Can you believe it? Is is a syndication the legal entity isn’t the issue. The issue is is the investor investing money expecting to make a profit and someone else is running it? Got it. And and again just Is it the syndication is the you know, what it represents? Is it more of like a definition of how the entity is operating or Really a definition that two or more people are combining their management expertise and their money. Okay, that’s what it is. And then the question is, what entity if there is going to be an entity and you could have, you could have a syndication with two individuals taking title, individually tenant in common. Okay, you’re gonna buy 50% with your money and I’m gonna buy 50% with my money. We’re tenants in common as individuals, we own the property. That’s the ownership entity tenant in common.

That’s a syndication.

And more than likely, that’s not a security with just two of us. But the five of us do it somewhere along the line, someone’s going to start making decisions and write in a raise it to us and security.

J Darrin Gross 14:46

Right. I know there’s different versions of syndications. And I believe, is this all under the regulation D is that where the syndication Law?

Gene Trowbridge 15:00

Regulation D. That’s an important I’m glad you brought that up when they wrote the syndication rules and the syndication rules we work under now really come from 1933 in 1934 and have changed. But over time of the syndication and the securities laws have matured to where there’s really a dichotomy.

Does the syndication law need to be applied to protect those people who are rich and smart? Does it need to be applied to protect people who aren’t rich and smart? And the answer keeps coming down to we don’t need laws to protect the rich and smart people for the most part, but we do need laws to protect those who aren’t rich and smart and a 1981. regulation D that had been around for a long time, was really modified and codified to say that in a private placement, you can have as many rich and smart people as you want. And then they applied the accredited investor definition to rich and smart.

But you can only have 35 non rich and smart people, call them sophisticated. And that’s to limit the risk. How many people can lose their money in this deal? How many people who aren’t rich and smart 35

And you can’t advertise? So 1981 that was the big, the big rule. And I said this dichotomy keeps going. The jobs act that came out in 2012 2013 really said okay, there’s a lot of rich and smart people who will We’ll never know about Gene Trowbridge his offerings, BECAUSE Gene doesn’t know them.

Why not?

why shouldn’t they know about Gene’s offerings? And there are a lot of rich and smart people that Gene doesn’t know.

Why not.

So let’s let Gene advertised all the rich and smart people there are. And let’s let all the rich and smart people find out about Gene’s offerings, and why would you do that to promote capital formation. And so they came out with 506 C, which simply was, hey, the rich and smart people all along, haven’t needed our protection. We’re going to expand it. And we’re going to let gene build the database of rich and smart people that he might not know and try to sell them, his offerings. And then rich and smart people can go online when they can Moment night and have a glass of a port and smoke a cigar and search the web for offerings offered by people like Jean and see if there’s something they want to invest in. So that’s been the trend is moving away from protection for the rich and smart people, but beefing up the protection from thought for those who aren’t.

J Darrin Gross 18:24

Got it. So in going back to essentially 81 kind of the rules there was that when the relationship was critical to this, and in order to participate, you there had to be a relationship or does that.

Gene Trowbridge 18:41

That still is that still is the case. And I’m going to I’m going to explain it like this. If the SEC came to you and said, you know, you were advertising, weren’t you? You were advertising you were soliciting when you took those people in and That’s a problem because if you’re going to do that you can only have accredited investors. And you have to have some third party verification of your advertising. And you say, No, I’m not advertising. This is family and friends and bla bla bla bla bla.

Your defense against advertising is number one, you had a pre existing relationship with the investor. And number two simultaneously, you had a substantive relationship with that investor. Those words go together pre existing and substitute. So in order to defend yourself against a claim of advertising, you have to be able to show that all your investors had a relationship with you before your offering came out. My firm The date is when you sign the fee agreement with me to do your offering. I think I think up to that point, you really don’t know what you’re doing, you might have a letter of intent. You’re just negotiating. You might even have a purchase and sale agreement. You might be wholesaling. You might be buying it yourself. I don’t know. But when you hire me to do your offering documents, I think it’s pretty clear cut, you’re looking to do an offering. And at that time, if you would, your database kind of freezes. Everyone who’s in your database up to that time would be pre existing.

Now, the question is, are they pre existing and substantive? Or did you just download some, some list of data, you know, I love that now that’s okay. If they’re all accredited. If they’re all accredited and you go do an advertising a 506 C, you can sell to people you don’t know you don’t need a pre existing relationship. You don’t need a substitute relationship. All you need to do is have some third party verification that the people you’re taking are granted. Yeah.

J Darrin Gross 21:09

So substantive. Is there any kind of a timeline or a knowledge base? Or is there a measure for defining that?

Gene Trowbridge 21:18

No. You’d think wouldn’t it be nice if we had four bullet points, but but we don’t. And over the years, there have been things called no action letters that the SEC issues when people want to define substitutive. And they’ve never really done it. The broad definition is, you as the syndicator know enough about the investor to know if the risk in the offering is something that they can handle and through their education, and their advisors, they can make a determination for themselves, that it’s okay and at the same time, the investor knows It’s enough about you to want to know about your offerings and hear about it, and go ahead and invest. That’s, that’s about it. There’s no bright line on that. I’m sure if I looked it up, I could read you the definition. I don’t have it right here. But that’s, that’s my plain English definition.

J Darrin Gross 22:18

Gotcha. So basically we’ve got a coming together of, of like minded known people or accredited people looking for, to to profit, your investment. It as far as the the, the benefits, I guess, of syndication is basically a means of raising capital so we can all do something greater than we could. On our own is that

Gene Trowbridge 22:53

Well, if you think about the examples of syndication I gave it gave it the beginning. If Just one person was going to make the movie. Or if you had a single passage xenos home movies. Yeah. So it really doesn’t work. But I think the reason, Darrin is that the investor public as a whole, for the most part doesn’t have enough money to buy a piece of real estate themselves doesn’t have the education and the training to understand a real estate investment by themselves doesn’t have the time and energy to do the management. And if we put a syndication together, we provide all those things for an investor, combine their their money, provide them professional management, and professional property management things that they couldn’t do.

So that’s why that’s what you’re looking for in your syndication if you’re going to be a syndication investor. A lot of people who say, my broker, friends, my real estate, commercial broker, friends say, well, I’ve had a lot of clients over the years, and I’ve bought a lot of properties. I think I’m going to do some syndication. And a lot of that fails, because the people who have the money and the time and the energy will continue to stick with their own property. But how many people is that? You know, there’s, there’s huge I, I think I think I saw somewhere along the line that they’re 38 or 40,000 accredited investor households in the United States. And a lot of them don’t want to buy real estate, but they’d love to invest in yours because the friends own real estate and their friends have made a lot of money in real estate. So they probably know you.

There’s all sorts of people Darrin that you know, who you’ve never asked to invest with you, who would love to invest with you You just never asked them. Right. My best story is Dan, the dry cleaner man. And for years I went in to see to Dan and today’s so does my dry cleaning. My girls had their first jobs with him. It was just amazing. And here I am a big money raiser big syndicator. In one day, he asked me what I did. Shame on me. And I told him that I was putting together syndications to buy us selves to build self storage in Southern California. And he said, Well, is that something I can invest in? Okay, so my job as a syndicator is to build my database of investors. And he asks me, okay, right. I said, Sure. You can. So he he threw $300,000 at a deal.

He did that 10 times.

J Darrin Gross 25:55

It’s pretty good dry cleaning business.

Gene Trowbridge 25:56

Pretty good dry cleaning business, but because I didn’t know That he inherited 36 dry cleaning companies when his dad died, and the only reason I knew him is the one that was close to my house was close to his house. And that’s where he came every day. But I never asked, okay, and so here’s someone who is too busy to buy real estate, had some money, didn’t know who to trust, didn’t know what to do. And that’s what the syndicators job is gotten from those people and give them the opportunity you don’t sell a syndication to someone, you give someone the opportunity to invest with you.

J Darrin Gross 26:38

Appreciate you, you know, making the distinction of what the job is, you know, finding the the potential investors and in fact, I wonder if you could take a minute and just define who the members of the syndication are the person that’s leading the or the call them the sponsor or the general partner or how do you need to find them?

Gene Trowbridge 27:00

If it’s an LLC, we have members members invest their money in the LLC that buys the property is the borrower. But someone needs to run that LLC. So we have a managing member. In my world, the managing member is also an LLC, made up of more than one person. So we have continuity. Because we need to make sure that, you know if there’s 3430 or 40 investors in the deal, we need to make sure that the member the managing member is always there. A single member LLC Upon the death of them of that member dissolves. Now who’s going to run? Who’s going to run all this? What’s the bank and say, we recently in the company had a situation where a fella was 56 years old, and he came to us and he wanted to do a big mobile home park development in Louisiana. Anna, and I said we’ve got to find you got to find a second person.

So someone in his office who was in his late 20s became a 10%. Owner in the manager LLC. Two years later, the 56 year old guy’s dead. Who would have thought, that pneumonia and died in four weeks? Oh,

What do you do? Well, luckily, we’ve got the 10% owner who just picks up and goes right to work. We don’t have to go out to the investors and figure out which one do you want to run this and all that we just we just carry on. So the lender is interested in continuity, your investors are interested in continuity.

J Darrin Gross 28:49

Know that continuity is definitely what keeps it going. Right.

Gene Trowbridge 28:54

Well, really, I think that that an investor should ask these four questions of a syndicator. And then the syndicator should have an answer. So this these questions go out to everyone. The first, the first question is, Darren, if I invest with you, what happens if something happens to you? And, Darrin, if you can answer that question, you’re not going to get my money. Period. Okay. So there’s the continuity, so we can solve that.

The second question and investors should ask is Darrin, have you done this before?

And I will tell you, Darrin, that every single one of us has had to say no, to that question the first time. So you got to go out and get your first deal done. And hopefully you’ve had some real estate experience that is maybe different than syndication. No, I haven’t done syndication but I’ve owned five properties myself, and I’m a CCI I am and I got an MBA and construction management or whatever it is, you know, You have to overcome that question,or they’re not going to give you their money.

The third question and investors should ask is, if this deal is so good, Darrin, are you going to invest any money in it? The old skin in the game question there.

And get Yeah, that’s where all the money is made is from the investors. So you should have some money. A lot of the deals we’re doing today, the minimum investment is 50, or $100,000. And I don’t suggest that the sponsor the syndicator, invest 50 or 100, in every deal, because pretty soon you run out of money. I think that you should invest something. And as core kind of a marketing issue is how much is enough? If it’s 100,000, minimum, and you can put in 40, does that satisfy the investors? I don’t know. You have to ask the investors. So that’s the third question. And then the fourth question is comes from the investor The investor says, well, Darrin, what happens if something happens to me?

Is this liquid? What’s the plan?

How do I get my money out of it? And that answer is, well, we have a well developed, drafted operating agreement that gives you the rules, and I’d be glad to have you look at it. And we take care of all the different ways that can happen. And I think you’ll be satisfied.

J Darrin Gross 31:29

I appreciate you sharing those. I was gonna ask you if we didn’t cover it. Before the end. They’re just kind of some questions that should be asked when somebody is considering getting into syndication. And those all definitely seemed like some primary points of concern and the answer should be available or near.

Gene Trowbridge 31:49

Darrin, I asked, I asked my clients those question if a first time client calls me, says they want to do a deal. They want to do a syndication. I’m gonna ask them those questions. If I were an investor and I had these four questions, how would you answer them? But the best thing I do is when the passive investor who’s invested in and literally that happens 25 30 other deals that other people have run, making a lot of money. They come to me and say, Gene, I want to be a syndicator. My best question is why?

Why would you want to do that? Being a passive investor is working for you. Why would you want to take on the issue of, of being a syndicator we have to have a heart to heart talk there in somewhere, we’ll probably talk about risk right? And we need to we need to talk about that because this is not a risk free, nothing down. Job.

This is a tough job.

J Darrin Gross 32:56

Want to ask you a little bit about the general partnership and raising money. Because I think I think one of the things I saw on one of your online, there was a video I think I saw you put together a while back. And it was speaking about this notion of the general partner and raising money and who can be on the general partnership and and in that, can you speak a little bit to that as far as

Gene Trowbridge 33:28

Sure. Let’s, let’s use the analogy to start with. For Sale By Owner. Okay. From the real estate world. The real estate world has licensing of people. You can sell your own property without a real estate license. But you can’t sell mine unless you have a real estate license. Bring that analogy right over to the securities world where there’s a licensing format. You can sell your own security.

But you can’t sell mine.

I can sell the securities I issue, but I can’t sell yours. And it’s called the issuer exemption. It’s not the for sale by owner exemption in the securities world. If you’re the issuer, you can sell the securities. So where do the issuers sit, they sit inside the managing member LLC. Members of the managing member LLC are issuers and they can sell the securities you’re offering.

Anyone outside of that group would need a securities license to sell those securities. And one of the things we see in the world today is syndicators and people are on the podium. Talking to big groups of people violate that rule all the time by saying or anyone in the audience who wants to put together a group of investors and come in and invest in my deal. And I’ll pay you a commission. That’s just totally illegal. Because the SEC would say, Well, if you’re selling someone else’s security, you better have a securities license. You don’t, you’re an unregistered securities broker. And there’s huge penalties for that. So you don’t want to, you don’t want to do that. One last thing about this Darren is inside the managing member group. Even though you’re issuers and even though you can sell the securities, you can not get paid a commission.

In order to collect a commission, you have to have a securities license.

You don’t have to have a securities license to be an issuer and sell your own stock, your own shares your own interest. But you can’t have anyone in there paid commission. There are a lot of ways we can compensate them. We can share all sorts of fees and everything, but it can’t be tied to what you raise $500,000 therefore you get x can’t do that.

J Darrin Gross 36:18

Gotcha.

Gene Trowbridge 36:19

That’s news to a lot of people who are going to be listening to this.

J Darrin Gross 36:23

Now I and I swear that, you know, I, I, I hear kind of what you hinted at some of the notions of, you know, yeah, raise some money for me, you you should do it, you know, right. And when you get into the details, so I don’t know, and I haven’t pressed on it, but I know I’ve been, I’ve been asked a number of times, yeah, you should raise some money for us. And the, you know, sometimes it seems kind of fast and loose. And, you know,

Gene Trowbridge 36:55

Tell you how you can do it. Put together your own offering of investors Bring them together in your own LLC. Have your own operating agreement. It’s your own securities offering. And then that LLC goes into Jean Trowbridge is LLC. As an investor. That works, you’re your own issuer. Okay? You can bring your own people together. And let’s say it’s Darrin Gross fund one.

After you raise that money, you can come in and invest in Trowbridge equity group, fund one. When the end of the year comes, I give you a K1. You go to your accountant and they break all that down into individual k ones for all your investors. And I give you a check. You put it in the bank, and then you write individual checks for all your investors. That works. You’re the issuer of your own securities, and we actually do quite a few projects. We’ll be four or five a year of something I would call a fund of funds, where someone comes to us and they syndicate money to invest in other people’s funds example. There are a couple big funds out there that have a million dollar minimum for an individual investment investor, and everyone has to be accredited. Well, not everyone has a million dollars.

But if you put together a fund and let’s say you raise $5 million $200,000 at a time, from accredited investors, you could take a share of this million dollar big fund. And you could take a share of this other million dollar big Fund and the people who invest with you who could never get into those funds, take advantage of pooling their resources and then diversifying into those into those big funds. We call that a fund to funds and totally, totally legal and totally done.

J Darrin Gross 39:06

Right? And then that point you’re, you’re following the rules and you’re, you’re structured properly and and you basically have capital, meaning if you’re raising the capital and you can deploy it and participate in these, these other investment opportunities is, are you would you essentially become in, if the Darrin Gross fund was participating with the Gene Trowbridge fund would that be would would I be or my fund be a limited partner in yours? Or would it come in as a general or as

Gene Trowbridge 39:37

You’d come in as a member? Yeah, I don’t want you in my managing member entity because that puts risk on you.

J Darrin Gross 39:48

Right?

Gene Trowbridge 39:49

We don’t want the risk. We just want to you just want we just want your money, right? We don’t want you to share in management and sharing our risk .

J Darrin Gross 39:59

Right? Right. No, it’s again, I appreciate you kind of distinguishing that because it’s, it’s always seems a little bit fast and loose. And I’ve gotten into a few of these conversations.

Gene Trowbridge 40:10

But the things I see that are wrong in the marketplace today is, people saying you can do joint ventures and it’s not a security. I think they’re loose with those facts. So you have to look at that. People saying you can raise money for me, and I’ll pay for you pay you for that. I think that is that is fast and loose. And another one we haven’t talked about, which is maybe too deep is something called a side letter, where you take 20 investors in under a certain set of rules. And I take Darrin in, and I say no matter what I’m doing for the other investors, I’m going to pay you twice as much of a yield.

Okay, well, that’s okay. But I better tell all the other investors

J Darrin Gross 41:00

Right,

Gene Trowbridge 41:00

You know, because you know, all the material facts has to be disclosed, or sometimes Darrin’s going to come in with a big amount of money. And Darrin is going to want more access to the books and the records and the decision making than the other members. So we better tell the other members that because maybe what’s in the best interest of Darrin isn’t in the best interest of the other members, and maybe we should all be alerted to that something that could happen.

J Darrin Gross 41:32

Yep, full disclosure, and that is, right.

Hey, we’ve been talking a lot about kind of the, the come together of a syndication and essentially to buy a property or invest in property and, and, you know, once it’s acquired, it’s operated and, and assumably. The property is profitable, and there’s distributions and and those all follow per the operating agreement. Everybody’s going to be paid. Can you talk a little bit about the liquidation and how a syndication treats it and if there’s any kind of an opportunity to take advantage of like a 1031 exchange or, or you know what the options are there.

Gene Trowbridge 42:20

So we’ve owned this property and we’ve gone full cycle and now it’s time to do something. Okay? There’s there’s going to be a capital event happening. And one of the capital events could be a refinance.

So what we do is we put a new loan on the property, generate new cash and give it back to the investors. That’s the return of their capital. The property’s gone up in value. They have equity, we refinance it, give them their money back and continue to own that property. Sometimes we take the money that we earned from the refinance and go out and buy another property. Now we own two properties. So there’s a lot of situations that are possible in a refinance.

The other thing, of course, is just the sale, we sell the property. We pay off all the debt and there’s all that money sitting there in the bank. We’re giving people their equity back. So it’s a return of capital. We pay them all off and they go away. The Smart syndicator has another offering ready at that time, Darren, we’re gonna sell this property you’re 100,000 is now 300,000. And by the time we get the sale or that ready, I’m going to have a new offering and I’d like to have you consider investing some of your money in that. That’s what the smart investment smart syndicator does.

And then the exchange. Okay. The LLC that owns the property Darrin has a deed to that property. The exchange rules simply say, you can exchange your deed and the equity represented by your deed for another deed on another property, moving your equity without it being diluted by income taxes reporting game. Okay, so we have this property, we took our $500,000 investment it’s worth, we now have a million and a half, we can take that million and a half and go over and buy a $5 million property. The LLC itself is the LLC that buys. Nothing changes.

The money just transfers, simple. Just like you doing an exchange on your own property. You own it in your name. You sell it, the money goes to the account. After you buy another property in your name, it’s a 1031 exchange. Same thing. LLC buys on the property. The issue becomes when someone wants out.

J Darrin Gross 45:14

I was gonna ask.

Gene Trowbridge 45:16

That that’s smooth, but the problem is, the first deal was 10 years ago. And now I’m 72 I don’t want to get in another 10 year deal. I want my money. Okay. So how it’s very simple what you do, you survey your investors, and you know, what your investors want to do, how many are going to go with you in the same LLC? How many are going to want their money? So what you do is in the escrow instructions, at the time of the sale, you set up two escrows one escrow is for the money that needs to go to Gene Trowbridge because Gene is going to leave. And the other escrow is from The money that’s going to stay with the LLC, that’s going to buy the new property. So when the closing happens, the cash goes into the correct escrow. I get my money, taxable, okay. All these other people accomplish a tax deferral in their 1031 exchange because they never got anything. They just transfer their equity from one property to another property, and that’s not taxable.

J Darrin Gross 46:33

And is there any number of of partners or members that need to go to the second deal to retain that?

Gene Trowbridge 46:44

No the number isn’t the issue. There are a couple issues that can happen number one, some of the states have rules that if the membership An LLC changes by more than 50%. The LLC is dissolved. That’s a problem because you got to take title in the same LLC. So you have to worry about that. Number two. The rules in a 1031 exchange is that what you have to acquire is a property at least of equal value with the loan, at least the same as the loan you gave up? Well, if too many people leave and take their money, maybe you’re not gonna be able to do that. Right?

So that’s just an issue of balancing equity and balancing loans now. What if too many people leave and you can’t buy all of this new property with who’s left? You can buy part of it. You can change into a tenant in common interest This new property and raise money from new investors who will buy the other tenant in common interests. So we can still solve the exchange for the equity we’re bringing over here. And then we can give new people some of whom may also have exchange money can come in as a tenant in common. So all this gets involved with the, the exchange accommodator and with the CPA for the LLC, and any new investors, their tax advisor in their accommodator but we see that quite a bit where we are today in the marketplace is anyone who bought a property 2012 1314 who still owns it has a lot of equity. And they’re all interested in how do we how do we move the equity without paying tax?

J Darrin Gross 48:53

How do we keep it?

Gene Trowbridge 48:55

Or or keep it. You know you want because no one The problem is if you pay taxes, your equity goes down. Down to buy another property and, and with the tax last day, if you just keep your property until you die, given the right size of your estate, you never do pay taxes on it. So.

J Darrin Gross 49:14

Right, right. I appreciate you you walking through that because I think that’s always been kind of I’d say some of the newer real estate investors that I’ve talked with that that are kind of in and out of something really fast or have maybe been used to kind of a stock market. In and out the taxing never doesn’t faze them. But if you’ve been in in a property for any length of time, and you’ve experienced some significant appreciation, and maybe you’ve depreciated the property down salutely, then you’ve got a whole different kettle of fish there that

Gene Trowbridge 49:51

Another question that comes up Darrin in that same issue and I get this call periodically. One of my clients will call me and we’ll say, Hey, I’m Raising money. I’ve found someone who’s got $500,000 sitting in an accommodators account. Can they invest in my syndication? The answer’s no. Because what the syndication is, what you’re buying in an LLC, is personal property. You don’t get titled to real estate. You buy shares or interest in an LLC, someone coming out of a property and wanting to accomplish a 1031 exchange needs to get title to real estate.

J Darrin Gross 50:36

Gotcha. And that’s why the TIC works.

Gene Trowbridge 50:39

That’s right.

J Darrin Gross 50:40

Because you’re on on title and

Gene Trowbridge 50:45

We’re covering a lot of stuff.

J Darrin Gross 50:47

No, it will use a wealth of information and it is nice to be able to speak with somebody that has you know, the the clarity and understanding and knowledge of all this. I got to ask you a question. And this was something I thought of just based on a a an insurance related topic protection. What kind of protection? Does the syndication provide the general partner? Or the limited partners based on the contract or is or you speak to that?

Gene Trowbridge 51:21

It’s based on state law. Okay, if you form and you use the words limited partner in general partner, which means you’re using a limited partnership, okay? If you form a limited partnership, the limited partners have absolute protection. Their only liability is what they have invested, or any promises they make to invest more money. I’ve invested $100,000 That’s it. That’s all I’m liable for, or I’ve invested 100 now and then signed a note to investment 102 years from now, when we do construction, well, I’m liable for that note, okay. But that’s all I’m liable for.

The general partner is liable for everything has unlimited liability. That’s why 99% of everything is done in an LLC. Because in an LLC, the members have the same limited liability they have in a limited partnership, but they can also vote, which they cannot do. As a limited partner, they can have any share in the management, or they’re deemed to be general partners, and then they lose their limited liability. So the limited the members in a limited liability company have total protection based on the state law. And the manager has total protection way back in the 80s when limited liability companies weren’t in existence.

The State of Wyoming was having some trouble because they’re, they’re drilling in oil and gas and all that industry. You know, we had quite a meltdown in the economy in 1981. And their industry died and what the problem was is the the wildcatters the guys who had gone out to raise the money and do all this, as limit general partners finally learned what unlimited liability meant, and they just got crucified. And the investors who are limited partners who couldn’t vote couldn’t really do anything to help save their money.

So Wyoming actually was the first state to develop a Limited Liability Company, which solved two things. It gave the wildcatters a new name, managing member and gave them limited liability. And it gave the investor a new name members and gave them while keeping the right to limited liability, gave them the right to vote. So itself to have the problems, the manager was willing to go out and take the risk, because now they were shielded with limited liability, and the investors were ready to come back in the marketplace. Because if anything went wrong, they could vote me thought at least that they could correct things. So there we are 1981. And all of a sudden, all the other states created their own individual limited liability company. So to answer your question, each state has their own rule, but generally, the manager is protected and the members are protected. doesn’t help the manager if the manager goes off and signs a recourse mortgage.

J Darrin Gross 54:50

Right. Okay. That’s That’s you. Sign up. I appreciate you you explaining that. You know, it’s funny how Much of law or you know, policy is reactive to events and get a little bit of a history there on

Gene Trowbridge 55:08

Oh, absolutely.

J Darrin Gross 55:09

How it came about there. So that’s great. Hey, Gene, before we started recording, I mentioned to you that by day, I’m an insurance broker. And as such, in insurance, we try and manage risk with our clients. And there’s a couple different strategies we typically consider. And then

The first is we ask, can we avoid the risk? If we can’t avoid it, and we look to see if there’s a way we can minimize the risk. And then if there’s not a way to avoid or minimize, we look to see if there’s a way to transfer the risk. And that’s essentially what an insurance policy is. And I’ve been asking all my guests, and I’d like to see what if you would take up the cause, but if they could consider or take a look and consider what they see to be the biggest risk. And just for clarification, I’m not necessarily looking for an insurance related answer a risk is certainly more broad than that. But if your game, I’d like to ask you, Gene Trowbridge. What is the BIGGEST RISK?

Gene Trowbridge 56:18

Okay, well, you talked about avoiding minimizing and transferring. Okay? So avoiding the risk. In my best legal language; Don’t do this! That’s how you avoid the risk of being a syndicator. Just don’t do it. And what is the biggest risk, the biggest risk is really, the investors. Never the property properties will get empty and go into foreclosure and all that you can always deal with that. Excuse me, but you can’t deal with the investor whose life changes in the middle of a project.

That’s really the BIGGEST RISK.

So simply how to avoid the risk is to don’t do it. Well, if you’re going to do it, then the question is how do you minimize it? Okay, you might minimize it by the investors you choose. You could have a strategy of only dealing with accredited investors who are rich and smart, who have enough money where they can handle the risk of your investment. That might be a good one. Another way to minimize it is make sure your manager LLC is free form correctly so that people can’t get at you. If there’s trouble, and maybe two, this is kind of an asset protection answer. Maybe you want to be an LLC yourself, and then that LLC becomes the member of your manager LLC. So they really have to go through multiple loops.

Every once in a while, I think asset protection gets a little carried away, you can have two very too many of these LLCs and tax returns and all that stuff. But that’s not uncommon for the manager to be an LLC and have the member of the manager be LLCs the one thing you don’t want to be, is an individual manager. Yet 30 investors up there, and Gene Trowbridge is the individual manager. There’s no protection for Gene Trowbridge from those 30 investors. I’m in the LLC with all the other investors are kind of protected from the outside world. But any investor can go after me for everything I have. So we want the manager to be have the layer of protection the LLC.

When I did it, it was a sub s corporation. Same protection, but today different issues that I was trying to deal with insurance and employees and all that stuff. But today almost everyone is ais aan LLC.

And then the last one How do you transfer the risk?

I don’t know if you do.

I don’t know if you do I think one thing I would say is the manager LLC is constructed in such a way that it has no assets. All you want you don’t want your let’s say there’s a commercial real estate broker listen to us and he has an office with 20 salespeople and own some buildings. That’s not going to be the managing member. We’re going to form a brand new entity that’s clean. And the only thing the managing member actually ever gets his some cash distribution for the fees and some stuff subordinated interest that might occur in the future. Okay?

So there’s nothing in there. Okay? So don’t syndicate.

Minimize your risk by having limited liability protection around you at least one or two layers. And then make sure that nothing in your syndication world, really at any time has any value. Now I do get I do get asked this question, should we buy directors insurance?

J Darrin Gross 1:00:35

I was gonna ask you that.

Gene Trowbridge 1:00:36

Yeah. I thought you should ask me that.

Our clients ask us that. And we’ve researched a lot of it. It’s very expensive, simple answer, very expensive, and doesn’t cover the crap that you do. The fraud that you do, the stealing money that you do all the stuff that managers get in trouble, doesn’t Anyhow, so don’t waste your money.

J Darrin Gross 1:01:02

Yeah, the exclusions.

Gene Trowbridge 1:01:04

Lloyds of London? Yeah, that’s where we’ve had some people who have big, big funds. And they’ll buy it. And very, very expensive. And I don’t know really what it protects.

J Darrin Gross 1:01:18

Yeah, no, I have a couple of underwriters about this. And, you know, I think that the, I think where the exposure I would think that exists or where it may be more applicable would be in a very large fund with you know, large money and the potential for a suit come from one of your investors for a quote mismanagement or something like that, but, but just like you said, if you take the money or you’re if you’re stealing, you know, crime is not a covered panel there, but, but the kind of the defense of have any kind of a mismanagement kind of thing is more of the I think the nature of the coverage.

Gene Trowbridge 1:02:02

I’ll tell you another thing that that that I just thought of the operating agreement of the company can also be a protection for the manager. In our operating agreement, we have a pretty well worked out dispute resolution provision, which is designed, I’m not going to go into all the details. It’s designed to keep you out of court. It takes you through mediation, it takes you through arbitration. And then it has some pretty strict rules like number one, no attorneys fee provision for the person who’s bringing the lawsuit that usually stops a lot of stuff.

And number two, the only remedy is your original investment. No damages. Now, I don’t know if all that’s legal, but that’s what we put in there. It’s never been challenged. And the deals that we’ve had where there have been disputes have always been resolved before we go to court.

J Darrin Gross 1:03:01

Right. Well, it’s certainly a better starting point than nothing written and no guidelines and you can test it all in court and and paying all the attorney fees and time. Gene This is this has been exactly everything. I’d hoped it would be in more. And before we wrap up, Where can the listeners go if they would like to connect, or learn more?

Gene Trowbridge 1:03:27

All right, well, our website is www.crowdfundinglawyers.net. And it’s a great website. We have all sorts of things on we have a YouTube channel, we have all sorts of stuff. You can reach me at Gene@crowdfundinglawyers.net. That’s probably the best way to work with me. I typically use my emails like a telephone. If you send me an email, and it’s an important question, I’ll just call you. So if you’re going to send me an email, and you want We do call you make sure you put your phone number in there. And then other than that, I have to send you an email and say, hey, I want to talk to you about this, but I can’t, because I don’t have your phone number. So the best thing to do would be Gene@crowdfundinglawyers.net. or just go to our website and if you want a if you want a consultation with me, you can sign up at the website for a 15 minute or a half hour consultation with me and that works also Darrin

J Darrin Gross 1:04:27

Awesome. Well, Gene, again, I cannot say thanks enough for taking the time. have enjoyed it immensely. learned a lot and I hope we can do it again soon.

Gene Trowbridge 1:04:38

Okay, thanks, Darrin. Appreciate it.

J Darrin Gross 1:04:40

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. C R E P N Radio

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