J Darrin Gross Podcasts -

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

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

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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

Commercial Real Estate Lending with Leslie Smith – CREPN #245

Today, my guest is Leslie Smith. She is the managing director for Commercial Direct, a National Small, balanced commercial real estate lender. And in just a minute we’re going to speak with Leslie about commercial lending for commercial real estate. But first a quick reminder, if you like the show, CREPN Radio, please let us know. You can like you can share you can subscribe, and as always, you can leave a comment. We’d love to hear from our listeners. And normally also want to just let you know that we do have a YouTube channel. If you’d like to see how attractive our guests are, you can check that out. It’s a commercial real estate pro network. Today we’re not the video option but just so you know that is available. With that I want to welcome my guest, Leslie, welcome to CREPN Radio.

Leslie Smith 0:55

Hi, thank you for having me.

J Darrin Gross 0:57

I’m so glad you could join us today. Before we get started, if you could take just a minute and share with the listeners a little bit about your background.

Leslie Smith 1:08

Sure. Hi, everybody. My name is Leslie Smith. And I, my background really started in banking, like many people, but I started in the call center area. So I ran a call center for many years and then moved over to lending for a private company. And the reason I found that interesting is because if anybody’s worked for a bank, you know, there are a lot of restrictions. Innovation is tough, and in product development and managing a team and making decisions and so moving outside of the banking space, but still in lending was really, you know, exciting and fun. And that’s where I’ve been since then.

J Darrin Gross 1:47

Got it. And you mentioned you were in a call center was that for commercial or was that for residential or

Leslie Smith 1:55

it was mostly residential and mostly credit cards, so highly regulated?

J Darrin Gross 2:00

Got it. Got it? Well, for conversation today, wondering if maybe a good starting point is just the difference between commercial and residential lending.

Is that a fair place to start?

Leslie Smith 2:16

Sure, sure. So, you know, I think, for when you talk about small, balanced commercial, you know, people, there’s different variations of what people think is small. But my business is small. I mean, I start loaned out 100,000. And then up to two, two and a half million and why I start there is because when you’re thinking about someone purchasing a home, you know that that range is much more reasonable than what people think about commercial lending, which is like million to 50 million, 100 million, right. And I think the business itself differences, you know, I am helping small business owners either buy the property that they’ve been operating their businesses in, or I’m helping investors buy single family homes or multi families for investment purposes, you know they’re in they’re trying to grow, build their worth with their, their their wealth and and grow that nest egg. So the main difference between us is a residential lending is someone really buying a home and purchasing a home for themselves and their family. My business is about someone either growing their business or investing in real estate.

J Darrin Gross 3:29

And do you guys do you work direct with consumers or investors or do you go through brokers or how’s that work?

Leslie Smith 3:39

commercial direct, straight direct to the consumer. So consumers come to me directly. A lot of times they are referred maybe by a realtor or a CPA or a lawyer. But a large part of my business is really digital. So people are googling they’re doing their own research or trying to get informed and they come through me through to me through my website.

J Darrin Gross 4:01

It’s amazing how that works anymore. It used to be that you had to have an ad in the yellow pages or something like that. But if you’ve got, if you’ve got some information that people are looking for, they will find you. So,

Leslie Smith 4:17

yeah, definitely, definitely. I mean, I think it shows like this also, it really helped people really understand what’s out there and what’s available.

J Darrin Gross 4:25

Right. So you mentioned small balance, hundred to 2.5 million. Is there a definition for small balance? Or is that basically what you’ve kind of defined it for your your business?

Leslie Smith 4:41

It’s what I’ve defined for my business, I think, you know, when, when in when I go out into the world and I talk to professionals in the lending and commercial lending world, some people say small balance starts at 5 million. And you know, there there are specific people in this industry that there they start at five, there’s others that start at you know, 100 million. So it really is, we’ve defined this as a small because we feel that this is where our space and where our bars are going or needing financing.

J Darrin Gross 5:12

Gotcha. And and are you placing it with like Fannie or Freddie product? Or is this more stuff where

Leslie Smith 5:22

you guys are holding the paper? Or can you? We are so we don’t do any agency. So we are when we when we think of our business we think of we’re lending to people that probably would not be eligible for an agency loan, or would not probably be eligible for a traditional bank loan.

J Darrin Gross 5:41

Gotcha. And for for the listeners, can you express some of the reasons why somebody might not qualify at a bank that would be a good option.

Leslie Smith 5:51

Um, well, this one is credit always so you know where your credit score is. The second thing would be the property type. You know, what is it we land on you know, not your you know, trip, you know, multi families and, you know, really pretty office space, you know, we tend to lend the daycares or restaurants, the bars, the, you know, car repair shop. So, these are property types that a lot of lenders really stay away from. On the agency side, you tend to need need to have experience and you are going to go through a full underwrite of all your personal and business tax returns. And so our program allows you if you want to go the route of full documentation, we can or if you know, we can do an alternative way of looking at you and your business, we have those options as well.

J Darrin Gross 6:47

Gotcha. And is there a length of time that you guys typically hold or a note as a like a short term loan or these is to the mature

Leslie Smith 7:00

Sunil a balloon are, yeah, we have six products, typically our, you know, our typical bar right now, we’ll take a, our average loan size of about 420,000. They typically take a 30 year fixed mortgage, which is really unheard of and commercial 30 year fixed mortgage is typically very much a residential product. But we’ve decided that, you know, for some of our small business owners are not looking to hop around to get alone, you know, every two, three years, every, you know, six months, they really want long term financing. So, our typical bar is in our loan for 30 years. You know, the ELP, you know, loan to value is about you know, 70% and it has a 30 year amortization.

J Darrin Gross 7:44

And for that, is there a kind of a rule of thumb as far as kind of a rate range compared to like what somebody you know, might have heard on TV or something they were they expect to get, you know, advertised rate as opposed to, you know what you’re able to provide.

Leslie Smith 8:04

So typically, you know, our starting rate is about five and a half our typical bars probably a six and a half. Um, depending on the credit score and pricing for us, it’s really driven by your your app your FICO. And again, that’s something different than commercial, you know, typically commercial loans, you know, the the credit score of the individual is not really taken into account when it comes to developing or providing terms. Our starting point is our credit score. So you know, depending on your credit score, then that’ll drive the your rate and your loan to value

J Darrin Gross 8:38

check and you said loan to value go typically as much as 70%.

Leslie Smith 8:44

We love to 80% depending on your credit score.

J Darrin Gross 8:47

Okay, gotcha.

Leslie Smith 8:50

And other the other piece that’s different for us is you know, we also give cash out on commercial to people people know about cash out, you know, when they think about their You know, taking out a line on their residential home on home equity line, it’s rare that you can get pull cash out of your commercial investment property or your own owner user property. And that’s another feature that I think bars are seeking. They’re seeking to reinvest in their own businesses and take out cash from the equity that they have in the property. Or you have an investor that has equity on a property and wants to buy another one.

J Darrin Gross 9:26

True. What about somebody that’s that’s purchasing a property that needs some repairs or there’s some sort of renovation budget that they have in conjunction with the acquisition price, is that anything you’re able to provide funding for?

Leslie Smith 9:44

We are looking for stabilized properties. So if there’s really large fixing of the property in order to reposition it and rent it, we that’s not the product that we’re looking for. We’re looking for something that’s pretty much like so Have any percent occupied and that it does need some repair, it’s very cosmetic in nature and not you know, fully I need a roof we need to build, there’s a complete build out, we consider that more of a fix and flip or a construction loan. And you know, that’s not our product. Gotcha.

J Darrin Gross 10:21

You mentioned or we were talking about kind of like qualifying our new investors, are they are you able to work with a newer investor?

Leslie Smith 10:30

We are we are.

J Darrin Gross 10:32

Alright. And what about like debt cover ratio? Do you do you underwrite to a certain percentage?

Leslie Smith 10:40

We do debt service minimum for us is 1.15.

And our minimum credit score is 650.

J Darrin Gross 10:49

All right, well, it certainly seems like that opens up opportunities for

Leslie Smith 10:55

you know what some banks may decline

J Darrin Gross 10:59

Do you think Find it like investors that have a large portfolio. I know, you know anymore borrowing money at a bank that has to follow all the Dodd Frank stuff, it gets kind of a narrow window of opportunity. I’ve talked with numerous investors and it’s, you know, whether they’ve got a number of loans or maybe they’re self employed or, or, you know, what have you. They may not qualify, even though their, their balance sheet is plenty strong and they make plenty of income. Is that somebody that would be a prospective borrower for you?

Leslie Smith 11:38

It would, and just like me, there there, there are many other, you know, companies that really are focused on that bar. They’re really looking at that experience, and the fact that they’re building that, you know, our rail schedule, so there’s definitely opportunity for those and for us in particular, definitely.

J Darrin Gross 11:57

Got it. So stabilized property. qualified lender and suitably qualified borrower.

Leslie Smith 12:05

And longer terms.

J Darrin Gross 12:09

Is that kind of the sweet spot for you guys?

Leslie Smith 12:12

It is and just as a, you know, we, you know, our average days to close is about 48 days. So when you think about a commercial loan and the process to get a loan closed, you know, that’s pretty much and more in line with residential than it is with standard commercial.

J Darrin Gross 12:29

That seems pretty, pretty aggressive. They’re

gonna ask you

talking about closing time, if you can’t remember now, who can you as far as the the, you mentioned, like the the average loan amount is there? You typically are most of your borrowers, are they owner occupied type things with you know, like an actual business you mentioned yourself do that or is it more defined more of the investor that’s

buying for a non owner occupied?

Leslie Smith 13:06

It’s a 6040 split for us. So 60% of what we see is investor and 40% is owner.

J Darrin Gross 13:15

Gotcha.

I’m trying to think of there’s Is there any Can you point any other like a highlight or a low light or a challenge you’ve seen that people, you know, may not hear about in the, in the normal course of getting alone that you guys have been able to overcome?

Leslie Smith 13:36

Yeah, I think that, you know, I think a story is really important, you know, especially when you’re talking about a small business owner and I think that it’s important for us, you know, small business owners, you know, especially when you think about, you know, a small business making it through the last recession, it’s pretty incredible. And so I think another a differentiating factors, a lot of data we can pull we can look at a lot of different things but a small business owner someone that’s looking for a $300,000 loan, you know, their documentation could be messy, maybe not as organized and maybe, you know, a traditional tax return, you know, even a bank statement might tell you, right, that tell you the story that this person can run their business. And there’s value in that real estate. So I think a differentiate is for us, it’s like, it’s important for us to know because ultimately, what we want to figure out is this person’s going to pay and if they’re, if this is their bread and butter, this is how they plan to retire or this is where this is a family owned business. It’s important to understand those types of variables.

J Darrin Gross 14:35

No, that makes complete sense. I my dad was a banker all through his career and and I didn’t understand what he did you know, I it just didn’t make sense to me but your money in the bank and, and at the time, you could get interest but, but I know looking back that, you know, a lot of what he did was, you know, somebody come over And, and my dad and the other person needed to be in the kitchen or they’d be on the driveway and talk and and, and a lot of that getting to know somebody and kind of understanding what their story was was really important to making the relationship and and, you know, essentially qualifying for the loan so it makes sense. Do you guys have any kind of territory restrictions?

Leslie Smith 15:26

We’re a national lender, I think we’re, you know, I would say where we’re not lending is really rule. So like you’re talking about the North Dakota, South Dakota is I think that’s where we stay away from. But but generally in a major, you know, we there’s 40, we lend in 40 in 46 states. So, it’s pretty much covered the math. And we, you know, we have we have a varied amount of different property types that we land on. So I think that that’s of interest to bars, because a lot of times it’s Doesn’t that cookie cutter? You know, it’s not you know, something that someone can really understand easily. Typically it’s even, it’s just a no

J Darrin Gross 16:10

doubt you mentioned you know how you guys go on FIFO but then you you’d mentioned kind of the property type and the occupancy type is Do you find it is more of the non mainstream occupant is kind of your your sweet spot on that?

Leslie Smith 16:33

Yes, definitely. Okay,

J Darrin Gross 16:35

gotcha now so you’re talking about the auto shops and, and not so much multifamily. But anything that that? Well, so you’re Bankston, not to William nuts. That’s a good opportunity for you.

Leslie Smith 16:51

As very few people understand like warehouse or sell storage or light industrial like, you know, for a banker, it’s like What does that look like? You know, you know, what would the appraisal look like? And for us that’s that’s really very much our sweet spot.

J Darrin Gross 17:09

And you know, this is kind of more of a curiosity of mine. When you when you underwrite for the loan and that valuing a property if it’s a unique property or something, are you looking based on the again because it’s stabilized and you can you can basically factor in what the current rents are the current tenants pain, is that kind of your starting point for an income analysis.

Leslie Smith 17:38

So we do order an appraisal for each of the properties and typically the instruction to our appraiser when they go out is that they also look at comps locally, you know, what, locally what other sales were there with a similar type of structure. You know, sometimes it’s it’s easier to get that Calm depending on if you’re in, you know, in any of the boroughs in New York or in Miami, Florida, pretty easy to get comps, other places not so easy. But then that’s the starting point for us that value really will come with the comparison to other properties like it

J Darrin Gross 18:20

is an insurance guy I got to ask is his flood, you know, properties in a flood zone or anything like that is that that’s something that you guys shy away from? Are you as long as there’s flood insurance in place for that? That’d be something you’d be able to do.

Leslie Smith 18:33

Yeah, we’d be able to do that. So um, we do run a flood cert at a fair and then we will we’ll let the borrower know that it’s in a flood cert and if they have flood insurance.

J Darrin Gross 18:44

Gotcha.

Hey, Leslie. Before we started recording I mentioned to you by day, I’m an insurance broker. And as an insurance broker, we work with our clients to manage risk. There’s a couple of different strategies we, we look to the The first is we ask the question, can we avoid the risk? If that’s not possible, then we ask, Is there a way to minimize the risk? And if we can’t avoid it or minimize it, then we look to see Is there a way we can transfer the risk? That’s essentially what an insurance policy is. And I like to ask my guests, if they can take a look at, you know, whether it be their business or the way they see, you know, real estate investors, if they can identify what they consider that the biggest risk. And just to be clear, I’m not necessarily looking at or looking for a an insurance related answer, because I do believe that, that risk is everywhere. But if you’re willing, I’d like to ask you, Leslie Smith, what is the biggest risk?

Leslie Smith 19:54

I think, you know, I’ll speak about investing. I think what’s really important when We see investors, one of the things that it’s hard for us, and when we’re trying to when we’re when I mentioned earlier about the story is that, you know, they don’t really know what their objective is as an investor. So, you know, if they don’t have like, an objective is okay, I want to, I want to own 12 properties, and they need to live like this, and this is how I’m going to manage them, it’s really difficult for us to see whether they’re going to be successful in growing that real estate portfolio. You know, you know, investing in real estate is not it’s not a sprint, it’s a marathon. And you really have to be methodical and thoughtful about what you’re doing. Because you can get yourself in a lot of trouble, you know, quickly, and you know, and that’s your nest egg that you’re building. I think risk is that there’s a lot of folks that say, Oh, you know what, I don’t really want to invest in stocks, and I think I need to buy real estate. They’re just they’re not thoughtful about the plan, and then the plan. Then if you don’t have a plan, then what kind of lender Are you going to, you know, seek, and that could get you into some not so great. loans. And we’ve seen that a lot with refinance people were, you know, they thought they were getting, you know, they were buying this property and it was their investment and then, you know, it’s like a double digit rate, and that’s tough. And so that’s really what we see as risky, because then you have a lot more default, you have a person that, you know, really thought they were making a smart investment, and really protecting themselves long term. And it turned out to be, you know, a loss for them.

J Darrin Gross 21:26

No, that’s, that’s great, great input there. I think the I am going to plan and understand the time it’s going to take to execute the plan. It’s definitely more than just a click of a button and, and, you know, try and watch it go up kind of thing, which I think unfortunately, in this digital age, there’s a lot of people that get kind of swayed by, you know, recent success that people have had and they get all excited and, you know,

Leslie Smith 21:57

y eah, and

J Darrin Gross 21:58

so definitely No worthy there appreciate you sharing that. Leslie Where can the listeners go if they would like to learn more or connect with you

Leslie Smith 22:10

to listen to they go to my to our website, commercialdirect.com, And you can either call us, you can chat with us so you can apply online. There’s a lot of information about commercial real estate if you’re new to commercial real estate, so we put a lot of educational blogs and videos to help people kind of go at their own pace. It’s up to them, you know how they want to interact with us.

J Darrin Gross 22:33

It’s great. Leslie, I can’t say thanks enough for taking the time. I’ve been enjoyed talking with you learned a lot. And I hope we can do it again soon.

Leslie Smith 22:44

Thank you, Darrin. Appreciate it.

J Darrin Gross 22:46

Minimizing Risk and Maximizing ROI with Christian Olin – CREPN #244

Minimizing Risk and Maximizing Return on Investment is how you build long term wealth in commercial real estate.

Christina Olin with direct lender, On Q Financial Inc, provides a look into risk and what you can do to minimize your risk when investing in real estate. They specialize in personal residences and small multifamily investment properties.

Minimizing Risk

Find a property with fewer competitors. To do this, search the property on your own. If you find a four plex, find out who the owner is and contact them directly. If you are the only potential buyer, you are not in a bidding war.

Get your finances in order. When you approach a lender with a story that makes sense and is backed up by your financials, they are able to get comfortable and are more willing to provide financing.

Talk to multiple lenders. When a lender knows they have competition, they are more willing to provide their best rate to avoid losing a good loan. Lenders have different requirements and different loan fees. Shop, compare and save.

Getting a Loan

Technology has changed getting a loan. The process starts with an online application, and you are updated throughout the process. Get educated before you apply for a loan. Depending on your employment picture will determine what lending products you qualify for.

If you are a first time buyer, the lender will look closely at your credit profile. If you have purchased a bunch of things when you are attempting to purchase a property, you can end up negatively affecting your ability to qualify for a loan.

BIGGEST RISK

Each week I ask my guest, “What is the Biggest Risk Real Estate Investors face?”

BIGGEST RISK: I think when we’re talking about residential investment properties, there are a lot of them. I personally feel, because I fall in subject to it myself, the biggest risk for an investor, someone purchasing a home, a first time home buyer is getting emotional about the purchase. And a lot of us just get emotional, it’s an emotional experience. It’s your, you know, your first time home buyers, your first investment property.

But to dive in a little deeper, what I mean about it is, is we’re in a market right now where there’s almost always more than one offer on that property, right? Um, that inherently creates more emotion than if you’re just, you know, when you’re in a bidding environment, it becomes more emotional. You, you sometimes would. And so how does that, and people say, well, how does emotion affect risk?

Well, emotion could affect risk books. It’s our inherent nature to be competitive, right? So you can get into a bidding situation on a two, five, four Plex. You find a perfect white picket fence house as your first home, you have to have that house and your budget’s 300,000 and the next thing you know, you’ve built yourself up to 350,000 while you can certainly probably still qualify for that.

Is that going to fit in well with the rest of your lifestyle? Are you somebody that eats out five times a week? You have to cut that part out. The emotional aspect of it. You find it investor property that’s, that’s redone and you’re the seventh bid on it. So you, Oh, I got this, you know, all these, all these experienced investors are bidding on it. This has gotta be my first investment property. And next thing you know, you’re bid number eight, you’re outbidding guys who have a whole lot or women who have a whole lot more investor knowledge than you have because you’ve gotten caught up in that horse race, rat race and it’s all done through emotions.

So the one thing that I learned, and I’ve learned it the hard way, even on my personal residence I live in now, that I’ve got a bidding war I got into a bidding war on, um, is that there will always be another property and you have to remind yourself. And when you’re buying a home with a partner, you’re buying a home, uh, with your wife, girlfriend, boyfriend, husband, whatever it may be. Um, now you’ve got twice the emotion. So kind of to answer that question, emotion is always going to be your BIGGEST RISK.

For more go to:

Website: OnQFinancial.com

Email: Christian.olin@onqfinancial.com

*Recorded 1/29/2020

Finding Value in Multifamily Where Others Cannot with JP Albano – CREPN #243

Finding value in multifamily where others cannot is key to your success in a competitive market.

JP Albano is a computer hard drive equipment sales turned multifamily real estate investor / multifamily syndicator. In a little under two years, he has invested in 230 plus units spread over 5 properties.

Finding Value

Finding value in today’s competitive multifamily market is difficult. JP’s most recent deal is a 60 unit property. It took almost 4 months of courting the seller, who was the original owner, and had operated the property for 60 years with no systems. Originally set up as a weekly rental for men, the current rents were less than half of the average market monthly rent.

A poorly operated property with 24% vacancy, in a market with no vacancies, and market rents that are twice what is being charged, that sounds like an opportunity.

Recognizing Opportunity

The condition of the property lent itself to the listing land broker as a redevelopment opportunity. Local code violations made other potential buyers look past this property. If you had no imagination, you too would drive right past. It was only through looking at the business and pulling the numbers together that JP and his team were able to realize the potential.

Time lingered on, and the seller had become desperate.

A Willing Seller

The seller was willing and ready to sell. Recent sales comps for area apartments were $64,000 per door. JP was able to negotiate a price based on the seller’s numbers about $17,000 per door. For a down payment of $400,000, and seller financing of the balance with 0% interest for 18 months. Additional opportunity, is the billboard on the property for which the seller has not enforced the lease for multiple years.

Preparing for Opportunity

In order to know a market, you have to do the footwork. JP was underwriting multiple deals per week, making offers on a fraction of those, and losing each time. The multiple reps helped fine tune his understanding of the market, and expand the search to additional markets.

The process can be frustrating. For each offer, you are emotionally invested. Losing multiple times, takes a toll. The antidote to loss, is making sure you have options. Focus on the number, and remember this is business.

If you only have one option and lose, it hurts. When you have four options and get one, it’s a win. Today, his team is underwriting in 12 markets, submitting letters of intent, raising money and closing deals.

Momentum

Meeting brokers face to face is where it all begins. If they present you a deal, you absolutely have to respond. Even if the deal does not work for you, you have to respond to the broker and give input as to why it does not work. This will give the broker additional direction for what you are looking for.

When you close your first deal it proves to the area commercial real estate brokers and lenders that you are a closer. This is the proof that makes others take notice. Once you are recognized, the deals start to present themself. The shortcut is to go into a smaller market, or partner up with a proven closer.

Partners

Multifamily is a team sport. When selecting your teammates, it’s important to find out if you are on the same page. To do so, JP recommends you underwrite a couple deals and see if you both recognize the same opportunity. If not, there is no harm. When you find a good fit, the opportunity to run will propel your growth.

BIGGEST RISK

Each week I ask my guest, “What is the Biggest Risk Real Estate Investors face?”

BIGGEST RISK: So one of the BIGGEST RISKS that we were unaware of that we’ve since become aware of is one of my properties in Texas, a small property, 28 units. I guess I’ll start with the summary and then I’ll go into the story. If you’re going to get started as an investor in smaller properties just because it’s easier, right? Easy to raise money, less overwhelming than taking down a hundred units on whatever, really investigate your third party property management options thoroughly. Have a number of backups lined up. You know, getting into this business, I thought I had an expectation that there was going to be more pacivity into this business. Passive income, passive income is a lie. Unless you are a passive investor, if you’re going to be a GP and even if you hire third party property management, there’s work to do.

In my experience there aren’t, I haven’t run into many third party PMs that will have the same level of care and attention to detail that I do. You know, you would. So we found ourselves in a situation where we had an underperforming, when all came down to it, property manager for our property and it was hurting our numbers.

Fortunately we were in a position where one of the partners is local to the property. So making sure that one of the partners is physically close to it, take over property manager roles. And, we were able in the course of I think four weeks to transfer to get, become 100% leased up and have a waiting list. Something that we were struggling for for weeks and months, um, with a third party PM. So, uh, part of the problem was we were having a hard time finding someone to take his role, uh, as a replacement.

And then one day he called us and said, Hey, I’m letting you guys go on changing our business model. So it forced us to figure something out. As a stop gap, we said, well, let’s just take over self-management for now. And it worked out, still working out really well. Um, because we’ve been kicking butt. But we didn’t, we didn’t expect to find ourselves in a situation where, oh my gosh, who are we going to find to manage it?

The smaller property sizes you’ll find there’s a lot of single family property managers, which is cool, but they’re not really well suited for multifamily. Four units sure, but not 12 or 20 or 30 or 40. And then it’s also too small for the bigger players. You know, they want 50 units or 60 units and above. So there’s this gray area of like 12 to 40 ish where there may not be in your area or your market. A lot of third party PMs. And that’s critical to the success of your investment. Now that’s an execution risk right there.

For more go to:
Website: www.jpalbano.com

Custom Software Solutions for Real Estate Professionals with Dan Moore – CREPN #242

Custom software solutions can make real estate professionals more productive for less cost.

Dan Moore is the founder and CEO at Vaporware Vaporware Custom Software headquartered in Raleigh, NC. After graduation form Georgia Tech Dan first worked for large software companies where he was not close to the problems the software was designed to solve. Wanting to be closer to the users with problems his software designs could help, he started his own consulting firm.

Custom software weighs viability, feasibility and utility. There is a great deal of satisfaction when the software solution to the problem contains all three.

Custom Software for Real Estate

An example of custom software for real estate that Vaporwrare has worked on is Servusconnect. This is a software solution for multifamily maintenance scheduling, which helps reduce the time necessary to turn a unit. The service order is initiated by the resident, and instantly, maintenance calendar is scheduled.

Upon completion of the repair request, the resident receives a satisfaction survey, which feeds the online reputation platforms. A good custom software solution allows the user to communicate easily, collect measurable data, and generate useful reports that enable the user to be more prepared for future events. When data is used properly, you can run a more profitable operation.

Levels of Software

Custom software ranges from fully custom to just one function that plugs into another software platform through API. Dan believes that the selected custom software operation is a better use of time and money. In this way you are able to customize the part you need to work better and get a robust solution. If you try to build the entire solution from the ground up, you end up with lesser degrees of great all the way around.

There are multiple excellent software solutions already available for things like payment collection. If you use MRI or Yardi for your property management software your custom software can plug into and work with these using API. Therefore you do not have to build a complete system from the ground up and your staff will not have to be retrained to utilize your custom software.

Ideas for Custom Software

For any data you collect and track in a spreadsheet, a custom software solution can be created to make data collection easier and more user friendly. Some reasons to consider a custom solution include;

You have created multiple spreadsheets, and cannot find them when needed. So, you recreate the information.
You organize information, but are not able to access it on a mobile device when you are in the field.
Speed is critical
Standardization is desired
You work with large data bases on a regular basis
Custom communication to many individuals is desired.

When Custom Software Makes Sense

The decision to have custom software created is involved. For organizations that are large enough to adopt the software for your own use. The cost tends to be more justifiable for companies with more than 50 employees and $10-$20 million in annual revenue.

If you can identify a single problem, and then find others with the same problem, you can start to determine if there is a market for your solution. When there are enough people with the problem who are willing to pay, it can make sense to spend for a custom solution that you could then sell to others.

Depending on your needs, custom software can cost as much as you want to spend. Vaporware approach takes into consideration the clients current solution cost and tries to determine what are the minimum output that will be helpful. Small custom software solutions can start as low as $5 – $10 thousand dollars.

User Benefits

User benefits are maximized when the programmer and user are able to communicate to develop specific benefits for the user. More input allows the developer to continue to improve the product so that the end product is easy to use and collects the wanted data. The output allows the company to put the info to future use and improve the output..

BIGGEST RISK

Each week I ask my guest, “What is the Biggest Risk Real Estate Investors face?”

BIGGEST RISK: I think the BIGGEST RISK for all of us in our personal, professional lives is speed. Time is a very limited resource for us all. Time is how opportunities kind of come and go. If we talked a little bit earlier about being able to know if a property is going to go on the market before it does, being able to operate faster than the competition.

So I would definitely have to say speed. The speed at which we can operate, the speed at which we can save our time and do passive investments and be able to realize value faster and see more opportunities and the right opportunities faster. So anything that we can do to be faster at what we do and relying on computers is a good way to do that.

For more go to:

Website: www.vaporware.net

Email: Dan@vaporware.netLinkedin: linkedin.com/in/toobulkeh

Retail Trends in Real Estate with Tom Londres – CREPN #241

Retail trends in real estate continue to change with the and for the consumer.

Tom Londres is the CEO of Metro Commercial Real Estate Brokerage based in Philadelphia, PA. The core business focuses on suburban retail strip centers, big box, community centers, supermarket anchored centers, and downtown urban. They provide third party solutions for retailers, owners of retail and investors in the greater metro area, including Pennsylvania, New Jersey and Delaware.

Location, Location, Location

Location was, is and will be key to the value of commercial retail real estate. Depending on the criteria of a particular business, the value of a location will vary from business to business. If you are trying to sell tequila on the morning side of the street, you are going to struggle. You have to make it easy for your consumer to access your business. For a retailer, location is a surgical strike!

Retail Trends

In the 1980’s the growth of the retail strip centers grew with suburban sprawl. This is when the big box retailers’ growth exploded, think Wal-Mart & Home Depot and the deconstruction of the department store began. Instead of being located in a department store, the departments became a store of their own. Apparel, appliances, tv’s all became a single mega center, often located across the street from the mall.

From there came the open air shopping centers with one or two categories under one roof.

Omni Channel

Online and bricks & mortar used to fight for the customer, you stay in your cage, I’ll stay in mine. No more.

Now, we have the omni channel. No longer can a successful brick & mortar retail business thrive without an online presence, nor can an online retailer thrive without a brick & mortar presence. They need both. Retail has to have an online presence and a bricks and mortar presence. This race to grow is creating disruption and opportunities for those who can execute.

Buy online, purchase in store (BOPIS) is the evolution of online with bricks and mortar. Stores are now trying to balance the physical space needs with just the right amount of merchandise on hand to increase sales when you pickup your online order in the store.

This eliminates the delivery cost, and the numbers show that the consumer will make an additional purchase when they pick up their order in the store.

Consumer Demands

The consumer demands quality at a good price, now and the ability to get out of the transaction whenever they want. For the retailer that gets this wrong, they will forever lose the consumer. These consumer demands are changing the physical configuration of the store.

Stores have to create an experience in their store. The consumer goes to the store to have the experience, then makes their order. The product can be shipped direct to the consumer or available for the client to pick up in the store.

Data Driven

Today, data drives decisions. For years data has been collected but only recently has it been analyzed and applied in a recognizable form. Now the consumer and retailer can lean into the data collection for greater convenience for both parties.

Apparel Reconfigured

Apparel reconfigured is happening much like the hotel business and Airbnb. Consumers recognize that they want the nicest brand, but realistically will only use it once. Instead of a closet full of once worn garments, why not rent. Millennials value material possessions less than prior generations. They want the experience, not the possession.

Good Stewards

Retailers have to be good stewards to meet the consumers expectations. Consumers expect a responsible retailer. The consumer is rejecting retailers that ignore conserving energy. Roofs, parking lots, solar power, recycled water, lighting, etc. If you do not conform and retrofit your store, the millennial buyer will pass you buy for the responsible retail option.

Opportunities in Retail

Disruption continues to reveal opportunities in real estate for those who can see the opportunity. The reconfiguration of retail is greater in the urban core than suburbia. Mixed use projects and established urban retail show great potential.

BIGGEST RISK

Each week I ask my guest, “What is the Biggest Risk Real Estate Investors face?”

BIGGEST RISK: I’ll give you what I think is the biggest risk or one of the big risks if you owned retail real estate. I’m not going to get into the mind of a retailer where they think they should be other than I think they should be always in the online world and the bricks and mortar world. That, that is universally agreed if you’re a retailer and want to move forward with some exceptions, but if you want to, generally speaking, if you want to be a vibrant, relevant retailer moving forward, you have to have an online and a bricks and mortar presence that’s effortless, that has a great customer experience.

And we can see that with both of those retailers that are disciplined in each one of those corners trying to get, um, into the other space. But I would say if you own retail real estate and you have an exposure, um, high exposure to department stores and apparel retailers, I would say if your portfolio contains a large portion, the percentage of your occupancy, is coming from department stores or apparel retailers. I would say you need to rethink when those options come up.

Retail from – to

If you have the opportunities to downsize to mitigate your risks, you have to inject entertainment, you have to inject food, you have to inject convenience, services. Fitness, theater. And again, moving towards diversifying your center, not away from retail, to diversify and add apartments. Although some assets would lean towards that just in scale and size you need mitigate and say, I’ll take one wing of retail and make them apartments or luxury condos or townhouses.

Maybe I’ll add a hotel or something, but generally speaking, if you look at your portfolio, if you’re owner of a retail real estate and you’re leaning more towards a department store and or apparel, I’d say probably rethink it. Because I think apparel is shrinking, uh, in its category and its demand and its consumption. And I think department stores, most of them, if not all of them, will be radically different or completely eliminated within a decade.

For more go to:

Website: https://www.metrocommercial.com

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Recent Posts

Minimizing Risk

Getting a Loan

BIGGEST RISK

Finding Value

Recognizing Opportunity

A Willing Seller

Preparing for Opportunity

Momentum

Partners

BIGGEST RISK

Custom Software for Real Estate

Levels of Software

Ideas for Custom Software

When Custom Software Makes Sense

User Benefits

BIGGEST RISK

Location, Location, Location

Retail Trends

Omni Channel

Consumer Demands

Data Driven

Apparel Reconfigured

Good Stewards

Opportunities in Retail

BIGGEST RISK

Retail from – to