J Darrin Gross Podcasts -

Real Estate Investors Condo Development Opportunity with Nick Earls and Eric DiNicola – CRE PN #336

ERIC DINICOLA 0:00

We sort of put the brakes on that a bit because we started to say, look, we know our market better when we’re actually seeing more aggressive cap rates down there than we are appear in some cases. So why don’t we sort of reel that in a bit continue to focus will still keep an eye on any market in the country that there’s an opportunity. And if we can make something work, we’ll jump into it. But right now, we still see our knowledge allows us to see you know, sort of the best opportunities for us are up here because we can enact all these kinds of parts of our business and development, the property management, the rental, and then also working with our home local City, Boston to do some of these affordable development projects.

Announcer 0:41

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

J Darrin Gross 1:00

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

Today, my guests are Nick Earls, and Eric De Nicola. Nick and Eric are full time real estate investors, developers and founders of winterspring capital, a private equity firm based in Boston, Massachusetts. Together they have developed over $56 million in multifamily assets with another $40 million in the pipeline. And their work includes value add affordable housing development, and luxury multifamily condo developments in the southeast us. And in just a minute, we’re going to speak with Eric and Nick about their experience and how you can learn and identify and, and grow your multifamily portfolio.

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

NICK EARLS 2:42

Hey, thanks for having us on.

ERIC DINICOLA 2:43

Thanks a lot.

J Darrin Gross 2:45

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

NICK EARLS 2:56

Yeah, so Eric, and I’ve actually been friends for almost 20 years now we’ve met each other on where kids in high school did a lot of team oriented stuff together football powerlifting played, you know, competitive video games. Kind of got a good, you know, Team report from a young age, always had that sort of rebellious streak didn’t want to work for someone else. Didn’t know how we would do it at that young age. But we had this idea that maybe we’ll start a company someday. And when I was separate ways for a few years in college, and a couple years after that, and I was working in real estate, I got my real estate license and 2011 was selling smaller commercial apartment buildings and Massachusetts and Connecticut. And I said, Eric, I think this is you know, this is a realistic way that we could kind of break out of the machine, you know, get financial freedom, something I think a lot of your listeners probably interested in. That was our original goal. And we thought, why don’t we buy a rental property, save up some money for a few years, and buy a rental property. And over the course of saving up money, we’re saving up money for maybe three or four, maybe even five years. I forget the exact amount at this point. But we decided that I had seen a really good opportunity in the Boston Market for condominium development. Boston’s a unique market number one of the either the number one or the number two Life Science city in the country. depending on who’s ranking it San Francisco’s right up there, but Boston’s right up there as well. And over the past 1015 years, we’ve had a huge influx of high income, life science industry workers. So we’re talking you know, biotech. You know, Maderna one of the vaccine producers is located in Cambridge right outside of Boston. So these people are high income. The population is kind of boomed. We’ve already surpassed our 2030 projections. And a lot of these people People go for nice luxury rentals, but a lot of them also want to own condos. So there’s a good niche in that market for condominium development. And we found our first project in 2015. So small project, it was a dilapidated existing two family, where you could add a third unit. So we added a third unit fixed up the existing part of the building, added that addition and then divided into three condos and sold those. And we’ve been doing that ever since it’s one of the main fronts of our business, but that’s kind of how we got into real estate. Yeah, and we’ve been doing it ever since.

J Darrin Gross 5:38

But the the condo thing I don’t think that typically people think that way. I think most often, people I talk with they they’re thinking more of like a build, or buy and hold or some sort of a, you know, you’re controlling the the entire asset kind of thing. But there was a time upfront remembering the timeline, but I want to say it was maybe even earlier back around 2000. Remember, as an insurance broker, I was dealing with a lot of people that were converting apartments to condominiums. And that was a, I think it went through, like, up until, like 2008 or so. But there was a fairly significant move to take some of the multifamily assets out of rental, convert them to ownership, assets, and then sell them and there was a delta in there. And, and I think that was a big play for developers. So So you got in basically on on a condo, and it would be development because you you did convert the use from one and then you also added square footage. Is that been your primary vehicle then, since then it has been more condo development, or do you also do traditional multifamily buy, hold the value, add, etc.

ERIC DINICOLA 7:02

We do a little bit of everything, because we’re pretty opportunistic. But that’s that’s really the meat and potatoes of our business, it has been more continuing to expand a bit where right now we have a deal that we’re going to be converting actually from an old office building into apartments that we’ll hold on to, but the condo development where we sell at the end of the development process, maybe like a typically like a two year period at this point, Boston, that’s really where all our you know, build and sell condo development projects are up in our neck of the woods or Boston. And we’ve we’ve kind of seen that from the start as this is our niche, this is what we are good at this is where we can add a lot of value. Once we kind of got our foot in the door, which is really hard in this market. We see a lot of other developers kind of struggle with that first step. And so once we got our foot in the door, and we saw how to do it, we understood the process, we understood all the variables, you know, for the most part, there’s always something new every project. And we’re always learning stuff from other developers and other experts in the field. But once we saw that, we said, Okay, this is a pathway to making, you know, quick profit, sort of, you know, relative to typical real estate profit. And we can use this as a boost for our business long term to start compiling assets. So we had that first project where we added a third unit sold the three condos individually, we ended up selling them for a higher price per square foot than we had even projected when we started so that the market, you know, is a good place at that point. So then we were able to get into our next two projects simultaneously. One was going to be three units, three very large luxury units in a city right outside Boston, ended up being only two, which was a long sort of process and fight with the city and neighborhood. And then simultaneously in the same neighborhood as our first project. We built a seven unit condominium building, which we sold all seven individually, the majority or under agreement before we even finished construction on that building. So we really said okay, this is something we’re good at, we know what to do we know how to add value here, we know what to look for. So you know, over the last five years, those opportunities have continued to shrink, because there’s more developers trying to do it. More parcels that had opportunity have already been snatched up and redevelop the least, you know, in Boston, but there’s still a lot of opportunity and we’ll see it and we’ll think creatively. But to get back to the point of your question. It’s kind of now just one of the components of our business. We’re also working with the city on an affordable housing project, which will be six homeownership units and one rental unit, and they’re capped out at certain AMI area median income rates. So you work with the local government on that, which is its whole kind of own process, still our development niche, and then we’re working on this office conversion, like I mentioned. And then we also have some pure multifamily rental properties that we own on the side as well.

J Darrin Gross 10:17

Gotcha. And in the seven unit, you mentioned was at a ground up development then or was that same kind of a conversion or, or change of occupancy from a rental to an owner.

ERIC DINICOLA 10:33

It was a was a prior to family. And since we’re still kind of early on in our business, we actually lived in the two family while we’re permitting it, and then we knocked down the two family and built the seven from the ground up.

J Darrin Gross 10:46

Got it? So I’m kind of curious, you know, from the working with an existing structure as opposed to a new ground up? What are some differences? And some lessons or some even be curious? Just on the numbers, do you find, you know, I’ve talked, you see, like, most of the the conversations I’ve had was mostly with value add people. But occasionally, I have conversation with new construction, guys, and it’s kind of a reminder of that, you know, the original value add was new construction, I mean, you know, you start with a bare piece ground and put something out, I’d be curious to hear what your your kind of thoughts are on, on the comparison between the two, the, the, you know, working with an existing structure as opposed to starting new.

NICK EARLS 11:39

So it’s definitely cheaper. You know, assuming there’s no major issues with the existing structure, definitely cheaper, because you’re removing all your excavation, your earthwork, your foundation, all those components are removed, and then the building envelopes, hopefully a lot of that can even stay so you a lot of your costs can be cut down, you’re probably looking at anywhere from 50 to $75 a square foot in savings, when you’re renovating an existing structure. The trouble is, when you’re doing like the the projects that we do for these luxury condominiums, a lot of them are urban infill. And these densely packed neighborhoods where you’ll find these odd lots that are maybe a double or triple lot, you know, they’re much bigger than the surrounding lots, but all have this little two family on it. And it’s not really practical, you’re going in there, you’re trying to build something that’s five times the size of that building, it’s not really practical to keep it so in those situations, you just knock it down and you start a new one, you could try to add to it. And sometimes you’ll run into historic boards that say, Hey, why don’t you just keep it and add to it. But you know, that’s in those situations where you’re trying to square peg round hole something and force it through, that doesn’t really make sense, your costs will actually increase because you’re gonna have to do a bunch of funky engineering and all sorts of stuff that’s really unnecessary. So it depends on the situation. You know, when we’re looking at a nice big building, like this office building, Eric was mentioning, it’s a 50,000 square foot existing office building. That’s all the space we need. And it’s configured perfectly to just convert it into apartments, whereas when we’re trying to build a large condominium building, and there’s just as little shack, single family or two family on it, just knock it down, and that sort of a situation.

J Darrin Gross 13:40

Yeah. On the office conversion there any issues with zoning or any kind of, you know, change abuse issues with the local municipalities? Or?

ERIC DINICOLA 13:55

That’s a very good question, because it is it is kind of central to this project. But almost like more central to our condo development, we have so many zoning hurdles, because most of our projects in Boston are require zoning relief require variances because they’re building a nine units and a two family zone, for example. And it’s very difficult, very long process, very political process. But what we’ve noticed with this office conversion, it’s in a city outside of Boston, sort of a satellite city and old manufacturing hub, they actually seem to welcome it. They like developers, they’re unlike Boston, it’s very pro business pro developer, they want you to come in and upgrade the city, they don’t force you to do a certain amount of affordable units. You can do all market rate. And so kind of the point I’m getting at is you do need a special permit. Yes, there’s zoning because you’re, you know, converting from one use to another and in our case, it’s going to be mixed use. We’re going to keep retail on the first level, there’ll be an office component and then the rest will be residential. But they’re much easier. to work with than what we’re used to in Boston, so they’re really willing to help guide you through the process, it will be a shorter process it has been so far. As long as you meet certain requirements and kind of uphold the historic nature of this building based on where it is, they will likely grant you the special permit, you need

J Darrin Gross 15:21

to track the development compared to like an ownership, kind of a long term play. How do you guys look at that? I mean, you mentioned in the beginning that the first development of the three unit kind of you recognize the the opportunity to get the money and you could maybe recycle it or put it into your your next projects. Net, but you know, that the the mindset and just kind of be curious to see how you guys think of the the short term versus the long term kind of thing is between the two different types of opportunities.

NICK EARLS 16:03

We both prefer the long term. And that’s why we got into it. But we were, we were young guys, when we started our business, we’re 25 years old, we had scraped up the money to start the company and do that first investment. But it wasn’t realistic for us to pursue. You know, we’ve seen people do great with the buy renovate refinance strategy. But we’re kind of similar to that, where we didn’t have that much money starting, and we needed to build up a pool of capital. And then we figured out, Hey, we’re pretty good at this condominium development thing, we’re doing a 32 unit, luxury one, right now it’s our biggest project. So we’ve scaled up pretty successfully in that niche. But all along, we’re, we’re after that passive income, you know, that that people want, we want to own rental properties and, and build up a team below us that can help us manage these rental properties interface with our property manager, eventually get to the point where a few years from now, Eric, and I don’t have to work that much. And we have financial security, you know, that’s what we’re, we’re really doing this for. So it was just kind of a life circumstance thing that this condo development became a pathway that we embarked on. But, you know, right now we’re very actively pursuing things for our rental portfolio, that’s what that office to apartment conversion is, we have another one that we’re looking at another office to apartment conversion deal we might be putting an offer on this week. So that’s, we’re getting to the point now, where we’re almost focusing on that a little bit more. But we really like the condo development for a quick kind of influx of capital that you can then put into longer term investments,

J Darrin Gross 17:52

Yeah, no, absolutely the ability to get your money back out and, and be done with something as opposed to the ongoing kind of curious, the, you know, a lot of times I talk with people and kind of come from like a flipping mindset, you know, and in, there’s almost like a light bulb that finally goes off that they recognize all that money’s going through the system, but not a lot of it’s staying, you know, kind of thing into exactly, the way to really, you know, grow wealth or accumulate, is through acquisition and holding kind of thing. And I think so many, so many times, I think people are chasing shiny objects will be the stock market or real estate or whatever the hot topic is. And in there, they’re expecting a quick, you know, quick buck kind of thing. And, and there’s plenty of stories, I mean, you can you always find the the story about the guy that bought something for nothing, and, you know, turned around and sold it on the same day for, you know, millions or whatever. And it might be a lawsuit after but but there’s that, you know, those stories are out there. And, you know, and then you look at, there was somebody that read something or something, but it was basically saying most of the wealthy real estate, investors are older. I mean, it was basically because it took time, you know, you you start off with something and you maybe you scraped in you’ve, you know, you’ve got into it, and maybe it didn’t cash flow in the very beginning, but over time, everything kind of settled and it you know, it turned into a nice portfolio there. So, but now, it’s good. kind of curious if you guys are in Boston. You know, a lot of times people get dissuaded by their local market based on the challenges and they start looking elsewhere. What were you able to find was it was it your local knowledge that gave you an advantage? Was it the fact that you were working in real estate that you were able to, to find and recognize the opportunities or what What kept you in that market? And then also be kind of curious to hear, you know, how you how you look for other markets? It sounds like you’re starting to work outside of Boston a little bit.

ERIC DINICOLA 20:14

Yeah, I mean, we’re so familiar, obviously, with the Boston Market, this is what we grew up on, we’ve lived most of our lives. That yeah, I guess we have some more insight. We’re very familiar with, you know, the geography where high populations are, where you know where the jobs are. So that that gives us a little bit of a leg up, we’re just used to it. And then just dealing with the real estate industry and data that we see and people that we know, and talking with other developers over the last, you know, five to 10 years, it has given us a leg up. But we did kind of what you said, We’re alright, let’s let’s kind of expand a bit outside of this, because there’s other markets out there. We talk to guys who own property, you know, all across the country, they don’t have to be right on top of it, maybe we don’t develop somewhere else remotely, but we can still own and have a great property management company hired that’ll handle the property for us. So we had been working the last year really in the southeast of the country. We had a few deals that we put in loi Zhan got the best and final, and these would have been larger value add apartment deals as part of our diversification strategy. There wouldn’t be you know, major construction or anything like that they would be really managerial value, add inefficiencies that we saw from afar, built up a lot of relationships with brokers down there, Florida, North Carolina, South Carolina, Georgia. And we just really liked a lot of the population trends, we’re seeing the demographics, we saw rent numbers, but it almost started moving really fast, where it got to the point where Cap rates were compressing so quickly, on some of these deals that you are paying for two or three years out. And if you didn’t enact your strategy very quickly, and it didn’t all go to plan perfectly. I mean, you might be in this thing in year two, or three, and you’re not even at, you know, what you’re hit the point that you really should have paid for it in the first place. So we sort of put the brakes on that a bit, because we started to say, look, we know our market better when we’re actually seeing more aggressive cap rates down there than we are appear in some cases. So why don’t we sort of reel that in a bit continue to focus, we’ll still keep an eye on any market in the country, that there’s an opportunity. And if we can make something work, we’ll jump into it. But right now, we still see, our knowledge allows us to see, you know, sort of the best opportunities for us are up here, because we can enact all these kind of parts of our business and development, the property management, the rental, and then also working with our home local City, Boston to do some of these affordable development projects that we think this first on working on will really get our foot in the door with the city and just add another vertical, you know, to our business. And that probably wouldn’t be as feasible or possible when we’re operating, you know, from 1000 or 2000 miles away.

J Darrin Gross 23:10

And I think that that’s, that’s well said, I think that, you know, it’s with the the internet and Google and, and Google Maps and all that it’s so easy to be wild by something so far away, when you don’t know the words, or the where all the bodies are buried or, you know, whatever those might be kind of thing. And, you know, just to have some sort of a local, or just base knowledge. I mean, it doesn’t necessarily have to be local. I know plenty of people that do it remotely. I’ve got some, you know, properties myself that are remote and stuff, but having a base knowledge. I think more importantly, is having a team, you know, that that you can trust, I’d be curious to know if you can kind of describe who are the members on your team and in how you you know, how you see that, as far as a level of importance when you are looking in these other markets?

NICK EARLS 24:06

Yeah, so I mean, we, as developers, we have a big team. Within our company, we have a couple employees, we have kind of a third junior partner, another friend of ours, Kyle, and he’s really good with investors. He kind of handles our investor network. He also finds deals off market and kind of interfaces with, you know, people, when he’s we’re getting a deal off the ground. He’ll get, you know, kind of the initial research going. So he’s a very valuable team member. And then we’ve got a virtual assistant. We’ve got a social media manager, and we’ve got a graphics guy on our team. And that’s kind of our in house team. But then when you expand to relationships you have with other people. We have a huge broker Network. And that’s extremely valuable. You know, people talk a lot about off market prospecting, which I think is valuable. We’ve gotten deals from that. But the best deals we’ve gotten have been from brokers. And I think it’s, it’s just more talked to a bunch of brokers, rather than talking to a million property owners and dealers will come to you, you know, so I think it’s a more efficient pathway. They do that full time. Obviously, they take their cut, but they deserve it. So that’s kind of our mentalities and everyone wins mentality. So we have a lot of brokers in our network. And then for development jobs, we have a big team, we have a couple different architects we work with, we have a really good zoning attorney for our Boston projects. And then we have zoning attorneys that we work with in other markets, because that’s kind of a very local knowledge based thing you’ll a zoning attorney will usually only deal with one municipality or two municipalities, because the rules can be very different the regulations and laws and all the and then also, we need engineers, we come from a sales background, Eric and I both, he has his real estate license, I obviously got started in sales. And then our other partner Kyle has his license as well. But now we we’ve been working with good brokers on the sales and for our condominium units, our upcoming project a 32 unit project, this is projected to be gross sell out of around 25 to 26 million. So we really want to bring in, you know, Top Best in Class brokers for that. So we brought in a really good brokerage, Charles gate, again, local experts, they’re not, you know, worldwide or nationwide, they’re really focused on this sort of product that we’re developing luxury condominiums, top of the market 800 to 1000 plus dollars a square foot. So we have confidence with them. And they work with, you know, during the design phase, and the planning phase, you know, they’re there every step of the way. So they’re really a team member as well. And they’re different, I would say, you know, they could bring us deal. But we also have brokers who just shop us development deals, they’re not on the sales. And so there it is kind of two different buckets. And then also you’ll have, we’re working with an interior designer. For our projects, they do a lot of legwork up front, they look at lead times for, you know, appliances and plumbing fixtures and lighting fixtures. Super important in today’s you know, supply chain issues economy that we’re in, and they look at the local market, what sort of design you can get away with while still fitting with your budget. So they’re extremely important. We’ve got a bunch of different types engineers, so the list goes on. But as a developer team is number one, it’s you know, it’s the most important thing. No man is an island. And that’s especially true, you know, in this in this business.

J Darrin Gross 28:12

And there’s two things that come to mind. One is, you mentioned supply chain, have you seen much change with with, you know, where you started versus where you’re, you’re ending up? Whether it be budget, or just having to make some modifications based on availability or, or delays? Or can you speak to any of that?

ERIC DINICOLA 28:37

Yeah, we have, we have seen not not a major change, we’ve kind of timed stuff and budgeted properly. We’ve talked to a lot of other developers who might have been, you know, mid order, when kind of COVID started and sort of the supply chain issues that followed that, you know, we’re still in. So we are seeing issues, but we’re kind of working around them where we say, Okay, looks something like lumber, which is a major component of any construction job we do. And of course, you know, as you probably know, and audio listeners know, that’s been a hot topic and construction, the cost of it, the availability, so we plan for that, you know, we give a contingency, you know, we add a contingency into our budget of a decent chunk above what it should cost what it has cost in the past. Our total cost per square foot has gone up a bit. sale prices have to so we can kind of work with that. And then we times sort of the biggest thing is Nick just mentioned the interior design firm we’re working with, when they’re making suggestions even on appliances or finishes there. They’re actually factoring that in, they’re going to that level where they’re saying look, you know, we think for this market for the buyer for this unit that you’re trying to sell this high end condo, we would probably go with this, you know, appliance package, but it’s made in Turkey. And we’re probably should choose this one instead it’s equal quality, but you’re going to get it probably in six months instead of 10. So even a little things like that we’re just trying to be right on top of right away. And it hasn’t really cost us yet. We’re because because we’re so kind of prepared for it. But I could easily see those becoming major issues if you don’t prepare on the onset.

J Darrin Gross 30:26

Yeah, no, I just hear all these stories about the house, that’s all done except for the, you know, the stove or whatever, you know, the, the specific guidance kind of thing. And it’s, it’s, I think it’s affecting everybody in some way, shape or form, but part of it. The other question that that I was kind of curious about, you know, is, is you guys are working with these brokers. I was kind of curious, what is the, the investment parameter are the criteria that you guys are, you know, because you, you have kind of a wide range of, of things you look at is that, basically, what you explained to the brokers is what we’ve done this what we’re interested in, or do you have kind of more of a narrow, narrow view of what you’re, you know, you’re asking them to look for.

NICK EARLS 31:16

I think I generally, you know, if a new broker approaches me with J has happened, like, in the past few days, actually. And I think what I told him was, we’re very interested in condominium projects in the Boston area, development ground up, that’s what we’ve been doing for years. But we’re also heavily pursuing value add apartment deals in the area. And this office to apartment conversion we’re doing we consider kind of a value add plus where we’re using our development, and then teittleman skills to add value. So that that would be the way I would answer that question to a broker pretty straightforward. We like either permit pre permanent deals, and Boston right now, just because of the political situation, or deals where the owner is open to entitlement contingency zoning contingency. So we don’t have to purchase the property, we can tie it up for a year or two, while we get it permitted, which removes risk for us, which is something that’s very important. So that’s kind of what I would how I would steer them. We’re not going to go after anything that’s completely speculative, on the condominium development side, just because those projects are so hard to get permitted. So either have to have pre permitted or a contingency, and then office apartment conversions or other sort of value, add plays where we can leverage our development skills.

ERIC DINICOLA 32:46

And sort of to add to that, I mean, when we get some of these deals from brokers, and we meet a new broker, sometimes we can tell pretty quickly, we know the local market, maybe that that is in the borrow of Boston. And we might be able to look at it 10 minutes and say, well, they’re trying to sell this thing for 5 million for this many units. We just analyzed a property yesterday, for three and a half million that couldn’t work there was almost identical. So we know this is just way over the top, you know, we can sometimes make kind of quick decisions like that, on deals, which is how we can review so many.

J Darrin Gross 33:20

No, that’s that’s definitely useful. Again, one of the the benefits of knowing the market, as opposed to trying to make the numbers work, as opposed to knowing what numbers work. And I think so that’s, that’s good. I’m curious, also, you mentioned investors, are you guys syndicating these deals? Or how are you going about? What’s your relationship with investors? What’s the opportunity that for investors in with winterspring?

ERIC DINICOLA 33:51

Yeah, we are we’re syndicating our deals. Early on, you know, we started with our own money. And we kind of gave the anecdote about that smaller kind of development we did to start but as we grew, we obviously realized, the way to do this is you have to bring it outside capital. So yeah, we syndicate our deals, we have investors who have been with us now for several projects, a lot of them reinvest. We have kind of unique structures, sometimes where we might with something like the office conversion, will actually be able to pay out all the investors when it’s done a preferred rate of return that we agree on initially. And then they’re completely out, they get all their profit, they get their initial principal back, even if we decide to hold on to the building, as a long term investment. With the condo developments, you know, it’s a balloon payment at the end. But just because the nature of how that business works still get a prorated share of every unit sold as we go. So yeah, we’ve had a lot of success syndicating you know, we have a lot of people who are interested in when we have a new deal, investing in it initially We started with sort of smaller relationships that we had in the industry, and it’s really kind of ballooned from there.

J Darrin Gross 35:08

No, no, that that relationship you mentioned, were you in the one where the investors will be cashed out, and you’ll have the opportunity to, to hold that. That’s one that’s always kind of appealed to me just just from understanding that because it especially if you’re a long term, hold as you can, you can, you know, satisfy both the investor to get their, their return. And also, you know, if you can create something for yourself to hold it, that’s always been. I’m so so that’s kind of a neat way to do it. So I want to ask you, questions here.

I think there may be, is there anything that I haven’t asked you about? I mean, you, you basically just on that refi thing? Is there anything that we didn’t address that you you feel like are important to kind of what you guys are doing?

NICK EARLS 36:13

Yeah, I mean, we could talk all day, because we’re doing so many different things. But I think we we’ve covered a lot of the important topics, I think while we’re on the topic of syndication, lots of people want to get into real estate. And it’s really you got to figure out what fits your lifestyle best. You know, for us, when we were getting into it, we’re kind of young and ambitious, we didn’t have a lot of capital, if you have a lot of capital A deploy, it might make more sense to just be a passive investor, where you have, you know, a high income job, you invest a little bit every year into a long term investment, you invest a little bit every year into maybe something a little riskier, with a higher return, like a development job like the condos, we do. So really, that’d be just advice that I would give to everyone actually wrote a book about it, retire early through passive investing, it’s on our website, but it just goes into kind of looking at your situation. If you’re trying to get into real estate, and deciding what fits you best, should you be an active investor? Should you be, you know, a developer like we are? Or should you be kind of somewhere in the middle where you’re buying rental properties slowly while you’re working? Or should you just go completely passive, because I think there’s a lot of different options to get into real estate. And if I had the opportunity to just be a passive investor, and from the start, I think I would have chosen that route. So just trying to spread the word on that. We’re accepting investors, but there’s a lot of syndication companies out there doing all types of different real estate investments, every asset class, every type of risk level. So something more people should learn about, I think the message is getting out there nowadays, but it’s still it’s a little untapped and unknown. So just want to mention that.

J Darrin Gross 38:07

I appreciate you sharing that, because I do think that, well, you know, there’s definitely an opportunity to be an active participant, the the passive one is available to, you know, everybody, and especially, you know, higher income earners that are looking for opportunities. I think that’s, that’s, you know, definitely a great great to remind people of that. If we could guys, I’d like to shift gears here for a second. By day, I’m an insurance broker. And I work with my clients to assess risk and determine what to do with the risk. And there’s, there’s usually one of three strategies that we look to try and employ. The first we look to see is if there’s a way we can avoid the risk. If we cannot avoid the risk, and we look to see what there’s way to minimize the risk. And when neither avoidance nor minimizing the risk is an option, then we look to see if we can transfer the risk. And that’s what an insurance policy is. And I like to ask my guests if they can take a look at their own situation could be their clients, investors, tenants, the market interest rates supply chain, however, however they want to frame the question or however you want to frame the question. But if you can take a look at your situation and identify what you consider to be the biggest risk. And for clarification, while I am an insurance broker, I’m not necessarily looking for an insurance related answer. But if you’re willing, I’d like to ask you, Nick curls and Eric de Nicola. What is the biggest risk?

ERIC DINICOLA 39:49

I think in the business we’re in and because we’re in, you know, a few sort of real estate verticals, if we focus say just on the condo development They’re, I feel like there are two major risks. One is sort of the political and municipality risk in the city or building. And I’ll get into that a little deeper in a second. And then the other one is sort of a macro risk right now or in potentially, you know, the Fed raising rates over the long term, it does, you know, potentially reduce buying power for individuals, and we’re selling condos. So the way we kind of, we don’t necessarily think at our firm, that’s going to happen. So at least not in the immediate future, there’s potentially too many consequences for that on a macro scale. But these two things that we see, so when you’re dealing with a city like Boston, there’s so much red tape, that if you get into a project, without sort of a backup plan, or a worst case scenario, still kind of breaking even, for example, a very simple way to put it would be you buy a property in a three Family Zone, you should make sure if you had if you get denied for your variances, you get denied the Zoning Board of Appeals, you could still develop a three unit property, that would always break even the worst case, because by the winter, the why you can do that you don’t need special permission, you’re in a three Family Zone, you’re allowed. So look at that scenario, if that scenario loses a lot of money, then you probably shouldn’t get into it without protecting yourself and minimizing that risk either by having a contingency that Nick spoke about, or some sort of backup plan. So that’s kind of the local political municipality risks, because in Boston is just very difficult to develop. And it’s getting harder and harder, you know, not even every year, it seems like every month, there’s much more red tape. And like I said, the other thing would be more interest rate risk, when you’re selling condos. Buying Power does go down for buyers as interest rates go up. So one way we kind of, you know, try to eliminate that is we say, okay, look, where’s the market at right now, a lot of developers project out oh, you know, the markets increased at this rate, this is the value of homes, you know, a year ago, this is what they’re at now continue with that project that I’m going to sell them for this this much higher than they are now. We don’t do that we project as is, even if it’s two years old, even sometimes with like a 10% hit to see what this still work. And if it doesn’t, you know, we second guess that project. So that’s kind of how we try. That’s how we see to the biggest risks we see. And those are kind of the ways we would eliminate them in our business. But also just the idea of diversifying within real estate where you have the different asset classes that we had, and the different types of verticals that were involved with, is sort of another way or to risk minimization.

J Darrin Gross 42:53

No, I think those are both well said the, you know, definitely the political thing. And then also, you know, just being conservative in your numbers, make sure that your numbers are going to work, regardless, rather than counting on those historical ups. I mean, it’s, it is funny how, you know, it doesn’t matter what market it is, whether it be the real estate or stock market, whatever people people don’t seem to remember their, their memory of, you know, markets, reversing or forgotten when it’s in a Go Go up, up, up, up up kind of things. But well said, Nick, and Eric, where can listeners go if they would like to learn more connect with you

NICK EARLS 43:38

Yeah, you can check out our website; winterspringcapital.com. We’ve got a lot of educational articles about development and all topics about real estate really. Then we also have some investor guides, I wrote a book about the condominium development strategy. You can get that at https://winterspringcapital.com/development-book. And then we’re on social media, pretty active on LinkedIn, just under our names Nick Earls and Eric De Nicola. And then we’re also on Instagram where you can kind of see project updates, videos of the buildings were developed and going up. Lots of good stuff like that.

J Darrin Gross 44:19

Awesome. Well, Nick and Eric, I can’t say thanks enough for taking the time to talk today. I’ve enjoyed it, learned a lot. And I look forward to doing it again soon.

NICK EARLS 44:31

Hey, thanks so much for having us on.

ERIC DINICOLA 44:33

Thank you, Darrin. Appreciate it.

J Darrin Gross 44:35

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

Announcer 44:55

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Real Estate Investor Tax Strategy with Catherine Tindall – CRE PN #335

Catherine Tindall 0:00

If you have that level of complexity where you’re getting heavily involved in investing in real estate investing, specifically, the tax ramifications are so important as part of being able to really get the best out of your investments. That by having that proactive relationship, you’re really going to be able to get a lot more out of your tax professional and it’ll turn quickly from it being an expense to you to it being something that is going to you know, generate more, you know, wealth for you because you’re taking advantage of everything you’re eligible for.

Announcer 0:34

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

J Darrin Gross 0:53

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

Today, my guest is Catherine Tindall. She is a CPA and partner at Dominion Enterprise Services, a concierge tax advisory practice. And in just a minute, we’re going to speak with Catherine, how to get the most out of your CPA relationship, and some general tax planning strategies for real estate investors.

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

Catherine Tindall 2:13

Thank you so much for having me, Darrin,

J Darrin Gross 2:15

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

Catherine Tindall 2:23

Yeah, so I’m a CPA, I’m my practice is located in Greater Boston, but we serve clients all over the country, the firm’s called Dominion Enterprise Services, we work with real estate investors, real estate professionals, self employed individuals, people who own businesses, because the primary focus that our practice has is tax planning work. So we work proactively with clients, where we know we’re going to be a profit center for them by generating creative out of the box tax strategies that are able to, you know, have five to six figures of impact for our clients. So that’s, that’s a bit of our our background.

J Darrin Gross 3:02

No, got it. That’s perfect. And so speaking to to the, like a real estate investor, or a real estate professional, what are some, I guess, kind of some good guidelines that you can suggest as far as identifying or picking a CPA that that can best serve real estate professional or real estate investors needs?

Catherine Tindall 3:31

Yeah, so it’s a common problem that I see real estate professionals and investors have is that the relationship that they have with their current professional is not what it should be for what they need. And I think for a lot of people, they don’t take a step back and think, you know, when taxes wiping out 20 to 50% of your income, that relationship of managing that really big expenses, it’s important to have that be strategic, and have that really be working for you. And so I think the best piece of advice that I can give for people when they’re looking out for a tax professional is because we’re so technical CPAs it’s hard to judge the quality unless you also know a lot technically about what goes on in tax. But I think for people having more of the mindset in those relationships of you know, is this professional, someone who’s just trying to get my tax return done, just trying to keep me compliant with a filing requirement? Am I you know, one of hundreds of clients that this person this individual person is serving, or is this person more an advisor, and that’s how they position themselves and that’s how they position what their services that they’re interested in doing more. They’re interested in being proactive. Because I think more than anything, it’s if you have that level of complexity where you’re getting heavily involved in investing in real estate investing specifically See, the tax ramifications are so important, as part of being able to really get the best out of your investments, that by having that proactive relationship, you’re really going to be able to get a lot more out of your tax professional. And it’ll turn quickly from it being an expense to you to it being something that is going to, you know, generate more, you know, wealth for you, because you’re taking advantage of everything you’re eligible for, which for real estate, anyone involved in real estate, there’s just a lot available in the tax code to be taken advantage of.

J Darrin Gross 5:35

Yeah, no, I mean, that’s one of the the great appeals of real estate as the tax treatment. So when you mentioned kind of, are you just a report, they’ve got to get done to get filed by a deadline? My words, not yours, but versus an advisor? From an advisor standpoint, I’m assuming, is that kind of where you guys try? And is that where your practice is focused on more of the advisory role?

Catherine Tindall 6:05

Yeah, so we’ve really shifted, when I originally founded this firm, a couple years ago, after working in other CPA firms, I realized that there was just in a lot of the client relationships, there were a lot of things that were broken, and that there were so much money being left on the table by the clients just because of the nature of the relationship. And so part of what pushed me to have the firm have more of this proactive advisory focus was so that people could really take advantage of all of the things that we knew how to do and how to really strategize things, because I think for a lot of people that I’ve encountered who come to me from other tax professionals, you know, they’re not even aware sometimes of things like doing Cost Segregation studies, or, you know, once when’s the strategic time to do a 1031 exchange, or, you know, even for people that are more in like, the fix and flip area, you know, can you take advantage of the personal residence exclusion, you know, if you want to live in a property and then upgrade, you know, they’re just not even aware of a lot of the basic strategies that are involved around real estate. Because they don’t have, you know, they haven’t just had they haven’t had that kind of relationship with a tax professional.

J Darrin Gross 7:19

Yeah, no, I’m, you know, sign me up as having had those conversations and realizations. I, I, we have some investment properties. And I remember mentioning to my, my former CPA, about cost segregation study, and, and, you know, it, he was basically like, well, you can do it, but, you know, you’re not a real estate professional, you won’t be able to take advantage of any additional in a write off, and as basically, you know, just kind of left at that. And, and, but then as we acquired another property of new CPA and, and ran into a tax situation that was going to be punitive, and I was like, Holy crap, what about what about this? And I, I don’t know that he’d ever done one before. But he was open to it. And we did get a, a cost segregation study done. And I was like, that’s a huge, that’s a huge thing. I mean, I just got, I can’t believe all the people that may know the word. But, you know, professionals like yourself that aren’t really attuned to it to really know the benefits of something. Yeah. That it’s, it’s just a huge, no, yeah. Different way to pay to do it. So. Yeah. But so, so do you have any kind of a regular schedule, you guys train and in review things with your clients? Or is it more of, you know, year end as needed during the year? With how frequently are you in touch with your, your clients? And I’m assuming that varies based on what they’re doing, but just kind of a general rule.

Catherine Tindall 9:06

Yeah, for the most part, you know, we like to engage with clients where they’ve got enough complexity going on where quarterly meetings make sense. You know, and it depends, because some people they’ll have years where they’re kind of in a set it and forget it year, they’re not doing any deals, it’s all very, you know, run of the mill. Other times, you know, you can hit like during COVID. You know, we had a lot of people that were doing a lot of deals quickly to take advantage of hot markets and everything and, you know, so it just depends on what people have going on. But I think kind of the thing that you mentioned with the the difference between like the the tax professional, who, you know, they’re just trying to meet a filing requirement and make sure that you’re staying, you’re meeting your obligations with the IRS, and that’s a good thing. Like, I don’t knock that, you know, that’s what we do too. But with real estate, it’s just so much more fun because you’ve got all these chess pieces to play with. And it’s almost more like a game and you can really strategize around it by doing stuff like those cost segregation studies, or accelerating depreciation and other ways and taking advantage of like different entity structures and things like that. So I think that’s just what it makes it more fun for the investor. And it’s a lot more fun for the tax professional. And that’s more kind of the relationship of the chess game.

J Darrin Gross 10:24

I’m just gonna say fun. And taxes don’t always say, same conversation or the same sentence, but but having fun planning to take advantage of some of the opportunities or you know, what you can do to minimize your tax? Makes sense? So, the, the ideal, kind of a situation for your client? I mean, do you have clients that are kind of just starting out? Do you have clients that are? Are, you know, seasoned? Where do you? Where do you range on that

Catherine Tindall 11:00

A lot of the people that we encounter, they’re kind of a mix. So we’ve got, we get some that are fairly well seasoned, they’ve kind of leveled up out of their existing relationship they need, you know, they have more moving pieces, they have more wealth they’re trying to protect, but we also get a lot of people where they started out in say, like a high earning W2 job, have realized how much they were losing in tax just or earning their income that way, wanted to shift more into real estate, and then are now transitioning to like, that’s how they’re building out their wealth. And we also get a mix of people to where they start off, maybe having a closely held business that they run, where they’re self employed, but then they want to transition to more passive wealth building through growing the real estate portfolio, and it’s just a, it’s a, if you have a taste for it, and a knack for it, it’s just a wonderful strategy to build wealth, you know, really tax efficiently. And so that’s kind of the range of, of people that we’ve that we serve.

J Darrin Gross 12:00

I’m curious, you know, you mentioned high high income or a W2 employee. Somebody that’s not invested in real estate in that kind of situation, versus having, you know, changed or gotten into real estate, and been able to take advantage of some of the, the, you know, the tax advantages of real estate offers it, can you give kind of a an estimate as to what you would expect their tax. I mean, I guess, their net tax rate to change from two, if there’s that, too.

Catherine Tindall 12:40

But I’ve know, I’ve seen people go from being over 50% to 20%. You know, just by because it all depends on the character of how you earn your income, right. So for people who are on a W2, every dollar that you earned from your employer, you’re going to have a certain amount of that that’s going to get taxed with payroll taxes. And then on top of that, you’re also going to have it all come in at your ordinary income bracket rates, right.

So those scale up really quickly, it’s really easy to all of a sudden you find yourself in a 30 something percent tax bracket rate. And then on the state side, if you’re in a high income tax state, you know, like, if you’re in New York, or California or any of those places, you can be well over 50% Just through having a W two job versus if you can switch it to the real estate, you can drop that down significantly because you can take advantage of things like depreciation that produce kind of a, you know, a paper loss, but you’re still getting a positive cash flow. And the nice thing with real estate is you can you can time how you’re earning your income, you know, you have a lot of control over when you’re going to do deals, you have a lot of control over you know, the character of the properties that you’re picking up as part of your portfolio and what you’re doing with them and, and how you’re making the investments. And if you’re going to make improvements to them, you know, you kind of have all the pieces so you can you can really strategize how much income you’re earning, and each year based on what you have going on versus if you’re an employee, you know, it’s you really don’t have any control on how that money’s, you know, going to come in and get taxed, because it’s that’s just how the tax codes written for employees.

J Darrin Gross 14:24

Yeah, no, the control you mentioned, I hadn’t thought about that. But I guess the option if you if you wanted to postpone the sale till next year, as opposed to close it before the end of the year, to give you some additional time to plan if you need to. It makes a lot of sense. You know, one of the things you didn’t mention and just kind of curious what your thoughts are on 1031 Exchange, as an option to defer the tax from deal to deal What are your thoughts on that?

Catherine Tindall 15:03

Oh, it’s wonderful strategy. You know, and it’s, I think it’s one of those things. Sometimes it’s worth it to pay the tax, it depends on your liquidity needs. But if you’re in the long game, it’s a very good strategy. And basically a little background for anyone who’s not familiar with the 1031 exchange, it’s a specialty area, it’s a, it’s a specialty section of the tax code, which allows you to, you know, you have to follow a lot of rules, and you have to use a Qualified Intermediary. So you can’t just, you know, DIY it, it’s something that you do have to have professionals involved with, and it has to be executed a certain way. But the basic benefit of it is you can take property, sell that property, exchange it into a like kind property, and not have to realize the capital gains on the appreciation from that property that you had bought. And so you kind of push everything into that new property. And then you’re able to, you can continue to do this over and over. So as you have properties that are appreciating, or you want to, you know, change geographic locations of where you have your portfolio or, you know, any number of things, it’s a fairly flexible vehicle for you to be able to keep, you know, growing your wealth, and, you know, realizing those appreciations without having to trigger income tax that’s, you know, going to really, you know, eat quite a chunk out of the principle that you you have, you know, you’ve grown in those properties.

J Darrin Gross 16:35

Yeah, no, I, it’s funny, because I’ve always had kind of a longer view of investing, and always thought the goal was to build a big enough, you know, nest egg or machine that would continue to create revenue to where it wouldn’t erode the principle, which a lot of times when I look at, like a 401k, I mean, basically, it’s a savings plan. And they’re the, you know, the idea is to get you just about a day passed, you die. To zero, it’s not there’s no, you know, it’s not really a plan to, to get beyond that, or at least that’s not really intent, I think, you know, they answer tax, period. But on the on the 1031, I had run into some people that were like, they were like, I don’t really believe in that. And I was like, Well, I don’t understand. But it occurred to me that if you’re, if you’re, basically you’re getting in and getting out basically flipping properties, whether it be, you know, single family or, or multi, multi family properties, or what have you, and you’re only in it for a year or two, and you’re out, you know, out, out slow enough to take advantage of the capital gains, tax rate, but fast enough that you don’t really have a whole lot of depreciation. You know, built up I was gonna, I guess it does, I can see how it’s not as advantageous for somebody that’s in and out of something right away. But if you’ve been in something, and you’ve used up, you know, as a 27, and a half years of depreciation on residential and 39, on commercial commercial, yep. So if you’ve, if you’ve used up a large percentage of your, your depreciation, and the property is appreciated, that can be a pretty significant, I guess, it’s not all tax, but just the I mean, it seems like you, you’re eating up a lot of that, that you could reinvest into the next deal. Yeah, and, you know, continue to collaborate, your, your leverage your, your equity, to then get into a larger and more profitable robbery. But anyway, it was definitely an eye opener for me to see somebody that was like anti that and to kind of understand that, do you have any kind of a sense of number of years? Or where do you look? Is there other time horizon where you recognize that a 1031, may or may not be appropriate?

Catherine Tindall 19:05

You know, it just depends too, on the rest of what they have going on in their portfolio, and what’s going on in the rest of their income, kind of tax life, because for some people, you know, if it’s, they’re just doing one deal, it’s a smaller deal, and they haven’t been in the property for very long, you know, it’s not that much of a hit to pick up the capital gains on it, because it’s certain, you know, bracket rates, you can take advantage of, there’s a certain bucket that fills up at 0%, there’s a certain bucket, you know, that’s 15. And so it’s more just comes down to the, you know, the overall timing for the person. And I think the other consideration to that you have is, you know, there’s a big difference between people who are in real estate where the property is considered an investment versus when the property is considered inventory. And so when it’s considered ordinary income and You know, if they’re doing fix and flips, and it’s really that kind of operation that gets treated differently than say someone who invests in a multifamily is planning on having it for, you know, 1015 years, they’re just going to rent it, maybe they’re going to put improvements in it, you know, strategic strategically to get some more depreciation on yours, when they have high income from other places, or whatever the case may be. So it is highly individualistic when it when it’s a good idea to do it. But I think that’s the key with a lot of the tax strategies is it’s really highly dependent on what your goals are, and what you have going on. And really taking the time to crunch the numbers to figure out if it’s going to be advantageous, and just knowing the full exposure and the full cost of doing different moves.

J Darrin Gross 20:49

Yeah, I know, and even just another thing that I was thinking over just kind of, as you mentioned, you know, the timing, and that I know, my mom’s retired and like, there was a farm sale a year or two ago or whatever, and just but how that that sale, I mean, it spiked your income for that one year, and how that then had like, not not huge effects. But as he was commenting on how the the, like Social Security going forward is reduced, because they recognize he had a significant, you know, income event kind of thing. And, but just across the board of all of you know, all of your income sources, or however you’re counting for your, you know, just to really have a strategy, as opposed to a surprise and finance give a big tax bill when you weren’t anticipating that’s, you know, you know, surprises aren’t good, I guess. No surprises. No, don’t want surprises.

Catherine Tindall 21:49

Yeah. I think a big one I see too, with a lot of people, especially probably for like your mom’s scenario is if you have any kind of subsidized health insurance, or anything like that going on, you can very easily disqualify yourself from government programs by just not, you know, not having the income smoothed out over the course of, you know, a couple of years instead of just having an all in one year. So you can, there can be a lot of surprises that pop up when you have, you know, an unusual income year.

J Darrin Gross 22:21

No, well, I didn’t get a just an eye opener to me, because I had we I was focused on all these other aspects for it and didn’t realize all the related potential complications that that, you know, that came about killing but but all survivable, but just more of a, you know, what you expected versus what you got kind of thing. So. So, I did want to just ask you, briefly, there, there’s talk about some of the the tax changes, any kind of a sense of what you think might happen with with Congress. I mean, this is we’re recording this in December 2021. Congress hasn’t exactly really been a, a real productive place. But there’s always a talk of, of change. And I think that the talk a lot of times kind of wears people out. before it actually happens. Do you have any sense of any any of the topics on on the table as far as what might happen or?

Catherine Tindall 23:35

Well, so currently, the legend, you know, this is recorded, you know, early December, so, obviously, that they they’re set to be voting on it around Christmas time, it might get pushed out to January, it’s been tough, because we’ve been, basically, they were supposed to originally have all this wrapped up back in September. So it’s a snail’s pace. And the thing that’s a little difficult with it, too, is a lot of the provisions that are in there, and that were originally proposed things keep changing. The reason for that is, the way that this legislation is getting passed is through a budget reconciliation. So it’s not just straight tax legislation. It’s all part of reconciling their budget. And so in order for them to be able to pass it, they have to have certain meet certain requirements for the dollar amounts of everything. And that’s why it’s making it so volatile. As far as you know, 1031 exchanges were on the chopping block, and now they’re not, you know, there was a lot of talk about increasing the capital gains rate for people earning over $400,000. And now that’s gone. There’s just a lot of pieces that keep coming in and out. But I think the main thing that people should take away from tax reform is that to keep a close eye on it, it’s hard to predict if it’s going to be retroactive or not. And And to just if you have that have a good relationship with your CPA. I know for us in our practice, once we get the actual final legislation of what’s happened, we’re going to go back through our database and see who’s getting impacted and reach out and make sure that we’re all we’ve done as much as we can to mitigate those negative effects from it. If it does get passed, and that’s that’s the hard thing to predict as well, because there is a lot of dissent in among the Democrats, who it’s really the Democrats who are going to be passing it amongst themselves. And there’s a lot of dissent internally in the party. And so that makes it hard to predict whether or not it will even pass in the first place. Not even knowing you know, what, specifically, they’re going to end up deciding on keeping or scrapping because, as of, you know, the night before, they can change, pretty significant provisions in the attempt to get it passed. So but I think a lot of these kinds of things like the 1031 exchanges, coming under fire, the capital gains rates, increasing a lot of talk around, getting rid of step up in basis, which is basically, you know, when you pass away, your properties get kind of marked up to fair market value, so that if your next of kin sell the property, it’s not like they have to pay capital gains on that, that piece of property the same way that they would, you know, if you were to sell it before he passed, so that was under fire, too. And so I think the main thing for people to keep in mind with a lot of those is that these are things that, you know, this particular party’s looking at. And so as long as they continue to be in power, I think a lot of these areas are going to be continued areas of interests, a lot of those kinds of motifs in the tax code and reform change, or things that have been around since, you know, the Obama administration. So just knowing that this is kind of in the mind of, you know, this party, and as long as they’re maintaining control, that these are things that might continue to come up and might continue to be areas of interest, I think is important for people to know.

J Darrin Gross 27:05

Question for you. You mentioned retroactive. Is there a point at which they go past where they would not make it retroactive? I mean, if they don’t vote on this until January? Is that? Would that like, they said, Okay, no, we’ll make it effective this year going forward? Or is it just there, they’re able to do whatever, it just seems kind of, you know, double whammy, if you think your past and then yeah, you know, I mean, even filed taxes yet for the year, but still, it’d be nice to be able to plan. Is there any kind of a line that they follow, as far as you know, when they will not make it retroactive?

Catherine Tindall 27:47

You know, there’s, there’s Supreme Court precedents for Congress being able to make retroactive tax changes, which to me, just seems really insane, that you can go back. You know, it seems like it should be a right that people are allowed to plan for their taxes. And that once the time has elapsed, you know, you’re only on the hook for what was law as of when you did things. But sadly, that is not how our tax code is written. And so, you know, I think some of the original provisions it was supposed to go back to September is when the changes would be effective as a, but you know, the best hope is that they don’t do that, because there’s going to be a lot of blowback if they do. But at the same time, it’s always kind of weighted between, you know, punishing people for doing for putting in retroactive changes, but then also, if they let people have the the window to make the changes, you can cause a lot of market volatility, and other economic issues can pop up. So I think those are the two things that they weigh. But no, they’re not. I don’t think that there’s a particular statute of limitations how far they can go back, you know, specifically, but so that’s the fear that it will be, you know, retroactive in 2021 and get passed in 2022. I’m just hoping that they don’t wait so long that we have to amend a bunch of tax returns at the same time, but that’s, you know, that is on the table.

J Darrin Gross 29:18

Yeah, it just seems a I could see just you know, more challenges of where we are we already have the the other thing so talking about the retroactive the unintended consequences you mentioned like if they pass something then all there’s all sorts of market activity. You know, if if they’re, I guess if they’re if they got away or did away with a step up in basis would not putting property in a trust would that not be your you know, your vehicle I mean, if that was the new, the new move to where they say, Aha, we gotcha, we’re not gonna be the step up and basis would would that not be kind of like a just a door open for? You know, trust business? It just seems like that’s kind of one of one of the things one of the appeals about real estate.

Catherine Tindall 30:20

Yeah. And that’s, I think that’s highlights part of some of the futility and some of the tax changes, just because they’ll there’s always other ways to do things. And, you know, between estate planning and tax planning, you know, once we have kind of a new rulebook with tax reform, it just becomes now another game of how do we Okay, so here’s what we have, how do we best leverage this based on the rules we have to follow? And where, you know, are there loopholes that we can take advantage of that are in the law? You know, what are the opportunities here? And then what are the opportunities in someone’s particular situation that they can take advantage of? Like, do they have, you know, close family members that we can shift things to? Can we take advantage of things like family limited partnerships, can we take advantage of trusts and gifting strategies? And so that just becomes, you know, it just forces both, you know, the tax planner, myself and the estate planner, to reassess the situation, if we have, you know, all of a sudden, the game has a bunch of new rules in it. So that’s usually, that’s what I’m anticipating if there’s, you know, major changes that happen, it’s just, you have to kind of reassess everyone’s situation for a new new set of rules.

J Darrin Gross 31:33

New Game. Interesting. Well, it sounds like your job. Security’s pretty good. I mean, as far as, you know, I mean, what’s funny is, you know, when people have basically a W two, and no ride off kind of thing, or very little write off. It’s, it’s really a pretty vanilla kind of thing. But once you do get into real estate, and you have multiple schedules and multiple properties, and while I mean, I can imagine somebody trying to do it themselves. I know people do, but I was like, I don’t understand why you would try to do that when there’s somebody like yourself that, that, you know, studies and swimlane, and every day and knows the ins and outs and can recognize an opportunity to, to, you know, give you a chance to keep more of more of your money, rather than have to just write a check. Yeah, but anyway, Hey, Catherine, if we could, like shift gears here for a second. My day, I’m an insurance broker. And one of the things we try and do is manage risk with our clients and, and there’s a couple of strategies we look at when we’re trying to manage or do risk management, the first we look at, we look to see if there’s a way we can avoid the risk. The second if, if that’s if we can’t avoid it, we look to see if we can minimize the risk. And then if we cannot avoid or minimize the risk, we let’s see if there’s a way to transfer the risk. And that’s what a insurance policy is. And I like to ask my guests, if they can look at their own situation. It could be your clients, you know, interest rates, it could be the legal claimant potential tax law changes, however, you’d like to frame the question. But I’d like to ask you, you know, what do you consider to be the biggest risk? And for clarification, again, while I am an insurance broker, I’m not necessarily looking for an insurance related answer. And so if you’re willing, I’d like to ask you, Catherine Tindall. What is the BIGGEST RISK?

Catherine Tindall 33:53

I say, you know, the BIGGEST RISK that I see, just from my professional perspective of the kind of cases that I diagnose and deal with on a day to day basis, the the main area of loss I see for people is that they, they do a set it and forget it strategy when it comes to dealing with their tax situation. And a lot of people because it’s so technical, they don’t have a way of assessing whether or not they’re doing everything that they can unless they’re going to take the time to learn how to do it themselves. And so I’d say for most people who get involved in real estate or who get, you know, start having a lot more going on economically, that it’s, it’s worth it to take the time to reassess your situation, get a second set of eyes, to make sure that you’re not missing out on things because it can be 20 to 50% of your yearly effort. You’re kind of working for the government, right if that’s how you deal with, you know, paying your tax. And so to just not re examine that every once in a while, you can really be losing a lot of the effort that you’re putting in just for, you know, things that are very easy to change, like just filing paperwork for splitting out entities or adding a kid to payroll or things like that. So that’s what I see is the biggest risk. And a lot of the times once, once those things are set, and times gone by sometimes we can go backwards to save the tax. But more often we can’t, it’s once it’s done, it’s done. I had someone recently where they, they tried to execute a 1031 exchange on their own. And they didn’t do it correctly. And they didn’t, they didn’t meet the timing requirements involved with it. And so they ended up with like over $200,000 in tax that could have been very easily deferred. You know, they were aware of the strategy, they had an intermediary involved, but they just didn’t execute correctly. And so I think that’s the biggest risk I see for people is, you know, to try to DIY too long, or to just set it and forget it, and not realizing that this, it’s another area of being able to really maximize your wealth is being more strategic with you know, that tax number.

J Darrin Gross 36:24

Yeah, the DIY 1031 Exchange, not an option. That’s not a good strategy. Wow, that’s too bad. But I appreciate you sharing that because it’s, it’s so true. I think, myself included like to, quote set and forget it, but forget that, you know, looking a little bit forward, you can, you can do a lot of preparation to make a better landing than crash landing. Good. Catherine, where can the listeners go if they’d like to learn more or connect with you?

Catherine Tindall 36:57

So two good places. I keep our website Dominion Enterprise Services, its dominiones.com. We have a lot of resources on there. Very often, my partner and I will post we’ll chat about tax topics, tax planning ideas. We have some tools on the website for you know, assessing eligibility for credits, things like that. But another good place to connect is on LinkedIn. I’m fairly active on there and post, you know, updates with what’s going on with tax reform and different thoughts that I have in situations that I encounter and planning ideas and those sorts of things. So those two places are the best to get connected.

J Darrin Gross 37:37

Got it. Catherine, I want to say thanks for taking the time to talk today. I’ve enjoyed our talk. I learned a lot. And I look forward to doing it again soon.

Catherine Tindall 37:50

Yeah, thank you so much, Darrin, it was an absolute pleasure.

J Darrin Gross 37:54

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

Announcer 38:13

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Cannabis Tenant Focused REIT Opportunity with Anthony Coniglio – CRE PN #334

Anthony Coniglio 0:00

We have seen time and again over the last three years and a few years before I even got into the business. There are many, many stories where a real estate owner would lease to a cannabis company. They’d submit the tenant information to their lender and the lender would say, you have 30 days to get rid of this tenant or your debt is being called because you’re in violation. And so it really is a no fly zone from the major banks. Now, there are some small banks that may lend against these assets, regional banks, this since they’re smaller state chartered banks, they tend to have some legal lending limits so you can get large transactions funded there. There we’re starting to see some of the mid size banks maybe nip around the edges. But by and large, there just isn’t the type of real estate capital available to the sector because of that federally legal classification.

Announcer 0:51

J Darrin Gross 1:10

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

Today my guest is Anthony Coniglio. Anthony is the president and chief investment officer of New Lake Capital Partners. New Lake is the leading provider of real estate capital to state licensed cannabis operators through sale leaseback transactions, and third party purchases, as well as funding for builders to projects. New Lake owns a geographically diversified portfolio consisting of 27 properties across 10 states with a tenants. And in just a minute, we’re going to speak with Anthony about the cannabis business and the opportunities to invest in real estate for with cannabis tenants.

But first, a quick reminder, if you like our show, CRE PN Radio, there are a couple of ways you can or a couple of ways you can you can help us you can like share and subscribe. And as always, we would love to hear from you leave a comment. Also, if you’d like to see how handsome Our guests are, normally, you can check out our YouTube channel and see us there and the YouTube channel is Commercial Real Estate Pro Network. While you’re there, we would love for you to subscribe. Unfortunately, today, you may see a picture of Anthony depending on how the Edit goes or have a little bit of technical challenges. But nonetheless, we have Anthony on the line and I’m really looking forward to talking with him. So as to any further ado, I’d like to welcome Anthony. Welcome to CRE PN Radio.

Anthony Coniglio 3:11

Thank you Darrin, I’m excited to be here. I apologize that we can’t get the video going today but I think we’re gonna have a fun conversation.

J Darrin Gross 3:18

No, I’m I am certain of that. Before we get going if you could take just a minute and share with the listeners a little bit about your background.

Anthony Coniglio 3:27

Sure my background I’ve been I’ve been in business for over 30 years I started my career Pricewaterhouse auditing banks and asset managers and real estate firms. I had a number of stops at CIBC and JP Morgan in in and around investment banking for a big part of my career. I started a residential mortgage company in in 2011, after I left JP Morgan, and we took that business and scaled it up nationally and we sold it to a portfolio company, Blackstone, then I found myself in 2018, trying to figure out what do I want to be when I grow up? Having you know, 20 years of experience Schwab at that time, excuse me, close to 30 years of experience. And a friend of mine who’s been a very successful entrepreneur said who runs a REIT, he runs a multifamily. And inside that multifamily REIT, they have a small it’s actually fairly sizable now lending business bridge lending business they had been seeing significant demand from cannabis companies in the 2017, early 18 period. And when he heard that I had sold the business I was running, he said, My gosh, we’ve got an opportunity to start up a new REIT that’s focused exclusively on the cannabis sector. And that started this whole dialogue around cannabis real estate investing.

J Darrin Gross 4:50

Awesome. So being a financial guy, I’m assuming the the numbers and the way the numbers work and all that’s probably secondhand to you as far as the ability to see something And then recognize the the opportunity there.

Anthony Coniglio 5:04

Yes, yes. As a banker at JPMorgan, I ran specialty finance, investment banking, we had a number of FinTech companies that will fall under our purview. And so, especially coming out of the financial crisis and seeing some of the dynamics that play with the mortgage business, when we look at cannabis, real estate and Alex specifically at the opportunity, there were some real value catalysts that were very apparent to us back in that late 2018 conversation.

J Darrin Gross 5:31

Yeah. So New Lake, are you guys a REIT? Is that how you’re set up?

Anthony Coniglio 5:37

Yes, we are an equity REIT.

J Darrin Gross 5:40

Okay. And for the listeners, if you could define that and, and tell us what that is.

Anthony Coniglio 5:47

Right, we are an equity REIT, where we purchase properties that are used exclusively in the cannabis sector. We acquire retail and industrial properties, we execute transactions with fully built and operational facilities, as well as facilities that are under construction, and even some build to suits we have a couple of transactions where we’ve executed where they’ve been ground up construction that we’ve been able to fund.

Today we own 27 properties across 10 states with eight tenants. We have some of the leading cannabis companies in the cannabis industry as our tenants some of the best credits in the industry names like Curaleaf and Cresco. And truly just to name a few. And we’re very proud of our track record. We’ve been at this for almost three years, and we have not had a deferral or an abatement. In no issues knock wood in our portfolio since inception. We’re very proud of that track record because investing in the cannabis sector is difficult. This industry has a lot of ups and downs. And it has had a lot of companies that have fallen under financial distress.

J Darrin Gross 6:57

Definitely the the cannabis definitely has some interesting challenges just based on the the legal climate. And I’m curious Yeah, so you guys, you you own the property and then you lease to the the cannabis business? What’s what drives it? Is it is it the you have a client as a tenant that needs space, or do you find the space and then look for the tenant and offer that up here, your current list of, of tenants,

Anthony Coniglio 7:27

We don’t actually work to entirely to buy properties and entitle them the properties at this point in the cycle, that tenants secure the properties. And typically in the limited licensed jurisdictions that we focus on these are jurisdictions where the license and the property are attached in in either explicit or implicit forms. Think about a state where you would not be able to purchase liquor at a supermarket. And so I’m sitting in Connecticut today, whether it’s you know, many states in the northeast, you have to purchase wine or beer or liquor cheese, wine or liquor at a liquor store. So in those limited license states, there’s attachment. And what that means is that the operator needs to identify in most cases where their business will be located when they go in and they apply for the for the license itself. So it’s part of that licensing effort. And so they’ve secured the location, they get it in title, they get it licensed by the state, and then they’ll look for a partner like us to come in and provide that acquisition capital or the tenant improvement dollars to improve the properties. We just to give you a little bit more flavor for our transactions, these are long term triple net lease transactions, they tend to be 15 to 20 years on the industrial properties call them 12 to 15 years on the retail properties and it’s all triple net where the tenant continues to maintain the responsibility for the property no no disruption is your listeners by no no disruption to their operations. So it’s a really attractive way for cannabis companies to raise capital in a non diluted manner.

J Darrin Gross 9:04

Right. And it makes sense you know, like you mentioned just the licensing and the zoning and you know, are where a cannabis business is licensed that mean established first and then you as the essentially the financing equity stakeholder and then the tenant is the the operator and the tenant triple net lease at that. I love the way that all fits together because I know just in Oregon, where I’m located you know, we’ve got lots and lots of cannabis businesses. And I know it’s just it’s been a challenge based on you know, the getting the space located and licensed. And then even with that, then you go with the the lenders, you know, not every lender is wanting cannabis on their on their books. I’m kind of curious if you can could speak a little bit to that. As far as just the the the opportunities for cannabis businesses are they is, is getting a loan at a regular Thrift is at a an opportunity, are they more looking for something like what you have available?

Anthony Coniglio 10:17

Traditional sources of capital for real estate are not available to the industry. And it’s what makes this investment so attractive. For us. It’s playing this disconnect between federal and state law, right? It’s illegal at the federal level, but yet it’s legal in 35 to 37 states from additional perspective and well over 10 states from the recreation coast. It’s about 15 states from a recreational perspective. And so what does that really mean in practice, if you look at most loan documents, there is there is an innocuous clause that says that you will not lease any properties you own to a tenant that is in violation of law. And we all execute transaction. And you see that companies say yeah, of course. But actually, if you have debt in your, in your real estate business, you can’t take a tenant that’s in cannabis without being in violation of that have that clause. And we have seen time and again, over the last three years, and a few years before I even got into the business. There are many, many stories where a real estate owner would lease to a cannabis company, they’d submit the tenant information to their lender, and the lender would say, you have 30 days to get rid of this tenant or your debt is being called because you’re in violation. And so really is a no fly zone from the major banks. Now there are some small banks that may lend against these assets, regional banks, this since they’re smaller state chartered banks, they tend to have some legal lending limits. So you can’t get large transactions funded there. There, we’re starting to see some of the mid size banks maybe nip around the edges. But by and large, there just isn’t the type of real estate capital available to the sector because of that federally legal classification?

J Darrin Gross 12:07

Excuse me? No, I would say even I know like insurance, we face kind of the same thing that’s, you know, different carriers are willing to, you know, look, I don’t say look the other way, but they recognize a state law, and they’ll put an exclusion on the policy with respect to any kind of a cannabis related claim. But by and large, the more of your name brand carriers to flat out now, and they don’t have anything to do with it. So your second tier, I don’t wanna say secondary is just, it’s just a different, it’s the excess and surplus lines carrier, which is more designed to carry the risk that the standard carriers are not. So it is interesting to go ahead.

Anthony Coniglio 12:50

It’s also a hard asset class for traditional banks, even many traditional real estate lenders to understand to get comfortable with. And it’s because it’s so highly specialized in the rules and the regulations are different state to state, county to county and County town and the setbacks may be set up different, the rules and the compliance regulations may be set up different. And really the best correlate correlate it give would be data centers from the late 90s, early 2000s, or even lab space. Back in the early day. These were sub sectors of commercial real estate that require investment This is particularly on the industrial or cultivation side of our business, they require investment that is different than you would see in any other commercial real estate transaction transaction. These facilities need water power and security well above what you would have for a traditional alternative use industrial use for one of these properties. And so understanding the demand for that type of asset once it’s built your ability to backfill the tenant should you have any issues, the risk you’re taking and the over investment you’re getting relative making relative to alternative use requires you to have a deep understanding of the industry to really understand that risk profile that you were just referring to.

J Darrin Gross 14:14

Let me ask you, so is a REIT. Are you guys raising capital for like a down payment? Are you raising capital for the entire purpose?

Anthony Coniglio 14:24

We raise capital for the entire purchase and we have now we have as a company raised over $400 million in the last two and a half to three years. We recently completed our IPO in August New Lakes ticker symbol is an NLCP. We merged in March with a like kind REIT like sized REIT like minded REIT. We put our two businesses together in order to have the scale to take the company public, and we raised $100 million in August. And so as I said earlier, we own 27 properties record was 10 states with a different tenants? We are the second largest in the country in terms of cannabis read owners that season cannabis property ownership.

J Darrin Gross 15:12

So that that just by nature, you have eliminated any of the lender kind of risk, as far as you know, anybody else that was trying to buy and have have, you know, cannabis tenants and in the as a tenant there? Which it’s that’s great. I mean, I think that makes complete sense it it’s a you know, great opportunity. So without any lenders involved in and you get the tenant as the the operator the the occupant they’re in charge of paying you your rent, taxes, insurance, maintenance, is it basically just a factor of a return based on acquisition price? Rent? I mean, what kind of returns are you able to? What kind of returns are you seeing with your, your REIT?

Anthony Coniglio 16:12

Yeah, essentially, yes, we are unlevered. Today, when we did our IPO, we disclosed that our top line yield, or gross yield is 12.4%, we do get annual escalators on our leases, we have a weighted average remaining lease term of over 14 years. And annually, our or leases escalated two and a half percent across the portfolio. And so not too bad when your top line is over 12.4% growing two and a half percent a year with an average life of over 14 years. So we think there’s tremendous value there. And again, similar to what we’ve seen in in other sub sectors of commercial real estate, like the data centers and lab space, these cap rates tend to be higher. And but then as the industries become more understood, they the pricing comes down, we are an internally managed REIT not external, so internally managed, so our shareholders will benefit with scale, we get a lot of operational leverage out of our expense. Base today, as we add properties, because this is triple net, we don’t have to have some corresponding growth in headcount to manage the properties. So we think we can continue to scale the company acquire properties, add yield to the top line with very minimal increase in in the expense number. And ultimately, we will be able to get leverage and to be clear leverage for us and for a couple of our professionally managed piers is available from an institutional perspective, and there’s even a banker to that we’re talking to that would be able to lend to us on a portfolio basis. So there is some leverage available to us. And we’ll do that at some point in time in our future, to further enhance the yield and to optimize the balance sheet. But the opportunity for us to be able to do that is really let me say that differently. That opportunity to lever a portfolio of commercial real estate is really only for those well professionally managed groups. By and large, can you find somebody here in there that’s been able to get a local bank to provide leverage on a property that they decided to keep and please, to somebody in the cannabis sector, for sure you could find those one offs. But on a portfolio basis, you know, there’s very few of us that have been in the business now for a few years and can garner the confidence to attract institutional investors or, or some of those banks. So we’ll put leverage on at some point in the future.

J Darrin Gross 18:44

Sounds great, especially like you said, as you you’re, you know, larger more professionally, or just the portfolio size of exhale, lender, institutional lender being very attracted to that. As far as in again, a REIT just to clarify for listeners, in that your your public investors are able to invest in an exit like a stock is that is that right? Or is it yes,

Anthony Coniglio 19:09

We are real estate investment trusts we are required under statute to distribute most of our earnings and so we’re more of a dividend yield play and listed listed on the OTC we have stock sales and purchases happening every single day so it’s not a private rate. This is a publicly traded company just the way you would buy or sell Pro Logic you can buy and sell newly Capital Partners ticker nltp.

J Darrin Gross 19:41

And then, you know, one of the attractions for a lot of real estate investors to real estate is you know, you have some additional opportunities to offset your expenses you know, with depreciation and an interest write off. Is that is that blended in to your return at the, at the retail level or would, I’m assuming investor wouldn’t necessarily see that directly, it’d be more of an indirect part of the returns.

Anthony Coniglio 20:11

That’s correct, the investor does not get the depreciation that they’re going to take on their balance sheet is that flows really through the through the structure of the REIT, and then through the dividends and what we’re able to pay out and not be taxed at the corporate level, right. As long as we’re meeting our requirements. All of our distributions are tax free at our level, I would have to tell your listeners that they need to check with their their own tax accountants, there are some advantages to receiving read income depending on one’s personal tax situation. And you could be eligible for 20% tax on our dividend but that is an investor by investor analysis that still needs to talk to their own preparer about.

J Darrin Gross 20:57

Gotcha. Gotcha. And as far as the qualifications to be an investor, is there any requirement to be acredited? Or is it just like since over the counter, you can?

Anthony Coniglio 21:08

Yeah, again, as a public company, just like Prologis you can buy three shares if you’d like it’s there’s no minimum. It’s not like a private transaction where you need a minimum of 200 or $250,000. You need a brokerage account, you need a brokerage account that will transact in in cannabis.

J Darrin Gross 21:27

Gotcha. And then, as far as the different types of tenants, you’ve mentioned, you have eight tenants 10 different states. It is everything from growing to the retail and everywhere in between or

Anthony Coniglio 21:43

Yes, within our portfolio we have, we have 11 cultivation facilities, and 17. dispensaries, dispensaries are retail locations, that actually adds up to 28. Because we also have a loan, the way the loan was structured on that cultivation facility is to convert into Kelly spec. So we don’t technically own the building. And that’s why I say 27 properties. And so yes, we do have cultivation, they tend to be indoor facilities, we don’t have farms, we don’t do land deals, we don’t do outdoor, large outdoor farms, we will do true what’s called what’s called industrial grow, or indoor grow. And then we will do greenhouses, but these aren’t greenhouses that you would see at your local nursery. These are high tech greenhouses, that will control humidity control temperature, they’ll control lighting. So with the with light deprivation screens that can automatically open and close as the cultivator thinks the plants need to adjust either the lighting or humidity, or automated irrigation systems. So they’re pretty high tech greenhouses. And then on the dispensary side, these are retail locations. And depending on where your listeners are sitting, many of them have probably driven past them in the last week or true week or two, these are traditional retail locations. And we have 17 of those properties. We like the mix of having retail and industrial within our portfolio, we know that our tenants like that we can serve all of their real estate needs across the retail and industrial needs.

J Darrin Gross 23:21

Now, I would think that, you know, having that relationship and being able to go from top to bottom or whatever your next venture is, a lot of these I believe do migrate from one aspect to another based on the opportunity. As far as the the underwriting of the the tenants, or the borrower’s or the I guess it’s more of a tenant for you. Is there any, like, level of scrutiny that you? Yeah, I mean, how do you discern this? Because a lot of it’s a fairly new business, I mean, are some larger operators, which it sounds like maybe that’s where you focus, but I’m just kind of curious based on like, here in Oregon, there’s just been a based on the state laws and the inability to move product across state lines, there was a somewhat of a I don’t say glut but I know there was a lot of products are thrown and I think maybe a lot of that’s been absorbed in the pandemic based on on, you know, people’s

Anthony Coniglio 24:26

absorbed a lot of it made its way to other States illegally. They call it crop Tober in the industry, and it’s been a real issue coming out of Oregon. You know, and I’ll get to your risk question and how we underwrite. But if your commentary about Oregon brings us back to this limited licensed state focus that we have we actually call it a jurisdiction because it’s not always states. A state like Oregon has been prolific in the way it hands out licenses. And that has indeed created a glut of production for cannabis and for dispensing and in his his upended the economics of the business, which means that you had all of this product, you didn’t have enough demand to meet the product. So prices decreased rapidly, so good for the consumer. But people couldn’t make money at those depressed prices, write their fixed costs, the average cost to, to, to generate a pound of marijuana may have been, say, $1,200, and it was selling at 100. And so people were underwater, what were they doing, they were taking across the state lines, they were traveling out to Michigan, a lot of marijuana ended up in Michigan, and in other states. And so there’s a lot of illegal activity. And it was very difficult for people to to be able to make money. And that has played itself out again, in other states. If you look at Oklahoma, today, Oklahoma, is now the new poster child for this dynamic. Whereas if you look at a state like New York, New York has only 10 licensees. So it’s a very controlled environment. And they’ve been able to really maintain more discipline in the market. Now some would say, consumers are harmed because the price of cannabis here and or in New York is you know, anywhere from three to $4,000 a pound. And so boy is so much more expensive for them. But I’d argue that there’s probably less illegal activity, with with product going out the back door, and so there’s probably some equilibrium between the two. To the point about risk management though, the reason I go into that is those are dynamics that are critical to making these long term investment decisions. And when I first started talking with my friend back in 2018, about the business, once I saw the investment opportunity, I quickly realized and said to them, we don’t have the expertise to truly understand this business, we need to understand it. And so we partner with and have on our board a gentleman by the name of Pete Caden’s Pete was one of the founders of a cannabis company called greenthumb industries, or GTI, was one of the co founders was the CEO of the company for five years, took it public, and then retired after he took it public. And so his knowledge of the sector was invaluable to us when we were first getting started. And what we’ve done is we’ve taken that knowledge, and we’ve institutionalized it across our entire team, not only our investment team, but our entire team and our board. And we’ve used that knowledge to really get smart on how can we make the right investment decisions. And then let me tie that into what our underwriting processes, we look at four things primarily, number one, we look at the diversification that any investment will provide us we like geographic diversification, like tenant diversification, we like use type diversification, retail versus industrial. We also look as you would expect at the company, right, we understand all the traditional metrics you would look at from a balance sheet perspective. But importantly, in this industry, we spend a lot of time evaluating the company’s ability to raise capital. And the reason is because we understand that this industry companies in this industry has a voracious appetite for capital. And it’s important to know that the management team has the ability to continually raise capital and stay ahead of its growth aspirations, or it can adequately balance its growth with its its capital availability. And quite frankly, if you look at a lot of the missteps in the cannabis industry, it’s been because they’ve run out of runway that that they didn’t have a good business plan they just ran out of runway didn’t have the ability to raise capital. The third thing we look at is the property. Of course, it’s a real estate business, we understand the property, its alternative use value. But very importantly, we understand its value in the cannabis ecosystem. So let’s take your your state you’re in Oregon, what will somebody pay for a cultivation facility in Oregon, where there’s probably over 1000 cultivation locations in Oregon, there’s nothing special or a retail location where there’s over 1000, that there’s nothing special with any one of those. But now let’s go to a state like Pennsylvania, where when we did our first transaction, only 26 licensees, when that limited license state where the license itself is selling for could be 25 could be 50 million just for the license.

You could see how that intrinsic value creates a lot of value for us as a property. So we would understand that in Pennsylvania. If that tenant experiences difficulty number one, they’re likely to monetize the pure licensed value, and we’ll find a better credit stepping in or number two, if they don’t, there’s now a licensed location that somebody else can step into. So we know that remarketing of that property would be much more easier versus another location. So I don’t want to go too far into that simply to say understanding the property is critically important in this industry. And its its pace and ecosystem. And then the last place cases that jurisdiction evaluate the last element. I said there’s four. The fourth one is the jurisdiction. So understanding what is the licensing regime? Like, will there be a slew of licenses coming out? You could look at Massachusetts and say, well, Massachusetts, there’s no limit on licenses, the state can issue as many as they want. Yes, however, it operates as a unlimited licensed state, because each jurisdiction has that that where the location excuse me where the property is, has to have what’s called an HCA host community agreement. So that particular limitation makes the state almost behave like a, like a limited licensed state. So that’s a bit of how we focus on underwriting. It’s about the diversification the transaction gives us. It’s about the quality of the company, importantly, their ability to continue to raise capital fuel their business. It’s about the property and its situation, cannabis ecosystem, not just the overall commercial real estate ecosystem, and then importantly, understanding the dynamics of that jurisdiction. There’s a lot that goes into it in a lot of specialized cannabis knowledge to try to be successful.

J Darrin Gross 31:02

Yeah, no, I appreciate you going into that. And, you know, the supply demand thing, the the, you know, licenses, if everybody has one, they’re not worth anything. But when you have a few, it makes complete sense. And there’s got to be some sort of balance in there. But yeah, it was a sad thing to see, you know, the all the excitement in the cannabis in the, in the early stages, and then it just, you know, there was they they over licensed and, you know, some of the people clearly didn’t make it here in Oregon based on just the oversupply. But well, why don’t you talk a little bit then about the the legal climate. So obviously, Oregon has both medicinal and recreational. You said they’re like 35, states that that have medicinal and, and 10 to 15, with the recreational Do you see anything coming? Or is there anything that you are anticipating that would change at a federal level? As far as the laws? And if so, how does that play into your your investment strategy? Or does it?

Anthony Coniglio 32:12

No, it absolutely does. And to set the stage for this conversation. Let’s talk first about the the polling on cannabis. And there’s a Pew Research poll is a number of other polls that have been done in the last few years for medical cannabis. It, it consistently polls well above 80%. And I’ve seen polls in the 90% approval for medical cannabis. So even as small even though the lowest poll I’ve seen was well north of 80%. So I think as a country, the country is generally comfortable with medical cannabis on the recreational side. Most of those polls are now consistently polling above 60% 62% 66%. There are not many things in this country at this moment in time that the electorate agrees on greater than 50%. And so I think it’s important to understand that societally, the backdrop for legalization is there, right? There is no anti movement that has enough support, that will keep it from happening. The people want it. I honestly believe it is inevitable, it will ultimately happen. But then that fact, or those facts meet the reality of Washington, DC. And so it’s not just about popular support in Washington, DC to get something done. It’s political will. And there are a lot of politics at play in this particular topic. There is to be sure there actually is meaningful bipartisan support in Congress, as demonstrated in voting on the floor. And in fact, Congress has passed what’s called the safe banking Bill numerous times on a bipartisan basis incentive to the Senate. It’s not been taken up in the Senate, either in this Senate, or in the previous Senate. In fact, the safe banking Bill was worked into the recent National Defense Authorization Act, and was stripped out last week in the Senate. Congress was trying to get it done through the must pass national bill. There have been other legalization bills that have come to the fore, whether it be states act or more act. Notably, there was a bill that was proposed in Congress by a Republican a couple of weeks ago, just prior to Thanksgiving. And so I do believe there’s bipartisan support for legalization. But where it becomes difficult is there is a wing of Congress that believes that any legalization of cannabis should come with it a significant amount of social justice reform. And that’s where I think the legislation starts to become a little too much for the conservatives. Some of these social justice agenda items I think just make it a little bit more difficult, you know, safe banking, I think most people if it had a floor vote if it got a vote in the Senate, I think it would probably pass on a standalone basis. Senators, just a little bit of the politics here, senators, Schumer, Booker and Wyden all are about to propose comprehensive cannabis reform. They put out a draft this past summer and asked for comments. They didn’t propose it as a formal bill. And so what the three of them have said is that they don’t want incremental reform, before they get the totality of a wholesome reform package. And so that’s why shape isn’t going anywhere right now. And then the question will be, can that proposal get enough Republican votes to support it, given its social justice components? You know, so without going into those, those pieces, that’s a bit of the dynamics at play? It will happen? It’s just a question of when but I do think we have the opportunity to get a banking Bill safe banking done, before we get comprehensive federal reform done, and could be as soon as next year.

J Darrin Gross 36:05

Do you see any of those changes, then changing your situation? As far as a strategy, do you feel like having been kind of a, you know, getting in the front line and creating a place that you’ll always have an opportunity in this space?

Anthony Coniglio 36:22

We’re actually very excited for federal legalization, the state banking, federal legalization. Think of this from a safe banking perspective. First and foremost, it will allow our tenants to accept credit cards. It’s a no, it’s mostly a cash business today. And so I’ve seen estimates, most of them center around 10%, I’ve seen estimates that revenues will go up as much as 20%. Once credit cards can be accepted, just think about that, right, you have an additional 10 to 20% of revenue, most of its dropping to the bottom line. From a credit perspective, all of our tenants become much better credits. From a banking perspective, people fail within the banks will get in again, this is a highly specialized area of real estate investment. And what we end up doing is we end up providing a meaningful amount of 10 improvement dollars to the to the tenants to complete the build out of the industrial or the retail location. So yes, for sure banks will step in. But they will step in by lending 60 80% LTV on a non cannabis value, and it really will limit the amount of proceeds available to people. And in some instances, that will work but it’s not going to happen right away built into the safe banking bill is a six month rulemaking period for federal banking regulators to write the rules. And so just think about this having been in banking for most of my career. A multi jurisdictional federal regulatory meeting takes months to schedule, let alone agree on what it will be. And you’re now writing rules for banks that may operate in every state or in multiple states, and some of the state they operate in and it’s legal. In some states, it’s not legal. And so from a compliance perspective, it is a very complex set of rules. And in fact, hemp, which is the sister of marijuana, hemp was legalized in 2018. Under the Farm Bill, we’re still getting some of the rules earlier this year, there were rules coming out about banking around hemp. And so it just demonstrates this point that banks won’t move in till the rules are set, and it will take a while for the rules to be set. And then I can do to do a follow up and then I can talk about federal legalization because there’s some other dynamics at play for us there.

J Darrin Gross 38:35

Yeah, please do the federal legalization. Please, please do

Anthony Coniglio 38:41

on the federal side. Once there is federal legalization, it will usher in a period of massive growth and massive investment. And so a group like us that has a first mover advantage that has the relationship we have a database of well over 100 Even though we only have eight in our in our portfolio right now, we have relationships having been there as a consistent source of dialogue and capital for the last two plus almost three years. We’re building up those relationships and we will be there to provide the capital the industry will need. As soon as that legalization is looking like it will come because it’s not going to happen overnight. We’re going to see it occur we’re going to see the bill work its way through we’re going to sense the momentum we’re going to have the sense of confidence in the industry, we’ll be investing ahead of that we’ll be able to provide that for them and then upon legalization, we’ll be able to continue to provide them capital using our first mover advantage and industry knowledge and relationships. So we think that’s a massive growth opportunity for our business.

J Darrin Gross 39:46

Sounds sounds like it is and again you know, being the expert in the field and being the one of the first and very recognized specialist and even like you said some of the lending criteria that the the lenders would wouldn’t necessarily lend on, on the the business, but just on the real estate thing would would totally make it a different fit for the tenants and answer that. That’s, that’s great.

Anthony Coniglio 40:14

Let me give you a rest, if I may. Sure, sure. So the risk there is some of your folks who are listening might know a little bit about the business and say, Wait a minute, right now, since you can’t transport a state across state lines, you have cultivation facilities in all these different states. Anthony, you’re in a cultivation facility in Pennsylvania and in Massachusetts. And once legalization happens, and interstate commerce is allowed, or you’re gonna have cultivation facilities that are going to be completely useless, and Massachusetts, and, and Pennsylvania, and all the cultivation will happen in California and Nevada. And it’ll be transported around. We look at that all the time. We like to know a that there’s strong alternative uses for the properties we’ll get into in case we get it wrong. But importantly, we think the properties that we own, are have durability, even in a world where you have federal legalization, we also get we also get Karen Karen T’s in our transaction. So if if a company decides they want to shut down their facility and move it elsewhere, they have to continue to pay us rent. But back to my point, I think most importantly, back to my point about ushering in a period of massive growth. A company given a sizable investment in a cultivation facility, which could be 10 2050 $70 million dollars. They’re not likely to just walk away from that infrastructure and their people. So I think most of the new capacity would then be brought online under federal legalization in another locale. But I think just like we’re seeing in, in other consumable product sectors, having some connectivity to the community, and local production is an important component of the overall infrastructure. So we like the durability of our assets, even after federal legalization and interstate commerce.

J Darrin Gross 41:57

No, absolutely. Literally, if there’s anything in the COVID. You know, the pandemics, tatis with the supply chain, bottlenecks, you know, they can occur. And I would think that just the mindset of any anybody that’s in manufacturing or production, recognizing they have, you know, there’s something Tim Ferriss and like, if you have, you have to you have one? So I’ve heard, you know, if you’d be one, you have none, so there’s some sort of like a, you know, a, having more options and better, wider distribution, and definitely a better, better way to go. Anthony, if we could, I’d like to shift gears here for a second, we’ve been talking quite a bit about risk, but there’s a there’s a question I like to ask all my guests. And it’s based on the fact that by day, I’m an insurance broker and and work with my clients to assess risk and determine what to do with the risk. And there’s there’s three strategies we typically consider, we first look to see if there’s a way to avoid the risk. And when that’s not an option, we’ll see if there’s a way to minimize the risk. And then if we cannot avoid or minimize the risk, and we look to see if we can transfer the risk. And I like to ask my guests, if they can take a look at their own situation. Could be your clients, investors, you know, the tenants, jurists or the laws, however, may be but if you can take a look at your situation, and identify what you consider to be the biggest risk. And again, for clarification, while I am an insurance broker, I’m not necessarily looking for an insurance related answer. And so if you’re willing, I’d like to ask you, Anthony Coniglio, what is the BIGGEST RISK?

Anthony Coniglio 43:43

Yeah, the risk I worry about most right now is and I worry about everything. And my team, they were they were here, you know, our team would laugh right now just they’d be nodding their head saying is he worries about everything. What I worry about most right now is the federal legalization. Impact on our tenants. I keep telling people in the industry, be careful what you wish for. You all want federal legalization, but it will not come in the form of okay, it’s legal, keep doing what you’re doing. It will come with massive regulation. And so I look at for our tenants, how will they be able to manage through that massive regulation? Are they doing what they need to do to get through the FDA? Right? Because these are consumable products? Are they doing what they need to do to to avoid issues around branding and how they’re communicating with people and some of the restrictions about how you will communicate around this product? And so I spend a lot of time trying to make sure that we really understand not just a federal legalization will happen. But how does it happen? What will the regulatory impact be on the industry and our tenants and our prospective tenants really having the capability to navigate what’s likely to come out of them at them, because I think many people in the industry underestimate the amount of regulatory burden that will be hoisted upon this industry upon legalization. And so, you know, it’s interesting, you said, avoid minimize and transfer. I’m not sure how we do any of those with that particular with that particular risk. But that’s where I spent a lot of time worrying about. And maybe that’s why I work because I can’t avoid, minimize or transfer.

J Darrin Gross 45:35

Alright, but I think that even in that case, you know, trying to think ahead, and to even to have the mindset of this, you know, the changes are going to come, I think, like you, you alluded to that, a lot of times we think, Oh, if only this, then everything would be great, but not recognizing the wave of have different set of circumstances that come with that, whether it’d be more competition, more more red tape, you know, whatever that may be, that you hadn’t anticipate, because you thought everything was gonna work, just the way it was only now it’s gonna be better. And I think that, you know, one of the driving forces in the American economy is disruption and change. And it’s always amused me because I think that from a consumer standpoint, most of us want something we can count on, we know that this will be this, and that will be that. And we can count on that. But the real opportunity for for the dynamic marketplace is the up in the down in recognizing the opportunity in the down and recognizing the opportunity to get out of the up. And, you know, and, and that’s really what keeps it a very dynamic marketplace. Although it’s a tough thing to to, you know, accept when you’re when it’s you that are, you know, in the firing line, but are in the line of fire, but, but it’s but it is something that you have to I think just you have to appreciate that that is one of the things that makes a vibrant marketplace in the United States and continues to do that. And then worldwide as well. But but it is sights

Anthony Coniglio 47:11

Totally agree. Totally agree is that same as saying the only cons the only constant is change, right? And so we have to expect and we have to plan for it and we have to manage our businesses. Knowing that change will happen. We won’t always be able to anticipate where that change will come.

J Darrin Gross 47:29

No, well said. Anthony, where can the listeners go if they would like to learn more or connect with you?

Anthony Coniglio 47:36

Our website is Newlake.com www dot new lake, n e w l a k e dot com. On that website, you’ll see some information about us. Importantly, there’s an investor page as a public company, we have an investor page. Feel free folks can feel free to peruse around that look at a recent investor presentation. As well as going to all of our SEC filings.

J Darrin Gross 48:02

Awesome. Anthony, I can’t say thanks enough for taking the time to talk. I’ve enjoyed our talk. I’ve learned a lot and I look forward to doing it again soon.

Anthony Coniglio 48:13

Darrin, it was a lot of fun. I really appreciate you having me. And yes, we’d love to do it again soon.

J Darrin Gross 48:19

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

Announcer 48:39

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Industrial Property Building Investor Chad Griffiths – CRE PN #333

Chad Griffiths 0:00

But I like the idea of having cashflow get like you said, if you have some rental escalations in the lease, you can get that that top line revenue growth just organically. If if a vacancy does come up, you might be able to do some value out over time. But on that other end of the spectrum, it might be somebody buying a derelict or building that’s vacant, and they’re going to do a full renovation and reposition it, and then try and find a tenant. To me that just comes with a lot of uncertainty. And I would, especially since I’m deploying my own capital into this, I would just rather have the comfort of of that, that cashflow certainty in exchange for not getting as high return as the guys that have higher risk.

Announcer 0:40

J Darrin Gross 0:59

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

Today, my guest is Chad Griffiths. Chad has been an industrial real estate broker since 2005, and an investor since 2014. And in just a minute, we’re gonna speak with Chad about industrial real estate. But first a quick reminder, if you like our show, CRE PN Radio, there are a couple things you can do to help us out. You can like, share and subscribe. And as always, we encourage you to leave a comment, we’d love to hear from our listeners. Also, if you’d like to see how handsome Our guests are, be sure to check out our YouTube channel. And you can find us on YouTube at Commercial Real Estate Pro Network. And while you’re there, please subscribe. With that, I want to welcome my guest, Chad, welcome to CRE PN Radio.

Chad Griffiths 2:09

Oh, thanks so much for having me on there. And I got to say you’ve got one of the most amazing radio voices I’ve ever heard as your natural for a podcast host.

J Darrin Gross 2:17

Well, I appreciate that. Hopefully, hopefully the content is rich and people people enjoy come for that. But I appreciate that. Chad, I’m looking forward to our conversation today. Before we get started, if you could take a minute and share with the listeners a little bit about your background.

Chad Griffiths 2:35

Yeah, so I started in real estate when I was quite young, I actually started in residential real estate, investing in around 2000 to 2003 with a few friends and didn’t really make any money but didn’t lose any money either. But I had the itch to to get into real estate more. So I started by actually joining a Residential Brokerage, did that for about a year in 2004. And just didn’t really see that as being a long term career path for me. So I reached out to a few people that I knew and God started as a commercial real estate brokerage in 2005. That brokerage was heavily focused on industrial real estate. So that’s just naturally where I got put into as well. And I like to say that, at the time, I had no idea what industrial real estate was, I was a complete layman going into it. And I thought it’d be maybe working in office towers or retail strip centers. And it was just by pure luck that I happened to join in a brokerage focused on industrial. And it was such a great turn of events for me, because I’ve been doing that now for 16 17 years. And it’s been an absolutely wonderful experience. So broker for the last 16 17 years. And then I started investing in myself in 2014. And with a series of partners that we have where we pretty much added one property a year. So we’ve got a pretty good portfolio going now, including we just closed on one boat a month ago now for 4.1 million. And that’s a multi tenant industrial building, right in the city that I work in.

J Darrin Gross 4:09

Sweet. That’s great. I and I love it when people are able to not only work in the space, but also invest. I think there’s I mean, it’s it’s always exciting to see others doing it, but to actually, you know, be in and be able to participate is that much more exciting. I wonder if we could start here for a second. You mentioned when you first started that you did not even understand what industrial was. For our listeners, I wonder if you could just kind of take a second and kind of give some parameters on what what industrial is and what it’s not.

Chad Griffiths 4:47

Yeah, great question there and I and that’s a natural place to begin because I think a lot of people are starting to learn more about industrial just with the rise of Amazon and E commerce and All these big distribution centers, I’m sure it’s the same in Portland as it is all over North America, where we see these massive distribution centers going up in higher profile areas. Like in my market, there’s a million square foot Amazon fulfillment center, right outside the airport. So it’s visible for everybody. So now you can miss this a million square foot building right off the highway. So now it’s on a lot more people’s radar, whereas traditionally, these these industrial buildings were tucked away more in industrial parks. And that’s, that’s by urban design, the planners will intentionally try to segregate the industrial parks, from residential and even other commercial parks, just because they can be noisy or they can smell or there could be more vehicle traffic, like semi trucks coming and going. So by design, these industrial buildings have been out of the public view, where now we’re starting to see them pop up all over the place. So I think that that’s a good place to get into it is the first one, which more people are becoming familiar with. And now are those distribution centers. And I would categorize that into, I usually break industrial state down into three main categories, warehousing, manufacturing, and Flex Properties. And those distribution centers will usually fit neatly into that warehousing category. And that’s all the properties where things are basically stored, or they can be repackaged, it could be a shipment of trucks come bringing stuff in, then it’s repackaged, put into different categories and then shipped out to somewhere else, those are typically going to be a warehousing type of property. And the other one, which is just as big and just as prevalent, but outside of that public preview, or the manufacturing properties. And a good example is one actually not far from you, the Boeing Everett factory just outside of Seattle, which is a 4 million square foot building. And it takes a bit of mental effort to actually understand how big a 4 million square foot property is. But all that they do in that property is all the raw materials for the planes come in, the planes are assembled and manufactured and pieces are all put together. And then the finished product, the plane will go out the door on its way to the customer. And that’s that’s a traditional manufacturing property, which is a massive building, but they can be all the way from a 4 million square foot building down to a 2000 square foot industrial Bay. There’s a wide assortment, I think that that’s what a lot of people don’t grasp. Without having some intimate knowledge of it, there’d be no reason that anybody would know this. But there’s a full spectrum of size on this as well. And on the last category is Flex Properties. And I consider that to be more of like a miscellaneous catch all. For industrial properties, they’ll usually be a property that’s zoned industrial, so the municipality will give it an industrial type of zoning, but it might not be conducive for warehousing or manufacturing. So it’s still an industrial zone property, it’s probably either in an industrial area, or it might be on somewhat of a higher profile area. But the key is that it’s still an industrial zoned property, but it can be a wide array of uses. And I’ve seen just to give a few just for context. I’ve seen churches and industrial zone buildings. Car dealers are another great one, because at the front, they’ve got their showroom for all the vehicles but at the back, they’ve got a warehouse for working on all the cars or storage. It’s really just an industrial building that has higher profile exposure to a main road where car detailers dealerships, like to be a bottle depots I’ve seen in industrial buildings. Self Storage is another common one, art galleries, there’s there’s a ton of uses that can provide that the municipality will let that that type of use into the zoning classification that they’ve set for it, you can put a number of different uses into a flex industrial property, but those would be the three main ones. And I would say the bulk of them will be either a warehousing or manufacturing property, but Flex is still a huge category unto itself.

J Darrin Gross 9:07

And I really appreciate you breaking that down because I think there’s there’s maybe like a fuzzy idea of what it is but to have a more clear picture it certainly helps in and I think kind of what I was picking up on what you were always you breaking it down. So industrials is basically the class and then you have the subclasses which you know the distribution manufacturing or the flex and then is the zoning then does that determine the occupancy possibilities or is industrial like if you came to review you looked at your local zoning and it says industrial is that then what can fit in that that or what can occupy that space? Is that determined by the city then or is that under industrial anything? Anything goes it’s it’s one of those that you’ve been

Chad Griffiths 10:00

Yeah, every city will have their their own guidelines on how they set their regulations or their bylaws. But going back to the point about this being an urban planning exercise, the cities are want to have the ultimate control over what’s going to go into that building. And it’s just for for the purposes of avoiding having a heavy manufacturing facility right next to a residential neighborhood. Now just cause that cause problems for everybody, there’d be non stop complaints, and it would just, it’d be something that they want to avoid. So every municipality is going to be a bit different on this, but the idea is that they’ll have within the main zoning categories industrial being one of them, though, they’ll typically be a few subcategories of zoning. So in my market, as an example, we’ve got light industrial zoning, medium industrial zoning, and heavy industrial zoning. And we also have a business industrial zoning. But for the purposes of just making this as simple as possible, if we just focus on light, medium, and heavy, every municipality or most municipalities, I should say, are going to have some sort of ranking system like this, and a light industrial property, it could even just be a street office use, there can be an industrial building that is leased just to Office tenants. So the the intensity of what’s happening in there is actually quite low. As you start going up that scale, medium industrial, you might see some more heavier uses, like an auto mechanic or some sort of use that will have more traffic or more noise. And then once you get to heavy industrial, that’s when you can get them to like a heavy manufacturing property where they’re welding or machining, those ones are typically going to be as far away from that residential base as possible. But for for good reason the municipality is going to want to or should, I might even go so far as saying they should control what’s going what’s going into each individual building that they assign a zoning classification for, just to avoid the problems of, of neighbors not liking each other, because one’s residential and one’s a heavy manufacturing, they just try to keep it keep that relationship as clean as they can.

J Darrin Gross 12:07

Yeah, and I it makes complete sense. I mean, there’s some sort of a buffer between, you know, the different classes, and especially when you get from residential to any kind of manufacturing, I think there’s, you know, makes good sense to have some sort of a barrier. You wouldn’t want little kids playing in, in the areas where the big heavy trucks and, and I can’t imagine it’s enjoyable, if you’ve got around the clock manufacturing, you know, Clank, Clank, bang, bang, boom, boom, you know, orange and a lot kind of stuff. So that all makes sense, but I appreciate you kind of breaking out because it’s like, I think sometimes when, when, you know, you mentioned like a manufacturing like a Boeing plant. I mean, it’s like, holy moly, that’s, that’s huge. And just as far as the the opportunity for an investor to get in, I mean, a 4 million square foot building is probably not likely to be owned by a, you know, individual investor. In that kind of raceway. Next question of the different classes, you mentioned, the the distribution, manufacturing and flex, is there any weight that you would be able to assign that you would think that the percentage of of occupants are owners versus, you know, more and more of an opportunity for an investor? That’s not the occupant to, to, you know, buy and be a landlord?

Chad Griffiths 13:26

Yeah, instead of you in focusing on the on the categories themselves, I think it’s almost going to be size dependent, because the just the price is going to rise in proportion to the to the size to some extent, the more expensive a property is, and the larger that it is, the more economies of scale are going to be there. So my price per square foot might go down a little bit as you get bigger. But generally speaking, a 200,000 square foot building is going to be a lot more expensive than a 2000 square foot building. So I think size wise is where people would most likely want to focus. Like it’s just it’s going to be unobtainable for the average investor to go and buy a $20 million building. Whereas some of these smaller ones and I speak about the first industrial property that we bought, my partner and I was a 2000 square foot, industrial condominium. So same same type of ownership structure is like a residential condominium or strata where the building is broken down into legal units. That was the same with ours is a building that’s about 30,000 square feet. And this one bay in the building was 2000 square feet. And by the time we had closed on that, and we had to fix a few issues in there, we were into that for about $400,000. And we actually still own that property to this day as the first one we bought in late 2014. And we still own that one and as a $400,000. Condo. It was very small. I think we put down 100 grand or so between the two of us on that, and I got really favorable financing on it. We’ve had one tenants in there for five years and then we’ve put another tenant in there since. And that’s that’s been a really good little industrial condominium for us. So I think it’s you, you could have different categories that you could find a, a warehouse, that’s a 2000 square foot warehouse, where tenants can come and just store smaller tents can come in and store stuff, you can get a manufacturing Bay, you can get a full flex property, we’ve we’ve got everything in our portfolio, we’ve got residential or residential, my apologies, we’ve got warehousing, manufacturing and Flex Properties in our in our portfolio, and they range from that $400,000 to the biggest one we have is about 5 million. But we’ve, we’ve we have partners on that as well. So it’s not just our own capital, and we’ve got bank financing on it as well. So we’ve we’ve scaled our portfolio, but it’s been it’s been over time. And we’ve intentionally sought out the properties that we could afford, as opposed to just focusing on warehousing or manufacturing.

J Darrin Gross 15:59

No, that makes sense. And especially like you mentioned, just the size of the property kind of predicts the the price and the opportunity for the investor. Let me ask you, so we talked a little bit about individuals and sounds like the the larger properties you’ve bought, I don’t know maybe all the properties you’ve had a partner on in some way, shape or form? I know. You know, there’s there’s multiple ways to do it. Go solo partner J or joint venture or syndication? Do you are you doing any syndication? Are you doing joint ventures? How are you going about acquiring properties?

Chad Griffiths 16:41

Yeah, we’re doing it all through corporate ownership, corporate partnerships right now. So we’re not into the syndication stage where we’re sponsoring a deal. And that’s, that’s been by design, where we’ve, we’ve just wanted to first build out a track record for ourselves. So that at some point down the road, if we ever do decide to sponsor a deal, then then we could be confident as the GPS and try to attract LPs and give them comfort that we we have a good track record. And we’ve just been fortunate, we’ve been in a position where our partners have come in as equity partners, and we’ve, we’ve gone in as equity partners as well. So it’s just been a good arrangement with some very close friends of ours. But at some point that we would like to do that just to scale the scale of the ownership portfolio beyond what we have right now, it probably is on the radar. But it’s been a very, very close group of friends and colleagues that we have invested alongside us right now. And it’s, it’s we’ll just set up a new corporation that will hold the real estate, and then our individual holding companies will own the proportionate share within that, which has just been a good structure for us without having to get securities lawyers and, and everything that entails a syndication involved in it. So that’s, we’re just trying to keep it as simple as possible for the time being.

J Darrin Gross 17:59

Yeah, I love simple keep. So let me ask you on on the different properties net. You know, a lot of times when people buy a property, they have some sort of a strategy, maybe to to improve the economy’s, you know, value add kind of a strategy, or at least that’s a real common one with like multifamily and in office or retail. Is there any kind of a strategy like that when you go and acquire an industrial property? Or are you basically just looking at here the numbers, we’ve had scheduled rent increases? In let’s see if we can’t fill the vacancies?

Chad Griffiths 18:42

Yeah, great point. And I put that on a spectrum right on just the the amount of risk tolerance that an investor has in relation to the upside that they envision. So I’m, I’m a pretty on the one end of the spectrum, I’m pretty conservative investor myself. So I like buying properties that already have some some element of stabilized cash flow. So I don’t have to take on the risk of waiting to find another tenant and, and the risk that accompanies that. So I’ve been a pretty conservative investor, most of the stuff that we’ve bought, has, has had tenants in it, or we bid really high degree of comfort that we could backfill some of the individual spaces. But I like the idea of having cash flow, get like you said, if you have some rental escalations in the lease, you can get that that top line revenue growth just organically. If if a vacancy does come up, you might be able to do some value out over time. But on that other end of the spectrum, it might be somebody buying a derelict old building that’s vacant and they’re going to do a full renovation and reposition it, and then try and find a tenant. To me that just comes with a lot of uncertainty. And I would say especially since I’m deploying my own capital into this, I would just rather have the comfort of of that that cashflow certainty in exchange for not getting as high return as the guys that have higher risk?

J Darrin Gross 20:02

Yeah, definitely the risk reward. And, you know, from what I understand the demand for industrial is is, like limitless. Are you finding that to be the case in your market that there’s just so much demand?

Chad Griffiths 20:18

It is crazy. In the 16 years that I’ve been in this business, I’ve, I’ve never seen anything like this. And that even includes 2013 2014, which was a pretty hot hot market. There’s just an insatiable appetite for E commerce around the world, everybody shopping on ecommerce, this last 18 months that we’ve been through have really accelerated that trend that was already gaining popularity pre 2020. So we we’ve just seen so much demand for warehouse property, not even just in the coastal markets. And we like along the whole coast where you are like, if you started looking at some of those markets there, the vacancy rate is sub 1%. And when you get into a sub 1% vacancy market, there’s essentially no vacancy, that’s just almost becomes like a rounding error to say it’s zero. But there might be a little bit out there if you’re really lucky. And we’re even seeing that start to creep into more inland markets as well, where Dallas right now is a good example, Dallas is probably leading North America in the amount of development that they have underway, because they’re at historically low vacancy rates themselves. And that’s an inland market. So we’re seeing that across the board, there’s, there’s still pockets of vacancy in in many markets, it’s not nearly as bad in Dallas for vacancy rate perspective as it would be in Los Angeles. But there’s still a lot of demand. And given the long turnaround time, right now to actually get a product from the just piece of dirt all the way up to a finish building. There’s constraints in the bottleneck to get building construction materials like steel, and it’s just making it cumbersome for these guys to actually build as quickly as they want to. So even some of this inventory that’s planned or in the process of going up, it could still face 12 to 18 month delays. So it’s I would expect that we’re going to see a lot of demand continuing for the next number of years, and the supply will try to catch up to it. But it’s, it’s only going to be able to catch up to it as quickly as the developers can build. And I suppose to some extent that leads to a potential problem down the road. And you and I both know that the development community has a propensity to keep building until someone tells them that they shouldn’t build anymore. And that’s usually in the way of vacancy rates rising because they just overbuilt so that that could be a problem at some point down the road. But if if you believe and I believe myself anyways, is that E commerce is going to continue to slowly take away market share from the traditional brick and mortar retailers. So I think this this trend will go for for some period of time still. But at some point down the road, whether it’s inflation, interest rates having arise as a result, or just overbuilding, there could be some uncertainty at some point in the future. But from my standpoint, I’m not making I’m not making decisions based on what might happen in five years. I’m just trying to make the best decision I can with the information I have available right now. And that information says that industrial real estate should be a very hot commodity for the next few years.

J Darrin Gross 23:31

Yeah, that’s, that’s consistent with what I’m hearing. I’m curious, you know, like there have been some leaks here in the States. And I would assume that it’s true up there in Canada as well. But some of the the large retail centers have kind of lost their pizzazz. Have you seen any, like conversion of of those types of properties into maybe a light industrial warehouse? option? I don’t know if that’s plausible, just to me, it’s always been amazing how some of these make some of these retail malls for you know, huge, and to just have them go dark or be knocked down just seems kind of like, you know, there should be some sort of an opportunity there, but maybe not.

Chad Griffiths 24:19

I think that will be a big trend going forward. We’re not seen as much in my market. And I think it’s more reflection that we just we don’t have as much retail inventory per capita as as some markets in the states do. Where there’s going back to that overbuilding problem, like retail for the longest time developers just loved building retail shopping centers and and they they were all Everywhere you go it’s you’d look at it at a shopping center and in I found name was in the US that there’s just a lot more retail per capita. So we’re we’re not seeing that as much. In fact, I was at a mall the other day, just getting some some gifts and I couldn’t believe how busy it was. So I thought the same thing we’re in this middle of this once in a century event, and everybody’s ordering stuff online. But here I am in a shopping mall having to wait to get a parking stall having to wait to wait in line to pay. And I couldn’t even believe it. But I think that that E commerce will still continue eroding that market share. So I think that that’s going to be a trend that that happens all over. And to your point, that this is already on the radar of a lot of these big distribution companies that want to get that last mile delivery service. And that last mile delivery is, is essentially, it’s not an actual mile, it’s just used to describe the final stage of getting that product. So it could have come from across the ocean on a container ship, it could come across the country by train, or it could have went to a factory by a semi truck. But it there’s that last stage where it gets from that final warehouse or final retail store to your front door. And what a lot of these distribution companies are trying to figure out is how can we do that as economically as possible. And in many cases, there, there are all these underperforming malls, especially in the US that are strategically located in in communities. That’s that’s where a lot of the shopping malls have set up. So I think that there’s going to be a big appetite for these distribution companies to figure out how they can economically enter into the shopping malls and converted into a giant warehouse distribution center. But the challenges that that they’re going to have to overcome are first can they pay, can they pay the retail rates that the landlord might have been receiving from the previous tenants that were in there? Or does the landlord just recognize that any rent is better than no rent. And then there’s also going to be some sort of zoning ordinance challenges on how they can convince the municipalities to allow a go to go from me commercial use to a an industrial use. And that’s, that’s not easy headed, I’m sure you’ve dealt with this as well, you start getting into all the red tape and bureaucracy, dealing with a city and trying to get them to change their minds on how they do this is not a quick or easy or certain process. So there’s still going to be a lot of hoops that go through there. But it really is a perfect setup. If for these distribution companies that need that last mile logistics, the shopping centers are in a fantastic location for it. And typically they have high ceilings, there’s lots of parking, so that it’s set up for it. It’s just there’s the economic factor. And then there’s the uncertainty of dealing with a municipality. But I noticed some great insight there isn’t I your 100% right on that, that will be a trend that we should watch going forward.

J Darrin Gross 27:34

Well, the facility itself, that to me makes a lot of sense. But as we as we’re talking and I’m just thinking about the traffic and the zoning would probably be one of the biggest push backs because if you’ve all of a sudden got a you know, it was a retail center and now you’ve got semi trucks backed up forever trying to get in and out of that property, I can see a little bit of resistance to that. I guess if a if a property were situated close to interstate or, you know, major roads, and it was something easy on Easy Off, it might be an easier sell, but I could certainly see if it was you know, deep in some sort of residential section, there’d be a little bit of pushback on that, which, you know, if you’ve ever there’s a I think it’s a FedEx distribution center near near where I live, and if you’ve ever been in in the morning traffic trying to, you know, go through that zone where they’re pulling out I mean, it’s like there’s just like a line of these trucks you know, pulling out through that one light you know, kind of thing.

Chad Griffiths 28:35

And they’re not they’re not they’re not quiet they’re so yeah, it’s It’s intrusive for just how big they are and how much they block the road. But they’re they’re loud when they’re if they’re hitting their their brakes or just backing up the sound of backing up if you’re in a house next to that shopping center. You’re not going to be very pleased to have that tenant move in there.

J Darrin Gross 28:54

Yeah, yeah, no, it you know, I think more about it it’s like there’s definitely some you know, method to the madness and and to try and you know, keep the peace if you will kind of thing so, but yeah, it seems like there’d be an opportunity for those you know, the failed retail centers that are further out. I often think of Kansas where I grew up and in the retail center where I bought every pair of Levi’s and every pair of shoes that I ever wore growing up they you know, basically went dark and they knocked it down and I think there’s a Lowe’s there but, but you know that overbuilding of retails a lot of it was accelerated based on the way that there was no, no like land use laws that prevented the urban sprawl or the suburban sprawl and you know, you had this just just ongoing and basically the, the valuation of your residential property was directly proportionate to how new it was. So you know, every couple of miles or be another intersection look just like the one you went through, you know, a couple miles back and it would have a Starbucks. On one side, and, you know, the grocery store and all that, and, you know, but there was kind of a recognition, I think, over time or people started going, like, we’re really a long ways out, you know, and so there was kind of this migration that’s kind of started back in and is that started with cursor moves further out, retail centers, lost some of the support. And I think they went dark and and and to me, that would make sense for those to have a chance based on, you know, the traffic patterns and where they’re located in proximity to a major thoroughfare and, and just based in a space, we’ll make one sounds interesting know how that, that, you know that, like you said, the most developers don’t stop and tell some, he says, Stop, there’s,

Chad Griffiths 30:50

well, you can see the problem that retail is having right now is that they’ve got waning demand just from losing some market share to ecommerce, and they have too much supply. And I’m just basic economics will say that that’s a bad problem. And right now that’s afflicting retail. But you could extend that to Office, same same problem, that there’s a lot of uncertainty on which home office is going to be needed going forward. But they’ve got a lot of supply. Whereas industrial right now, it’s the opposite problem. There’s increasing demand, and there’s not enough supply. But there’s it’s cyclical, I wouldn’t be so naive to think that industrial is going to continue growing at this rapid pace indefinitely. Nor did retail nor did office. So there will be some turning points on that. But it’s how long that is and what the implications are. And whether it’s just a temporary setback, or whether it’s more systemic. I, it’s really hard to extrapolate that far out into the future and know what’s gonna happen. So I’m, I’m kind of trying to make my plans based on like, short and medium term objectives. And just I guess, maybe it is naive, but just kind of hoping that things work out over a 1015 year time horizon.

J Darrin Gross 32:02

Yeah, a couple of questions I have for you about the deal. Lens lending is a lending environment favorable for for industrial, is it? What kind of terms are you seeing on a regular basis,

Chad Griffiths 32:16

it’s definitely very favorable from the capital market standpoint, but it’s not necessarily favorable for buyers that are new into it. And by that, I mean, a lot of investors that want to consider industrial probably have some multifamily background. And that’s just seems to be the the path that a lot of investors take that get to industrial not saying that everybody does get to industrial even wants to but for the ones that do it’s the first time or the small investor anyways will usually have a couple of houses. Though they’ve made some money, then they’ll parlay that into a multifamily project and, and maybe they want to diversify, so they start looking at industrial. When you compare industrial financing to multifamily financing, there’s a lot of really good financing packages you can get from multifamily where where you can be putting down much less from a loan to value perspective. Whereas an industrial, you’re still looking to be probably not 25 to 35% down to buy an industrial property. And that’s using conventional bank financing. If you wanted to get a get a second mortgage or, or do more aggressive terms, there’s certainly lenders out there but you’re probably paying anywhere from 400 to 800 basis points higher on your interest rate. So it’s it comes with a lot more risk. So what what a lot of investors do is they want to get that conditional, conventional financing, whether we did one renewal on a term that we had last year, we got 2.57% on a I think we did a four year fixed on that one. So you can get some like really cheap money, but those those are ones where you’re you have 25 to 35% even downpayment or equity in the property if you’re if you’re refinancing it, so it’s it, whereas like multifamily, you can get much, much higher loan to value ratios. So I think that that’s might be the one surprising part. But the thing that that I like about industrial is that if you’re putting down that much of a downpayment, and you’re getting really good terms, you’re cash flowing right out of the gate, that we’ve cash flowed on every single property that we’ve bought from day one, we didn’t have have those issues where our loan was so high that it was it was stressing the cash flow coming in we’ve cash flowed on every property and then once you couple paying down the principal, and if you can get some appreciation in there, those three factors the cash flow appreciation and and mortgage pay down. If you can hold that property long enough. It can be a very lucrative investment. But people have to wrap their head around the fact that it’s you’re not going to be able to get as high of a loan to value and industrial as you couldn’t in multifamily.

J Darrin Gross 34:56

And I think that’s that’s creeping into the Alliance. As far as multifamily, just based on you know, the the concern of interest rate increase, what are the mean and the pricing still going higher, but just to get your debt service coverage ratio to be what the bank wants, they’re, they’re looking for a little bit more you know, downpayment or equity in the in the deal. So, but but I, you know, I don’t have any issues with that, I mean, being conservative on that, I think that prevents us from having, you know, another cratering event that just, totally undoes the market. But, but that’s, that’s, I appreciate you sharing that. What about under Oh, and I want to ask you, are those 25 year am amortization terms? Or?

Chad Griffiths 35:51

Yeah, thanks for asking. That’s important point as well, industrial, it’s much more common to see 20 year em on deals, newer properties, you could certainly push to 25. If it’s older, their lender might even try to push that down to 15. But the most common that, that I’ve seen as a broker and an investor be 20, at the end, everything that we have is 20. Year amortizations.

J Darrin Gross 36:14

Okay, well, I mean, you’re building equity that much faster. So yeah, that’s exactly. That’s good. Good. Let me ask you about underwriting your tenant, you know, in, in a residential multifamily kind of thing, you’re, you know, you’re looking to they have a job. You know, in any prior evictions or convictions or, you know, I was her past experience, the little bit that I’ve looked at industrial, I mean, I’ve come to recognize that the value of the property is directly correlated, to the quality of the tenant. Lisa, that’s, that’s kind of my perception on it, can you speak a little bit to that?

Chad Griffiths 36:53

Great point. And, and I and I would, I would have been on that same mindset as you until recently, actually, where I was talking with the, the regional, I can’t even remember what his position was, he was essentially in charge of industrial acquisitions for a very large fund, like in the tune of six $7 billion. And I was talking him on that very topic. And he said that he’s more concerned with the building itself than who the tenant is in there. And his mindset was that if it’s a good building in a good market, you’re always going to be able to find a tenant for it. And you if you take the approach that a tenant is always going to have moving on on their mind. And I think that is a reality is every tenant does think at some point about moving because if they weren’t, then they’re not in growth mode, or the non expansion mode, or the non repositioning, they’re built their business for optimization, every tenant is thinking about moving at some point. Now, they might stay for 30 years, and that’s great. But the tenant might also stay for five years. And at that point, you’re going to have to get another tenant in there. So his position and I’m coming around to this as well is that the building and how it’s how the building is set up so that it can attract future tenants at at the rates that you need, is more important that the tenant themselves. And I think that that’s from like a institutional mindset, which this this fund would fall under. I think that they can do that because they’re it’s investor money, and the people that are managing are making a salary and they’re going to make a salary, regardless of whether the buildings in 90% occupancy or 100% occupancy might affect their bonus, but they’re still going to get paid. Whereas a small investor like myself, I need that cash flow right now I need that cash flow to support the debt, I need that cash flow so I can keep reinvesting it and deferred maintenance and all the things that come with it. I’m I’m hypersensitive to that cash flow that’s coming in right now, whereas the institutional guys aren’t. So I, I balanced that short term mindset about needing to have cash flow by the long term objective that at some point, the tenant could leave the tenant they could go bankrupt. There’s big companies all the time that go bankrupt for for reasons that weren’t clear at the beginning, it was a surprise. So that is a factor or they could just leave once their lease term is up. So I look at it that cashflow up front is vital for for me as an investor as with my own capital and bank obligations. But I also do want to have a property that that is releasable or sellable down the road in the event that they leave in terms of how you can look at a tenant and and underwrite them as a viable entity leasing space from you. I think the easiest way is any information you get from them on their on their financial statements. If you can get two or three years of financial statements, you can decipher pretty quickly how much they haven’t retained earnings, how much they have sitting in cash, what their expense line item was for rent previously, and you can get a pretty good sense of whether they’re capable Have paying their bills and they have a history of paying their bills and can continue to pay your rent. And you can supplement that by getting references from their banker, previous landlord, anyone else that can help give you some comfort. But there’s undoubtedly risk that comes with renting to anybody, whether it’s a small mom and pop manufacturing company, all the way up to the biggest company in the world, there’s some area of risk, like Sears, who would have thought 50 years ago that Sears would have went bankrupt, but it did and in in the context of history in a very short period of time, they did. So I think that that is just a risk that comes, no matter what you’re investing in and into that large institutional investors mindset. If you take the approach that that is a risk that the tenant can leave at any time. But the underlying real estate, the property that you have, so long as it is competitive with the rest of the market, and you don’t have huge expectations of of overperforming, what your neighbor’s property might be leasing for, you’ll always be able to find a tenant. So I balanced both of those. I know, it’s a very long winded question, my long winded answer to your question, but I do think it’s important in industrial to have that short term outlook, especially if you’re like a smaller investor, like myself, that cash flow is key, you need to have cash flow, and but you also need to balance that, oh, by having that long term vision that that tenant will leave at some point.

J Darrin Gross 41:27

And now it’s part of the cycle there. I appreciate you sharing your your thoughts on that, because it’s a again, not having looked at it so closely as a potential investor in the past, I mean, a little bit that I did, I was like, called, like, wow, this, if you’ve got a lease, that’s like a 10 year lease, that’s, that’s where the law is supposed to one that’s got six months left on it, I’m kind of an understanding, there’s, you know, if you don’t know if the guy’s going to stay, you know, and having that that empty, empty place, and possibly a market. That’s, that’s non big demand. That could be a, you know, buyer beware kind of thing. But if you know, you’re I mean, obviously got to know your market, you know, your market know, the demand and the supply. I mean, that’s that’s kind of the starting point is, is you got to have a good good base knowledge of, of the market you’re in and, and how easily it’ll be to fill the space. That’s good. Chad, if we could, I’d like to shift gears here for a second. By day, I’m an insurance broker. And I work with my clients to assess risk and determine what to do with the risk. And there’s three strategies that we typically consider, we first look to see if there’s a way we can avoid the risk. If that’s not an option, we look to see if there’s a way we can minimize the risk. And when we cannot avoid or minimize the risk. And we’ll see if we could transfer the risk. And that’s what an insurance policy is. And I like to ask my guests if they can look at their own situation. In framing, however, you want to be your clients, investors, tenants, the market politics. But if you can take a look at your situation and identify what you consider to be the biggest risk. And for clarification, while I am an insurance broker, I’m not necessarily looking for an insurance related answer. But if you’re willing, I’d like to ask you, Chad Griffiths, what is the Biggest Risk?

Chad Griffiths 43:30

Right now as I see it, the Biggest Risk is that we are forced into another shutdown or lockdown in the market. And I hope that that doesn’t happen. I think everybody has fatigue from from this past two years that we’ve been going through this. And I think everybody wants to get back to business. But I think from the standpoint that if the medical community starts making more issues of this, and if the if some faction of the of the public starts pushing for more, more measures, then then I can see that happening, unfortunately. And if it is for good cause if that is the best course of action, and people agree on it, then then it is what it is. I’m not going to argue it. I’m not going to be that guy with a pitchfork out there saying we can shut down. I just I really hope that we don’t. If we do, I’m concerned that how long this is going for, it’s just going to lead to a whole set of problems. And that isn’t just the immediate ones of of some businesses not being able to be open and the corresponding pressures of revenue and their continuing expenses. But even just what happens with the government’s reaction to another shutdown, because I think that that would mean more stimulus, more spending, more money printing and considering everything that we’ve had to go through in the last two years. I’m concerned that all this spending is just going to lead to some sort of inflation and, and even though the feds are saying it’s transitory and and we should be able to get a handle on this, I’m still concerned that this is this is more than just a short term transitory problem. And I like to really only are the I shouldn’t say the only, but the biggest ammo that the feds have to fight inflation is just increase in interest rates. So I think that that’s coming, I think we’re gonna see, I think we’re gonna see inflation in the near term, or continued inflation in the near term, I think we’re gonna see upward pressure on interest rates. And this This is the status quo like this is if nothing else changes in, in what we’re dealing with right now. And interest rate increases is not good for for, for real estate, because it’s now costing that much more to borrow. That’s a that’s, I think that that this happens anyways. But if we have to do another round of of shutdowns and lock downs, and, and the government prints more money and adds more to it than I think that just adds another level to to inflation and, and trickles down to interest rates. So that that’s probably the biggest risk that I see right now. But I mean, you mentioned it as well, there’s, there’s, there’s so many areas where we could be terrified of we could be the geopolitical risk, economic risk that like it’s endless. And I guess the only solace that I take it in myself is that, in the 16 years that I’ve been in this business, there’s always been risk. Every, every time you open a newspaper at any day, over the last 16 years, and there would have been the media trying to sell us fear about what’s all these bad things going on. And I think that that’s just, that’s a reality that we have to deal with is that there’s always going to be that, that risk on the one side, but that’s what makes a market and makes a market that there’s going to be people that that look at that risk and say, Okay, now we’re sellers, and then there’s people like me who are more optimistic and not ignoring but maybe suppressing that risk and mentally, who are saying, well, now it’s time to buy, like I see a lot of reasons to be optimistic on this. So I think that’s what actually makes them a market is that you’ve got people that are fearful, and you have people that are optimistic, and that the fearful part does weigh on me, I am cognizant of that. But I I still balanced that by just thinking that over the long term, there’s there’s going to be blips on the radar, there are going to be things that manifest like, like we saw this last two years, there are going to be issues that we have to deal with. But over the long term, US and Canada have shown an amazing ability to keep trending upwards. So I’m still optimistic long term. But that, to answer your question, that’s the interest rates being the ultimate outcome, I can see interest rates going up at some point in the future.

J Darrin Gross 47:46

Yeah, amen to that. I hope to God that, you know, just just the mental fatigue of the shutdown, start, stop, start, stop, start saying I just, it wears on you and and eventually, people get numb to the noise. And just, you know, you, it’s really hard to, you know, martial anybody to get them to go after you continue to, you know, whether you call flip flop or change, I don’t know, the science continues to change that. But still, it’s just people like a message of here’s where we’re going, here’s how we’re going to get there. And just stick to it and work through it. But it’s it’s just weary. But I hear you.

Chad Griffiths 48:25

One other thing that I would add today because I do actually want to just address the insurance issue because your that is your, your podcast, I think having an insurance broker, such as yourself on your team is probably the most underrated position that people try and fill out their team when they’re buying property. So they’ll likely have a lawyer, they’ll have an accountant, they’ll have a banker, they’ll have a broker, but a lot of investors, specifically first time investors underestimate the value of an insurance broker like yourself, and they tend to treat him more as a commodity, where they can just go to five different companies and get five different quotes and just choose the cheapest one. I I did that early in my investing career as well. And once we secured an investor broker, insurance broker to work on that we’ve built an excellent relationship with him. We’re now anytime we have a question regarding insurance. And there’s a lot of complexities you won’t be the first to say on insurance on even on industrial if you change a tenant that you have in there that could that could change the the insurance policy. So you could go into that I’m sure in depth, but there’s a lot moving in insurance. And if all you’re doing is chasing the cheapest quote that you get, you’re not going to have anyone like yourself who can actually direct you through these challenges and these risks. So I’d encourage anybody add an insurance guy to your team because it will make your your life so much easier than trying to just get the cheapest price out there.

J Darrin Gross 49:58

Now I appreciate you saying because it’s definitely a moving target and the information changes all the time. And like you said, tenant selection can, you know, create complications for the insurance and and a lot of people don’t think about that upfront. And it’s only when you have a claim and it’s not covered that, then you’re really man. I got it. Chad, where can listeners go if they’d like to learn more connect with you.

Chad Griffiths 50:25

I started a YouTube channel about a year ago. So it’s just, it’s just my name, Chad Griffiths CRE. And as you can tell, I just love talking about industrial real estate. So I decided to start it a year ago just to address challenges that people can come up with and talk about terminology and, and just really try to fill a gap in the market where there isn’t a lot of information on industrial real estate. And I like to pride myself on the fact that I don’t talk about my company, I don’t talk I don’t even say what city I live in. Because I don’t want to I don’t want it to come across as a as a commercial for my business. I want it to be a standalone product where I’m just trying to add information and value to anyone that’s interested in it. So even if you just search up industrial real estate, you’ll probably come across my channel, because there’s not a whole lot of people talking about it. But that’d be that’d be the best place to go.

J Darrin Gross 51:17

Awesome. Well, I will certainly check it out myself. Chad, I want to say thanks for taking the time to talk today. I’ve enjoyed it. Learned a lot. And I really appreciate you going in depth. And you know, I look forward to doing it again soon.

Chad Griffiths 51:34

Yeah, likewise, and thanks again, so much for having me on. And if I’m in Portland next month, like we talked about earlier, it’s been two years since I was there. But next time I’m in Portland, I’ll look up and try and grab a coffee.

J Darrin Gross 51:44

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

Announcer 52:06

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2021 State of Office / Retail / Multifamily / Industrial with Michale Hironimus – CRE PN #332

Michael Hironimus 0:00

But retail you know, it was sort of muted when you look at nationally prices for, you know, they’re just up 1.9% over pre painted pre pandemic levels. And revenues are up about 2.2%. And so there wasn’t this build out of retail, it’s not oversupplied. And so I I’m sort of bullish on retail, I think that there’s good opportunities in retail with well located assets that have a good tenant mix. I think the tenant mix and the focus on experience are the most important things in retail. People you know, we’re social creatures. I think people despite the variants and everything, people still want to go out, they still want to have a good meal, they still want to be with other people. They still want to try on you know, clothes, they still need to get their hair done nails, you can’t those things you can’t do online. So, you know having a good tenant mix and focus on experience. I think there are opportunities in retail still. And I think that is one of the asset types that I think has room to grow.

Announcer 1:08

J Darrin Gross 1:28

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

Today, my guest is Michael Hironimus with Duckridge Realty Services. He provides private asset and portfolio management, market analysis instruction. He’s an instructor for market analysis. And he’s also a CCI M chapter president. And in just a minute, we’re going to speak with Michael about the current commercial real estate condition of the various asset classes and trying to look beyond the current situation and where things might go.

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

Michael Hironimus 3:03

Thanks, Darrin. It’s a pleasure to be here. And thanks for inviting me.

J Darrin Gross 3:07

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

Michael Hironimus 3:17

Sure. Actually, started most of my professional career I started a in insurance actually I was started a insurance company with a friend and we we did it just before Hurricane Katrina hit we did public adjusting and went out and and I was working with a lot of commercial property owners working on there. That was a disaster at that time. And but there was a lot of people that were just sort of, you know, regular folks that had invested in commercial real estate and done really well for themselves. They had large apartment complexes and they were truly concerned about you know, their tenants and getting things back to normal, of course. And that sort of spurred my interest. I didn’t really know much about real estate at that at that time and spurred my interest in getting into commercial real estate.

So when I got back, I moved into commercial started doing some advisory work and that’s when I started investing. Got my first investment property back in 2006. And then I decided, well, you know, the best place to figure out where the deals are at would maybe be to be a broker and understand where the deals were and how they were flowing. And so I started doing that. I worked mostly I did retail and industrial down in the San Francisco Bay area where I was from, and then about four and a half years ago I moved on I’m here to Oregon and got my CCIM designation, which was very important for me. Once I got my CCIM education, I realized all the things that I didn’t know at the time, you know, they always say it’s not what you know, it’s what you don’t know. And CCIM really opened my eyes to a lot of the analyses that go on and being a true advisor instead of just a transactional brokers. So that was, that was great.

So I, when I moved up here, I started my own company duck rich Realty advisors and, and really focused on the advisory side of things then eventually morphed into doing portfolio and asset management, meaning we look after high net worth clients portfolios, actively manage those for them oversee their property managers do financial and market analyses and so forth. How I equate it to his kind of wealth management, if you will, you know, that you always talk with a wealth manager on the equity side, I do it mostly on the, on the commercial real estate side. So that’s what we do. That’s kind of how it’s evolved over time. And I also teach now, for CCIM Institute, globally, I teach market analysis for the institute. And that’s, that’s been great connecting with people around the world, and, you know, just sharpening my skills. So

J Darrin Gross 6:33

Awesome, I appreciate you sharing your background there. And it is interesting, the the I you get into real estate, from an insurance of vantage point. I think I’ve similarly were, you know, curious about real estate myself, as I saw some of my customers stablishing, you know, portfolios or acquiring properties had and have pretty good stuff there. So I can appreciate that. So, you and I, we’ve met a couple times, and you have a, a, I believe it’s a quarterly meeting that kind of got interrupted with a COVID. But you also put out a quarterly newsletter. And the most recent one that I saw kind of caught my attention. That’s, that was kind of the the impetus for inviting me to appear. And I thought maybe what we could do is, is kind of go through to some of the current economic conditions, and how they have affected the various asset classes. And, you know, kind of what your your outlook is as to, you know, how things have changed and what, you know, the future kind of near and far look like, from your vantage point. And I think one of the things that obviously, we’re, we’re recording this here in December of 21, we’re still dealing with a pandemic, it’s created all sorts of interesting situations, you know, supply chain issues, and also just the way people are doing work, you know, more of a remote base than than previously. And so, I wonder if, if there’s a, a starting point that you have, or there are there’s like some additional information that you look at when you when you kind of view the the different asset classes, whether the jobs report, interest rates, government policy, any of that kind of factors into your, your, your viewpoint?

Michael Hironimus 8:55

Well, yeah, it all does. You know, when you’re talking about sort of looking into the future, we try to do what’s called gap analysis, looking at the current supply, and then sort of trying to forecast increased demands, and see if there’s a if there’s a gap there, whether it’s negative or positive. The The thing is, is it all starts with jobs, really, jobs, you know, bringing people people bring in money, and that all filters down to the different asset types. One of the things that sort of thrown a monkey wrench into it and as you’re alluding to, is was the COVID pandemic where, you know, there was this sort of work from home change that that occurred, mostly in office but also in retail, where there was some company means that went to more online sales, restaurants, of course, for one of those as well. But it was just a shift where now you’re suddenly thinking about different types of demand drivers that maybe weren’t there before, just in terms of, well, how do you, we used to take what was called, you know, the, the gap, the demand for office space, let’s take, for example, you know, you usually look at the, when you’re looking at the Labor Statistics reports, you’re looking at, you know, caught kind of the fire sectors, as we call them, that’s finance, insurance, real estate, they also look at government services and professional sectors. And so you look at it, and you say, Okay, well, how much space? Are they taking up sort of square footage per employee? And so let’s say just for an example, you know, per employee on the office sector is 250 square feet per employee built in the past, you are able to sort of extrapolate that out, okay, well, what is sort of the future forecast demand for increases in those sectors and extrapolate that out over square footage, and then you look at your metro area, while how much square footage is in the market? And then you can kind of see that that gap? Well, it’s sort of been sort of turned upside down, especially in office, a little bit of retail, where it’s difficult to forecast those things now, because, well, what percentage of those workers are actually going back into the office? And what sort of threshold is there for these companies to keep that office? So it’s really difficult to do analyses, particularly for office and retail, industrial and multifamily? You know, it’s not as big of a deal. But there is some risk there on that side. And I don’t think it’s all been thoroughly fleshed out at this point, you know, there are companies that don’t even know what they’re doing in terms of work home policy, there was just a report that came out that said that Google, Google is telling employees to come back at the end of January, and now they’ve extended that with this new, you know, variant that’s coming out. So, you know, there’s still a lot of state of flux. If you’re looking across the different asset factors, you know, you get into industrial supply chain issues, and so forth. But, you know, hopefully these things start to get worked out, there’s still quite a bit of risk out there in terms of, you know, understanding where these markets are heading. But there’s some positive things out there as well. So, hopefully, that answers your question.

J Darrin Gross 12:47

Yeah, no, I think there’s just kind of a, you know, state of what is and just said, that uncertainty that kind of underlies it. I’m kind of curious, you know, with some of the asset classes, I have heard of some conversion from use from one to another, ie the hospitality seen some conversion from, you know, hotels to apartments, or even some big box retailer, like malls and stuff. I think they’ve spent some conversion. Have you seen much with respect to office? I mean, is there any movement afoot to convert office into? I don’t know, multifamily or other?

Michael Hironimus 13:38

Not today? Not on, not on a large scale. You know, the differences between multifamily and office are the differences in the internal systems of, you know, with office space, you know, you need, you know, a couple, a couple of restrooms per floor and, you know, multifamily, obviously need restrooms, you know, and every unit that’s up there, so there’s a there’s a difference in the systems, plumbing H fac those sorts of things. And I’m not sure that a lot of developers sort of get those things to pencil all the time. You know, you’re talking about big box retailers. We have seen some conversions, some to retail, some to, you know, fulfillment centers and so forth. I think a lot of that as regionally it just depends on your land values and so forth. Here in the Portland metro. I haven’t seen a lot of that on the ground in terms of those conversions, but there certainly are, you know, different buildings that are taking on different lives for themselves. Talking about you know, looking at the Lloyd center now where that’s headed, probably going from a mall to some type of mixed use along with residential and In summary, Retail and so, you know, a lot of these older facilities are getting a new life which is good. And rethought and, and hopefully with a lot of housing in mind because we are obviously very undersupplied. Here regionally, as well as nationally in terms of, of, you know, housing. So,

J Darrin Gross 15:23

Yeah, no, that definitely is kind of a, a one one, I guess, bright spots for demand. Housing is demand is definitely strong. So, let’s, let’s jump into kind of each one of the the asset classes here if we could, and talk a little bit about where, where things are and where you think, you know, based on the current situation things are going What if we start with say, industrial that that a good place to start or

Michael Hironimus 15:58

Sure. Yeah, start with the bright shining star.

J Darrin Gross 16:02

Yeah, start with and we’ll work our way down.

Michael Hironimus 16:06

Yeah, I started brokering industrial back in 2009. And this was sort of just coming, I guess it was right at the peak of the Great Recession and industrial was not very sexy, I guess. Back then, when I first started, you know, industrial is looked on as sort of a dirty product. You know, if you’re an investor, you certainly didn’t drive people pasture industrial building and pointed out, you know, everybody wanted to be a multifamily. And, and so and obviously, that’s changed over time, you know, as, as the internet progressed, and as the E commerce in nourished industrial is taken on really a new, a new pillar for our economy. So, you know, industrial continues to perform really well, rents continue to rise nationally, as well as locally. here in Portland, we’re running a vacancy rate of about four and a half percent. That’s more or less in line with the National vacancy average. And you’re seeing, you know, rents anywhere from, you know, 8090, over to over $1, triple net here locally, which is a considerable increase, just even pre pandemic. Cap rates, if you’re looking at Cap rates, they continue to either remain stable or decline, I would say where we’re seeing a lot of cap rate compression is on the institutional assets. Institutionally, there’s a lot of money still out in the market, a lot of liquidity, and they’re looking for places to park that industrial seems like a pretty safe bet in those terms. So you’re seeing some Capri compression on institutional assets. is funny. I don’t know if you know, Prologis. But Prologis is pretty much the largest landlord of industrial real estate throughout the United States. And their CEO about three or four weeks ago, came out and said they were essentially sold out a product, they have a one to 2% vacancy rate. And, you know, that can be attributed to just people, shifting spaces, if you will. So that’s pretty significant when you have the largest landlord in the United States come out and say that they’re out of product. And it just tells you about how consumer habits have shifted, you know, when you look at the share of ecommerce that’s risen. You know, there’s just gonna be continued to be and I think as people get more comfortable shopping online, the other thing in the talk about the supply chain issues, you know, there’s been a little bit of shift in thinking in those terms. There used to be and Prologis had actually come out with report on this. There used to be a thinking pre pandemic, where it was just in time delivery, Jaya T delivery, where it was, okay, well, the products are coming out from overseas, they quickly go through the warehouse, and then they’re quickly distributed out to their to their closest facilities or directly to the consumers. That began shifting even before COVID as supply chain issues sort of ramped up, and now they have what’s called just in case delivery. And just in case means that there’s more supplied being stocked onto their shelves just in case they can’t get any shipments from overseas. And that’s just to you know, satiate the consumer demand on ecommerce. And what that does is is okay, so if you’re just keeping more inventory in your warehouses, that means that you need more warehouse They’re anticipating that that could put another 10 to 15% of demand overall, on the industrial sectors, so I think industrial has room to grow. There’s still a lot of demand out there. And, frankly, the supply still hasn’t caught up even at this point.

J Darrin Gross 20:21

I was gonna ask you, you mentioned the four and a half percent vacancy rate. I know I can, you know, holy, even like multifamily stuff that’s almost like, full because the it’s more transitory you don’t really you’re not faking as much as you have somebody move out and you’ve got somebody moving in and, and is that kind of similar in the industrials at?

Michael Hironimus 20:44

Yeah, that I mean, that’s pretty much right on, you know, some of the some of the vacancy, you know, within industrial their sub sectors, you know, you have word of warehouse and distribution, you have manufacturing, you have flex, I would say maybe some of the vacancies coming on the manufacturing side, which has been a little slow to grow after the pandemic, but warehouse, the distribution assets, you know, the vacancy rate is, is remaining low, and like you say, it’s more of companies moving to and from other spaces, and whether they’re expanding or contracting. So yeah, that’s, essentially we’re sold out around here, too, every once a while, you’ll see a spike in vacancy, but that’s usually because there’s kind of delivery onto the market of an industrial asset.

J Darrin Gross 21:28

So thinking the through just a little bit if we we go from a just in time, philosophy for for the supply to now just in case. Do you see more of the I guess the inventory is growing, as well as more of the actual manufacturing or the source of the product being brought on shore to kind of overcome that? Or is that? Are we still is it still cheaper to produce goods overseas and in transport them? Is that Is there a shift there? I mean, I’ve kind of kind of curious about that.

Michael Hironimus 22:11

Yeah, I mean, now you’re talking about economic policy? And, you know, is there more onshoring going on? I would say there is. And that’s being driven by, you know, a few things, there’s a lot of economic unrest with China. You know, whether we agree with all of their policies or not, obviously, supply chain is pushing there, I think there is a push to do more on showing of manufacturing. But you know, if you look at the Labor Statistics, at least locally, you know, we’re not seeing a huge increase in in manufacturing employments, unfortunately, at least regionally. But, you know, that being said, I hope there is manufacturing is a huge driver for us in terms of basic job employment and bringing, bringing dollars into the local economy. Hopefully, manufacturing continues to increase, but, you know, we’ll see, we’ll see how it, we’ll see how it pans out, I guess.

J Darrin Gross 23:23

Sure. And even along the the import, you know, strategy of doing business where we’ve done it seems like if there’s such a bottleneck and in Long Beach, or the or, you know, the primary ports, it would he would give an opportunity or present an opportunity for some of these lesser port ie Portland, to become a solution or a source of importing anything like that, that you’re seeing, or is that is that anything on the horizon that you’re talking about with her?

Michael Hironimus 24:00

No, I don’t. I think a lot of the ports are just packed right now. Some of the smaller ones, you know, maybe are, are soaking up some of that, but it really comes down to where the product needs to go and how it gets there. You know, you talk about intermodal travel and, and it’s it’s difficult right now, because there’s bottlenecks pretty much everywhere. You know, you talk about labor shortages, you talk about increases in supply costs, it can’t say that there’s one thing that is holding everything back seems to be like a little cocktail of different things that are holding back. This bottleneck in supply chain and from reports that I’m reading, it’s probably not going to go away anytime soon. So once again, that’s just going to put more pressure on our industrial assets overall.

J Darrin Gross 24:56

What sounds like the near future is pretty bright for the industrial base. On Demand where you can’t see the end, you know, it’s just yeah, you know, for for, you know, at least the next couple of years because, you know, even if this thing starts to, to figure itself out, and it sounds like there’s kind of a shift from the just in time to just in case that would obviously create more demand for the space. And as people kind of shift their, their buying habits from, you know, in store and they get more comfortable the online certainly makes a good case for for the industrial hand. If, if more than manufacturing comes on shore? I think that would Wouldn’t that naturally absorb some of that industrial? Or is that ready?

Michael Hironimus 25:51

Well, manufacturing sort of a different build a little bit, they rely more on power, maybe less on docks and clear height than warehouse and distribution does. But you’re along the same sense. One thing that we have regionally or at least in the state, is, you know, sort of an artificially constrained supply in the the urban growth boundary. And so that will probably continue to be a force and where new construction is being built, and probably put further supply constraint on in the near future. But I think, you know, the, the risks would be if there’s a big slowdown in the economy and consumer spending, and or if there was a if industrial started to get overbill. But at this point, you know, just looking from the fundamentals, it doesn’t seem like that’s the case anytime soon.

J Darrin Gross 26:51

Got it. Let’s talk a little bit about retail. We kind of touched a little bit about how the buying habits have changed. But what is the current state of national and local for retail?

Michael Hironimus 27:10

Yeah, I think you sort of have to disaggregate the retail. You know, malls have been beat up. Those are places where there was large amounts of debt, and not a lot of consumers were in the large malls. You see mall failure and defaults nationally. But I think some of the other types of retail, particularly grocery anchored retail, ended up doing pretty well and remaining stable through the pandemic, locally, you know, rents pretty much remained stable, they declined just slightly, but they’re pretty much back up to where they are pre pandemic level and run at about $20 per square foot annually. But if you look at it, you know, talking about industrial office multifamily, you know, there was large increases in pricing and revenues. But retail, you know, it was sort of muted when you look at nationally prices for, you know, they’re just 1.9% over pre painted pre pandemic levels. And revenues are up about 2.2%. And so there wasn’t this build out of retail, it’s not over supplied. And so I I’m sort of bullish on retail, I think that there’s good opportunities and retail with well located assets that have a good tenant mix, I think the tenant mix and the focus on experience are the most important things and retail. People you know, we’re social creatures, I think people despite the variance and everything, people still want to go out, they still want to have a good meal, they still want to be with other people. They still want to try on, you know, clothes, they still need to get their hair done nails, she can’t those things you can’t do online. So, you know, having a good tenant mix and focus on experience. I think there are opportunities in retail still. And I think that is one of the asset types that I think has room to grow as long as consumer spending remains at the levels of the round.

J Darrin Gross 29:25

So when you said you’re bullish on retail, and I’m just kind of thinking of an even pre pandemic, there was kind of the, the death of the malls was kind of a foot as far as the you know, they were having to change their their way trying to create more of an experience kind of thing. Yeah. When you’re assessing this, you mentioned good tenant mix and good location. Is there anything that outside of that I mean, because I you I’m just thinking like, having grown up in the Midwest and in seeing the mall where I bought every pair of Levi’s be destroyed and redeveloped to a Lowe’s now, I’m like, Are you kidding me? Yeah. But, but just the, you know, I think like you said, if, if, if a retail center has, you know, grocery being a good anchor, and about build, I mean, those seem to be doing very well. Is there any? Is there anything outside of that is that pretty much that’s, that’s as simple as it gets? You got to have that good tenant mix? And a good location?

Michael Hironimus 30:39

Yeah, I mean, you also want to be in areas that have good demographics, good, what we call psychographics, which are spending habits, you want to understand where the demand and what those consumers are looking at? What sort of discretionary spending, and you want to make sure that those line up well with with your tenants, we do those sorts of analyses where we look at okay, well, if a tenant is looking at coming into their once again, what is that? What is that gap? Is there demand for that type of tenant, and are they going to be a good mix in terms of the other tenants that are in the property. But, you know, going back to fundamentals, you know, place with good, good visibility, places that, you know, places that have, or retailers that have abilities to fulfill online orders, I think are going to be more in the future, we’re seeing a lot of people that are a lot of properties that are moving towards more of, you know, drive thru, retail, which I think is going to get even more popular, where you can go through and, and, you know, not just get a coffee or, or fast food that you can drive through and pick up groceries or drive through and pick up your jeans or things like that. I think that you’re going to see more of that in the future. And that’s going to change how layouts are for retail. In the future. I think we’ll see. We’ll see different types of layouts and new development in the future for retail. But I once again, I think retail has has a bright future ahead. And I think that I think the death of retail has been a little overstated. Not necessarily malls, malls, have been having a tough time generating traffic, but good retail, neighborhood shopping centers, power centers, they should they should do well, I think in the coming years.

J Darrin Gross 32:50

chatted. We talked a little bit about Office, is there anything more that, you know, with with offices? Is it is it pretty much based on? You know, how people are working? Are they coming back? Is it just more of an uncertainty or? Or is there any, any anything we didn’t talk about? Yeah.

Michael Hironimus 33:15

Well, I mean, office is the I think the probably holds the most amount of risk right now, just in terms of, you know, what companies are thinking about in terms of balancing this work from home? What are their employees want? I think that, you know, you read reports, and one report will sail out, everybody wants to come back and want to report a sizzle, everybody wants to stay home, I think it’s going to be somewhere in the middle, where there’s work from home flexibility where people can go into the office if they have an important meeting or want to collaborate with their team members. But maybe they also want to stay home and work in their slippers or stay at home with their dog or their kid who’s in school. It’s it’s going to be more flexible. And once again that that creates a little bit of difficulty when we’re trying to understand forecast demands in office. Castle, which puts out a barometer Castle barometer, the castle is the company that does the key cards that you know for getting into your office and getting into buildings and so forth. And so they track you know, people that go through and right now we’re only at about 40% occupancy nationally in terms of people going back into the office. So we’re still well below pre pandemic levels. You know, vacancy in the Portland metro areas running about 16% on direct vacancy. It’s stabilizing. Luckily, we had a ton of sublease space that came on late 2020 early 2021 Luckily, that’s starting to stabilize and our vacancy stabilizing. But you know, really the vacancy rate, I think is much higher than that when you factor in some shadow vacancy that’s in the market. You look at some large buildings downtown, the Bancorp buildings running. You know, they have about 350,000 square feet vacant, wells, Fargo’s got 150, the coin towers got 125 16 mains got 150. So you look at these buildings that are downtown that have a lot of vacancies still. And it’s going to be difficult to absorb all of that, at least in the near term. I think it’s going to take a couple of years to get back to some sort of stabilized vacancy rate that we’ve seen in the past. And once again, I think that script is still being written as companies wrestle with the work from home policies.

J Darrin Gross 35:53

No, no, it’s, it’s interesting. I know, you know, early, you mentioned kind of the average square footage per person. He said around 250 square feet. I’m kind of curious, you know, he is we just kind of talked about the space use for retail being kind of reconfigured, if you think that the the space for office will be reconfigured, plus or minus, maybe because like, you know, if we, if we’re in this continuous cycle of the new version of, of whatever the pandemic presents itself as, and we’re trying to create space. Could it be that that people get more comfortable coming back, but just to be safe? We increase the space or? Yeah, that? I mean, it’s kind of thought of that till just we’re sitting there talking. But that mean, seems like at least, I don’t know, if it would mean that you would, you know, or possibly that you have a reduced workforce on site. But you have more space per person, which basically nets out the similar square footage demands? I don’t know. Does that make any sense? Or is it Yeah, well,

Michael Hironimus 37:07

So if we think back to, let’s say, the early 2010s, you know, around 2010, there was a real shift in office to go from sort of the old cubicle style that we thought about traditional office to more of open collaborative spaces. When you think about tech, you know, there was these bench style, office seating and more of an open air area, there was much less demand for private offices and cubicle space. I think we’re gonna actually maybe go back and revert a little bit. And the other thing is, is just how office landlords look at, you know, this, this safety measures for tenants, you know, these touch spaces, keyless entries, we’re looking at increases in H back for better air circulation to get out some of these, you know, vapor particles and so forth. And I think the idea is to try to make it so that people feel safe going back into the office, and I don’t think it’s going to be these big open air, necessarily spaces, maybe it does go back to more private offices where people are sort of sheltered a little bit. But it’s going to be interesting to see how that, you know, like you said, the price per square foot for employees, they were starting to pack them into offices, and there was concerns at one point there was going to be as stress on the on the office systems, I think it’s going to go in the opposite direction, our office square employee per square foot is going to start increasing as people want to sort of have a little more shoulder room and and as people are actually in the office, I think there’s going to be less people in the office at any given point. And there was in the past.

J Darrin Gross 38:59

Yeah. No, definitely be interesting to see where it lands. Let’s talk a little bit about multifamily. Sure. It’s been kind of the the, one of the demand our most in demand products. We touched a little bit about the demand for housing. How do you see the the multifamily housing and you know, are we do we have any lingering effects from the moratorium on evictions, etc. Or are we are we pass on that?

Michael Hironimus 39:39

I think in some pockets, perhaps there’s some lingering effects to that I, you know, surprisingly, overall, with some of the stimulus that went through, there really wasn’t a large decrease in rank collections and that that’s nationally as well as locally. We really didn’t see a lot in terms of defaults which were expected and so forth. In fact, the opposite has been true as as you know, labor shortages and cost of materials, increased multifamily construction sort of declined. As you know, there was continued demand on multifamily construction increase year over year about decrease 45%, I believe, locally for multifamily. And that’s a little bit concerning part of it once again, is the labor shortages, part of it is increasing in material costs. Part of it is some of the governmental regulations talked about rent control and inclusionary zoning locally. You know, there’s been a decline which isn’t good, that’s only going to put more pressure on on rents and prices per unit increasing. costar in September reported that Portland had the fifth fastest declining vacancy rate among the top 50 metros in the country. So that’s pretty significant. Portland had a lot of demands, despite, you know, sort of limited supply. And it makes sense to a certain extent, because if you think back, you know, a couple years takes a couple years to break ground, you know, you’ve got to go through planning and zoning and so forth. And, and if you think back a couple of years, well, that’s when the almost the start of the pandemic started. And so I think there was some sort of a hiccup there, I think it’s gonna increase again, multifamily will come back. Hopefully, we get the labor shortages figured out, people start going back into the workforce. But I think multifamily is solid, I mean, really solid. You’re just seeing huge price increases, rental increases are going up, nationally, as well as locally, and I think it’s a great asset class for the future. If the Fed increases interest rates significantly, which there’s just starting to telegraph a little bit, that might be that might put future homeownership out of reach for some folks, which will just further exacerbate the problem for in demand for multifamily. So I think multifamily is still got room to grow, still got room to expand, we really need more construction and more. We’re we’re severely under supplied both in Portland and in the state overall. And hopefully, these state governments and local governments start to figure that out and incentivize developers to increase because that’s the only way we’re gonna get affordable housing and suppress these memories.

J Darrin Gross 42:50

Yeah, now, that’s always been kind of a head scratcher, you know, some of the local politics and how simple economic, you know, balance is supply and demand. And, and seems to me, that’s a pretty, pretty simple one to see. But it seems pretty difficult to enact I mean, if you if you want to overcome this shortage, you know, if you flood the market with product, you would say, you know, accomplish that, but that’s, that’s not the direction they’ve, they’ve chosen to head so,

Michael Hironimus 43:25

Yeah, well, you know, you have the rental, you know, the first in the country, statewide, you know, rent control, and then Portland sort of double down on the inclusionary zoning policies. So anything over 2020 units, you have to have 20% for low income housing. And what that really did was, you know, include that with once again, labor shortages, custom material increases, it just didn’t get a lot of developments of pencil anymore, you take the land costs that are increasing in Portland metro area. And so there’s no surprise that there was a severe decline and construction in downtown Portland. And so their policies essentially did the opposite of what they were trying to do, instead of getting all these affordable housing units on the market. It essentially shut down construction for most people because it just didn’t pencil. And so, you know, unfortunately, politicians are passing laws that do the opposite effect of what they’re trying to accomplish. You know, that’s a whole nother podcast.

J Darrin Gross 44:39

Yeah. It’s just a constant you know, frustration and and yeah, it’s a topic that everybody has an opinion about and, and like said we could do multiple episodes on that. Sure. Sure. For now, we’ll stop there. But, Michael, if we could, I’d like to shift gears here for Second, by day, I’m an insurance broker and, and try and work with my clients to assess risk and determine what to do with the risk. And there’s there’s three strategies we typically look at, we try and figure out if we can, first if we can avoid the risk. If that’s not an option, we’ll see if there’s a way to minimize the risk. And when 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, is a risk transfer vehicle. And so I like to ask my guests if they can look at their own situation could be their their clients, investors, tenants, the market, interest rates, etc. But take a look at the situation and try and identify what you consider to be the biggest risk. And for clarification, while I am an insurance broker, I’m not necessarily looking for an insurance related answer. But if you’re willing, I’d like to ask you, Michael Hieronymus, what is the BIGGEST RISK?

Michael Hironimus 46:06

Oh, goodness, the biggest risk. If you’re just talking about the commercial real estate industry, overall, I would say the biggest risks that I can think of at this point would be dry up and liquid and access to debt. And a significant shift in interest rates. A lot of the acquisitions that have been occurring have been at, you know, compressed cap rates, and so forth. If we have a large push on interest rates, there’s one of two things that can happen either your risk premium, the cap rates are built upon us is going to compress even further, which is probably going to mean to drive people out of the the asset type, or you’re going to have increases in capitalization rates, which is going to have severe effects on valuations for all the asset types, really. So I would say that’s the biggest risk at this point. The other risk to that I think, at least off from an investor perspective, and, you know, we try to we try to balance this out and be conservative is that and I’ve seen this in the past, we saw this in the great financial crisis where sort of whatever has happened in the past people project into the future. And so we have these, you know, great rental increases, you know, you’re looking at industrial multifamily, even, you know, some increases in retail and office and you go and you try to extrapolate that out into the future, I would say that there’s a risk there in that. If you’re anticipating those rental increases to continue on. At infinite, that you probably know it underwriting very well. And you may be setting yourself up for risk and potential issues in the future, I would be looking at forecasted demand, looking at jobs, how they’re shifting within your metro area, how looking at the changes within the different industries that are focused on your asset type, and be conservative in your underwriting because I think once again, there’s there’s going to be maybe a slowdown in the future things can’t run 100% Hot for forever. So once again, if if these supply chain issues continue, and if interest rates expand, it may signal cooldown in the economy and those rental increases may not continue in the future. So I would say one of the biggest risks is just you know, be conservative in your underwriting when you’re doing your acquisitions, and make sure that those those are all increases, make sense and buy on actuals. Today, don’t don’t buy on anticipated returns in the future.

J Darrin Gross 49:26

Always good advice, but in the heat of the moment when there’s demand. Hard to hold to that. No,

Michael Hironimus 49:33

I know, I know. You just got to stick to your principles because I think people that stick to their principles and investments. They can hopefully weather the downturns better.

J Darrin Gross 49:44

Well, I agree. Michael, where can listeners go if they’d like to learn more or connect with you?

Michael Hironimus 49:53

Oh, yeah, great. Um, you can always reach out to me I’m on LinkedIn or you can Go to duckridgereality.com I also, as you mentioned in the beginning, I also run a societies called the Oregon Society of Commercial Investors. That’s where I put my quarterly reports and pre COVID, we would get together quarterly. But that said, ORSCI.net. You can check that out. We’ve always got articles and, and quarterly reports. But then, yeah, love to connect anyone out there.

J Darrin Gross 50:34

Cool. And all of that will be listed in the shownotes here. And so if you’d like to connect with Michael, I encourage you to do so. Great information and insight. As always, Michael, I can’t say thanks enough for taking the time to talk today. I’ve enjoyed it, and learned a lot and I look forward to doing again soon.

Michael Hironimus 50:56

It was my pleasure. Thanks for having me.

J Darrin Gross 50:59

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

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Discounted Bank Note Investing with Martin Saenz – CRE PN #331

Martin Saenz 0:00

So what a bank will do, over, after a certain set of time, for most banks, will will bundle those defaulted mortgages in their tranches, and sell them into the secondary mortgage market at a discount. So the homeowner may owe $100,000 and principal balance, but the bank is just going to try to recoup some investment and get it off their books. So they might sell it for 20 30,000 to a hedge fund in the end, so So it allows us to kind of work towards a win-win situation with the homeowner. And obviously, you know, more profit, the better if we can swing it. But here’s the thing if we, if we, you know, hold the homeowners feet to the fire, you know, in full and it’s not a plan that they can afford, it’s not going to be sustainable and they’re not going to make payments over a long, long period of time, which is absolutely our whole business model is 20 30 year cash flow streams.

Announcer 0:57

J Darrin Gross 1:17

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

Today, my guest is Martin Saenz, Martin is the managing partner of BeQuest Funds. Together with his business partner Sean Muneio, Martin co founded BeQuest Funds with a dual purpose of helping investors grow their wealth and helping mortgage borrowers stay in their homes. He has directly helped over 1000s of families, stay in their homes, and countless more through the influence of his mentorship. And in just a minute, we’re going to speak with Martin about note investing.

Insurance for Lenders

https://www.buildinginsurancerisk.com/insurance-for-lenders.html

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

Martin Saenz 2:48

Darrin, thanks for having me on.

J Darrin Gross 2:50

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

Martin Saenz 3:00

Sure. So you know, I started my, my, my career in corporate America like most folks after getting an MBA, and I just just found that it wasn’t a fit after a few years of working in corporate America. So my wife and I decided to start a government contracting company in 2005. And, and so after going through small business ownership and all the all the rigors behind that, you know, we started buying commercial property in the DC area, which we were living in at the time, in oh nine. And so, so really, we just were rolling profits from the company into real estate. And this was after three grueling years of getting the business off the ground and bleeding, bleeding money, like like nobody’s business. So with that said, though, you know, we found that small business ownership was very taxing, very demanding, ours wise, stress wise. So we sold that company in 2013. And a month after selling the business, I stumbled upon a note investor, and I was hooked ever since.

J Darrin Gross 4:18

Awesome, awesome was quite the background there. I mean, the fact that you you tried different things, I love that as opposed to just kind of you signed up for the corporate gig and never left kind of thing. And, and, and also to get it to get a flavor of the challenges of small business. Because even in real estate, and I’m sure even what you’re doing now with notes, some of those lessons learned probably carry carry forward do the not

Martin Saenz 4:47

Oh, absolutely. I mean, just the imprint of, of being broke, staying broke. Whereas, you know, because we ran hungry for many years, getting the business off the ground. So that’s never left me. It’s allowed me to appreciate what I have much more so now, and not take anything for granted and live within my means and be humble with, you know, all that I have in my life. And I got all that from all the painstaking years of getting a business off the ground

J Darrin Gross 5:22

I hear you. Well, let’s talk a little bit about notes about note investing, probably a great place to start is if you can just kind of describe what is it?

Martin Saenz 5:32

Sure. So in the context of what we do, because there’s various forms of note investing, if you take a homeowner that’s looking to buy a home, and they go to a bank, and they apply for a mortgage, and it goes through underwriting gets approved, and they go to the closing table, and they sign a promissory note, which means they’re going to borrow this money, they’re going to pay it back, given a certain certain set of terms. Now, they’re also going to sign a mortgage or deed of trust, which is going to tie that promise to the property in the form of collateral. So if they don’t make their payments as promised, then the bank or lending institution will take back foreclose and take back that property. So what happens in 4% of the cases with bank originated mortgages is they go into default, something happens in the homeowners life, like a divorce or health or job loss whereby they stopped making payments. And so what a bank will do over after a certain set of time for the most banks will bundle those defaulted mortgages in tranches, and sell them into the secondary mortgage market at a discount. So the homeowner may owe $100,000 In principal balance, but the bank is just going to try to recoup some investment and get it off their books. So they might sell it for 20 30,000, to a hedge fund in the secondary mortgage market. We operate a hedge fund on one side of the fence and have been for the past nine years that buys these mortgages in and works with the homeowner to create a payment plan that they can afford, while keeping them in their home in making a profit for a company of course. And so that’s our whole business model, we take in mortgages, you know, that are four or five years past due. And in normally what we find is at this point, the homeowners have remarried or they’ve gotten their job back or their health back something has happened in their life, whereby now we can go to the table with them, figure out what they can afford, and give them a plan accordingly.

J Darrin Gross 7:50

So the I think the the key to that whole opportunity. Sounds like it’s based on the percentage discount, you’re getting up front because the debt hasn’t gone away. It’s still intact, but you you purchased it at a discount if if they owed 100. And you’re buying for 20 or $30,000. Is that not pretty much the the model there is that the I mean, as far as the the key to the opportunity.

Martin Saenz 8:17

Yeah, we look at it as a way of allowing us to provide concessions to the homeowner. So if if someone owes, you know, 100,000, and we look through their financials, and we determine that, you know, it makes sense, if we lower the balance and make sense, if we lower the interest rate, extend the terms, you know, to help to help make it affordable for the homeowner, we’re able to make certain concessions because we did pay for that mortgage at it at a discounted price point. And so so it allows us to kind of work towards a win win situation with the homeowner. And obviously, you know, more profit, the better if we can swing it. But here’s the thing, if we if we, you know, hold the homeowners feet to the fire, you know, in full and it’s not a plan that they can afford, it’s not going to be sustainable, and they’re not going to make payments over a long, long period of time, which is absolutely our whole business model is 2030 year cash flow streams.

J Darrin Gross 9:20

Now it’s beautiful. You mentioned 4% of bank loans. That’s the running average for forever or is that like a recent like, period or I’m trying to think just given the

Martin Saenz 9:39

Probably over like the past 1020 years? It’s about it’s just it’s a small percentage that goes it goes into default.

J Darrin Gross 9:48

Well, I mean, that makes makes, I mean again, makes it clear why real estate’s a good, a good investment if test the the rate of failure and that Residential loans, I’m assuming, correct?

Martin Saenz 10:02

Yes, that’s correct. Okay. And we have the second side of the business, which is bequest funds, which is an income fund that so our hedge fund buys in distressed mortgages that’s privately owned with my partner myself, we have an income fund, it’s a 506 C reg D Income Fund for accredited investors. And that only buys in what we call re performing mortgages. So these are these are bank originated, the homeowner, you know, had a credit, you know, they’re in a tight bar, and they got into default, something happened. And then they got back on their feet, and through a loan modification or reinstatement, and they’ve been making their payments on time for 12 months, 24 months. And so they’re back in good standing. And so request will buy that into the Income Fund.

J Darrin Gross 10:54

And are you buying from the other fund? Are you buying out of the market? Or how are you attracting or finding those?

Martin Saenz 11:00

Yeah, we’re part we’re primarily buying from other hedge funds that operate the same business model as ours, we really don’t want to tap on our own reserve, because we use the reserve in the hedge fund to operate our whole operation from an expense standpoint. But if we have, if we have an abundance of capital in the fund, in the funds bank account, and we don’t have a trade teed up, you know, we may look to pull from our own, from our own stash.

J Darrin Gross 11:31

So let me ask you a little bit about like the rate of return. My dad was a banker, and, you know, for most of my life, I didn’t understand what he did until I went to go borrow money, and then, you know, became very clear. But my basic concept is that the bank borrows money at a discount, you know, from Fannie or Freddie, mark it up a point or whatever, and then retail it, and they might get fees, you know, for the transaction on top of that, but just the loan itself and repayment, there’s that spread that they’re looking for over the life of the loan. Is that similar on your situation, or I mean, cuz you’re if you’re buying at a discount, I’m assuming you have a lot more opportunities or leverage to kind of create a return.

Martin Saenz 12:24

So as as the paper goes into defaulted status, majority of this paper was securitized at one point with Fannie because all of its underwritten with Fannie and Freddie underwriting guidelines. And so it goes, it goes into securitization, with most lenders and then, but once it goes into default, it gets kicked out of the securitized bucket. In some cases, there’s, there’s additional collateral reserve requirements placed upon the bank to hold default to paper. So it’s just not it’s just not a good business for them. And so they’ll they’ll bundle it up once they sell it to the secondary mortgage market. It’s, it’s out of any kind of securitize. tranche so it’s it’s not Fannie and Freddie. government sponsored mortgages. That’s not applicable in our case.

J Darrin Gross 13:19

Yeah. But you’re when you take them in or whether it be in the your original fund, or your or the B quest, again, how much capital I mean, does it take to start one of these these funds, I mean, to be a player buying from banks and their defaulted mortgage? how big or how big of a, a fund or you know, checkbook do you need in order to to be a participant?

Martin Saenz 13:52

Well, checkbook is just one, one of the factors of what it takes to run a successful fun. You know, we’ve been doing this for the past nine years. So I can kind of speak to regulation, compliance, licensing, you know, capital reserves, you know, the list goes on in terms of the risks out there. There’s less inventory out there in the open market than there was before. So So to answer your question, it’s it’s much more than just an amount of capital. There’s a whole risk element to running our operation. We have people full time on compliance. We have attorneys that that keep us in compliance. We have licensed servicers that keep us in compliance. And, you know, we carry various licensing across the United States. So there’s a lot to kind of maintain the operation from from that standpoint to keep you out of trouble. But then there’s a whole other component about building relationships with to other hedge funds so that you can have an ongoing supply of deal flow, as well as having the capabilities to run due diligence on large portfolios. And managing those portfolios. We have a whole team of asset managers. So what do you do once you buy the mortgages, you know, you have to go and convert them from a non performing state into a performing state. And that’s the whole asset management approach.

J Darrin Gross 15:24

Gotcha. And just that process, you you you get a portfolio of non performing loans. What’s a typical timeline for you to get them, you know, performing?

Martin Saenz 15:40

Yeah, so, you know, we’d like to look at a two year a two year time point to fully convert or work out all the notes in a, in any particular by, obviously, depends on the size of the pool, and the states that the notes are held in, because each state has its own foreclosure requirement and various legal steps that we have to take to work out these mortgages. So it really, it really depends, but we’ve just looked on average two years.

J Darrin Gross 16:13

So in two years, you’ve worked through the cost of acquiring the I mean, the the the borrower is now paying as agreed, and, and now you have a potential deal, if you wanted to sell it, you know, somewhere else or just retain it, but it is performing the appointed. Is that what I’m hearing?

Martin Saenz 16:34

So so if you buy 100 mortgages, you might have 10 or 15, that start performing out of the gate, and then you might have another 20 to 30 that start performing at the six month point. And then you know, another batch at the eight month point and other another batch at the 15 month point in some someone’s lagging towards the second year point. So you’re you know, is as it depends on the effectiveness, or actually the defense depends on the quality of your due diligence to know that you bought notes that they were, you know, high quality that they can, resolutions can be had. And then you know, having all the asset management approaches in place to connect with the homeowner, and work out a resolution to help keep them in their home. So based on how effective you are in those two areas will determine you know how soon you convert that pool. But the beauty of it is that is it. And this is why we created request funds two years ago, we my partner and I just own the hedge fund privately just ourselves. So we don’t have any investors in that. And so about two years ago, we had just thought, you know, I have I have three books written on the note in industry. So I have people reaching out all the time. And I just, you know, we came to the conclusion like, hey, we need to open this up. People don’t want to necessarily start a new business because of all the requirements, but they want to be a part of the profits. So but with that income fund, when we buy a pool of mortgages they’re performing from day one, we’re receiving cash flow from day one.

J Darrin Gross 18:11

And what kind of a rate of return that opportunity present in the note. Note fund?

Martin Saenz 18:20

Yes, so it’s a an eight, there’s an 8% annual preferred return that pays monthly. And there’s a 9% annual return that pays monthly, The 9% carries a four year lock in period and the 8% carries a one year lock in period. So depending on liquidity needs of that individual.

J Darrin Gross 18:45

And I know you said accredited investors only what’s the minimum investment for somebody?

Martin Saenz 18:51

Sure. So minimum is 50,000. In the maximums, a million. And most people are come in for about 200 is what we normally see on average. Gotcha. But it’s a very boring, we like to call it a very boring fun, because it’s it’s just boring, predictable income. You know, there’s people that we I talk to investors daily, because I run the investor relations side of the business and some people you know, I need 14% I need them like great, you know, you should go go go for it, you know, there’s always risk associated with higher returns, you know, if there’s something that you need to kind of, if you can manage the risks, you know, great. And we could be a diversification tool but if you’re looking for just steady, boring money, ACH into your account where it’s a good option,

J Darrin Gross 19:46

right. So as far as the so the first things you have to be an accredited investor. The the funds I know I’ve talked to other people about different options penalties and I know that you know, like with syndications and all these kinds of things, there’s, there’s, if you were to put just your own cash in the deal, that’s, that’s a very clean deal. And sometimes people are looking about moving around some retirement funds. Is that an option for somebody? If they had a 401k? And they, you know, self directed now they wanted to put some money in is there? Is there any resistance or reasons why they could not put their money in? In a, one of your your funds are? Big Question.

Martin Saenz 20:38

Yes, so, probably about 45% of the money in our fund, is, it’s a $50 million fund, is comes from Ira self directed IRAs. So a good majority of the money, or a good portion of the of the money in our portfolio, comes from self directed IRA money, and most of those folks come in at the 9%, because they’re not looking to pull money out anytime soon. I would just add that, you know, kind of tier tier initial point you kind of touched on, when we, when my partner and I Sean launched the fund, we decided that we wanted to put our own money into to just get it kicked off. So we put about 1.3 in of our own money. And that was really important. Because for us to be able to ask anyone else to put their money, you know, we wanted to show that we had our money in there. I know there’s a lot of investments that you know, that that kind of work, the operators really don’t have any skin in the game, so to speak.

J Darrin Gross 21:43

Yeah, I’m always happy to hear that, that the the operators have some skin as opposed to, you know, nothing. So on on a fun when you’re investing into fun, I mean, a lot of times we talking in on this podcast about the tax benefits of, of investing in real estate, if you’re directly investing, you have the opportunities for depreciation, and interest write off, I’m assuming and correct me if I’m wrong, investing in a fund where you’re doing notes, you’re not necessarily taking title in these properties. So there wouldn’t be any kind of, you know, depreciation, nor would be any kind of interest write off because you’re, you’re now the bank here, you’re making interest? Am I reading that, right?

Martin Saenz 22:36

That’s correct. You we, I do have a CPA opinion letter and sample k one, if anyone wants to see, you know, that they can they can shoot me an email, what the one savings we do have is a portion of our income is derived as capital gains income. So we pass that portion on to each individual investor. So if our overall income 25% of our overall income came as a capital gains, as a capital gains, earnings, then we would pass down that to the investor. So 25% of what they earned that year would be capital gains.

J Darrin Gross 23:18

So you get the benefit of lower tax rate on capital gains, as opposed to just ordinary income.

Martin Saenz 23:25

Or if you’re in with a Roth IRA, you know, what does it matter? Or, you know,

J Darrin Gross 23:30

say I was just thinking in my cell, I win, and this would be pretty good opportunity to, to move some Roth funds over and, and do that to begin some. So, quick question. So you, obviously you’re you’re in and now it’s working? You’ve you’ve got it established? And that you mentioned that somebody introduced it to you? What was that opportunity that you saw? Was it was it an individual property? Or was it a fund or what was the what was a saw?

Martin Saenz 24:01

Yeah, so I was going to my local Ria, at the time real estate club in the DC area. And we had a presenter that was from a note education company. And they did you know, they did their song and dance on Wednesday night, and I signed up for this satellite session on Saturday. And, and from that point, I was hooked. I’m thinking, you know, I had been on the real estate side. So I kind of I kind of understand real estate, I’m still a landlord. So I still still manage properties. So I get I get that side of the fence, but I was also looking for something that I can do remotely, they gave me a little bit more freedom of time. So so that was what was intriguing, you know, buying mortgage notes, rehabbing them, essentially, like you would rehab a property, getting the homeowner back on track, keeping them in their home, developing, you know, 2030 year payment I’m in cash flow streams for yourself. And so, so I read every book I could get my hands on, and really just kind of learned by trial by fire. I bought some 10 notes that I shouldn’t have bought, you know, out of the gate, but I learned a lot from them.

J Darrin Gross 25:17

Yeah, well, experience I think is always one of the the best teachers period, just like your small business experience. And, you know, if you if the 10, you bought work beautifully, you never know what the problems might be. So that’s right. Pretty, pretty powerful learning.

Martin Saenz 25:36

Yeah, you know, what was interesting about the 10 Is that is that I was focused initially out of the gate, I was focused on obtaining the property. So this was going to be a backdoor into acquiring property as a landlord, because that’s all I really knew. So what I learned, though, is that when you focus all your due diligence efforts on on obtaining the property back, then you’re going to get what you focus on, right, like kind of simple rule of thumb. And so what I ended up getting back was vacant properties, you know, blighted properties, stripped out properties, and so on. And so I was having to kind of be a long distance landlord kind of turning over these properties. But after I bought those 10, the first one I actually modified. So I got a deed in lieu 90 modified, I’m sorry, I got a deed in lieu I resold it for half down, 18,000 down, and I took back an $18,000. Note, over eight years, it’s 7% interest. So that was my first experience of doing a seller financing note, and earning cash flow. And that really changed my perspective, because I’m like, why am I trying to focus on the property when all I want is someone to pay me every month. Like, that’s truly all I want. And so that I shift my whole focus, I started performing due diligence on the homeowner, and understanding their ability to pay where they’re at, in addition to the property.

J Darrin Gross 27:08

That’s a I’m glad you made that point. Because the, the emphasis, you know, and again, a lot of times in real estate investing, you’re taking location and and you know how much rent you can get for it. But, you know, you stick the wrong tenant in there. The one that signs up first and the first one with cash, you may find out in a hurry, the the landlord tenant laws, and how long it’ll be before you see your money kind of thing. Yeah, so yeah, underwriting the tenant, you know, underwriting the borrower the tenant is, is really key to success and in real estate, period. And that’s why, you know, banks and, and insurance companies have so much, you know, invested in underwriting is trying to understand what they have to make it all work. So, definitely.

Martin Saenz 27:58

Yeah, in what’s interesting, and we do everything from an underwriting perspective, everything that a bank would do. So we’re looking at property valuations, pulling bright broker price opinions, we obviously can’t go in the home, we’re not legally allowed to, we pull only reports, title reports. So we’re looking at lien validity, lien positioning ownership, we’re looking at property tax records, bankruptcy searches, credit report, pulling in analysis, skip tracing, I mean, on and on, and we triangulate data, and we make determinations and cash on cash projections. So we were very sophisticated in that regard. But at the end of the day, you’re really, you’re really going to get what you focus on. And that’s just from a sourcing perspective to not just due diligence, so, so our whole world is sourcing pools and mortgages that have equity coverage, where we where we believe we can work with the homeowner. And then so so we build relationships with other hedge funds that are aligned with that in that we can be downstream from them, who receive deal flow. And then so once we massage those relationships over the course of years, which we’ve done, then we receive opportunities, and then we run it through due diligence to really make the determination, can we get this bar to the table, so we can do a payment arrangement?

J Darrin Gross 29:23

Right? It just occurred to me is where you were describing what you do there? You’re buying a blind pool, aren’t you? When you when you get this from one of your other hedge funds? Do they say okay, we got a tranche of, you know, 20 million or whatever the number is. You want it or whatever. And at that point, you get a chance to underwrite that list, or is it? How much upfront due diligence opportunity do you have?

Martin Saenz 29:55

So it’s due diligence runs in two phases for the most part So you have a, you know, you get an initial snapshot of the opportunity and Excel file, and you get to to run due diligence and then put in an initial bid. And if that initial bids accepted, you’ll have, you’ll put some stipulations on there to run further due diligence. So in commercial world of study period, if you will, and so then you can go into deep dive, and then through going into deep dive on, let’s say, 50 mortgages, then you might find that a few are not the liens are valid, you might find the the fair market values were way off on what was projected, and then you might price adjust some of the notes. But you have to be careful that you’re not that you’re not being a nuisance to the seller. And you’re not kicking things arbitrarily or just trying to manipulate the situation because you’ll get blacklisted at the end of the day. So you want to kind of be delicate about how you take that that back and forth. Approach.

J Darrin Gross 31:04

Yeah, no, that’s, that’s similar in the, you know, real estate acquisition mode, you make the offer, you get accepted, then you have your, your due diligence period, and you’re trying to confirm all the information you you thought to be in, I think, is it considered a Retrade. And that’s the word they use. And in commercial real estate, if you come back, and you try and say, Hey, wait a minute, I thought it was this, it’s got all these things, we need a credit or a discount for for that. I’m assuming if it’s legitimate, if you can say way, way, way, way, you know, we like the deal. We like the package. But these things were not disclosed. We never dealt with these before. These are issues that we we need some credit for is that if it’s legitimate, is it pretty well understood.

Martin Saenz 31:54

So it is so but here’s, here’s the thing is, this is where our competitive advantage comes into place. We have long term relationships with very large hedge funds, and they trust us. So when they have a deal, most of our trades are negotiated trades. So they’re coming to us and we’re just negotiating against ourselves really, right, it’s for us to lose. And so these aren’t out in the open market with 2030 bidders. So with that said, you know, we have to be real delicate with that relationship. And in what we’ve learned over the course of time, is we’ve learned to manage defects in the mortgage notes. So we know won’t call it out, we’ll call out, you know, hey, it’s missing this piece of collateral, it’s missing. The original note, it’s missing, you know, the fair market value skewed hear that, but but we also understand our internal systems to be able to overcome certain obstacles, whereas other hedge funds may just kick that paper, they made this kick that note here in there, and then we’re not creating that relationship with the seller. Got it?

J Darrin Gross 33:06

Is there any kind of a timeline to perform once the the offers? Made? If somebody says, hey, Martin, we’ve got this, and you can take a look at it. Yeah, we’re interested in in your, in your, your study period? Is there a time is it weeks months, what’s what’s a typical on that, to close a deal,

Martin Saenz 33:27

like, like any transaction, the seller wants to close immediately, and the buyer wants as long, long of a period as time typical trade, you know, 50 100 mortgage notes, you’re looking at a good month to get through the whole process. But what I would say is we do everything our other competitive fannish is we like to be speedy to closing. So we like we have a whole acquisitions team that, that does, these individuals do other functions in the company, but when we ever trade in hand, they all come together and form an acquisitions team. And we do that because we take an assembly line approach to run a due diligence, so that we can get through it promptly and get back to the seller, get them paid and closed out. Because what we have found is we’ve lost opportunities because of time. So whereas most buyers want more time, because they want to truly understand and I get that we’ve had loans that paid off before we close so we never got those got kicked out of the pool. You know, we’ve had we’ve had other other kinds of whatever happened, you know, and trades got pulled. So we want to rush it to closing but know what we’re buying before we buy.

J Darrin Gross 34:43

Right? Well, your your history and your performance sounds like it speaks volumes to you know, the other hedge funds that you buy from. So, you know, kudos to you and, and your team. And, you know, like anything I think that the relationship of one that can perform, you know that, that history there carries a lot of weight. And, you know, you’re going to get additional opportunities, the more you do that, prove that you are an option in the marketplace. So I get it

Martin Saenz 35:17

Yeah, yeah, it’s worked out. But like anything else, you know, I found I found a spiritual relationship with a higher power 2013. So I kind of always stay humble. And what that’s helped me do is, is it’s helped me not settle. So it’s not not even though the relationships are there, I’m not waiting for the Batphone to rain. And so we’re always aggressively looking at new asset classes, looking at connecting with new hedge funds, they could they could be trading partners. And we’re not just kind of settling for where we’re at.

J Darrin Gross 35:57

Now, I got it, kind of, Martin, if we could, I’d like to shift gears here for a second. By day, I’m an insurance broker. And I work with my clients to assess risk, and determine what to do with risk. It sounds like you probably do a lot of that yourself. In your business. There’s three, three strategies that we typically present as options. The first is we look to see, can we avoid the risk? When that’s not an option, we look to see if there’s a way to minimize the risk. And then the third option is can we transfer the risk, and we transfer to an insurance company and insurance policy. That’s what what it is, it’s a risk transfer vehicle. So I like to ask my guests, if they can look at their own situation, could be their their clients, the borrower’s the market, hedge funds, however you want to frame that. But if you could take a look at your situation and identify what you consider to be the biggest risk. And for clarification, while I am an insurance broker, I’m not necessarily looking for an insurance related answer. So if you’re willing, I’d like to ask you, Martin Saenz, what is the BIGGEST RISK?

Martin Saenz 37:16

I would say compliance, being out of compliance, so missing something in the due diligence process, such as you buy a loan that’s outside the statute of limitation, and you and you begin legal activity on that loan, then then you could be held liable as an organization. So there’s a risk that way? Property, the collateral, right? That’s it, that’s really what’s backing the the obligation at the end of the day. So not having force placed insurance on a senior lien mortgage note in the house burns down, then, you know, you’re not going to get paid, you know, you need force placed insurance, errors in emissions from an insurance perspective. You know, there’s just there’s, there’s so much, you know, we say paper, but this paper is full of words that are written by attorneys. And there’s a lot of those pages. So so, you know, just making sure that, you know, say all the promissory note, all the collateral files have been signed and initialed by the, by the, by the bars. And whereby, you know, they’re validating that debt to, you know, to be there and existence. And so I would say some of those and then licensing to I mean, you have to have certain licenses to operate in certain states. So if you’re, if you’re operating out of compliance from a licensing perspective, then you can have a state regulatory body come down on you with fines and in they could they could prohibit you from operating in that state.

J Darrin Gross 38:54

Yep, no, compliance is a big deal. And especially when you’re working across multiple states, you find out that they’re not all the same, right?

Martin Saenz 39:03

Oh, gosh, yeah. No. Yeah. Right. And that’s why like, you know, whether, whether it’s be quest, or it’s a syndication or read something that’s out there, you know, you have other guests on that, that have other opportunities. You know, that that’s what I would always want to know, as an investor, because I’ve been an investor for a while is, you know, what, what’s the risk there with that, with that opportunity? You know, how are the are the operators licensed? Are they you know, what, you know, what’s the downside and all that. Very important to know.

J Darrin Gross 39:36

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

Martin Saenz 39:43

Sure. Just send me an email Martin at BBQ funds.com. And I’ll send you the tax treatment document. I’ll send you a free ebook I’ve written I’ve written three books on the mortgage note industry. Two other books I’ve written five in total. I’ll be happy to mail you out a book. You know, I love connecting with people and it’s really a passion for me like, same way you’re doing this program you’re you’re helping educate people in new ways to invest how to be better investors, in that I have the same passion. You know, I’m a believer in passive income, cashflow, financial independence, and and you have to do that by taking control of your future and educating yourself and, and being disciplined. So, so if I can help anyone in any way, whether it’s note related or other, you know, let me know.

J Darrin Gross 40:40

Awesome. Martin, I can’t say thanks enough for taking the time to talk today. I’ve learned a lot. And I hope we can do it again soon. Thank you, Dan. All right. For our listeners. If you liked this show, please don’t forget to like, share and subscribe. Remember, the more you know, the more you grow? That’s all we’ve got this week. Until next time, thanks for listening to Commercial Real Estate Pro Networks. CRE PN Radio.

Announcer 41:13

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Section Eight Real Estate Investing with Tom Cruz – CRE PN #330

Tom Cruz 0:00

That’s one another huge advantage of the section eight program is with a regular tenant, you have no recourse they break a lease you have to sue them or a victim with Section Eight you just go to their housing counselor let them know how they broke the lease and one email or phone call from them. It puts the fear of God in them they don’t want to lose the housing assistance for life.

Unknown Speaker 0:15

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

J Darrin Gross 0:35

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

Today my guest is Tom Cruz. Tom is a 33 year old real estate investor based in Wilmington, North Carolina. After graduating from UNC W. Tom started wholesaling real estate and then graduated to find single small multifamily properties. And in just a minute, we’re going to speak with Tom about Section Eight real estate investing.

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

Tom Cruz 1:57

Appreciate you having me on.

J Darrin Gross 1:59

Well, I’m grateful for you to be here and looking forward to our talk. Yeah, before we get started, if you could take just a minute and share with listeners a little bit more about your background.

Tom Cruz 2:09

Sure, yeah, my name is Tom Cruise. I’m originally from Rio de Janeiro, Brazil. I grew up in North Carolina and started investing when I graduated from college, University of North Carolina in Wilmington. And I started with wholesaling real estate, buying property or putting properties under contract and then flipping them to investors that wanted to flip the properties or you know, rent them out long term. And that’s how I essentially got my start and started building down payments for what would move into single family and also small multifamily real estate investments for the long term. I’ve always wanted to do buy and hold always wanted the whole, you know, passive income aspect. And I just knew that, you know, doing wholesaling or doing flips or doing air b&b is wasn’t the way so I got into then I accidentally fell into section eight.

J Darrin Gross 2:58

So your portfolio. Now how many units do you currently have?

Tom Cruz 3:03

Yeah, I’m right under 400, single family and small multifamily. When I say small multifamily, I mean duplexes, triplexes, and quads anything less than four units. I don’t do any apartment complexes or large scale multifamily. It just not very conducive for Section eight or HUD. So I focus mostly on single families in the same zip code. And I have most of my holdings are in North Carolina. And then I also am buying in Ohio, Tennessee and South Carolina.

J Darrin Gross 3:29

Got it. Well that’s quite impressive. How many years? Have you been investing?

Tom Cruz 3:34

A little over eight years. So I started when I was a couple years after I graduated from college. So I was 24 is when I really started wholesaling quickly, and then just over the last eight, nine years really scaled up from there.

J Darrin Gross 3:49

That’s awesome. Well, thank you. Well, let’s talk about this. The section eight is a term that I think most everybody’s heard of correct. But I would doubt that everybody knows exactly what it is or how it works, right? If you could start with just kind of defining what it is and kind of get into how it works. Sure.

Tom Cruz 4:14

In a nutshell, Section Eight is a federal program, the US government will pay the rent directly to the landlord for economically disadvantaged people that are pretty much at the poverty line or below. So if you get a rent, for example, at $1,400 a month for your unit, Section Eight will pay up to 100% of it. In some instances, if the tenant has you know, a part time job or full time job, then they might have a portion of the rent as well, they might pay two or 300 bucks out of that 1400 But for the most part, they pay the lion’s share of the rent. They stay for a much longer period. That’s what I really like about Section Eight is there’s almost no turnover with it. So yeah, that’s that’s essentially what the program is

J Darrin Gross 4:54

Got it. And how did you get attracted to it?

Tom Cruz 4:57

Yeah, so like I mentioned before I fell into it accident, I was buying more middle of the road, you know B C class properties 170 $180,000 properties. And I just found that it just sucked up too much downpayment money. So I started going, you know, sub $100,000. And I found a unit, my first unit that I got into with Section Eight, it was 55 grand, they had a tenant in there at $1,350 per month on a three bedroom unit. And I was like, Man, this return is insane. So I went checked it out, I met the tenants walk through the property, everything looked normal, up until this point already had dozens of units. So I kind of knew what to look for. And then the day after closing, I get a call from the seller. And he’s like, Hey, man, we need to switch over to Section Eight direct deposits. And I was like, What do you mean? It’s like, well, it’s essentially a property that you just bought. And of course, that was never disclosed to me, you know, when I bought the property, so he’s like, how did you think I was getting 1350 and rent on a $55,000 unit? I was like, Okay, well, that makes sense. Now. So that’s kind of where the light bulb moment hit. I mean, I had a little bit of a panic figure inspections, figuring out, you know, direct deposits, figuring out how things work with with the program, but it’s really just a payment method, you know, regular pennant tenants pay with a credit card or money order every month, and Section Eight pays with. With government funds, that’s really the only difference outside of that you have annual inspections. I mean, that’s pretty much an hour every year. So it’s not, it’s not that difficult thing where most people mess up on is getting the tenant and putting that tenant in the property. And that’s resection A gets all the misconceptions and kind of the bad rap is at that point.

J Darrin Gross 6:31

Yeah, lets the let’s talk a little bit about that. I mean, you mentioned that the the rent gets paid, it’s instead of coming from the tenant, it’s coming from. Is it the federal government? Or is it a local authority, like a housing authority that receives the funds?

Tom Cruz 6:45

Yeah, yeah.

J Darrin Gross 6:45

the Federal that? Yeah.

Tom Cruz 6:47

So it’s the program is funded. Federally, but you’re right. It’s it the actual payments physically come from the local housing authority on a county level? That’s correct.

J Darrin Gross 6:57

Okay. And then the inspections, like you said, They’re annually and they, they, somebody schedules a time and goes through and make certain that everything’s what’s safe, is that pretty much?

Tom Cruz 7:06

Yeah, I call it the three S’s is safe, sanitary, and structural, they come Sure, make sure there’s no debris, or there’s no massive, you know, foundation issues, and there’s no roof issues. And then, as far as inside, make sure everything works, appliances, work, utilities are on. And then there’s more nuances to it. For example, if there’s a crack tile, even if it might be a hairline fracture, they would consider it a tripping risk, they might make you replace that one tile. So it’s just just a matter of experiencing going through it to understand what they look for. But once you pass it, you just, you know, kind of sail on through it for the next year. And we also have two inspections of our own. So we always are proactive to make sure that we’re gonna pass that inspection when it comes up.

J Darrin Gross 7:50

Yeah, I was gonna say I’ve had a little bit of experience with Section Eight, where my tenants was a section eight and, and I always felt like that inspection that was performed by the Housing Authority was kind of like an enforcer for the, for the tenant, because they, you know, they the tenants value having that section eight, that’s, that’s, you know, what’s paying for their housing, and not wanting to lose that, right? Have you found that to be most mostly the case? Or have you found otherwise?

Tom Cruz 8:21

No I mean it’s both. So when another huge advantage of the section eight program is with a regular tenant, you have no recourse, they break a lease, you have to sue them or a victim with Section Eight, you just go to their housing counselor, let them know how they broke the lease, and one email or phone call from them, I put the fear of God in them, they don’t want to lose the housing assistance for life. And if they lose it, it really is for life. I mean, it’s based on your social security number, they put it in their system, and you get removed from the program. I’ve seen tenants lose their vouchers forever. So the inspections yes, they’re there as much for the tenant as they are for us. It just to make sure that especially you know, nine times out of 10 There’s kids involved in the property, they want to make sure there’s no lead base paint or asbestos or anything that’s gonna be a hazard. So but for the most part, once you get a good relationship with that inspector, and you understand what they’re looking for in the tenant, everybody knows that inspections coming. It’s not some surprise thing. So we’re always prepared and you know, it’s over 95% of time on annual inspections. We’re passing them.

J Darrin Gross 9:13

Got it. In you know, you talked a little bit about the tenants the way they qualify at or below the poverty line as far as income goes. Is there not a an allowance based on number of children and did not kind of ramp up if you have three kids? It’s more than one kid? Kind of?

Tom Cruz 9:36

Yes, they do have a formula they have it’s a very convoluted formula. They don’t make it public but they tell you what goes into it. A big part of it is number of dependents so kids and then the other part is disability status, you know, they’re disabled or retired military because the VA Veterans Affair program goes also through the section eight program safe housing guidelines and everything. So we’ve had, you know, veterans that are on Section eight now They still have the same section inspections. So it’s based on that it’s also based on their income, you know, if they are on 100% disability with, that’s the only income they get, then section, it’s gonna be paying a much higher percentage of their portion because they don’t have enough to pay it on their own right. And then you have utilities gets thrown into that. If they have, for example, I’ve seen, you know, to people like a couple both full time jobs and making 3100, you know, $3,000, as a couple, they’re under the poverty line. But for Section Eight, they still make enough where they would be paying a big portion of the rent, right? So on a $1,400 rent, they might pay 500 bucks, and Section Eight will pay 900. So that it every tenant is different. You can have the same house and five tenants internet five separate numbers every single time from them.

J Darrin Gross 10:44

Right. As far as setting the rent, how does the rent Get set, because I, at least what I thought I heard you to say was that the amount that they’re going to qualify for an assistance is going to vary based on their own particular.

Tom Cruz 10:58

Correct. So the way that we do that is we look out, it’s all published. So you can just Google FMR, HUD on Google, and it’s going to show you exactly based on the county or the zip code, what they’re paying in that area. So we look at that number, and we just generally go between 10 and 15%. Above it, that’s what we advertise the run out. So if it’s at 1200 bucks, we’re putting it up there for 1300 1350. And then we’ll just negotiate down from there, because the Housing Authority, they will waive it, that number that you see on that FMR HUD site is not set in stone, if you have a tenant that’s been looking for housing for three months, and they’re desperate, and they can’t find it, and they have three kids, and they’re homeless. And you know, they’re they’re essentially putting pressure on the housing authority we found where they’ll just say, hey, look, you know, we can do 1300 foot, you know, we can do 1250, you go on the HUD website, it’s listed at 1200. So there are circumstances where they will pay above that, but the thing is, on a $50,000.03 bedroom house in Akron, Ohio, you know, that rent might be 700 bucks. But if you go to section eight that rents 1100 all day long. So that’s the big advantage is that arbitrage between the low purchase price and the high rent, where section eight really, you know, has an advantage there?

J Darrin Gross 12:06

Yeah, I guess, again, based on the need of the tenant is how that that

Tom Cruz 12:10

it is in that’s also actually a question that is part of it. So so in the event that there they don’t qualify for as high of rent, you have a chance to back out of that point, you know, we declined tenants all the time, hey, look, we were at 1400 rent, the publish FMR is 1300. You know, we’ll come down to 1300. And they’ll say, hey, look, sorry, they make too much money, or, you know, they don’t have enough dependents or whatever the reason, we can only approve 1100. Okay, no problem, we’ll just go to the next tenant. And that’s their huge advantage, you can call any housing authority in the country right now, say that you want to get on the section eight waiting list, they’re gonna tell you, you know, 234 years, depending on where you are. So there’s a huge list of tenants. And it just it’s never ending?

J Darrin Gross 12:50

Well, let’s talk about that real quick. The demand. So the demand for housing is infinite. Yeah, you know, the, how does a landlord get plugged into the system so that they’re recognized? Yeah, opportunity.

Tom Cruz 13:08

Yeah, it’s simply a matter of calling the housing authority in the area that you’re investing in and telling them that you want to be a section eight landlord, they have a forum, you send them a voided check of where you want the rent to be sent to, and then they approve you normally, two to three day process. And then from that point on, once you have a property that’s ready for inspection, you send it over to them, they put it in their system, depending on the county, I mean, as far as how they notify the tenants, like locally, in Wilmington, they literally just have a bulletin board in the office, they add an add the address, and then people go in there, they see it, they have my or my property managers phone number, and they’ll call them but I have some counties like in Tennessee, and they have a straight up MailChimp list. I mean, they have an email list where every week they’ll send out you know, all new properties that are that are online. So it depends on on where you are, how, how advanced or backwards they are.

J Darrin Gross 13:57

And the caliber of tenants you’ve mentioned, obviously veterans, you know, people basically below the poverty line, but it sounds like a lot of the people that you’ve identified are primarily working poor, I guess what I would say based on they have jobs, but they’re just they’re not able to meet the guidelines. Yeah, whatever the housing needs are in the in the community. Do you find that most of the tenants are? I mean, do you have or have you had any issues with tenants? I mean, I have always been kind of curious. My experience, my personal experience was great. I mean, these people stayed until their kids graduated from you know, and in the rent increases were were always at or above market, based on on their need. But I’m kind of curious, you know, when I talk to people that haven’t had an experience about Section Eight, a lot of them have kind of uh huh, you know, yeah, but that I don’t know if I want to do that. Have you can you kind of describe your kind of range of experience? Or is it all? Yeah,

Tom Cruz 15:04

and this is the number one reason why we’re just crushing it so hard with Section Eight is because of this misconception, right people before even accepting it have all these you know notions in their head as to how it works. So with Section Eight, the tenant is like any other tenant it until you screen a tenant, you don’t know how good they are, right? So doesn’t matter if they’re paying with Section Eight federal funds, or if they’re paying, you know, out of pocket. So we screen them the same way we check their background, we check their eviction, we check their credit, we check income verification, we check landlord verification. And we also go as far as having our property manager go to where they’re currently living and seeing how they’re living there. So the risk that we have on each tenant is virtually zero, I mean, outside, the only time we ever have a problem is if we place a tenant, and then they get a new boyfriend, or they get a new partner, or we get you know, a business partner that’s out living with whatever the reason, um, it’s when there’s out it kind of is unknown variables that come in. But that can happen with any tenant. So that’s where the program gets as bad rap, because I talked to literally hundreds of investors every month through my coaching program, and just through people that are just wanting, you know, on social media, and what happens is this, they hear that the rent is guaranteed, so the tenant comes to them, they waive, you know, $1,500 cash in their face for a deposit. And they’re like, Well, I’m already going to get my rent every month. So let me just let them in, let’s sign a lease. And then two months later, you know, they turn the house into a trap house or something drugs out of it, the cops are there every day, and they’re like, Oh, I hate section eight. If you don’t screen the tenants, it doesn’t matter what program they’re on what subsidy they’re on, if they’re regular or not, you’re going to have problems, you know, it just you’re you’re, you’re playing Russian roulette at that point with with your 100,000 or $200,000 asset. So that’s how we’re able to stabilize and really scale, you know, my portfolio was making sure the tenants are all really high quality. And yes, you might have to go through 567 tenants before you get there. But it doesn’t matter. I mean, the the number, if I put a listing right now on Section Eight, locally, I’ll have I would say, by the end of the week, on Friday, at least 25 calls. And then we just have a process, you know, we send them a link, they fill out an application, and then it’s all automated from there, they even even the decline email will be automated if we decided to climb them. So it’s just a matter of finding quality tenants just like you have, like you’ve seen with yours. Every year, the rent increase gets automatically applied once you request it. That gets direct deposited, you have like you said, you know, annual inspections that are known, you just go by there, make sure that everything is good. And then it just keep going.

J Darrin Gross 17:33

Oh, what do you find? Is the average length of stay? Is it longer and longer than normal market? Or?

Tom Cruz 17:43

Oh, yeah, so the way that we do it, um, we found that most of these tenants stay for so long that we don’t even do annual leases anymore. We do five year leases, and tenant sign at no problem. So we’re signing three five year leases on pretty much all of our tenants now with Section eight. And they’re staying. I mean, like I said, I’ve been doing this for eight years on Section eight for six years, and I still have tenants from my original properties that are still there. The only reason I see them leaving is a if they die, especially the elderly ones. That’s one option. And two is if they get older and they move away from to be closer to family. Occasionally, you’ll get an incarceration you know, especially if you have other people that come into the house like I mentioned before, and then even in Section Eight, they will still continue to pay for like three months depending on their situation until it you know, I think that’s waiting trial or that three formerly something has to formally happened before they cut their their that’d be convicted. So that could take months. So we’ve had tenants waiting trial haven’t been convicted, empty house in Section A continues to pay. So that’s all part of it.

J Darrin Gross 18:45

Right. Now, and even with that, I would assume that if you do have a vacancy, and you’re known landlord with the housing authority, yeah, a call to them can republish your unit. Oh, yeah. Yeah. So on, you know, basically the kind of the pros and cons we just talked about, I mean, you have the, the kind of guaranteed rent quality of tenant equal to or as, you know, equal to a market rate tenant long you screen them properly. Exactly. Sounds like you mentioned a five year lease, which I’m guessing any landlord to be excited to have do you build an increases into that

Tom Cruz 19:30

we have built in 5% increases, and that’s just a high increase that we put in there. Normally, it’s 234 percent, but we’re reserved the right to increase it 5% And to the tenant, it doesn’t matter because the Housing Authority is normally going to pick up that difference. So if the rent increases $100, their increase might happen. 1520 bucks might be 20% of that overall increase. So it’s never enough to really rock the boat with the tenant. So you know, we’re able to do that consistently without any issues.

J Darrin Gross 20:00

But what about do you face any issues with lenders or insurance companies when you are focusing on Section Eight rentals,

Tom Cruz 20:12

Fair Housing Act, they can’t have any discrimination based on the type of tenant you put in there. But anything, no lenders love it. I’ve gotten preferred terms when I’ve told them that it’s going to be affordable housing and low income section eight tenants, because they get credits from, you know, I think it’s on the federal level, you know, if they have regulators in there, they have a certain amount of percentage of

J Darrin Gross 20:32

Yeah, LIHTC, low income housing tax credit. Yeah,

Tom Cruz 20:35

Exactly. They get those for being able to borrow up against those types of assets. So they very much like those, when we’re doing that, and they know the rents guaranteed, so the risk becomes that much lower, you know, as me as a borrower on the insurance side, they don’t even know I mean, when I call my insurance agent at a new property, she doesn’t ask, Hey, is there going to be a subsidized tenant or not? It’s gonna be cool. How big is the house? How old is the house? You know, what are the updates on it? So now on, there’s no downside from vendors or any third parties about Section Eight?

J Darrin Gross 21:05

Yeah. On the insurance side of things, I just know that on some of the like, more apartment type policies and stuff, there’s usually a question of the tenants or they are market rate tenants or their, you know, low income or whatever. And it’s not like, it’s I think it’s more of just a screening thing. And it could be and I’ve not pressed the question, but I’m just wondering if the concern is a concentration of, you know, if you have one or two, or, you know, Section Eight spread out throughout a building, it’s probably considered a lesser risk. And if the whole building is

Tom Cruz 21:45

Oh, yeah,

J Darrin Gross 21:45

you know,

Tom Cruz 21:46

Yeah, if you go into homogenized communities like that, where it’s 100%, section 8, and you know, then you have like these HUD buildings, where it’s, you know, essentially the projects where everyone is on the same Assistance Program. I’m sure there’s some, some questions about that, because I can see there being because just the wear and tear people are home all day long if they’re on assistance, and it just causes more risk in the property.

J Darrin Gross 22:05

Right, right. And, you know, speaking of which, you finding properties. You mentioned this one that you bought for 55, that rented for 1300. Is there any particular things you look for when looking to acquire a property that makes it a better section eight, potential rental or not?

Tom Cruz 22:29

Yeah, I mean, I have a pretty set criteria, I’m looking, you know, for three bedrooms, two baths under 1000 square feet. Normally, under 100, grand, I mean, anything under 100 grand that’s moving ready is going to cash flow, it’s impossible not to almost any county in the in the country, the rents are going to be too, too high, especially on three bedroom units for to not cashflow. And then you don’t have many expenses, especially if there’s a new roof, new HVAC, new water heater, I mean, you’re going to be good for at least 10 years, before you really have to worry about anything. So then it just comes down to tenant selection.

J Darrin Gross 23:04

So let me ask you this. And I don’t remember the specifics. But I remember having some sort of, of there was a, I don’t feel a wrinkle, but there was just some sort of condition. If I’m a current landlord, and I have a property and I have a tenant that is historically irregularly late, or there’s always a story of blah, blah, blah. Is that an option for me to encourage them to seek out section eight? And, you know, clearly, this isn’t working for you, you know, you, you need some help and paying your rent? Why don’t you go, you know, check out section 8, and see if they can help you, see if you qualify.

Tom Cruz 23:45

You can but the problem is the waiting list, they’re gonna be waiting years before to the point where you’re not gonna want to tolerate you know, it’s not this is this is a situation where you can be like, Hey, Tom, go call Housing Authority, get some free rent, and come back and see me it’s a whole process. I mean, you have to prove that you’ve been trying to get a job, you have to prove that you follow the law that you have to provide tax returns to provide everything in order to be considered for assistance. And then you have to wait, you know, for people to get off the program or for people to have available slots for it. So it’s as as great as that would be to say, hey, just go to this office, call this number, and then you’ll get free housing. It’s not that easy.

J Darrin Gross 24:22

No, I remember that. And it seems silly to even ask a question that I’m thinking about just based on what we talked about just the demand being so much and the pool of funds is not infinite. It’s the demand for the funds and the demands for housing. That’s, that’s, you know, infinite.

Tom Cruz 24:40

Exactly.

J Darrin Gross 24:41

And, you know, that’s, that’s just a continuum, or it just continues to be an issue. On I was gonna ask you about a you’d mentioned fair housing, right. So if there’s a a tenant that has A voucher, and they come and they see my, my property that’s for rent. And, you know, they they apply, there’s, there’s no way for me to refuse them as it if I’m if I have a if I have a unit for rent and they qualify in every way except that they’re their section 8, can I say no section 8 and my, my

Tom Cruz 25:25

You can that you can’t legally say no, you can discriminate based on the voucher type and there’s even some legislation now they’re wanting where it makes it even more difficult or could be illegal. But um, as far as we always advertise it, I always put vouchers accepted, and you know, they’re gonna get priority, we’re going to look at those applications first, right, because that’s our portfolio is comprised majority of subsidized properties. But um, but no, you can decline or accept based on on any reason as far as, as long as you’re screening everybody equally. You know what I mean? So as far as you’re holding the same standards for background checks, for as long as there’s an equal opportunity for everyone to get housing, then you’ll be fine. But as far as advertising and marketing it, I’m pretty sure you can’t discriminate based on how they’re paying.

J Darrin Gross 26:16

Yeah. Nice thing about it seems like there are those I see some sort of a, an ad that, you know, he says, I mean, people either say they do or they don’t, right. Yeah, I guess. And if they if they uniformly don’t get I guess I wouldn’t be discriminated. We just don’t that’s just not something we work with here. Yeah. So I get that. So you got 400 units. Now, what’s your, what’s your game plan for the next eight years are you looking to,

Tom Cruz 26:46

I’m trying to get to 1000 units. And then either because what I’m finding is I spoken to institutional buyers and hedge funds and REITs that would be interested in buying in most of them are between 500 and 1000 units is really what they what they want to see. So my my end goal is, you know, by the time of 40, the next seven years, pick up another five or 600 units, and either just sell out and sell the whole portfolio, most of my units are in opportunity zones. So by that point, most of my unit, most of these capital gains are going to evaporate. So I’ll tell them already by you know, by 10 years from that point, that’s the kind of the tipping point. So yeah, I mean, that’s that’s kind of the goal right now.

J Darrin Gross 27:24

And as far as a financing, do you find there is a journey, you mentioned that lenders are excited to have you is there any different requirements for down payments, or

Tom Cruz 27:34

now the same as a rental house, single family investment property, you’re gonna get between 85% 80% loan to value depending on the bank that you’re working with. I work with private lenders as well, I use a lot of other people’s money, you know, I’ll partner with people, they’ll bring half a million dollars, I’ll do the management of it, I’ll you know, I’ll do the financing, they bring the cash, there’s a lot of different creative ways that I’ve done in order to get units under my name. And then inevitably, two or three years later, after I stabilize a portfolio with Section Eight, I’ll do a cash out refinance by all my partners. And then I’ll keep the unit tell myself that’s how I ended up with foreign units by my I have no partners and I solely own 400. Is that’s because I’m always cashing them out. And, and they’ll either come back in, you know, at a later time and do more or, you know, they’ll reinvest and other assets.

J Darrin Gross 28:23

Got it? And are you as far as like, you’re lending? Are you doing? Man? I’m assuming it 400 units, you’ve got some sort of an entity, you’re not just Yeah.

Tom Cruz 28:35

Yeah, no, I’m buying under multiple LLC is okay, I’m not doing like one per LLC, that just gets so ridiculous. But I’ll do anywhere from 50 to 100 per LLC. And then if I have a new partnership, then it’s a new LLC. So I have, you know, scattered hierarchies of these LLCs. And it also depends, like, if I’m buying out of state, I’m using a property management company, right. So I don’t need to set up the property management LLC, just a holding LLC. So it totally varies, what I’m doing, who I’m doing it with, with how I set it up legally.

J Darrin Gross 29:04

Do you have a management company then that you control that manages all these are

Tom Cruz 29:09

locally? I do I have four full time managers here, majority of my holdings, I say over 300 units are in one zip code in Wilmington, North Carolina, and I have four full time managers dealing with those. And then the other 100 actually be a bit more than that right now. Are like I said, between three different states and I have property management companies for the most part on those.

J Darrin Gross 29:28

You see you have outside property management or do you manage them?

Tom Cruz 29:32

Yeah, yeah. Outside property management, if it’s out of state for the most part.

J Darrin Gross 29:37

Yeah, but your 300 Local you manage yourself and do your management copper.

Tom Cruz 29:42

Yeah, my management company with those with those full time managers.

J Darrin Gross 29:47

Got it. Well, that’s that’s definitely an impressive track record so far, and and, you know, an aggressive goal and I, you know, I don’t see anybody wouldn’t get there based on Sunday, it is

Tom Cruz 30:02

a constraint of inventory. That’s really the biggest, you know, thing holding you back, I mean, I would easily be able to get, you know, 40 or 50 units per month, if they were as consistently available as they were in 17 1819. Right now, it’s all post COVID. Everybody wants $100,000 for their shack. So it’s, that’s, that’s the biggest hold back right now.

J Darrin Gross 30:27

I get it, I get it. Well, hey, Tom, if we could, I’d like to shift gears here for a second. Sure. As I mentioned you before we started by day, I’m an insurance broker. Okay, and I work with my clients to assess risk, determine what to do with risk. And there’s a couple of strategies we typically, you know, look at, we first looked at see as a way to avoid the risk. If that’s not an option, we’ll see if we can minimize the risk. And when that’s not an option, as well, then we look see if we could transfer the risk. And that’s what an insurance policy is. And I like to ask my guests, if they can look at their own situation could be their clients, investors, tenants, you know, the section eight program, however you want to frame the question, but if you can identify what you consider to be the biggest risk, and for clarification, while I’m an insurance broker, I’m not necessarily looking for an insurance related answer. Okay. And so if you’re willing, I’d like to ask you, Tom Cruz,

Tom Cruz 31:34

Yeah,

J Darrin Gross 31:35

What is the BIGGEST RISK?

Tom Cruz 31:38

I would say the biggest risk in not even section eight housing, but just investment house air rental properties is going to be the tenant selection, because if you think about it, buying the property is very low risk, you can always refinance it, you can always sell it, you can always rent it, you’ll always have that demand there, especially if you’re buying affordable housing under 100. Grand right. But with a tenant, depending on where you’re buying, the risk can be can be huge. I mean, if you’re buying in the Northeast, and you put a wrong tenant in there, you could be waiting months to get the tenant out. Obviously, if you’re buying in North Carolina, in the southeast, it’s a lot more landlord friendly laws. So we can get a tenant out for 150 bucks in three weeks, and they’re out by the sheriff. So and also you have the tenant the the damages from the tenant. So if you don’t screen the tenant properly, or if you’re lazy on that part, me, it could cost you 1000s of dollars, a lot of which, you know, you’re gonna be out of pocket for because your security deposit won’t handle it, Section Eight is surely not going to come in and handle the damage that a tenant calls independently. So I would say the biggest risk in rental properties is putting the wrong tenant in your asset. Um, and the best way to mitigate that, like I said, is through screening.

J Darrin Gross 32:49

No, I think that holds true for any landlord. Yeah, you know, screening is definitely a small price, or small investment. Oh, yeah, certain it. You have a good relationship in a good, or at least you start off on the right foot. So they have a new significant other or something like that, but that’s good. Hey, Tom, where can listeners go if they would like to learn more or connect with you?

Tom Cruz 33:14

Yeah, and I appreciate it. I’m pretty big on Instagram and Tiktok. Both of my usernames are the same. It’s T Cruz NC. T as in Tom Cruz, CRUZ. And then N C, like North Carolina. And then if you guys can also find me at section eight formula.com section the number eight formula.com. I have a 15 minute intro video explaining section eight in more depth. You can also book a call with me or somebody on my team to learn more. I have a $5,000 coaching program and course that explains how to buy properties, how to finance the properties, how to screen tenants, pretty much everything we talked about, but a lot more in depth. I provide checklists that provide documents everything you would need. And we also do monthly coaching as part of that. You have access to me to ask any specific questions to your situation.

J Darrin Gross 34:02

Great. Well, Tom, I can’t say thanks enough for taking the time to talk today. I’ve enjoyed it and learned a lot. I hope we can do it again soon.

Tom Cruz 34:12

Yeah, thanks for having me on. And looking forward to again.

J Darrin Gross 34:16

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

Unknown Speaker 34:35

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

THE VALUE OF OWNING FARMLAND with Peter Badger – CRE PN #329

Peter Badger 0:00

So my richer friends in Silicon Valley said listen, have you looked at farmland and I was like Why? And that’s what we’ll think about it. Single Family you get multifamily you now get there’s efficiency you got one roof for 2050 or 100. Apartments. mobile home parks even better, because you’ve got a concrete patents utilities, there is no air conditioning write down. That said, My farming standpoint, you plant a coconut tree, wait five years for to produce coconuts, and it prints coconuts for 60 to 80 years straight. There’s no tenant moving out, you know, you have other risks, which we’ll talk about in a little while. The farming side of you know the risks but but generally, as an asset class is designed where it’s you have to wait up front for the permanent crops, which I recommend to grow. But once they start producing the produce, you’ve got 20 4060 years depending on the crop, and you not only have income during your lifetime, but it is passed down to your future generation.

Unknown Speaker 1:02

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

J Darrin Gross 1:21

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

Today, my guest is Peter Badger. Peter is an entrepreneur investor, who has been successfully investing in ag development projects since 2016. And he recently joined Farmfolio’s executive team as the chief strategy officer. And just a minute we’re going to speak with Peter about the value of owning farmland.

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

Peter Badger 2:47

Thanks, Darrin happy to be here.

J Darrin Gross 2:50

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

Peter Badger 2:59

Yeah, briefly, I mean, we’re all a part of our journey in life. So I was a tech guy on wall street for 18 years, worked for the major investment banks, you know, Morgan Stanley, Merrill Lynch, Credit Suisse, Barclays, and then dovetail that into a career in Silicon Valley. Did my own tech company and the enterprise software space went through an eight year crazy startup journey you know, series A Series B and finally got acquired by Citrix systems. So I think that’s really my corporate career and basically spent that time since 2014. Investing full time mostly in multifamily real estate, hospitality and now heavily into farming.

J Darrin Gross 3:42

Got it? Got it. Well, I’m definitely curious about the farmland you know, it’s an asset class that I’ve covered vacant land and I’ve covered like parcels that people you know, buy that are, you know, kind of stray that nobody claims or wants or whatever, and they end up selling them that kind of thing, but not specifically farmland. And kind of my curiosity, my background, I grew up in Kansas both my grandparents were farmers. And one of my favorite things to do as a child was to do laps in the field with my grandpa on the fender of his Massey Ferguson you know, on the field there kind of thing. And I’ve since you know, my parents of our my grandparents passed away and my parents inherited you know, parts of that and so I’ve seen kind of the the farmland from as a landlord side, but I’m kind of curious to hear a little bit more on on, you know, how the inner workings are and what, what drew you to farmland?

Peter Badger 4:48

Yeah, so I think it’s worth talking about asset classes in general, because I’m kind of a business model jockey as an internal account. What’s the best business model for low friction, high scale and therefore high income, and I jumped into real estate, you know, we’ve all owned a single family rental in our past, you know, that’s where people generally start. I sold the company in 2014. I was okay, I don’t want to put it in the stock market, because I lost my shirt in both 2000 and one.com bust and 2008 financial crisis. So as I kind of went to all my CXO peers and Silicon Valley on this, and what do you do with your money once you earned a decent amount? And they said, honestly, most people make their money from private and public company stock. And then they put it into hard assets like real estate. And that’s the general picture I got. So of course, I went on this crazy real estate journey. I bought 24 single family homes over 18 months. To the friction of the business model, I realized that, you know, they’re across Pennsylvania, Texas, Florida, six property managers, all turnkey rentals, managing you know, I was in California, they’re at a stage. And it was all perfect for 18 months. And then month 19 tenants started leaving, trashing the apartments on the way out someone’s stolen a conditioning unit. And basically, I realized in the single family home model is trying to manage, you know, with third party property managers at a state. There is a lack of efficiency and scale in that model. So I had 24 roofs 24 air conditioning units. Now in generally a tenant moves out and you lose your income for six weeks, while you’re trying to rehab it, get it back to rentability and then get a tenant in. So I then shifted to multifamily. Obviously a single roof 20 3040 apartments, went through and done a couple of buildings. Again, property manager, the party stole their money once we’re in a lawsuit with the second one. Hit by Irma, you know what a 12 unit in Tampa, Florida. Insurance companies no offense are a bit tricky. So of course when Irma hit, the storm came in. The storm receded. The water came back in the next day and they claimed it wasn’t the storm that caused the damage. lawsuit with the insurance company still never got resolved. We ended up at like 30 cents on the dollar the request for the rehabs to happen. classic story, but I kept going through these asset classes bought a mobile home park in Illinois, got a Mexico condo on the beach, try and do a bit of Airbnb, hospitality, hotel and Puerto Rico kept going through all this stuff. And as I’m on this journey, some my richer friends in Silicon Valley said listen, have you looked at farmland? And I was like Why? And they said well think about it. Single Family you get multifamily you now get as efficiency you got one roof for 2050 or 100. Apartments. mobile home parks even better, because you’ve got a concrete pumps utilities, there is no air conditioning write down. That said my farming standpoint, you plant a coconut tree, wait five years for to produce coconuts, and it prints coconuts for 60 to 80 years straight. There’s no tenant moving out, you know, you have other risks, which we’ll talk about in a little while, the farming side of you know the risks but but generally, as an asset class is designed where it’s you have to wait up front for the permanent crops, which I recommend to grow. But once they start producing the produce, you’ve got 20 4060 years to pay on the crop. And you’re not only have income during your lifetime, but it has passed down to your future generation. And so I actually child to a very senior Wealth Management person in San Francisco about three or four years ago and he actually told me that the high net worth individuals, especially in Silicon Valley, own between 14 and 20% of their portfolio, or their assets is actually in agricultural land or farmland generally. And I think we’ve seen that bear out in the statistics, you know, Darren, I mean, there’s been all these articles about gays you know, biggest farm landowner in America type stuff so you know, in reality it is true farmland is a bellwether asset class and honestly, it’s not correlated also so you kind of think about the intergenerational legacy wealth building angle but it also is not correlated to housing markets to the stock market to anything else people got to eat food if you get the right crop and the right location being sold to the right wholesale retail customer that doesn’t stop when the economy tanks.

J Darrin Gross 9:44

No, I get it from in especially examples you’re you’re siteing in like coconuts are made me think of, you know, being up here in the Northwest. I mean, a lot of a lot of people on Timberland, similar kind of thing you mean that the wait times kind of a long time But the payoffs you know, you can harvest timber, you know, set, you know, on a cycle and continue to replant that and like said for generations have kind of a cash machine there. I’m curious, are you are you investing in farmland? In the domestic there? You know, in the US? Are you looking outside the US? Some of the, again, my mindset just again, where I’m oriented for my youth is more of like row crops and in, you know, kind of low level kind of land with with dirt and tillage and all that kind of thing. Is that, or is that part of your thing? Or is it more of just a global farmland view?

Peter Badger 10:49

So we are global. But more importantly, you got to start somewhere, there’s this whole classic thing. I know people, for instance, in the single family home space, you either decide to have properties in different markets to diversify, or you have all your properties in one market or very, you know, sub sector of the market that you know, and you watch it very closely, there’s these two theories, we actually have ended up concentrating most of their farm on development in Latin America. And the reason for this is a multitude of reasons. Number one is the cost. If you look at us farmland today, not only is the land double or triple Latin America, but the labor is six to 10x, more expensive. And so I think one of the keys to farming investing for me personally, is that we have our assets in the US, you know, real estate, mostly multifamily apartment buildings. That’s a cash flow and appreciation. But for diversification, we do farmland overseas, not only because it’s a better product, which we’ll cover in a second, but more importantly, gives you a diversification outside of the US, which you just can’t get the returns in US farm and will be my argument Today, I’d like someone to show me a farm that is making, you know, double digit returns from a US perspective.

J Darrin Gross 12:13

Yeah, no, exactly. That’s been kind of my, my understanding and kind of viewpoint as I kind of watch, you know, my mom, on the return she gets, I mean, you know, the, the typical or least that the example I’ve seen, is there some sort of relationship between the landlord and the tenant, the tenant being the operator, the farmer, and that that cost structure, there’s, there’s got to be enough in it for the, you know, the operator to make a profit, and then to pay the, to pay the landlord. And I’ve seen different models, whether it’d be just a straight cash rent, or like some sort of percentage of the, of the crops, but, you know, you mentioned the expenses, I mean, you know, just the, the cost of implements the cost of, you know, seed and fertilizer and, and all of these things, it’s a very, you know, low margin kind of a profit kind of thing at the end of the day. But in the other side of that, I’m kind of curious, your thoughts and again, this is kind of more American model. You know, you’ve got a lot of the government programs and stuff and enter into this and, and, you know, insurance net, when you’re looking outside of the US, and like said, Latin America, what are you? What are the the incomes? And what are the expenses? I mean, you mentioned labor, certainly is a lower, lower costs are and obviously the acquisition point, being lower, but can you kind of,

Peter Badger 13:49

Yeah, let’s give an example. I mean, labor is an easy one to knock off in a single sentence, you know, a, you know, farm worker in Colombia. It’s about a buck 14 an hour. In California, it’s $14 minimum wage flat rate. You know, so it’s, it’s, it’s multiples, you know, when you’ve got a 10x plus on labor or low and that’s why you understand why it’s difficult to make profit in the US farmland. Yeah, I’ll never say never, we still look condemning for farms, and opportunities globally, actually. But But I think the sweet spot we’ve worked out Darren is from an arbitrage standpoint, is to find the best produce and crops in lower cost locations, then export them from that location back to North American Europe, for the highest premium price in the supermarkets. And that’s the key to this thing. Then there’s enough margin in there for the farming side, for the packhouse for the shipping, and then the sales and distribution in the final mile market. And that’s the key to this thing there. There are many costs throughout the entire end to end supply chain. The fact that we’re doing it in an incredible climate, great produce, you know, agriculture is amazing and Latin America, they’ve just had very few avenues to export certain crops back to the major markets in North America and Europe. And that’s what we played as farm folio.

J Darrin Gross 15:25

So I get the the kind of the cost model I’m kind of curious more about the the so you’re owning the crop, you’re not just owning the land? Because right I mean, you you Oh, yeah,

Peter Badger 15:39

That’s right. So maybe, let’s let’s step back a second on a given my farmland journey, because I’ve been doing this for seven years. So it’s a small amount of time, but it’s full time. I’ve seen everything globally from, you know, walnut farms in Eastern Europe and, you know, near Tbilisi, Georgia, through to the US. vineyard, I’ve seen everything. And basically, here’s how you’ll normally see this farm and offerings. You’ll meet somebody who’s a glossy marketing brochure, and they’re gonna say, Hey, listen, we found some cheap land, name that country, you know, overseas, we’re going to basically clear it, we’re going to plant irrigation pipes, create a nursery, find some seeds, plant a crop, wait 3456 years, depending on the crop. And then we’re going to sell that, after we put into a pack house wash, sorted, packed and sent, and we sell to, you know, retailers in the supermarket. That’s the story, they’ll tell you. I’ve invested in three of those starting in 2014. I lost money in every one of them. And the reason was, is because of several number one, they’re either great farming people, they have no idea how to do the commercial distribution plus sales, because it’s a very hard business to be in all the great commercial sales and distribution people have contacts where they can sell the produce, but they can’t farm. And so you got to find basically, the multidisciplinary team that know the full end to end because if you don’t, and they just farm and then sell to the middleman, middle people nowadays, then you’re going to lose all the profits as people down the chain, take that cut. And so what we did at farm photos, we actually reverse engineered the whole farm land ownership construct. And so what we did is we built a packed house. And we then started to receive all the fruit in this case from local Colombian farmers in Colombia, the country and we said Listen, if you deliver your lines in this case, TT limes to our pack house door, will give you double the price you normally get setting a local Colombian market. And what we did in our pack houses, we wash them, we pack them with permanent shipping container, sent them overseas, they actually mostly come to the Rotterdam for Europe distribution via truck and to Philadelphia for the East Coast. And we then will sell them to Walmart, Costco, trader, Joe’s Albertsons, the major retailers, and some wholesale channels as well. And so we did that as the business model and started actually getting all these fixed price fruit contracts and major retailers. Now what we’ve done is we’ve gone back and bought those farms that produce the best crop because think about it right now in the model most of our lives come from the Colombian farmers we sell their produce in North America and Europe and we give them the cash flow now we’re going back and buying those funds or breaking them up into what we call locks or land ownership titles Sunday people like you or me down and then we’re just moving the cash flow from the Colombian farmer to us as an as a lot owner and that is the perfect way to avoid all of that farm development risk.

J Darrin Gross 18:59

So let me ask it again the I love the fact that you’ve gone in and you know inserted yourself into more of the chain there because like you said there’s there’s all sorts of middle people that can you know affect the the profitability of a product based on the markup so they get the gernot getting if you’re the producer when when you did that, and then you go back and you you buy the the the farmer net? Are you are you then hiring people that that we’re working on, I mean, because now it sounds like you’re you’re responsible from the from the ground, to the product to the to get it to the to the packing house to the distribution. And in speaking of distribution, I’d love to hear a little bit about Have you had any issues with any of the supply chain, you know, Port issues that we’re seeing on the news all the time with with COVID in E in that just any Is there any issues with with your your product being perishable. You know, I’d love to hear all that. But they,

Peter Badger 20:07

Let’s pick it apart of it. All right, yeah, start with Yes, we become the administrator of the farm because one of the other things I’ve seen happening a lot is farm and offerings is they’ll often break up the land sell you a hectare of like, I don’t know, mango avocado trees. And they’ll tell you, hey, listen, we’re gonna like grow your fruit or manage it for you. We’ll pick the fruit, we’ll put it in crates, we’ll tag it, and you’ll get the money for that harvest. It’s an asinine concept in reality, because farms need to be operated at scale. And so you need to be profitable. Yeah, yeah, yeah, they take a fall from a Colombian farmer. In this case, you need to keep managing it at scale. And so what we actually did was we, we created something called the farm Owners Association fly, which is like a homeowner’s association, in us real estate. And so actually, as an owner of that, titled farmland, so obviously, it’s key that you own the title, because you control how long you get the income from that land. But then you’re part of the FOIA. And so we as farm folio, administer the FOIA on behalf of all the landowners, just like a Hoa board would manage, you know, an association. So we take care of the common areas, you know, in this case, it wouldn’t be a clubhouse or a pool an HOA, it’d be the erosion, the farm and the areas where you stack the crates, the Hacienda where the farming management team live, we also will employ a third party farm manager, just like a property manager to same role, we find the best farm management teams in that region to manage those farms on your behalf. We also negotiate the valley Verde, in this case, packhouse contract to make sure you’re getting the premium price for the projects coming from the farm. And so as an administrator, you know, you can fire us, you know, it’s, we know this business, you know, cold. And so our goal is, you know, you have a three year lock in after three years, and we’ve not performed, feel free to basically as an FHA group, voters out, find someone to manage the fund, or it can go your own way. But obviously, our goal is that if we can keep performing at the high level we do perform today and keep setting your fruit is that you’ll keep us around for, you know, decades to essentially deliver your income for that farm. So that’s the kind of the model that’s worked best for us, because we therefore control the whole supply chain from end to end. Because this is the key to this thing to avoid the middlemen taking nickel and dime every way down the chain. And so I call it like the apple of farming. Because Apple control the hardware, the software, you know, all the way through to the retail stores and the online store, where they’re saying we actually administer the farms, we hire the bar manager, we’ve actually run the pack houses. And we have a very strong sales and distribution team in the US and Europe who are responsible for actually getting those fixed price through contracts from the big major retailers.

J Darrin Gross 23:18

Can I got two questions that come to mind that that are her kind of, you know, I’m the president with with farmers are not omnipresent, but but certainly would be in your situation. So one of the big issues with farming, historically is just whether you’ve got, you know, whether it be in your case, whether the, you know, temperatures, I can’t imagine there being a freeze. But you know, in Portland, Oregon last year, we had 115 degree temperatures, I wouldn’t have thought that to be the case, either. So whether and the other thing is now that you’re not operating domestically, you’re you’re, you know, outside of the US borders, governmental issues. I know like in some countries, land ownership, laws, etc. are different. In and I’d love to hear your little bit of how, what issues there are and how you address those, both the weather and the government.

Peter Badger 24:20

Yeah, I’m going to show you some data, because I get really critical, alright. My preamble is that I’m a tech guy. I’m a data and process guy. I will never now I used to, I will never enter into any kind of ownership or investment opportunity without doing detailed due diligence around data. I’ve got my own process for different asset classes. And I see people make a mistake. I mean, you’re on a commercial real estate space right now. number of people I’ve actually met and I was like this earlier, you know, you trust somebody and a marketing brochure on doing the detail. Do diligence yourself. That’s where people lose money over and over again. So in the case of commercial real estate, multifamily apartment buildings value add, I go through, and I work out at the macro, you know, MSA Metropolitan Statistical Area, there’s 400 in the US, for instance, and you look at job growth, you look at population growth, you’re looking at, hopefully lowering crime rates. You’re looking look at home and condo values going up, you can look at all this data on the macro market. And then once you then understand the macro market, great, is it growing? Are crime rates declining? Yes, it’s a good place to invest on a macro level, then you go down to the neighborhood or zip code and even block by block can do exactly the same process. You know, is this area growing from a population standpoint, Are there going to be people who are going to rent your buildings are the crime rates coming down was the 20 year data showing crime rates in that zip code, and in that particular neighborhood, because real estate is hyperlocal, block by block, so I can go on for hours about real estate data. I carried that across the farmland, because I lost money in those first three deals. And that’s because I didn’t know what I was doing. And so let’s kind of talk about the climate data. Let’s kind of, I’m going to share my screen, see if this works on the YouTube actually. And let me just show you this. So hopefully, you should see that. So data is available everywhere. It’s an embarrassment. If you don’t believe you can’t find data on everything at this stage of life. Yes, there’ll be some stuff, you can’t get an overseas client, our countries because it will be in a different language, but then hire someone on up work through the research for you who speak Spanish or you know, whatever language you need to find it. And so kind of let’s talk about whether in this case, when you look at a world map for precipitation, you can see here, the blue is the higher and it’s all about longitude, latitude, isn’t it? So here’s Latin America. And it just so happens that the best place in the world to farm in this hemisphere is the country of Colombia. This blue one here, because it has the highest rainfall. So okay, let’s talk about it. It’s like it’s a combination, you need sunshine. And you need rainfall. Well, why are we in Columbia? Why is farm folio got a massive beachhead? Why are we producing and by the way, Walmart did a grading of all their farm produce in the lime space in the past 12 months. And we were number one, we had the best quality, best brick, I mean, they do certain measurements, the best green, no sparkling I mean, we have some of the best produce in the world. And it’s because of these factors is the soil altitude, sunshine plus rainfall. And so I’ll give an example. Most of our farms and refined out is in near on mania. And is some data. So just like, you know, time and date.com. Well, how much sunshine is that? And how much precipitation is that? Look at this. We have constant sunshine all the way around. And we have rain all year round. There is not a dry season in this region. These farms also it’s very mountainous. And this farm we’re offering right now la frontera is 1100 meters in altitude. And so what you actually have is the best of all worlds, it’s sunny in the mornings, and mid to late afternoon, the clouds sweep over and dump rain on the crop. And this is why we have the best produce in the world. And this is why Walmart grading is number one across all their crop line deliveries.

J Darrin Gross 29:04

The temperature ban there’s pretty pretty tight from a low coldest month 73 degrees average hottest month 74 degree average. I mean that’s a It’s incredible.

Peter Badger 29:14

The data doesn’t lie. Yeah, right. Let’s take an example. All right, what is the biggest farming region in the US Where’s 40% of the produce the wheat needs in this country coming from?

J Darrin Gross 29:29

I would assume California or Florida

Peter Badger 29:31

Yeah, California San Joaquin Valley. Okay, let’s go across and check it out. Is the song licking Valley Yeah, I won’t go into detail but you can go down this whole tract of land here. It’s huge. And just pick any location on this map and bring up the weather. So I would like you to know that this is Fresno, middle of the valley and look at the rainfall in this case They have annual precipitation of four inches of rain per year. pretty dry. In our farms and our mania we have 118 inches. Now, tell me why you wouldn’t invest in agriculture in California right now. That’s why water rights matter. I have people come to me all the time, like yeah, farm photo and say, Hey, we’re allowed to buy some, you know, some of your farm? What’s the water rights situation? And I laugh because we’d have to worry about it. We actually don’t have to irrigate these because we have water all 12 months of the year, whereas actually water rights are incredibly bureaucratic, regulated, and messed up in places like California and across the states, but reasons you understand.

J Darrin Gross 30:48

Yeah, no. And that basically created an artificial market. I mean, he, you know, he wasn’t farmable before had the, or I mean, very little production compared to having all the dams in that. Yeah, and provide the irrigation so.

Peter Badger 31:04

So anyway, have a process have data, make sure you do due diligence, you know, so, like I did if you’re gonna buy a walnut farm in Tbilisi, Georgia, find someone locally who speaks the language, which I also don’t and have them pull the data out for those regions understand this basic stuff, your climate data around soil, weather, altitude, and water is the same as rents, population growth, job growth, crime rates, declining, etc. We have a parallel in every asset class, whether in self storage, mobile, home parks, this data is all available. Don’t be a fool. And trust a glossy marketing brochure.

J Darrin Gross 31:49

That’s pretty succinct right there. And like you said, data, those are the facts. You can’t can’t run from that.

Peter Badger 31:57

Right? And then you start down just to point out another thing. So also a lot of the what people do is they hoodwink you with some fancy glossy brochure. Yeah, you should know where your property is overseas, you should be able to identify it. And either you should go and visit it or you should have a very trusted third party to do on your behalf if you can’t make it down there. And just say, you know, in our farms so I’m based our headquarters farm folios in Jupiter, Florida. Let’s take you to one of our farms on Google Maps. la frontera in this case, gonna spin you over there, down to South America. And here’s a farm This is called lat fronteira there’s 103 lots and you know, you can see your land and you can see the configuration of your land

J Darrin Gross 32:47

those are you guys bought the whole farming and personal that creates rosters?

Peter Badger 32:52

Yes, what we do is we again, we have packhouse data, this is the beautiful thing. We have the most advanced packhouse in Latin America 4080 lambs and things ample. The lambs come through the machine, and I’ll actually send you the link so you can put the video on it. It’s incredible. This thing a Mexican machine, cru built this thing. So they come through, they get washed twice, you know, waxed, come through, and then as a little video camera, and the machine both ways plus takes photos, four or five photos per second of each line, and it comes out the end and it spits it out based upon diameter, color quality. And basically all the highest quality lines are spat out into one side of the machine for export. And the ones which don’t quite make it in terms of quality of spat out inside the machine to be some lovely Colombian market low price. And so as you start to see tons and tons and tons of fruit Trevor has taken for a podcast machine. We’ve started to see the data on which were the best farms. And therefore we went back to those farms met the owners started to negotiate and bulldoze farms in his case, this is called la frontera. They are a multi generational Colombian farming family. This is their business. They’ve got like a dozen farms, we’ve only purchased one of them. And basically, you know, they have 80% of their fruit is high quality enough to be export across the Walmart, Trader Joe’s etc. And so I can’t remember the question you asked, but it’s all about the data. Yes, we bought this farms at the highest export quality fruit, Walmart of buying the fruit today. You can find it in Walmart down the eastern seaboard. Virginia, North Carolina on down and yeah, this farm is broken up into 103 parcels or lots, and you can buy a lot for $32,000. And on a 10 year range you can make between 12 and 20% based upon the project being sold now.

J Darrin Gross 34:55

You said what was it 12 and 22%?

Peter Badger 34:58

Yeah, because our farms are We’re very different. We have different ages of trees, different locations, but generally depends on the tree age as to when the income comes. So in this case, we have 22,542, Didi lime trees, some are planted or four years old at the top of the farm. The fruit is right now harvesting going to Walmart, and through our packhouse, we’re going to Rotterdam, some of the lower portions of just newly planted. So I like to call this a is like a multifamily value add project, you know, you’ve already got the high end rehab departments being rented out at the top dollar, you’ve now got a bunch of years to go to rehab, in this case, the young trees. So we know the climate works, the sunshine works, the water works, we know that the quality is there in terms of the farm management and the team, therefore just making waiting for all 22,542 trees to come up to their premium years. year six and seven are tricky, which they actually harvest between 140 and 160 kilograms of 80 lambs per tree per year. And so you can get in early. And over the next 3456 years, you’ll see the appreciation or the noi net operating income, you know, this farm really supercharge itself to get you into those high double digit returns. And that’s what we do from a foreign ownership standpoint.

J Darrin Gross 36:23

So on the age of the trees, I guess this is a question I hadn’t thought to ask. I mean, most often I think of trees as something that they grow and grow and grow fruit trees, no, you’ve got to be a little bit more money just a little bit more labor intensive to keep them pruned properly. So they continue to produce fruit and stuff. But But is there a point where you rip them out? And you have to put new presen? Yeah, so what is the life expectancy? pose in

Peter Badger 36:52

Mortality is the term. All right. So trees are like human beings. You know, as they get older, their production declines, they don’t just die one day. You know, there’s no pre existing condition type stuff happening. But so what you can expect in the case of a, so it all depends on the hybrid as well. Sure, so a coconut tree hybrids go from 40 to 80 years. In the case of TT line, in the case of the tree we’re planting, they have maximum production of 20 to 24 years for Mr to reduce their production. And so in terms of this ownership opportunity, you can expect in year 17, to get to that mass production of 140 to 160 kgs per tree per year, and then wait 17 to 20 years now we’ll start as a farm, as we’re harvesting. So the production decline in certain parts of the farm certain trees, that’s when you go through a replanting program, they don’t all die at once, they don’t all decline at once, they’ll go through a certain phase of declining. And so in, say 20 years now, you’ll take you know, a quarter of the farm one year quarter farm next year and over a four year period, you’ll have some income, but it’ll be dropping obviously, as we replaced those trees and bring those next crop back up to full productivity over a seven year period. That’s the way you should think about mortality for these products in TT line.

J Darrin Gross 38:19

We’re in just as a capital improvement project, replanting. Can you give me some sort of sense of cost? I mean, if I got 30 few 1000 does that is that? First of all, how large of a plot is that? There’s a 30. What do you have these divided into?

Peter Badger 38:35

Yes, this is probably 65, 68 hectares, I think it is you got some tree, some areas that can’t be planted. So what you do is you basically the original owner, took their land, they started planting everywhere they could, at reservoir occasion, the middle of summer, you know, haciendas inner rows to make sure you can harvest and pick the produce. But overall, they’ll plant it. By year three, you’re seeing whether there’s mortality in certain areas of the farm. In the case of this farm, there’s a 3% mortality rate across the whole farm by year three. And so when you think about that, why did the 3% of the trees die? Well, that’s maybe a bit too Rocky, you know, the roots didn’t take over the steepness. Maybe there’s just on the edge of the farm where, you know, it’s it’s shaded from whatever reasons farming is variable, yeah. And so then you have a choice, you then start to replant those or not, and see if they take a second time, but generally, you know, you’ve got your general number of trees at that point. So in the case of this farm, we know the flavor of it at this point. And now it’s a question of letting that just you know, grow and grow and grow and grow. Occasionally, you’ll still get mortality, trees dying throughout the years, and you just replaced them, you know, two to $3 per seat, maybe 10 to 15 bucks with the labor total to replant a tree. very much a very Low cost to keep that at its full?

J Darrin Gross 40:03

Did you said seeds or you’re starting these from a seedling then does that tell you are you

Peter Badger 40:08

Yes, you need to buy the seeds from somebody and create a nursery or need to find a nursery who has already got the seeds and got them into saplings.

J Darrin Gross 40:17

Okay, so you’re not, you’re not just like planting a seed and in waiting for it to grow, you’ve got to, you’re starting with just a juvenile tree or some sort of low planting or sampling or whatever the

Peter Badger 40:27

So in the case of our capability, we are at such scale right now that we have our own nurseries, okay, in these regions.

J Darrin Gross 40:37

So you really are from I mean, from seed to consumer, almost as ever, at least to retailer. That’s, that’s pretty impressive.

Peter Badger 40:45

Absolutely. That’s probably the apple of farming. Yeah. And the pros, by the way, is that, from my perspective, I was looking for a consistent and reliable farmland ownership investment in myself, I only joined a company in May this year, like, you know, three or four months back, I was investing in every project list since 2015. And

J Darrin Gross 41:06

it’s impressive, just the the model, I mean, again, taking control of the middle. You know, if you look at it, it’s very similar to if you look at some of the corporate farming models in the US, I mean, I think a lot of like, your livestock production, whether it be Tyson chicken, or, or, you know, I don’t know what the Hon, you know, the farm or whatever, but I mean, they basically it’s the plant, then they have all the the farmers to bring the, the, you know, the the product to the plant. And something I learned even in the COVID was that like with the pigs, I mean, all the machines were a certain size, and that if the pigs were at a certain day, a certain age, that’s when they had to be slaughtered. Otherwise, they didn’t fit in the machinery. So I mean, it’s, it does make sense again, on the scale side of things, what you’re what you’ve accomplished here, and what you guys are doing with the product and his genius and the fact that now the once you had the the place where people were bringing the product, you were able to identify the best producing farms and go by that as opposed to, like you say, not having the data and, and can read the brochure and ended up with rocky soil or something didn’t, didn’t break. That’s, that’s great.

Peter Badger 42:14

And let’s take another, you know, era of due diligence, like normally for real estate property manager. So in this case, how do you get the best fire management teams, the packhouse, told which farms had the best fruit. As we started to analyze which farm management teams were actually managing these farms, we found this company called JRD. And this region at least. And it’s this guy called Jorge campusano. And he’s been in a multi generational, you know, citrus farming family, you know, and he’s got this amazing team, and he actually contracts out to rich people, and creates lime and citrus farms on their behalf, and manages on behalf so he is now our main partner in this region, because it does such a fantastic job. So again, we had to extrapolate back from the pack house data, quarter the fruit to work out who the best farming families were. And Jorge and his team, were the winners. So again, follow the data. So anyway,

J Darrin Gross 43:14

Let me ask you so investor buys a whatever, 60 hectors or whatever it is that you’ve got the the in that comes with the trees already planted?

Peter Badger 43:24

Yeah, in the case of this farm, there’s 20,542 trees planted from the age of basically four months to close to up to four years now.

J Darrin Gross 43:36

What? I’m sorry, good,

Peter Badger 43:37

No, so so as a member of the FMLA there are 103 lots in this farm. Because it’s variable, because we’re managing at scale and growing and efficiency, you actually for your land ownership have won 100 and third of the income minus one 130 of the expenses

J Darrin Gross 43:59

and that was the whole farm it’s just okay, I would say that that would make a lot more sense than having one one parcel

Peter Badger 44:09

Think about it, farming is variable, you know, you may have 227 trees, your neighbor might have like 204 right, but the key is that it doesn’t work unless you’re farming as a collective group and

J Darrin Gross 44:21

Blended right there. So as far as the the I mean, are there really any kind of capital calls I mean, as far as having to you know, replenish the trees, or is that just basically built into the model as a reserved were knowing that you’re, you’ve got an ongoing expense to after replace these trees? And that’s, that’s already factored in those rates of return.

Peter Badger 44:42

Yeah, so the simple answer is we don’t see by the law itself or multiple lost people buy three 510 depends on what number of the monthly passive income they’re looking for. We then will take depending on the month, the year, we buy the farm We will then take some prepaid for managed expenses. Because if we buy the farm on April, the first, we’re going to operate it through to January when you get your first payment, and we pay every six months, that net income amount, total income from the packhouse manage the expenses for the actual farming itself. So in the case that you’ll pay for the lot, plus pre pay those first nine months or four, manage the expenses, and then you just cycle forward on a six month basis. It is all built into the model over the decades, such that the, you know, the profit from the fruit sales should cover the three to four year replanting schedule 20 years from now. And really, the goal is that you just receive a net income check every six months from your title filename.

J Darrin Gross 45:49

Got it? couple of questions here. So in in more of a different asset class where their structures and in datamine lending is a big thing. Leverage is a big thing in order to produce a positive return. Is there financing? Or is it basically just a cash? Cash? I mean, I would think that this is more about you’re just investing into the fund. And then maybe maybe you guys at scale are doing some, some financing. But I would think the investor is not in full. Yeah.

Peter Badger 46:25

The answer is no, it can’t be financed right now. But we’re looking at some lenders, we’re in discussions right now to try and offer that as a product. Because, you know, I get that people want to buy a single family home, you know, loan to value of 75%. And, yeah, right now it’s a cash only transaction. We do. This is a real estate transaction, by the way. So number one, you’d have to be accredited, you can be non accredited. Our goal is to basically democratize farmland ownership, it frustrates me that the American government decides they can say what you should invest in or not. So you’re buying real estate, therefore, it’s not a regulated, sec kind of structure. By titles, the land. Cash now, we are looking at the ability to leverage multiple lots. We have some lenders were in latest discussions whether we may bring that to the fore, hopefully q1 next year, if the conversations go where we want them to be, because ultimately, price of the farm is low enough right now $32,000 that would be the same as a deposit on like a three bed two bath, single family home in Jacksonville, Florida, you know, right? If you are leveraging 75% loan to value. So our goal is to get people in now so they can see how it works. See the checks coming? But eventually, yes, we would like to bring leverage in those who can buy three or four lots for that 30 to $40,000. price point.

J Darrin Gross 47:58

The other question is a again, with anything with the structure, at least in the US your tax benefit is the depreciation. I’m assuming there’s not a lot of depreciation. I mean, is there? I mean, obviously, I guess there there is, but it’s Is there any talk about that? Is there any depreciation built into your

Peter Badger 48:18

There is no depreciation from this part? No. But I think in reality, depreciation is a bit of a bonus on top, the returns way outweigh the advantage of depreciation for the average person.

J Darrin Gross 48:32

Right? No, no, I just doing a kind of a side by side as a class comparison kind of thing. So now that’s that’s, that’s impressive. So the one thing that I mentioned, and I’m just kind of curious if you can speak a little bit about government issues, is there any kind of governmental concerns I mean, Colombia is different counties are different country there’s, I know that different different countries are more. I don’t want to say secure or just stable.

Peter Badger 49:04

I’ve spent six years investing overseas, I was basically a digital nomad, my partner and I were kind of traveling a lot, mostly, you know, Europe, Eastern Europe, Latin America, Central America. And yes, you need to be very clear which countries have strong foreign property ownership rights. And so in the case of Colombia, they have very strong laws, and you have the same rights as a little Colombian to own that land. And so yeah, the key is to make sure the country has clear titled land and that they allow foreign investors to own that in the way that they would normally for local Colombian who owns their own land. Academy agency, no. Problem matrix.

J Darrin Gross 49:53

No, absolutely. Absolutely. Let’s see here. I’m trying to think now. If you have Can I do this here? I’ve got the you’re driving now?

Peter Badger 50:05

Yeah.

J Darrin Gross 50:08

I’ve lost my Here we go. Okay. So just wanted to run down my see if there was anything else that I was looking at her questions I was thinking of it because it’s a neat model. And I just think you guys so the way you’ve I mean again started with data you clearly made made a good case for passing pharma. But if we could hear it, I’d like to shift gears here for a second. As I’ve mentioned, by day, I’m an insurance broker. And I work with my clients to assess risk and determine what to do with the risk. And there’s basically there’s there’s three strategies that we look at. The first is we look to see if we can avoid the risk. If we can’t avoid it, we’ll look to see if there’s a way to minimize the risk. And if we can’t avoid or minimize, we look to see if we can transfer the risk. And that’s what an insurance policy as you’re transferring the risk to the insurance company. I like to ask my guests if they can look at their own situation could be their clients, investors, tenants, the market government, however, however you want to, you know, frame them the question, but if you can take a look at the situation and determine what the biggest risk is that that you face your clients face, or however you want to get however you want to frame this. And again, for clarification, while I am an insurance broker, I’m not necessarily looking for an insurance related answer. And so if you’re willing, I’d like to ask you, Peter Badger, what is the BIGGEST RISK?

Peter Badger 51:51

The BIGGEST RISK is the macro risk that you, as an owner or investor, do not follow a very data driven due diligence process before you buy. And so I can sit here with my risk matrix and my process, and I go through it. And that’s the irony of this, you need to have a risk process, a due diligence process to follow Darren and most people don’t, if I had $1, for every time somebody took a recommendation from a friend, or went to the internet, downloaded a nice glossy marketing brochure and trusted somebody. I there’s a there’s a famous quote from Ronald Reagan, when he met Mikhail Gorbachev. And I don’t know the Russian saying, but it was basically trust, but verify. And that’s what you have to do. So the biggest risk for me is that you don’t verify you don’t have a process, you don’t have a due diligence matrix with all these areas to look at, you don’t follow the data to make sure that what people are telling you is actually true or not, that they have the track record that they have considered all these aspects in that asset class that you’re considering owning.

J Darrin Gross 53:10

That’s definitely some some words of wisdom, their due diligence. Il’ll eat alive if you don’t, so,

Peter Badger 53:19

So maybe to summarize down, the BIGGEST RISK is laziness.

J Darrin Gross 53:24

Now, now there’s, there’s certainly a case for that. And if you’re not, if you’re not inquisitive, enough and curious enough, you know, the reality is, it’s probably not a good direction for you to go, you know, if you if you’re not, you know, willing to understand, you know, in some people, it myself included sounds like, you know, you have had the experience a little bit is that the experience is a is a tremendous treat a teacher, but there’s no reason in this day and age when you can, you know, sit at your computer and Google, you know, all of the things you were just showing, you know, rainfall and temperature and all that kind of thing, you the information is available. You have to be curious enough and willing to go look for it. So, I agree, completely agree. So, Peter, Where can the listeners go if they’d like to learn more or connect with you?

Peter Badger 54:26

Yep. So please head over on to Farmfolio dot net. We actually have all of our farms listed as they come available. You’ll see a video get a tour. You can reach out to me personally, I am Peter. P te R, let’s say Peter, in American accent sometimes. Peter@farmfolio.net. And yeah, I mean, we’re here to democratize farmland ownership. If you’re interested in the asset class, come to us we can send some articles to educate you. We can send you some data sources to help you do your own due diligence and More importantly, we can introduce you to some amazing farmland ownership opportunities which are passive in nature, consistent income, strong appreciation as they grow to their full fruit production. And more importantly, they are not cyclical or correlated with the public stock markets or real estate. This is a true way to diversify. And I would love you all to have a farm folio alongside your portfolio.

J Darrin Gross 55:28

Awesome. Well, Peter, I can’t say thanks enough for taking the time to talk. I’ve enjoyed it and learned a lot. I look forward to doing it again soon.

Peter Badger 55:39

Thank you. Thanks, Darrin. And thanks for doing what you do. Thanks for educating your membership. So we really appreciate it.

J Darrin Gross 55:45

Unknown Speaker 56:04

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Real Estate Deal Sponsors Verification with Lance Pederson – CRE PN #328

Lance Pederson 0:00

It’s been great because we’ve been on a historic Bull Run. So everyone looks like a genius. But at some point, some point that stops, right? It’s these these markets, real estate is cyclical, and it will cycle and they’ll, you know, I just don’t want to see a situation where a bunch of people raised a bunch of money did a bunch of deals based on you know, fabricating sort of their claim. So we allow sponsors to pay us to verify their track record, right. So my whole thing is, listen, pay us once we’re an independent third party and just keep paying us to verify the things you do, you now have a living track record. So when you make the claim that you’ve acquired half a billion dollars worth of real estate, you can literally say, well, don’t trust me, just go look on my profile on Verivest and you can see that you know that that they’ve already checked it.

Unknown Speaker 0:46

J Darrin Gross 1:05

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

Today, my guest is Lance Pederson. Lance is the Founder and Managing Partner of Verivest, and the host of the Real Estate Risk Report Podcast.

And in just a minute, we’re gonna speak with Lance about Verivest, verification and monitoring. And but first, if you would like we would love your your help, there’s couple things you can do to help us out. You can like, share and subscribe. And as always, we encourage you to leave a comment, we’d love to hear from our listeners. Also, if you’d like to see how handsome our guests are, you can check out our YouTube channel. And you can find us on youtube at Commercial Real Estate Pro Network. And while you’re there, please subscribe. With that, I want to welcome my guest, Lance, welcome to CRE PN Radio.

Lance Pederson 2:17

Yeah, thanks for having me, Darrin. Appreciate it.

J Darrin Gross 2:20

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

Lance Pederson 2:29

Yeah, I think you know, for me, my background is I’m an entrepreneur at heart. So you know, went to college for a brief time realized that wasn’t for me, had not to, you know, too much fine. I think I you know, realize that more of the entrepreneurial pursuits are my thing. And so I started my first company I was 20 years old, it was an IT services company. So built that from nothing to about 5 million in revenue and 35 employees and sold that and then I ended up getting into the real estate game via commercial hard money lending through a mutual acquaintance of ours, Darrin, Matt Burk. He was in my EO Entrepreneurs Organization forum group who became good buddies and I joined forces with him in 2008. And then we pivoted the business in 2011, to really moving more from private lending strategy exclusively to more of a capital allocation strategy. You know, private equity, real estate investing. And and that led to sort of the accidental business that we now refer to as veribest. We learned quickly with our capital allocation strategy of investing in deal sponsors around the country that the back end back office reporting is a was a big problem and was creating issues for us to report to our investors. And so we started offering it as a service. And given my sort of outsourcing type of background and I headed that up. And it really took off and and now if we’re, what do we have nine years later, it’s a, it’s a, it’s a great business. And we’ve got about two almost pushing 2.3 billion in assets under administration and serving a big need. And along the way, we’ve sort of, you know, uncovered as entrepreneurs do other other issues or friction in this little corner of the world, that is sort of sub sub institutional, real estate investing and, and have tried to eliminate or remove as much of it as we can to, to help all the participants, you know, limited partners, or investors and general partners and deal sponsors.

J Darrin Gross 4:41

I love the path. You know, even from college, recognizing that wasn’t the thing to, you know, following your entrepreneurial spirit and then sounds like you’ve, you have kind of an awareness of a problem and when there’s a problem, kind of find a solution. If there’s not one, I’m assuming And it sounds like it’s worked out pretty well for you. So let’s talk a little bit about Verivest Can you describe just what is Verivest?

Lance Pederson 5:14

Yeah, I mean I think at the core of what Verivest is, is we’re really a middle and back office administration platform, you know, for the like what I call the sub institutional real estate space you know, and it’s really with the proliferation of syndication since the passage of the jobs act right you’ve got a lot more high net worth investors and you know, smaller family offices that are investing into you know, funds or one offs or syndicated deals you know, 50 100 150 200 grand at a time and so you know, there’s there’s a lot of moving parts that come along with that and so it veribest really what we’re trying to do I think now you know, as the years go by the clarity becomes greater is that it’s really trying to help match interested investors you know, match and you know, educate and match limited partners or passive investors with you know, general partners or, you know, deal sponsors in the space. Because, you know, I think the commonality between the deal sponsors is that these aren’t household names we’re not talking Blackstone or KKR. So you don’t have no you have no brand recognition. If you’re really good, it means you probably have a really solid acquisition strategy whether you’re originating loans or you’re buying houses or multifamily buildings, you know, if the better you become at it, then then your pipeline becomes You know, it versions and, and it really capital becomes a constraint, and then managing that capital, right, those investor relationships and all those things is very different than you know, acquiring property and even the asset management right, which is what many of the participants in this space that’s their passion, you know, their deal guys, they like negotiating, they like underwriting, they like you know, real estate for, you know, for the real estate, but yet you know, what comes along with it is that you really need to use other people’s capital to grow and scale a real estate investment firm. And I think from the investor side right, it’s now that they are aware that you know, you can allocate capital into these alternative investments and specifically real estate ventures into agree that you’re credited especially that’s what most of the opportunities are available to them. It’s just you can really generate outsized returns, right, and I think, above average risk adjusted returns. And but the issue of course, once again, is figuring out who’s offering those investments and then figuring out whether or not you should trust them with your money, I think is that problem now that needs to be solved? You know, back in the day, you know, if you were gonna invest in a deal like this, it was probably in the town you’re you lived in, right? And you probably heard about it from buddies on the golf course. And that’s fine and dandy, but you know, that’s not super scalable. So even even from any deal sponsors I mean, even as human beings I mean, how many relationships can we really build I mean, it’s some of us more guys like me fewer, I’m introverted. Anyway, many real estate guys are probably similar. So they’re not it’s hard to go out there and sort of build the net new relationships with people that are in your locale, there’s sort of a finite number, but now that we can advertise these things broadly, you know, you can develop relationships with the power of the internet, but you run into this problem of you know, there’s there’s limited oversight and regulation by design which is which is which is a good thing, we want to keep it that way. But at the same time, we want to make sure that the good guys are winning and that you know who they are. That’s sort of when I wake when I woke up this morning that’s really what I’m all about Darrin is I woke up this morning a leader of a movement you know, I really believe that that this is what the industry needs Is this fair play you know to ensure that it can proliferate and I believe that limited partners deserve to have greater transparency into these investments and you know, I’m a lead the movement and try to help create and foster the solutions and implement them so that so that that continues.

J Darrin Gross 9:24

Got it. So Verivest, you guys kind of set between the deal sponsors and the investors as far as a kind of a lens to look through that, that looks at the the deal sponsors and kind of, do you rate them or do you just kind of composite, the, you know, profile the information or how, how does an investor What do they see when they when they look at a Verivest, is it a report or is it a subscription or how is it that the information is made available,

Lance Pederson 9:58

So the way we structured that component of it is we’ve created a directory. So each sponsor has a profile. And so investors can go there and they can filter that directory by, you know, property types geography, you know, you know, try to narrow down, like who’s doing deals that look like what I’m looking for. And then what we don’t rate them. But what we do is we say, Okay, well, if you want to be a verified, you know, you want to be verified, verified sponsor, then you and the principals of the firm those who control this firm that you’ve representing your company need to pass a background check. So will that look back seven years and you can’t have any felony criminal convictions? No, you know, personal or business bankruptcies, no unresolved accusations of fraud from investors, no regulatory sanctions, you know, the bad boy stuff. And then the results of that background check are publicly accessible to the world. So even if, you know, if you’ve been in some lawsuits, those are going to show up. I mean, it may not be a disqualifying event from being veribest verified. But you know, nonetheless, those are the things that show up because, as we know, that’s sort of where you can find some red flags. People are highly litigious, although it’s not my place to sort of pass judgment on what’s too litigious or not. And I’d rather not do that. And veribest would rather not do that. I if we make that information transparent to the investors before they invest, they can say, well, this person, although, you know, has no, no one’s accusing them currently of fraud that hasn’t been resolved, you seem they seem to keep running into issues, right. So giving that in that information, and you know, what happens when they know that’s going to be accessible, the guys who have questionable backgrounds, guess what, they don’t participate. And then for those who do participate, it’s sort of that reminder every day that they wake up, to sort of keep their nose clean. So to me, you know, that’s, that’s that component of it. And then the other big piece that we do, once again, we’re not rating it, we’re just we’re just the twist is all what’s objective and empirical. And what can we measure? So someone’s telling me on the phone, that that they’ve acquired $500 million worth of multifamily properties? It’s pretty easy to say that, you know, eyes the investor having just met them minutes before, how in the world can I? How can I corroborate whether or not that’s an accurate and true statement or not, I can’t. So what’s happened in this business, which is one of the reasons why I sort of, you know, ny veribest started to go down this road is that I saw that misrepresentation was becoming rampant. And that’s a problem. And I think that, unfortunately, many of the participants in this face, you know, deal sponsors or real estate guys, I don’t think they fully appreciate sort of the how important it is to not misrepresent yourself, right? So it’s fine to exaggerate your fishing expeditions and your high school football career. I mean, I mean, it’s not fine, but I don’t care, right? Like it’s not, it doesn’t affect me. But you exaggerating your, the the length, and the your track record is a problem. those are those are securities violations. And it’s serious stuff. And you’ve been in the insurance business notice, you got to take licensing and tests, and I’ve been a registered representative and an investment advisor. Rep, I’ve had to pass the tests. I know how I know how important those things are. But it’s happening, and it’s happening too much. And we have to clean it up. Right? Like, it can’t be that way, you can’t fudge numbers like that, because people make decisions based upon that information. And it’s been great, because we’ve been on a historic Bull Run. So everyone looks like a genius. But at some point, some point that stops, right, it’s these these markets, real estate is cyclical, and it will cycle and they’ll you know, I just don’t want to see a situation where a bunch of people raised a bunch of money did a bunch of deals based on you know, fabricating sort of their claim. So we allow sponsors to pay us to verify their track record, right. So my whole thing is, listen, pay us once we’re an independent third party and just keep paying us to verify the things you do, you now have a living track record. So when you make the claim that you’ve acquired half a billion dollars worth of real estate, you can literally say, well, don’t trust me, just go look on my profile on veribest. And you can see that, you know, that, that they’ve already checked it. Right. And so and I think that removes a lot of friction from that. what amounts to a sales process fundraising and getting someone invested in a deal that’s friction because I as the LP or the passive investor, it if I can’t corroborate that, it’s going to cause me to do things differently, right, I may I may write a smaller check, right, I only invest 50 grand instead of even though I could write the $200,000 check. Or I may decide to pass on this deal and wait for deals later to get more comfortable and see more before I invest. Or I may not invest at all because I just can’t bring myself to doing it without being able to corroborate those claims.

And then you know, and then for us, the last piece we do is just after someone makes the investment into it. Deal. Most of these things don’t have audit requirements, right? So no one’s really you know, a tax returns being done by a tax preparer but he’s not it he or she’s not digging into the details, right. So what we do is we monitor, we have a service where we’ll monitor that deal on a quarterly basis and basically review the financials. It’s like audit light, where we’re making sure that the fees that are being charged, you know, are being calculated correctly per the operating agreement, making sure that all the money’s going where it’s supposed to go make sure that the assets and on the balance sheet actually exist. And make sure that there aren’t any, you know, related party transactions or money going out the backdoor, which is most Ponzi scheme and fraudsters that’s what they do they have control of the money and the money has its way of sort of disappearing and sitting in some you know, company account or you know,

J Darrin Gross 15:51

Right now making it back to the investors. Yeah, right. So you mentioned kind of the you know, the fishing tails or just the kind of the not the truth per se I’m curious in in your discovery mode Have you found that those are typically like intentional or are a lot on just like they don’t know the rules and the boundaries as far as what they can and cannot say?

Lance Pederson 16:21

I think I think what happens Darrin is that when because they aren’t necessarily paying super close attention it’s so what happens in conversation and then ends up translating an email communication oftentimes is that we always throw out sort of these round numbers and the numbers just I think, depending upon the person tend to be you know, anywhere from 10 to 40% more than they really are so what we’ve seen already early on in this process is just in my you know, in our conversations with the prospect this prospective member of front like hey well How much do you think it is or whatever right and then when push comes to shove and we they actually give us the information then we start to see that there’s there’s a gap right and then you start to hear the we have but why included the stuff that I did when I worked for this other guy that did whatever and you know and it’s just it’s it’s once again it’s not like they’re trying to lie it’s I mean it’s just that they don’t think they realize that okay, but you have to be able to prove it right like and and so in you know letters you know, you’ve been in the business and you’ve seen a lot of LP activity a lot of investors are kind of getting into syndication games so you’re sweating also seeing is people that have invested as LPs in deals sort of trying to count that in you know, this these claims about how many doors they have or you know, and it’s just it’s just stuff like that it’s like I don’t have a problem with it right like obviously you know you making a $50,000 investment in a in another person’s deal to me is part of your track record right because you made the investment so versus you not having made the investment it makes you more experience than the person who hadn’t you know and and then of course if you make the investment the deal goes full cycle and it’s a win then you know, you should get credit for identifying an operator and ideal that you invested in and you know, when you get as much credit in the mind of a prospective investor as you would for someone who actually found the deal and bought it managed and operated it No but it’s it’s so that’s sort of the way I look at it

J Darrin Gross 18:19

Yeah and I think that is kind of one of these you know, when you get down to it and you and you really study the numbers and stuff I found that to be a consistent thing or some you’ll say I’m in you know, hundreds of doors or whatever and you find out that they’re fractional you know and like so they are invested so I don’t want to like take that away from them but it just it’s more a matter of I guess clarity and kind understanding level of participation kind of thing and and I think the to the to the to the good again being involved in in deal and stuff and and you know watching others operate and stuff definitely helps one see how to or how not to or what, you know, how to overcome certain situation or what if there is value in that, but definitely it is it is kind of a an interesting, you know, tale of sorts, you’ve got to try and parse to try and fully understand where somebody’s sitting. Yeah. So so you guys then if somebody is very vest verified then you will do like a quarterly is that basically taking their their quarterly report and then just measuring that against you know, what you find or how, how, how deep does that go? He said, it’s kind of a light, but I’m just kind of curious.

Lance Pederson 19:40

Well, yeah, I mean, I think it’s it’s like compared to a full blown financial audit, I mean, so I’ll tell you what it is and you can tell me if you think it’s like so yeah, and for the record to the other step, the other state of member we have the very best verified gold members and a gold member is someone who’s engaged us to monitor the totality of the amount of capital they have under management, so they so what they’re doing is on a quarterly basis, they are sending us their income statements, balance sheets, bank statements, bank reconciliations, and a general ledger detail, and any backup documentation on acquisitions of assets, or dispositions of assets. So basically, they’re sending us the financial package, one, one, what that does is it requires you to actually have a process in place where you’re closing your books, at least on a quarterly basis, which actually disqualifies lots of people. So another pet peeve of mine, I don’t understand why that’s such a problem. But then how you can actually operate a business without doing that. But nonetheless, we requested information, which is information that should already exist, right? If you’ve done a closed process, everything I just said is readily available. We take it in, and we make sure that everything ties out income statement ties, the balance sheet, the bank statements tied to the bank, rec, the bank rec ties to the balance sheet. Because he that’s how people sort of fabricate things, right is that it’s really hard to like fabricate financials, but if I get that total thing, I can basically tie everything out with all the reports, I just said, if you know what you’re doing, and we do have a bunch of accounts that work for us. So So that’s sort of what we do. And then we spend much of our time focused on money out, right, so the cash out the door, is where we hone in on like, okay, I mean, money came in, that’s, that’s great. But where did the money go out, and we look at the operating agreement, it says the manager is going to earn an asset management fee, and the property manager who’s a third party property manager earning a fee based on this, we’re going to make sure that the fees that those people are earning is actually the amount that they should be earning. Because that’s the other thing that happens is that well, no one’s paying attention, I’ll pay myself double, you know, the asset management fee, who’s gonna really notice, right, and the reality is probably nobody. But we do, and it’s sort of, that’s that proof that it’s like, hey, everything you’re seeing here is legitimate, and you can sleep well at night, knowing that someone who knows what they’re looking at is looking at it regularly on behalf of all the investors,

J Darrin Gross 22:07

I would think that’s, that’s definitely a higher level of certainty and, and would give any investor, you know, comfort to know that, that everything is because like you said, the, and I think, you know, real estate lends itself to a lot of lesser sophisticated operators, from a standpoint of just, you know, getting the once you qualify for the loan, kind of thing, you know, you talked about as far as management operations, reporting requirements aren’t that great. If you’re operating your own deal, you might have to provide financial the bank annually or something like that, but, but when you’re when you have other people’s money, and have to be able to provide them the level of detail, or some sort of report that assures them that their money is what is where it’s supposed to be. And that, you know, they’re going to get paid, and they’re going to get their money back. You know, it’s definitely a degree of, of reporting that they may not have been used to, on their own deal, you know, kind of thing is, whereas when they, when they start working with others, that is absolutely a requirement.

Lance Pederson 23:16

Yeah, I mean, it shouldn’t, it shouldn’t be right. And that’s why I was telling guys all the time, like, let’s just seems like this is a lot of stuff I’m like, but you don’t understand, like, if we don’t, as an industry start doing these things ourselves, then what’s going to happen is, and we’re already seeing some of this is that it’s the regulators are going to come in and start requiring it of more people within all that’s gonna do is the way that they’ll implement their regulatory regime will be far worse. And we’ll make it so that most people that are trying to participate, now, the barrier to entry will be even higher, which is what, you know, I think we’re starting to see Wall Street, sort of realize that the public markets are shrinking, you know, their ability to generate, you know, alpha that markets not there. And, you know, they’re they’ve got lobbyists looking for ways to sort of, you know, get access to more of that retail type money, you know, the accredited investor money, and it’d be a hell of a lot easier to do that if, if it wasn’t all flowing to a bunch of, you know, random, highly fragmented individuals and all sorts of corners, you know, like, it’s just, it’s, anyway, the point is, it’s the right thing to do no matter what, I think that it definitely demonstrates that you have competence, right? That you’re able to do that you’re willing to be transparent, which is the whole point, right? Is like how do we narrow down the universe for perspective, LP, who may not be as sophisticated yet or whatever, we need to narrow it down this sort of it certainly narrows it down and then it gives you greater certainty. And it’s a way for those who are really good at what they do to demonstrate that to the world, when they may not be the world’s greatest marketers or have the best branding or whatever but it’s that’s you know, that’s sort of what I’m after. I’m we know of having been we’re very active investors. ourselves you know the guys who are some of our best operators that we invest with, I mean, on the surface they don’t necessarily look like they are. right but but but these they’re the type of people that do everything that we’ve been talking about during this episode. Right?

J Darrin Gross 25:15

So do you does Verivest offer a verification for individuals that are doing one deal at a time or more fund oriented?

Lance Pederson 25:31

So the I mean the one deal at a time, if it’s syndicated equity then that fits in right I mean, those who are like acquiring single family homes with their own money and some baina

J Darrin Gross 25:45

Yeah, I wasn’t planning but I meant more like somebody that’s that’s doing a syndication as opposed to a fund.

Lance Pederson 25:51

Yeah, yeah, definitely. I mean, I think the syndications are Yeah, it’s it’s, it’s really targeted at syndications. And, and those who’ve graduated to using funds is really the, the any I mean, I think the key here, right, is that it’s anytime that investors putting money in where they’re in that limited, you know, and, you know, their limited partner there, they have, they don’t have any, they have no rights, they’re completely abdicating the decision making authority to some other party. That’s, I mean, that’s really the the rub.

J Darrin Gross 26:22

Right? Are you seeing more of the experience syndicators leveling up to creating funds? I yeah.

Lance Pederson 26:33

Yeah, I mean, I think I think we are, it’s a bit of a, you know, a love hate thing for people. But I mean, I think what we what I’ve been telling guys, you know, is that if, hey, if you’re in a position where, you know, you’re going to syndicate six or more deals in a given year or something, you really should think about sort of launching at least what may amount to like a co GP fund or just a co investment fund. So even though the fund may not end up, you know, wholly owning all of the assets, I mean, that’s a pretty steep climb to sort of go straight from syndicating one deal at a time to that, but it’s a good interim step, right to demonstrate to your investor base, like hey, there’s a more there’s more efficient ways to sort of capitalize our deals and we’re getting to the point where we need to start using those you know, those ways which would be a fun and I think it’s a good so rather because a lot of people look at it very binary like I’m going to syndicate each deal or I have to have a fund that’s going to raise all the equity and in control the equity in the deal. And I’m going yeah, that’s a really steep and wide you know, deep and wide Canyon. That’s a really hard leave to sort of make, but I think that offering that and starting to put that in place early where it’s like hey, and what we did that you know, at fairway America, that was sort of what we did is say, Hey, we’re gonna start syndicating some deals one off but it the first look is gonna go to those who are foreign investors. So for the investors listening, I think you got to understand that the more successful people come they become and the more velocity they have, it sort of may make sense for them to make that leap and don’t be surprised that that’s sort of what happens is they’ll say, Hey, I’ll give you a look at these these one off deals that you’ve grown accustomed to, but only if you’ve you make an allocation of the fund as well.

J Darrin Gross 28:24

Well it makes sense you know, from a standpoint of you have the investors capital you’ve you’ve you know implied you’re going to put it to work and they’ve they’ve gone with you and now you have an opportunity to get a reward and investor money and make the you know the returns or your investors are looking for I find it fascinating just fell in again kind of going back to the the impetus of all this kind of the JOBS Act really kind of freed up all this or created all this opportunity whereas before it was kind of like you know, like suddenly you know, somebody the golf course and just how it’s kind of proliferated and and really, you know, kind of what you you identified as well it’s just the you can do this but how good are you at marketing or, or attracting capital? And is that space kind of becomes more known and crowded you know, how can you you know, stand out and make certain that people know that you you can do are able to and provide the returns that they’re looking for and have something like veribest that can actually you know, provide some transparency to it and and you know, third party I think it’s I think it’s an awesome idea that you guys created this and I’m you know, the few syndicators I’ve talked to that are that are clients of yours. You know, are gone Wow, this is exactly what the space needed. Because of of just the the lack of ability to discern, you know, a, you know, an operator that that is doing well versus one that tells him a good story one that’s more marketing oriented kind of thing. So I think that’s, that’s a great thing. So you mentioned you know it, fairway, you guys were doing the the funds and also sponsoring some deals. Do you find that that all of that experiences and also helps you be that much more able to discern? You know, because obviously, everything we’ve talked about so far has been more about numbers to the numbers match. But I’m just curious, your your own experience and having been in the market, as long as you guys have, are there things that you for that maybe that the, the numbers don’t tell that, that help you? And again, I know you’re not grading and you’re not providing any subjective reporting, but I’m just kind of curious, does it does it? Does it show up anywhere? That experience you guys have?

Lance Pederson 31:07

Oh, most definitely. Yeah, I mean, most definitely, I think that My take is on everything we’ve spent all our time just talking about is the sort of thing that that removes a bunch of the bias we have just because we’re human beings, and we’re attracted to certain people, and like, you know what I mean, like, you’ve got that whole thing, we just, there’s so much bias built in. So as investors, and it doesn’t matter, if you’re real estate investor investing in equities, like, it doesn’t matter. I mean, to be a good investor, you need to learn how to keep yourself out of that as much as you can, you know, you can’t be emotional, right? You just can’t, right, like, you have to have a process. And so, for us, what we found is that, you know, we were no different, we’re professional investors. But, you know, we were assessed as susceptible as anyone else to just those marketing things, and the charisma of a given operator and, and, of course, we’re human beings, we’re going to be so much the things I think that are important. That’s why I say, take this stuff off the table, right? Like, this is stuff that’s empirical and objective taken off the table. Okay, so you know, what you’re dealing with. When it comes to the people, I think one of the most important things that you have to look at as a passive investor and the things I’ve we’ve learned through going through this process of like, you know, how do you do it and get become better at figuring out who you should invest with? And what deals you should invest in is that it really is about the people. So it’s, it’s looking at who’s on their team, right? Who are these people? What roles do they play specifically? And what is their background? Right? Which ones again, might not necessarily show up on the track record stuff that they have as a principle and its principles, whatever. I mean, it’s still these other things are important. And and then the other big thing is just what’s their strategy? Right? Like, do they have conviction about their strategy and their mandate? And is there a method to their madness, right? Because it’s it they, once again, there’s no right answer, per se, but if they haven’t, they don’t have clarity about how they do what they do, why they do it, you know, all those things, you need to dig into that stuff. And you need to be able to get to buy into whatever it is they’re telling you. Right? Because that’s the risk mitigation part, like that’s the extra it’s like, how do you do what you do? And why do you do it? And then you have to ask yourself an investor does them doing that mitigate risk, right? Like, if you like a multifamily guy who goes in and makes a big deal about having social services for their tenants? And, and you know, and then whatever it is, they’re doing these different types of amenities? Like, those are the people who thought through that, and they’ve got a bunch of different things they do that’s like their playbook that they run, you need to be looking for stuff that a little more depth to it than just like we buy ugly apartment buildings, or you know, I don’t know, right? Like, you want to push on all those things, to see if there’s any depth to it, or any conviction behind it, or they just this is looking for the passing fad, right? And that’s why I mean, I don’t like to be the guy who says, like, oh, people who invest in markets, they’re not in, that’s impossible. And I would always pass on that maybe that’s your own mandate or philosophy, that’s fine. But that’s not necessarily true that someone couldn’t live in California, and invest in a bunch of multifamily deals in Arkansas, but I want to know how in the world, they’re going to do that, you know, and do it successfully and ensure that you know, that they’re not, you know, that there’s not risks that they can’t mitigate because of the distance as an as one example. Right, like so. Those are the things we’ve learned like, it’s just not easy. It’s not simple. And you really have to like do your homework on everything.

J Darrin Gross 34:40

Yeah, no, I think the the, the question I think is outstanding, and I think it’s just across the board. On it kind of goes back to the start of this when the the JOBS Act passed, and how the market has been running up ever since. And you know, how many guys got in when the market was upside down from the, you know, the great recession and have been able to produce these amazing returns? How does their experience translate when there is the, the, you know, future dip correction, whatever you want to call it, I think ever since I’ve been doing this podcast, there’s been a, a, you know, in anticipation that we’re in the late innings of a baseball game, if you will, for an analogy, and that, you know, it’s it’s coming, but there’s continually these different you know, factors that have changed the lay of the land or they continue to promote this run. And so I think it’s, it’s crystal ball business is not what I’m, I don’t think anybody has one. But it’s, I think, just again, everything that you’ve, you’ve talked about this, it’ll be interesting to see how, how these, you know, players do when, when they, you know, the market is corrects itself or, or whatever the next challenge is, and it’s not necessarily a correction, but just a change in the in the course of the winds or, you know, the wind blows a different way.

Lance Pederson 36:16

So you got, I mean, we, you know, a book that I think many people quote is one of the greatest business books ever right was good to great by, by Jim Collins, in the whole book is based on studying comparable firms that we’ve all heard of, you know, head to head, right? And which ones are the ones that went from good to great. And so at the heart of that, and if you listen, if you follow Warren Buffett at all, right, like, what’s his whole thing? It’s all about the teams. It’s all about the leadership of these companies, or whatever. So it’s the, it’s this intangible stuff. It’s like, what are they made of, you know, what’s in them. Because what happens is, that’s why you have to figure that out. And that’s why we don’t Advair Avast, I don’t tell you what deal to invest in. I don’t want to do that. I don’t want to be in the business of saying, you know, shilling this deal, like, you know, put money in this deal. It’s the greatest deal in the world. Right? Right, right. I’m like, I just don’t believe in that. What I believe in is like, that’s your job, you’re an investor. If you want to be in the game, then you need to get learn enough, educate yourself enough to do that, I’m going to help you, we’re going to do as much of that stuff that’s really hard to do for any given individual, but you can do the stuff I’m talking about. In fact, that’s what we tell our sponsor members is that we’re providing you because we have the level of insight into your operation as we do. Our willingness then to provide you with a platform to share what you’re made of with the world goes way up. Because if I didn’t have that level of insight, I’d be super nervous that I’m letting some you know, charlatan up on stage, you know, tell you how great he is. Right? So it’s To me, it’s that’s not my job. So my job, the pitch the deals is not my job to sell, why I’m why I’m, you know, this guy’s great at what he does, it’s their job. And if they don’t figure it out, they won’t get capital. And if they do figure it out, you know, they might, right. And then investors need to also do the same. They need to dig in and see what makes these guys tick. And what are they all about? And do you believe in it or not? Yeah, I don’t know. I don’t I don’t know the answer.

J Darrin Gross 38:12

Right. Right. Right now, and I think, you know, there’s always a, you know, a degree of risk in that. But I think just to try and eliminate the noise as much as possible to where you can, you know, see the numbers and make it more empirical, certainly is a good starting place. I’m curious, is there any asset class that you guys don’t work with as far as any any of the investors is or do you work across all the asset classes for real estate investors?

Lance Pederson 38:42

Yeah, we were Yeah, across all the asset classes for real estate. I mean, we’ve we’ve got, you know, guys doing tax liens, and, you know, single family multifamily. I mean, I can’t think of anything that I mean, obviously, some of the special purpose stuff, we probably haven’t, you know, haven’t done anything with the ski resort there. But it’s not to say, I mean, I mean, we wouldn’t stay away from it. So I mean, I think for us, that’s the other thing is just, it’s, hey, if it has if it’s real estate, and you there’s a strategy you can put around it to acquire it and add value to it and do whatever, then, you know, then it makes sense. They need some of this ATM stuff, which isn’t really real estate, it’s like personal property seems to be popping up. I’ve got a client who’s, you know, thinking about doing a fun with one of those. So that’s kind of different, but the mechanics are kind of the same. Now on the monitoring front. You know, that’s not something we could monitor as a good example, because I have no idea how to keep track of 3000 ATMs around the country, right, like, right, but I certainly know how to figure out with real estate it should be titled, and, you know, with the technology that exists today, we can, we can we have much higher levels of certainty that that things are properly titled.

J Darrin Gross 39:54

Well, income and expenses, right.

Lance Pederson 39:56

income and expenses bank and cash and tax returns and You know, so there’s when you know the financial side I mean, it really is I know it’s complicated lots of people but you know, when you do know it, it’s like, it’s either right or it’s wrong.

J Darrin Gross 40:09

Right? Math. Yeah, like it. Got it. Lance, if we could, I’d like shift gears here for a second. By day, I’m an insurance broker and work with my clients to assess risk and determine what to do with the risk. And there’s three strategies that we typically consider, we first look to see if we can avoid the risk, that’s not an option, then we look to see if we can minimize the risk. And when we can’t avoid or minimize and let’s see if we can transfer the risk. And that’s what an insurance policy is. And I like to ask my guests if they can look at their own situation could be their clients investors the market, in tenants interest rates, however you want to define that. But if you can take a look at the at the situation, and identify what you consider to be the biggest risk and again for for clarification, while I am an insurance broker, I’m not necessarily looking for an insurance related answer. So if you’re willing, I’d like to ask you Lance Pederson what is the BIGGEST RISK?

Lance Pederson 41:21

Yeah, I mean, this is a bias answer but I wouldn’t be doing what I do if I didn’t believe it. I believe that the lack of oversight and I mean is as it pertains to a limited partner investing into a deal that’s controlled by somebody else is just if no one’s watching what’s going on that’s the biggest risk that you’re more than likely not being compensated for you know, in whatever return you’ve been quoted so to me to your to your three step thing I don’t know how to transfer it because there’s no you know, no one’s writing I mean, I’ve seen a few where you can insurance on stuff like this but that’s ridiculous but you can minimize it right? And I think that’s what veribest does, is we just we just minimize it. Is it foolproof? No, it’s not but it’s a big deterrent, right and you take that off the you take that off the table so once again much like concerns the cost of the monitoring and even the light touch in the way we do it to keep that cost down it’s certainly minimises what I believe is your biggest risk is just some go sideways they stick their head in their sand and they start moving money out of the deal and you don’t become whole because of it. How many times have you heard that?

J Darrin Gross 42:32

Yeah, no, absolutely the the you know, the ponds here just you know, again, like you said, People aren’t watching the numbers and nobody’s paying attention and go. Lansa can’t say thanks enough for taking the time to talk today. Before we wrap up, where can listeners go if they’d like to learn more connect with you?

Lance Pederson 42:57

Sure. I mean, so you can go to Verivest dot com check out the directory. there there’s a little chat bubble there. I currently man that I like to be on the front lines. As we you know, the service gets off the ground so you can chat with me there. I’m on Twitter at L at L Pederson. Pederson. pretty active on LinkedIn as well. So yeah, it’s it’s pretty easy to get ahold of me or find me.

J Darrin Gross 43:25

All right. Well, Lance again, I can’t say thanks for taking the time. I’ve enjoyed it. learned a lot. And I hope we can do it again soon.

Lance Pederson 43:33

Yeah. Thanks, Darrin. Appreciate it.

J Darrin Gross 43:35

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

Unknown Speaker 43:53

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

Infinite Banking Leverage using Insurance with Jim Oliver – CRE PN # 327

Jim Oliver 0:00

But I looked at what our actual rate of return was versus what our platforms were telling our customers, their rate of return was. And now you would think those two things would be the same, but they weren’t. The platforms were telling my customers and me that they were getting 9.38% over the last 10 years. They were actually there kegger compound annual growth rate was a little over four, after fees, taxes, expenses, etc. It was then that I started to look at all of my clients and how much money or how they made their money, excuse me. And I found that there were two ways real estate in businesses. Now at the time, I didn’t realize. I mean, real estate is a business, right? So it’s real estate and businesses. And I started to study real estate and business ownership. And I shifted all of my focus to that, and how I was going to help my customers build wealth in real estate and businesses rather than in the stock market.

Announcer 1:05

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

J Darrin Gross 1:25

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

Today, my guest is Jim Oliver. Jim is the world’s foremost authority on the infinite banking concept and has dedicated his career to breaking the financial shackles that bind people in businesses to unnecessary taxes and interest expenses. And in just a minute, I’m going to speak with Jim about infinite banking.

But first, a quick reminder, if you like our show, CRE PN Radio, there are a couple of things you can do to help us out. You can like, share and subscribe. And as always, we encourage you to leave a comment. 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 on youtube at the commercial real estate pro network. And while you’re there, please subscribe. Without I want to welcome my guest. Jim, welcome to CRE PN Radio.

Jim Oliver 2:49

Thanks for having me. Darrin, I’m excited to be here and share with your audience today.

J Darrin Gross 2:54

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

Jim Oliver 3:03

Yeah, absolutely. So I grew up in Los Angeles and went to school in the Midwest was a big change. And I decided because I grew up very poor, stood in line for government cheese, and lived in Inglewood, California, I decided that I was going to study money. So I went to school, became a financial planner, and set up shop in Denver, Colorado, and thought, Okay, this is great. And I studied everything I could find on money, and Wall Street, and everything that I can find like how to get rich in Wall Street. And after 15 years of doing that I didn’t say I was I was a quick learner Darren but I, I looked at our portfolio, and I had about $700 million under management. So we were doing pretty well. But I looked at what our actual rate of return was versus what our platforms were telling our customers their rate of return was. And now you would think those two things would be the same but they weren’t the platform’s were telling my customers and me that they were getting 9.38% over the last 10 years. They were actually there kegger compound annual growth rate was a little over four, after fees, taxes, expenses, etc. It was then that I started to look at all of my clients and how much money or how they made their money, excuse me. And I found that there were two ways, real estate and businesses. Now at the time, I didn’t realize. I mean real estate is a business, right? So it’s real estate and businesses and I started to study real estate and business ownership. And I shifted all of my focus to that and how I was going to help my Customers build wealth in real estate and businesses rather than in the stock market. I’ve been doing that 18 years

J Darrin Gross 5:11

no, I’m I’m interested in hearing more full disclosure here. I’m a son of a banker myself and I’ve learned a few things that just putting your money in the bank because I was told as a kid is not exactly the most prosperous way to, you know, take care of money. But so you were a broker then is that basically are a certified financial planner or what?

Jim Oliver 5:38

Yeah, I was fee-based financial planner, full service, you know, sit down, you guess a little bit I, you know, you I asked you questions, and you guess, and then I guess, and then we hope together that you’re going to build your wealth over a 20 3040 year period. And yeah, at all the all of the terms down, we had, you know, how much you needed to invest? How much time inflation and everything else and look at this and 40 years, you can quote, retire, which means to be taken out of service. And you shouldn’t run out of money based on the Monte Carlo method. That Yeah, I did that for 15 years. That’s all I you know, everybody was telling me that’s, that’s how people make money.

J Darrin Gross 6:28

No, no, it’s it’s to interest am I’m kind of curious, what was the lightbulb moment for you, that caused you to shift gears and, and then quit that?

Jim Oliver 6:42

Yeah, all of my clients that really, you know, that didn’t get lucky, right? They didn’t work at the right company at the right time, or, or something like that. All of my clients that didn’t get lucky, they built their wealth, with real estate, and business ownership. So why would we try to build somebody else’s wealth outside of that, and I really couldn’t find any good examples of somebody, middle income, upper middle income, you know, etc, that had built some great fortune in Wall Street. And it was a mentality of scarcity. And I like to think that I don’t live in that scarcity mindset. And and I think that I realized that the noise out there, that it’s designed to keep us in that scarcity mindset. So that was kind of the lightbulb moment.

J Darrin Gross 7:35

So when you when you realize this as a real estate and business ownership for kind of the path to actually creating wealth? What What did you where’d you go? What did you do? What did you do?

Jim Oliver 7:50

Yeah, that’s a great question, what I did is I started reading everything that I could get my hands on, going again, I was in Denver, at the time going to any real estate, seminar, course, anything that I could, could sign up for, and that I could attend. I started talking to my clients that built big real estate portfolios, or big businesses. I mean, I remember a guy that started a plastics business was a big influence on my next steps. And so I just started interviewing clients and interviewing people that had done it. And I just found, I just found a treasure of information. And then it came down to, it looks simple, might be simple, but simplicity is elusive. You know, it’s not it’s some of these techniques. And some of these systems are tried and true. But they take you know, they take work they take, they take education, so they’re gone from there.

J Darrin Gross 9:00

So what are some of the techniques and I assume that’s how we get to the infinite banking. Is that is that one of the, the concepts or the technique that people were using?

Jim Oliver 9:11

Yeah, I mean, I always ask people is, you know, Darren, if I would loan you $100 million today, and the or only obligation was to give the pay me $5 million of our $5 million of interest, one year from today. So you, you know, I’m going to give you 100 million today. And one year from today, you got to pay me $5 million of interest. Are you going to take the loan? Yeah, absolutely right, because you know what to do with the money. So let’s reverse that for a second. What if you made me the same offer and Darren, if you are making that offer, I’m I’m open to talking after the show. You loaned me 100 million bucks. I’m gonna go to the bank. The seller, and I’m going to get 80% loan to value. So I’m going to get another $400 million, I’m gonna buy $500 million of real estate, my standard, and we’re getting slightly better than this, but is 25% cash on cash. So I’m gonna make 100, I’m gonna make 25 million on because I got your 100 million in it right? And I’m gonna, and I’m gonna call you at the end of the year and I’m gonna say, hey, Darren, I’d like the fly out to Portland and buy lunch and give you a check. And we get together and you say, Jim, hey, do you want to pay any principal? And I say, No, see you next year. Right? That’s kind of how infinite banking works. And that’s what I discovered is people can find deals, I’m not saying it’s easy, but we can find deals, it’s putting the financing together, and it’s managing the debt. So how do we do that? Well, if we can control the banking function, which is what infinite banking concept does, then then we’re way ahead of the game. And what we what we do is we get alone, kind of, like I just said, we use a very special, specifically designed insurance contract that’s designed for cash value, it’s guaranteed, you have a right to borrow up to 100% of the cash value, right? With an interest only loan, and your money never leaves your account in this tax favored account. And the insurance company has to give you their money, kind of like I just said, Now it’s interest only. Now I can take that money, the insurance company’s money while my money is going, they’re growing tax free. And I can go and I can leverage that with the seller is what I would prefer, or a bank that wants to play with me. And I have control over that. More so than if I’m putting my money in, right. And so then as that that property starts to cash flow, I’m going to flow that money back to my insurance contract until my next deal. And then all of a sudden, I have multiple deals that are appreciating in value, cash flowing, I have money in my insurance contract that’s growing tax free, I have a loan against that, right. And when I have windfalls if I sell a property or whatever, I can put that money back into an insurance contract, but all of my cash flows back in there, which reduces my interest expense. And I just do it over and over and over and over again until the policy won’t hold the cash flow.

J Darrin Gross 12:52

Okay, so in a you mentioned, you’re kind of slow learner I challenge you on that because I know I’m a slow skier. But the basic concepts if I understand right, the the insurance contract is kind of the vehicle that provides the the in and out if I have a and I’m assuming these are life insurance policies is that

Jim Oliver 13:15

Yep, they’re especially like they’re they’re, they’re a combination of a paid up additions writer, which is like a one pay insurance policy, and a standard whole life policy. And the reason we use that is because there’s guaranteed growth in the whole life policy in the universal life, there’s not guaranteed growth. So it has to be a very specially designed contract. We write it right up to the mech line, which is the definition of life insurance over the mech line being too efficient means it doesn’t get all the tax benefits. So yeah, it’s a life insurance contract. But but it’s designed like a bank or corporation with design an insurance contract with Boley bank owned life insurance, or Kohli corporate owned life insurance is designed that way, not kind of how normally consumers buy life insurance.

J Darrin Gross 14:07

So so the policy is still underwriting your life presuming you’re, you’re healthy and in the premium amounts. track all that I’m assuming I mean, although it’s paid up policy, can you explain a little bit of that? I mean, so if we, if, if, if I had it, guess what, what’s a minimum amount that people usually start with to make this a viable option?

Jim Oliver 14:36

You know, it’s funny because when we think of buying insurance, we say, okay, we want a certain amount of death benefit, what’s the minimum amount that we could pay for that death benefit, right? But because of what we’re doing, then we people think differently on the funding level, so they don’t really think of it in minimums. They think of it in what cash flow. Do. I have Right now, either from my w two job, my properties or something else, that I’ll flow that money through the insurance contract first, instead of holding it in the commercial bank, I’ll hold it there until I need it for escrow for whatever it is, right? And so people start from 10 $20,000 a year to millions of dollars a year. In fact, let me let me give you an example. And then I’ll go back, there was another part of your question. I’ll remember here in a second, but we have a real estate investor in the Midwest that has about $120 million of real estate, that, by the way, they’ve done that in the last seven years. They, I mean, which is pretty amazing, right? And they’re escrows about $175,000 a month at the time, right? So what they they came back and they said, can I run that 175 per month through the insurance contract, then when I meet need money out for escrow, I’ll pull it out and and every month I just keep putting it back in. I said absolutely. So the difference for them is there’s a point around the fifth year maybe a little bit sooner, it just depends on your age and underwriting. But where every dollar you put in there, Darren, you have more than $1 to use. Right? So like in year 10, I might put if I put 40 grand and I might have 60,000 to use now if I’m running that, if that’s my escrow money, I just got a big discount, right? Because I got more money to use than I put in there. And so normally people buy life insurance where they’re letting it sit there it’s accumulating and again over 2030 years or whatever they say this is how much money I’m going to have. And then they say is that a good rate of return? Is that an adequate rate of return whatever it is, we’re using the money this is you’re exactly right this is just the place we park the money it’s the money pool it’s not infinite banking, that’s a process not a product Okay, so the insurance contract is it’s kind of like cogeneration the think about like up in your neck of the woods you know, you you might have a lumber lumber yard next to a paper mill your or something like that where you you know, you have wood and then you have paper and and they work together and so the insurance contract and then your behavior and the cash flowing assets. They all work together in concert. But now remember that the other question is you can buy here’s the cool thing. Okay, so I’m 56 I have some business partners that are all the way down to 24 that’s my youngest business partner. I can buy insurance on them because I have insurable interest I’m the owner and I’m the beneficiary they’re just the insurance they have no control over the policy but I can find bugs by cells I can you know I can I can make my business and my partners more secure and myself more secure what all while I’m becoming my own banker and controlling the bank banking function in my life.

J Darrin Gross 18:20

So that the vehicle is basically just a vessel quick in and out I mean you have maximum flexibility you put the money in you can take the money out up to 100% is that

Jim Oliver 18:30

Yep yeah and what here’s another thing because when we think of loans we think of approval processes or applications or anything there’s none of that they have to it’s a contractual right that you have to take that loan you literally sign a form and and and we we scan it to them and we literally can have your money I mean I’ve done it the same day but let’s just say by tomorrow.

J Darrin Gross 18:58

So, so Okay, so I get basically the the initial concept is the individual you you created in some sort of like a corporate structure as opposed to just a straight pay down or like a life insurance policy I mean, it’s more like this this vessel that has a maximum flexibility. So if I have a you know, income of 10 and I keep putting that in there eventually that that the the availability can grow beyond the 10 per month to where I can borrow more is that my tracking?

Jim Oliver 19:36

Yeah, absolutely. Because of and and it’s each year as you’re putting money in like so let’s just say that make the math easy, and I can think of the purse, the percentages in my head, if you put 100 grand then in by like the third per year, okay, so like by the third year you put 300 grand in, you’re gonna have a total cash value, but the way We look at it because it’s not sitting there, most of that money is probably borrowed out, is you put in 100 grand, maybe you have 107,000 to use in the third year, right? And it gets better every year. So we use it as a cash flow system, not an investment we’re setting letting the money sit there. So um, you know, this reminds me Darren that it’s it’s, it’s a it’s a mind shift. It’s a, it’s it’s changing our thinking it’s a different paradigm, but it takes a little bit of time for people to change that paradigm, because everybody thinks the life insurance, like other investments or savings vehicles, where you put money in there and let it sit, and then Okay, what’s my rate of return? It’s, it’s, it’s not that it’s, it’s really compared to like your checking account, because you’re gonna flow money in, you’re gonna flow it out. And in, in, basically, you’re like, collateralizing, your checking account, but your checking account in this example, is in a tax favored vehicle. So you can there’s literally, as long as you let Don’t let the policy lapse, you can never pay tax on it, again, on the growth or the access to it, there’s no tax on the death benefit to the next generation. So there’s legacy planning. And leverages, there’s a point in just a few years where you put in $1, and you have more than $1 to use.

J Darrin Gross 21:31

Gotcha. So so the leverage is not a an instant option, it’s, it’s, how long does it have to season before you can leverage that.

Jim Oliver 21:39

So like, I’ll give you an example, if you are a woman under 50, it leverages in the second year, I mean, it’s just crazy, because women live longer than men, right? If you’re, if you’re male, and you’re under, you know, probably 46 47, it’s gonna be right at 100%, maybe 99, you know, percent, some, I mean, right at 100 in the second year, and then the third and fourth year, it’ll start to leverage if you’re in your 60s, and I think our, we had a client that was 85, that started this when they were 78, or 80. On they unfortunately passed away. But if you were in your 60s, it might be the fourth or fifth year, maybe the sixth year before it starts to leverage. But again, if I’m in my 60s, and let’s say that I’m in poor health, but I have, I have a business partner, who’s in their 20s 30s or 40s, I can insure them or their spouse, I can insure my spouse if they’re healthier or younger, or you know, any of those things.

J Darrin Gross 22:53

Got it. And the the, I guess the it’s the end, I mean, if the the policy gets called because there’s a death, then I’m assuming the benefits are less whatever is outstanding, as far as the loan goes?

Jim Oliver 23:07

Absolutely, that’s what’s really cool is, if you wanted to turn this into an income stream, you could and you could take out all of the cash value over your lifetime. And then your heirs get what the policy minus they get the death benefit minus the loan balance. But think about this for a second. If you were going to say write insurance on a business partner, and, and the you know, the business partner dies, you get a tax free death benefit. So you know, there’s a lot of things, a lot of different planning things for everybody’s specific situation. But um, you know, I’ve used it in so many different ways in so many different businesses. And it works with every business, it’s just how does it fit for each business?

J Darrin Gross 24:01

Got it. So okay, so I understand that the basic concepts of the who, the the vehicle and the the opportunity to leverage, you know, after it’s seasoned in a new, you’ve got, quote more than the cash value that you’ve put into the account available to you. So, the in and out thing, if we could go over that one more time. So if, if I’m just again, round numbers, easy numbers, if I’m putting 100,000 a month in, and let’s say it’s, you know, 100,000 a year. So 10,000 in 100,000, you get to the the magical point of say three years, so you’ve got 300,000 in at that point, presumably it’s worth but 400,000 is that too much?

Jim Oliver 24:56

That’s probably a little bit high because we’re in a low dividend because we’re in so It’s a low interest rate environment, but

J Darrin Gross 25:02

It uses the cash I guess what I was trying to figure out. So, yeah, so that so let’s just say two or 300? Because I’ve got three times 300. Yes. But now I can leverage that 300 up to what 400? Are

Jim Oliver 25:15

you? Well, I mean, what I mean, there’s two different languages like there’s, there’s, I could take that 300. And then I could go use that as 20% down payment, go buy some real estate, have that real estate sub, because remember, we’re talking about just the way we design the insurance contract. And that’s just the the money pool, but where the real magic happens, is taking that money. And even if I was going to use, you know, I’m going to go to somebody who syndicates real estate, because i don’t i don’t i want to do it passively. I don’t know anything about it, let’s say whatever it is, I mean, it would work slower. But the way that I would do it, the way that you would do it there is that you would take that 300 grand, and then you would use that as a as a 20% down payment, and you wouldn’t go out and buy. Three, you’d go out and buy, what am I trying to say, but that was 20, what’s 20% 80%, you’d go out and buy one point million, or $5 million worth of real estate, let’s just say, right? Okay, and so then on that real estate, then I would expect to get 25% cash on cash. So I get $75,000. And that would flow back into my system. So let’s say the next year, I put in 100 grand, but I got the 75 to use again, right? And then I’m going to take that 175, I’m going to go buy $2 million worth of real estate or whatever it is. And then I’m just gonna keep on doing that over and over and over again. And pretty soon the cash flow won’t fit in the policy, and I have to have more policies. That’s why it’s important to have the know I mean, like, there’s only so much though right on one person, right? And so then you know, that’s where we, we expand out to partners and everything else, even people are running your property management, because you have insurable interest on them. So that’s how I would leverage it. Now, some people do take that money and they say, Okay, I’m going to take that 300 grand, and I’m going to give it to one of somebody syndicating real estate, and they’re buying assisted living facilities, and they’re going to pay me 20%, you know, over per year over three years, but nothing the first, whatever the deal is right? Then, then I can still draw that out with the cash flow, it just takes a little bit longer, because there’s no seller or bank financed leverage.

J Darrin Gross 27:51

Gotcha. And the the so so as long as you you know, you circulate money through this thing, you keep the policy paid up. The cash is available, or at least a large percentage of it is, and allows you to continue to go out and leverage and create more, is that kind of?

Jim Oliver 28:15

Yeah. So so what we’re kind of trying to do, this isn’t maybe an example that’ll help is, if you think about a mortgage, you know, just are your average everyday American who has a mortgage on their house, right? Let’s say they’re gonna buy a $300,000 house, it’s 5% 30 year mortgage and the payments 1600 bucks a month, right? I’m just making these numbers up. So when you pay that bank that 16 $100, what does the bank do with that money?

J Darrin Gross 28:49

They take most of it for interest and put a little against a principal.

Jim Oliver 28:54

Yeah, but what they do really is they just take that money and loan it right back out. Right, right. And so they’ll take your payment, my payment, the audience’s payments, and they’ll pull them all together and loan it out to somebody else. Now, again, we can’t do fractional reserve lending. But so so sometimes you will jump to that. I’m not saying that. But what the bank does, is they loan that money out every time you make a payment over and over and over and over again, because the asset is the loan. Right for the bank, you know, and you mentioned your dad was in banking, the asset is the loan, everybody that works at the bank, they’re trying to get deposits in so then they can loan those deposits out. Right. And that’s the I own part of a bank in South Dakota. And if we were at a board meeting, we’re not talking about I mean, we’re only talking about one thing, I mean, not really I mean we’re a lot of things but the one focus is our is our loan portfolio doing how our assets doing right and you know, then it’s who’s late was, you know, whatever it is, but but when what we’re doing is we’re turning that liability which most people think of. Most people think that when you deposit money at the bank, that it’s a asset, but it’s actually a liability for the bank, they make it an asset by loaning it out, but loan is the asset, excuse me, sorry.

J Darrin Gross 30:30

No, it is a flip the script kind of a thing when you you realize the value of it is, you know, an asset by lending it out as opposed to the liability of having it on your books or so, so, let me ask you this, I get the basic concept. And this is, is opposed to not having a life insurance policy and just having a mortgage or being limited to, you know, to your, to your own, I guess capital, you know, the ability to go out and raise capital or, you know, say I mean, if you, if you were to put the same amount of money into a savings account and wait until you had the or enough on hand to go buy another property you know, essentially as a similar scenario, the differences you wouldn’t have the protection of life insurance or the, the tax vehicle of a life insurance policy is that my my track and as far as a comparison?

Jim Oliver 31:30

And remember, at some point in time, every dollar you put in you have more than $1 $1 that you can go borrow, because the policy leverages the reason it leverages is because it never leaves that account and it’s accumulating right but and that’s that’s the way people think of life insurance my cash value is going up every year just a little bit by mumbo jumbo but we’re using that insurance company’s money while our money is sitting in there and growing. So it literally gets to where I put that 100 grand in and let’s say at year 10 I can take and go invest 150 grand because my policy is growing by that deposit and I’m and I’m taking and I have all the money borrowed out using it for real estate it’s you know this part of it Darren is a little bit harder easier to to see you know it’s more visual seeing the tracking than it is verbal and I’d be happy to give you some links to videos that we’ve done that literally draw this out so you can see the kind of the how it all works together and in we do have real estate examples in there that again are drawn out and you can see the math and and we we have people that I use 25% cash on cash I have some times people say to me, you know they’re at 27 or 28 or they’re 23 or 20 It doesn’t really matter it still works it’s you know again I’m just for an example I’m just trying to use him Yeah, just for illustrative purposes.

J Darrin Gross 33:12

Gotcha. So let me ask you this so the the the good news if I’m hearing all of this is basically that the you have the the benefit of a life insurance policy you have the ability to leverage the cash value in the policy to where you can go out and create more investments more equity more cash flow so what are the risk of this what’s the what’s the potential downside or something like this?

Jim Oliver 33:43

You know, the the downside really is kind of the same as like at a bank if they have the because of the posits if they’re just sitting there and they don’t use them, then the banks in trouble right now it’s not that harsh here because it would just gain gain that you know just would earn dividends and just kind of chug along like a normal life insurance contract that somebody might buy but it’s not going to give you all of the things that we’re looking at it’s not going to give you all of the freedoms to take over the banking function. So sometimes people just like anything else they they started and then they they don’t take their first loan they don’t go buy their first property they don’t go and and they’re the only risk there is now you have to fund insurance and and you’re not letting in your and you’re using your income to fund the insurance instead of using your assets to fund the insurance and that’s not really the system so that’s that’s a danger it’s it’s something that I would say that wouldn’t be as desirable. I mean it’s not like it’s gonna hurt you but but you’re then you got all this money in the insurance contract that you’re not you But it’s the that’s kind of rare what, what we try to do is when somebody starts, we send them videos, we send them articles and and they figure out what their imagination where their niches, right? So if you and I interview we’re coaching somebody on how to get into real estate, and let’s say commercial real estate, right? And I mean, you, you would say, okay here, here’s what you need the start the read, here’s what you need to listen to, I’m going to coach you, I’m going to do this, this this, and I’m okay now I want you to go evaluate 10 deals or whatever it is, right? I mean, you have a system. And so if that person at some point in time, 90 days, then says, Yeah, I’m not gonna evaluate any deals, well, then they’re not going to get the benefits that you’re trying to show them or buying commercial real estate. Right.

J Darrin Gross 35:54

Right. Right. Right. Now, then it makes sense. I, you know, so the downside is basically for if you don’t do if you don’t take advantage of that’s basically what it means. So let me ask you this question. Because I think that what we’ve certainly learned here in the last couple of years and the potential going forward, nobody knows exactly what’s going to happen. But there’s always a potential for like a change in a law or something. Are there any unique laws that this life insurance takes advantage of that potentially could? You know, change? And this the the ability to use this policy this way change?

Jim Oliver 36:37

Yeah, you know that? That’s a great question there in in the life insurance, whole life insurance has been around since the 1650s. In England, but over 250, around over 250, almost 300 years. In the United States. It was so it precludes they were pre existed. federal income tax, right. So. So that’s one thing, the last time that they changed the law was in 1988, during Defra, I don’t know if you remember those tax changes, but it limited how much money you could put inside the insurance contract for a given death benefit. And they and that was the the Internal Revenue Code 7702 is definite definition of life insurance. Everybody that bought an insurance contract before 1988, they were grandfathered. So if they change the law again, because I don’t know, they would really have no way of undoing all of this right, then you would be grandfathered. The other thing that protects us, in my opinion, is that there are so many people that are elected officials that do this, it’s kind of like the real estate laws, there’s a lot of there’s, you know, it’s that it’s very interesting how somebody can spend their whole life in public service and become a billionaire. But if you look at their portfolio, they invested in this, they invested in this real estate, this property, whatever it is, right. So in my opinion, they’re not going to go and change these laws, and hurt themselves. And then you have the insurance, the insurance lobby, which is very strong, can you imagine if they took away the tax deferred growth and the tax free death benefit inside of an insurance contract? Well, then a lot, then most people would not put money inside of an insurance contract. So if they didn’t do that, then there wouldn’t be any private protection, which means the government would have to protect everybody, again, a negative. And if you go back to before 1974, when the IRA was invented, or roll was introduced, people would put up the 50% of their savings in life insurance contracts, and just let it accumulate, because they could turn those life insurance contracts into the type of pension at retirement. The IRA really took all that money away from the insurance industry, and in and so they did that and people didn’t have private life insurance. It’s getting a lot more expensive for the rest of us.

J Darrin Gross 39:32

It’s interesting to see that history I forgot about the life insurance being kind of the vehicle pre IRA. So definitely, things can change. But like you said, the the fact that the policy makers are the ones that are typically taken advantage of these things, I think that’s some insulation from from change, it would make it punitive to do so. So that’s good. So in summary that is there, is there person you think this works best for?

Jim Oliver 40:08

You know, I think it works for everyone. I really like probably I see people get really excited about it that are real estate investors, business owners, entrepreneurs, you know that I’m not saying that somebody working a W two job doesn’t get it, they do. Okay. And we have lots of clients that are working w two jobs, we have a lot of doctors, you know, attorneys, things like that. CPAs. But it is, it is a paradigm shift for, for them kind of like, if you were looking to get into commercial real estate, it’s a paradigm shift for that w two employee. Now sometimes the most exciting people to work with are those w two employees that haven’t broken out of the rat race yet. And, and because they see this as a vehicle that can accelerate that, that for them breaking away.

J Darrin Gross 41:17

Gotcha. Hey, Jim, if we could, I’d like to shift gears here for a second, absolutely, by damn an insurance broker, and try and work with my clients to assess risk and determine what to do with the risk. And there are three strategies that we typically look at, we first look to see if we can avoid the risk. And if we can’t avoid it, then we look to see if there’s a way to minimize the risk. And when neither avoid nor minimize the risk our options, and we look to see if we can transfer the risk. And that’s what an insurance policy is. And I like to ask my guests, if they can take a look at their own situation. Could be their their clients, investors, tenants the market, however you would like to identify the risk and consider what is the biggest risk? And for clarification, like said, while I’m an insurance broker, I’m not necessarily looking for an insurance related answer. But if you’re willing, I’d like to ask you, Jim Oliver, what is the BIGGEST RISK?

Jim Oliver 42:29

I think the BIGGEST RISK is inflation. And I think that because the dollars in our pocket, are going down in value so fast, that if we have a bunch of dollars sitting around Fiat dollars, then we’re in trouble. I mean, if if you gave your kid $20, to put it in a savings account today, you’d be doing them a disservice. Because that $20 isn’t going to be worth very much as we go along. And my example of that is when I was a kid, we could buy about five candy bars for $1, right? Maybe a few more, and now you can’t even buy one. So if the dollars in my pocket are going down in value, how do I combat that? So my, you know, I could say taxes, but taxes are gonna go up and down. And I believe taxes have to go up based on our that, right? But inflation is really a stealth tax. Because the dollars are going down in value and every time the Federal Reserve prints money, then my value is going down, that’s a threat to me, that’s a risk to me. And the only way to that I know of to well, by the way, you could take all your money and put it in cryptocurrency and get out of the Fiat system, okay. And I’m not discouraging somebody to do that. And I’m not encouraging somebody to do that. Okay, but but you can get out of the Fiat system, which is one of the reasons that these cryptocurrencies these digital currencies exist, right? And then, but, but you could also you can buy assets, because if I own assets, that are appreciating in value that are that I have tenants and in customers that pay me to use my space, if it’s real estate, or if it’s a business, I can raise my prices, if it’s real estate, I can really raise my rent. I can keep up with inflation. So that’s the biggest risk, and that’s the answer and how to mitigate that risk.

J Darrin Gross 44:43

No, that’s a great answer. And I think in the years that I’ve been doing this, you’re the first one that’s actually said that and it seems so obvious. So I appreciate you sharing that with us. Absolutely. Jim, we’re gonna listeners If they’d like to learn more connect with you,

Jim Oliver 45:03

So you can go to Create tailwind dot com. The reason it’s create tailwind is most people are fighting a financial headwind, we show you how to create a tailwind right and push you faster in the airplane. So create tailwind all one word.com. Or you can go to our YouTube channel, which is create tailwind, and we’ve got video resources on there. They’re also on the website, too. There’s links to the videos, but those are the best ways to get ahold of us.

J Darrin Gross 45:37

Got it? Well, Jim, I can’t say thanks enough for taking the time to talk today. I’ve learned a lot. enjoyed it. And I look forward to doing it again soon.

Jim Oliver 45:48

Thank you there and thanks for having me. And I really enjoyed it too. Thanks for all the good work that you’re doing out there.

J Darrin Gross 45:54

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

Unknown Speaker 46:15

You’re listening to see our EP n radio for influential commercial real estate professionals. For more information on this or any of our guests like us on Facebook, CRE PN Radio

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