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J Darrin Gross Podcasts

J Darrin Gross Podcasts

Archives for June 2021

Real Time Landlord Monitoring Solution via Cellular with Charles Hadsell – CRE PN #306

Charles Hadsell  0:00  

We have a solution that could it could detect in real time. Running toilets, burst pipes leaks, and allow a landlord to remotely take action like close a water valve send an alert or sound sound a buzzer. So it’s a pretty unique solution because we know we’re the only one that operates over cellular. So it gives landlords a way to now track water consumption and prevent damage in their in their properties.

Announcer  0:23  

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  0:43  

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 Charles had cell. Charles is the CEO of EA property care, a prop tech company based in Boston that provides smart building solutions for landlords and developers that operate over the cellular network. And in just a minute, we’re going to speak with Charles about tech for property that can help boost your net operating income. 

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 can, we’d love for 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, Charles, welcome to CRE PN Radio.

Charles Hadsell  2:10  

Darrin, thanks for having me. I’m excited to be on your show.

J Darrin Gross  2:13  

I’m excited to talk with you. But before we get going here, if you could take just a minute, and share with the listeners a little bit about your background.

Charles Hadsell  2:24  

Yeah, sure. So I, I graduated with an electrical engineering degree. So I kind of knew I always want to be like technical like hands on. But I quickly realized that I wasn’t gonna be a good engineer, like I moved into kind of sales and marketing. So I spent the first 15 years of my career in the semiconductor world, you were working at Texas Instruments and Analog Devices. So we’re really we’re literally building these ships that go into all these IoT and electronic devices. So that excited me greatly through my various like corporate moves, I got into real estate. So I moved to a city by by our residents rent out rooms, moved transferred to another city rent out that place, kind of rinse and repeat the process. So I kind of acquired over like 15 years rental properties across like multiple states. And I kind of got to a point where like, okay, you know, there’s, there’s got to be a more efficient way to manage these properties to kind of try to use tech to kind of track with to track what’s going on. So my parents have been in real estate for a long time. So they encouraged me to kind of get into you lean into real estate and kind of figure out how to how to solve some of these problems. So did a lot of investigation and kind of saw, you know what, there’s not really any good solutions that meet kind of the use cases of small landlords. So let me kind of go build one that kind of covers the use cases that I need to efficiently manage to an out of state rental portfolio in a more tech enabled fashion. So three years ago, you know, I came to a transition point, and I decided to, you know, found a property care to kind of build that solution now to help you know, small landlords and big landlords, you know, remotely control the rental properties and boost noi at the same time. Cool.

J Darrin Gross  4:01  

So you were you were in real estate, you had rentals, you had a problem with your background decided to solve the problem. I love it. Let’s talk a little bit about what what is he property care? What do you guys, what do you do and what are the some of the, the the tools that you have available for landlords?

Charles Hadsell  4:27  

Yeah, sure. So if property care is basically a cellular smart building platform, so when when you think about a lot of the problems with rental properties, a lot of landlords don’t have reliable landlord owned like Internet connections because that property is not cost effective to get you know, Comcast or a big internet provider to provide Internet just for a nest thermostat or a video camera. So you know, we’ve kind of come in over a cellular you know, utilizing the alarm comm platform. So one.com kind of built up, has built up a platform over 20 years. That is basically a cellular first kind of platform that allows us to support a lot of these very interesting use cases. So the first use case that we we focus on is water protection. So water is a problem for every landlord and a homeowner out there. And if you’ve had ever had water damage, you know, you never want to have that again. So we have a solution that could it could detect in real time running toilets, burst pipes, leaks, and allow a landlord to remotely take action, like close a water valve send an alert or sound sound a buzzer. So it’s a pretty unique solution, because we know we’re the only one that operates over cellular. So it gives landlords a way to now track water consumption and prevent damage in their in their properties. A second big use case that we focus on is temperature monitoring. So we have thermostats that are part of our platform, that allow landlords to remotely control the temperature, but also limit the range that tenants can operate the thermostats so tenants especially if the landlord supplying electricity, you have no It has very little incentive to conserve energy. So they could be a blast the heat at at open all the windows, run the AC at 60 freeze the coils of the air handler. So this this left landlords kind of have more control, you know what’s going on. And even better, you know, the solution kid predict when something’s gonna go wrong. So instead of getting that you know, late night call that my heats out, my AC is out, our system actually uses analytics to look at the heating and cooling cycles to identify when there’s a problem to say, Hey, there, you’re taking a long time to cool your apartment Darren, something’s wrong here is an alert, go check it out before you get that late night call and have to pay you know after hours you know, emergency maintenance, you know fees. And the third use case is access control. You know, I think going keyless is it’s kind of been a big mega trend here where you’re kind of once you go keyless with your apartment or your rental, you know, attendant never goes back to he’s just like with your cars, you know how many people insert a key in the engine and turn it to turn it on, it’s all wireless and push a button turns on. So you know, keyless entry is the same big thing. You know, tenants can go keyless uses a code or an app. But the landlord now could remotely control the lock and remotely add an erase codes. So this was actually the key use case I was looking to solve, you know, three, four years ago, it’s like how could I basically rekey that lock in my property in Dallas, without having to pay someone to like drive over the property and rekey the lock. So that was the use case that kind of propelled me again, kind of into this. So our platform ties these all together over cellular and gives the owner the property manager and even the tenant app control the different elements of the of the solution. So you can kind of pick and choose what makes sense for a given building. And focus on the use cases that are most important to you,

J Darrin Gross  7:44  

Got it. So that the cellular means there’s some sort of a transmitter that’s at the located the property then that that is what I mean, I’m assuming there’s some sort of power connection. 

Charles Hadsell  8:01  

Yeah, like, like, you see in the video that this is the actual cell hub right here. So this kind of goes in goes into the the property. So it could go into like the basement or a common area utility room or the unit itself is into larger like multifamily building. And that just requires power that doesn’t need a Ethernet connection doesn’t need Wi Fi. Just plug it in. And it connects to all the devices, normal locks, the sensors, the thermostats, the water shut off valve, and gives you that kind of cellular connectivity. And even better, you know, it has battery backup. So, you know, when you look at like what happened in Texas, the two months ago, where there was those power failures and all that water damage that just devastated allow these multifamily buildings. I think every landlord that in the world kind of saw those pictures of the frozen icicles coming down from a ceiling fan and realized that you know what, I don’t want that to be me, or to or to be my building. But in cases like that, you know, this is why cellular is, I think the best medium for connectivity for for rental properties because the cell tower stay online because they have battery backup, our hub stays online as battery backup. So that kind of gives you that kind of activity, even when power’s out Wi Fi networks are down, you know, everyone’s kind of worrying what’s going on. So that’s when your property is most at risk. So our solution kind of allows you to kind of know what’s going on during those kind of time periods.

J Darrin Gross  9:20  

No, I love it because that’s been one of the things that I’ve I’ve got a property in other states and and you’re exactly checking the box or at some of the challenges I’ve had with you know, if you pay for an internet connection thing for one thing, is it really cost effective or are you just better off just to take your lumps or whatever. So, you mentioned three things kind of the water, the temperature and then also the access. Can you are there any other devices or any other types of of connection off So you can incorporate.

Charles Hadsell  10:02  

Yeah, so the platform also could support like lighting control, like audio, video video, doorbells, you know, so there’s a lot. So it’s kind of a, a platform that covers a lot of like homeowner use cases as well like having like a video doorbell or control on your lights, or you been able to play Sonos over your your speakers. But you know, but we’ve kind of oriented more towards the the landlord use cases. And I kind of found that access temperature water are really the three kind of killer use cases for where one of those will resonate with every landlord out there. But the platform could do more, we could also control building doors. So if you have 100 unit building that has an electric strike control on the storefront door and a butterfly intercom, we can integrate that in as well into the system. So now that the single app gives us the resident, that entire new kind of digital experience, but our focus is on the asset protection side. So now the landlord, the building owner now has all these analytics about water consumption, temperature or status of things, to allow them to make quick decisions and take quick action to prevent losses.

J Darrin Gross  11:06  

No, no, I get that. I just I’ve got a particular situation my own and it’s driving me nuts. It’s the illegal dumping. You know, I’ve got people that are coming by and taking my dumpsters a public dumpster and just throwing all sorts of crap in there. And then the trash company, they have their ability to take a picture and send me the picture. And, you know, at that point, there’s not, you know, it’s too late, they’re already charged me more for the trash pickups. And I’d love to find out who the heck’s you know,

Charles Hadsell  11:35  

We got a solution that we could do video over cellular so for like a one or two camera system, we actually have a way to do video over cellular so now, you can set up a little single camera system and not have to pay you know, 100 bucks for Comcast to have an internet connection. Yeah, that’s

J Darrin Gross  11:50  

exactly that’s exactly it, you know, the the overage is not cheap. And and, you know, it just blows me away how this big strong truck, you know, the guy inside can’t lift it, because the bins overfilled or whatever, it’s, you know. But I would think that that would be a maybe it’s just me, but I would think that landlords anybody has ever experienced that it’s it’s a frustration. It’s like, God dang it, you know, here it is that you’re you’re trying to conserve your costs and keep things you know, running efficiently. And you got these weird things sticking out some?

Charles Hadsell  12:28  

Yeah.

J Darrin Gross  12:30  

Yeah, so that so that the the, the basic is your your unit there, you plug that in, it’s got the cell signal, and then you’re plugged into the Is there a specific network? You said, is it alarm comms at the network you guys operate on? Or is or do you have to then get a cell contract with a local provider, or how’s that work?

Charles Hadsell  12:50  

Now we integrate that into our monthly service. So we handle all like the cellular data and like the software, and alarm.com provides, like the underlying platform, so with all the devices, we operate on the Z wave network, so think of z wave as it’s different than why because Wi Fi is not designed for like low power sensor networks, WiFi is designed for like audio and video, like high speed stuff. So if you have like a water sensor sitting in the basement, you know, if that thing was offering on Wi Fi, you’d be changing the batteries a lot, because it’s just not a little power protocol. leeway was really the one of the first major protocols designed for building automation, you know, because it’s low power, it’s long range. And it’s what’s called a mesh network. So that sensor in the basement and talks to the next node, which which passes the data along back to the hub. So you don’t need to have like the Wi Fi router in the center of the house to talk to everything directly things kind of phone home through through other nodes in the network. So it makes it really efficient to kind of build these networks in like buildings and homes, you know, offices, you know, commercial commercial applications to be able to have like good connectivity from you know, basement to you know, rooftop in some cases so so so the technology all uses z wave for the local connections and he uses cellular kind of on the back end to get home to get onto the internet

J Darrin Gross  14:08  

No, that’s that’s great because that is always an issue with the Wi Fi is centrally located so you can handle your sponsor otherwise you got to add add additional antennas or modems or whatever

Charles Hadsell  14:22  

Yeah, those little beacons and repeaters Yeah, it just makes it inefficient and just not designed for like low power battery operated devices you know so that’s kind of where these sensor networks because having sensors like on your condensate pump on your by your sump pump by your water heater, a washing machine, now it’s effect now it’s cost effective because you can deploy those and not worry about them for you know, five five plus years and when they get low they’ll tell you that they’re low so you don’t have to worry about a is that is that water sensor still act still working you know, because it will work report back when said hey, I’m running low on batteries. Come change me.

J Darrin Gross  14:55  

Right. Right. You mentioned the the water These like water bugs or whatever that are on the floor? Or do you also tap into the line to tell if you’ve got a, you know, just the the waterside, shutting off? Or how how’s that work?

Charles Hadsell  15:11  

Yeah, so two parts of the solution. So again, we’re on video here, I’ll show you a little demo. But this guy right here, this is a water shut off valve flow meter. And so that gets cut into the line after the water meter. And it could go either after the water meter on a riser, or on the honest Pacific unit shut off into like a larger building. In some cases, developers use to one for the hot one for the cold for every unit of building. So what’s really unique about that product is it can detect in real time, high medium and low flow conditions. So let’s say you have, you know, you have a property in Dallas during that freeze, and now the exterior faucet burst because of the cold time because you forgot to drain the line. So that would see, you know, maybe 10 gallons a minute for, let’s say, five minutes. And that could be you know, if I see that, that’s a problem, shut off the water. And this is all programmable, they might also see an another from property two gallons a minute for 60 minutes, that’s a that’s a problem that’s that too long for a shower, that’s probably a running toilet, or someone left a faucet on. Either way, you know, let’s send a note to someone to go check it out before you have an overflow or get get tagged with that $1,000 water bill from the city. And the third use case is the kind of really low flow conditions. So think of like a leaky refrigerator water line. Like Normally, you wouldn’t catch that for probably six months. And by the time you catch it all your floors rotted, you have mold, just a big mess. So it can kind of catch that high medium low flow condition. In addition, it could catch even things like periodically running toilets. So you have like a loose flapper that occasionally drains and refills. You know, typically that’s never caught, you know, because a tenant doesn’t report that and rarely do they even report the running toilet. And then they can catch those. So those are just big sucks on noi, because that gives a lot of times landlords bear the cost. Tenants don’t care, it leads to that with the wrong incentive that basically lead to view a big bill for the landlord.

J Darrin Gross  17:08  

Yeah, no. And usually the only way the landlord catches it is you know, your bill is out of whack. And and it’s amazing how much water bad flapper can waste.

Charles Hadsell  17:18  

Yeah, so that was one lever. One bath library. If you think about people who have 1000s of properties out there 1000s of doors, they probably have dozens of running toilets right now that they don’t even know about. Just because he gets integrated in and you think about, you know, running toilet the cost? Yeah, probably 20 to 50 bucks a month. And that adds up over time, you know, even periodically running flapper, so it adds up over time and properties. So that’s like one level, the other levels, water bugs, things that will go by like a washing machine, some pump water heater, just to give you that added level of protection. So it kind of lets you pick and choose what makes sense for a given building you want. If you maybe have a water main water heater on the third floor of a building, might want to have an additional sensor there just in case because that thing goes it could ruin all three floors. But the water valve and gives you that added layer of coverage and protection and the ability to shut off and and that’s what the insurance companies really like.

J Darrin Gross  18:13  

Right? Right. Let me ask you on the these types of alarms, if you will, any kind of issue with false alarms.

Charles Hadsell  18:27  

So on when we think about the water valve, the false alarms will only trigger if you have like the wrong the wrong settings programmed in. So let’s say you say someone say you set the medium waterflow Timer at 30 minutes, and someone takes a long shower, you know that that could trigger a false alarm, you know, or if you’re in the basement and it’s really humid or there’s moisture seeping up from the concrete floor, you know, that could trigger like a false alarm. So I’d say they’re they’re not, you know, they’re they’re not perfect. But I think that technology is getting like better and better where it’s basically recognizing, you know, like a really a high percentage of the correct cases and only false positives or, you know, a minority of the time. That’s least at least my experience. 

J Darrin Gross  19:14  

Right now I in the reason I asked the water bugs brought to mind claim we had years ago and it was a situation where they had they would create a false alarm. And what happened was over time, the client got kind of numb to that, you know, I got a false alarm and cried wolf cry. Yeah. And then when the one time it really is gone, you know, full throttle water everywhere. You know, he had a whole lot of time that elapsed before they were able to get in and and take care of it because it was like some sort of reset thing. But I mean, but even so, I mean, that was like, you know, it’s probably more of the waterbug than it was the alarm system. It was the you know, the sensor, something like that was was the issue there.

Charles Hadsell  20:03  

And that’s why we like the flow meter, I think the flow meter shutoff valve is really the right solution, because that covers the entire plumbing network of that downstream plumbing network or the pipe. And, and that’s, you know, digital, you know, looking at water consumption, so that that one’s easy to kind of, yep, program is just to make sure you’re capturing the right use cases. But that’s also why we like to layer the layer, the solution has water sensors, and that, so you have multiple degrees of protection. So if you ignore that water bug that goes off, you’re still caught and protected with all the water, the water flow meter.

J Darrin Gross  20:36  

Right, right. Well, and even if you’re just able to, to mitigate the situation, you know, sooner rather than later, you know, more water in a place is not a good thing. You know, inside of a vessel, it’s supposed to be and that’s not good. So, basic concept of get he got the the sensor, and then you can program the whatever the different monitoring devices to your unit. And so what is the the the user the, the investor have on their hands just on their cell phone is an app, they

Charles Hadsell  21:15  

Yeah, it’s an app, and they have a website to go to. And we also have like, We’re one of the few dealers of point Central, which is one of the first big prop tech kind of smart apartment providers. So that allows like the user to have like a single dashboard to kind of view all their properties. So they could have like multiple buildings and multiple units in the buildings. So it gives them the ability to look at that enterprise level, or just at the local level. Like if you just had five rental properties scattered among, you know, different different states, you could have five properties all lined up in the app, or you just easily flip between all of them from the same login. And that’s what I, that’s what I do for my rental properties, you know, I have them all in the app, I get alerts from them, you know, real time alerts, and I could affect change on them through through the app, so I could be on the go. And I could take take action. So it makes it really easy for a landlord to kind of manage the property.

J Darrin Gross  22:06  

That makes sense. So you mentioned having multiple properties. You know, if a guy’s got a, you know, a 20, unit building, or you know, 10, single families or whatever, he works all on all of them, or I guess I’m the 10 singles, you’d have to have a transmitter at the end each location, but on the one that has multiple doors, can you operate on just the one transmitter and then multiple sensors, or how’s that as I work,

Charles Hadsell  22:35  

There’s a couple of system deployment options, it kinda depends on the level of software integration that the client wants. So a lot of the larger like apartment owners or building owners have like a PMS system from like a yardie, or an app folio or real page. So we have a version of the software to integrate them with those. So the fully take advantage of integration, you basically need a dedicated hub per apartment to kind of handle all the full the full scope of the integration. Now, if you didn’t have a PMS system, or you didn’t have like 100 units, 100 plus units, you can use like a shared hub implementation where you put a hub that covers, let’s say, four different units, and by United control everything from a single screen, so you lose some of the benefits of like all the integrations, but it gives you like a more cost effective approach to be able to get a lot of the key benefits from from the land from the asset production and the control standpoint, with with a lower monthly and in hardware cost. So we kind of give people multiple options. And then for the single family, you know, it’s really one of the only solutions that that is out there that could scale down to a single family rental and be cost effective. You know, because we think about that that internet problem that we talked about earlier, you’ll be able to come in at, you know, 510 bucks a month, and give connectivity to a property. Most landlords would say yes to that, because they’ve been burned by one of those use cases that just waste time or waste money or cost them cause damage. And they’re like, like never again.

J Darrin Gross  23:57  

Yeah, no, I mean, yeah, I was gonna ask your next question about the cost did is five to $10 a month is that kind of the price range per per unit or?

Charles Hadsell  24:06  

Yeah, for like, for like a dedicated hub system, probably like five to 12 bucks, but for like your shared hub, that that price could come down to about $2 a month, per unit, depending upon the software version, the use case. So we kind of give landlords a lot of different options, they can choose what what’s needed for the given building, realizing that every building is going to be a little different, they’re going to have a different kind of focus and price sensitivity. But we want to be able to dial in a solution for the people pay for what they need and don’t pay for what they don’t need, so to speak.

J Darrin Gross  24:36  

Not that seems very, very affordable from management or cost management standpoint. And, you know, just to have that kind of, you know, an awareness of what’s going on at the property. So that if there is a problem you can attend to it before it becomes a big problem. Because in at least in the water case, That we’ve talked about I know, you know, insurance is one of the things that I sell on, and it’s good I was telling my clients, I said, I hope you never have to use this. Because when you do, you got a problem. And, you know, then even even though the insurance works, you’ve got a deductible, you’ve got time committed, you’ve got now you’ve got a blemish on your record, so that naturally your cost goes up. Because now you’re, you’re no longer a preferred risk, because you’ve had a claim and any more companies are taking more of the attitude, I don’t know, say all companies, but there, there are a number of companies out there basically saying, hey, look, you know, you had a claim, we don’t like customers that have claims and you got to go. So it’s, it’s to be able to just be on top of it to where you wouldn’t have a claim, I think would be just, you know, certainly beneficial to to you, and certainly the insurance can make and see how they would love to know that you’ve got something that’s going to prevent them from having a claim as well.

Charles Hadsell  25:57  

Yeah, we’ve actually worked with several insurance carriers, because because when you think about water is their second largest cause of loss outside of like wind and hail. And water is majority of it is preventable, you know, obviously floods, you can’t prevent that, but you know, leaks in plumbing and verse fittings that cause all the damage. So it’s a huge problem. So we’ve actually worked with insurance carriers, especially up here in like New England and New England area that really liked the kinds of cellular and kind of the automated protection aspects of it. And they’re actually giving clients credits, allowing clients to take can take max credits on their on their policies, just to having a protection solution in place. So what we’ve seen is some customers are able to basically pay for the cost of the solution through insurance savings, because more insurance carriers are getting into this water on water bandwagon, realize that you know what, let’s let’s create some incentives here to get these go out people and either homeowners or like commercial commercial lines, people to deploy these protection devices to prevent these, you know, million dollar disasters.

J Darrin Gross  26:59  

Yeah, now, water, water is a messy one. And once it gets into the drywall and carpets in your sub floor, and all that, and if you’ve got multiple stories, it’s it’s just a math. So that’s definitely something that nobody nobody wants. So let me ask you the we kind of talked about how it works in kind of some of the applications, but do you find Is there any? Anyone that’s more kind of your target audiences? Is it the investor of properties that are like traditional rentals? Or do you find that even like some of the, like, Airbnb, kind of rental type situation? Are they? Is that a good, good opportunity for them as well? or?

Charles Hadsell  27:50  

Yeah, like, I mentioned earlier, how the solution kind of scaled down to like single family rentals. And that includes like short term rentals. You know, we have integrations with lots of short term rental providers to basically automate everything, you know, to have like, a tenant resident, like, moves in, you know, for like the duration of stay. When they move out, they hit a closing code that informs the cleaners to say, hey, come and clean, you know, that cleaner comes in, does their thing enters their closing code, it will inform the inspector inspector comes in hits it, then it says, Hey, the next resident, your property is now available. So basically streamlines that whole process, because now imagine you’re going on vacation somewhere, and I get that a text and say, Hey, your units are now available, you know, two hours early, you know, come here’s your code and check in. So it makes it really streamline for short term rental situations. But I’d say we’ve, we’ve focused more on like the larger multifamily both in kind of two ways, like on a class kind of class like BNC, you know, properties, there’s a huge retrofit opportunity there, you know, because I think for those buildings, asking an investor to replace all their locks or replace our thermostat, that’s a hard ask when you’re midway through a whole, you know, a whole period, but the water that’s one where you get an instant boost and building protection and save against those rain toilets. So we kind of frame it in the context of noi. You know, on the protection side, water has a huge impact on noi because it will reduce your insurance, it will catch those running toilets and it will prevent that kind of catastrophic damage. So that’s one where that makes sense in every building new or old to kind of to kind of consider we’ve oriented towards more towards kind of class a housing on like the grounds of construction projects. Because for these smart apartments really become the very desired amenity. It’s almost becoming into Mandy’s arms race among these large like you know, apartment providers, you know, you’re almost at a disadvantage. We don’t have smart tech in your in your property, because you’re going to be able to charge you know higher rents and get higher renewals because once the tenants go smart, it’s hard to go back to the old way of doing things. So we kind of see kind of the market in two ways, kind of the retrofit market where we focus more on like asset protection. And in water protection. And then on the new construction side, you know, we could obviously design and allow the asset protection into the into the plans. But now you also have this concept of a better resident experience that could drive rent growth. So we kind of look at reduce rents, increased rents, reduce costs, and that has a big impact on noi, which makes us more of an investment not a cost.

J Darrin Gross  30:22  

No, if you can increase the noi, and lower your cost, that’s all good. And like you say, also, I think the making your property more attractive, you know, having more the new bells and whistles are just what people are used to not having to have a carry radnicki ringer, so like, that’s definitely something people appreciate. And, and I can, I can definitely see that. Well, this is this is really cool. I mean, I just I’m, you know, I’m sitting here kind of, in my own head thinking about some of my own situations. And, and, you know, I’ll talk to you later about possible solutions. But this is really, I mean, it makes complete sense. And just the fact that you’re going over the cellular as opposed to the Wi Fi thing is, is I mean, that seems like that’s really weird. that a lot of the the benefit for somebody like myself with with not is opposed to that extra cost of that, that contract with Comcast or whoever kind of things. That’s, that’s awesome. Eight, Charles, if we could 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 three strategies we typically consider, we first look to see if we can avoid the risk. If that’s not an option, we’ll see how we can minimize risk and is a third strategy, 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 look at their own situation. And LA, you allow you to frame the situation, whether it be your clients, the marketplace technology, however you want to look at them. But if you can identify what you consider to be the biggest risk. And for clarification, I’m not necessarily looking for an insurance related answer. But if you’re willing, I’d like to ask you, Charles. Hansel, what is the BIGGEST RISK?

Charles Hadsell  32:36  

Yeah, sure. Darrin, I think, you know, when I thought about this, I think the biggest risk I think about is technology rescue, you know, even even alluded to it a little a little earlier in our discussion, right of kind of the early generation water bugs having so many like false alerts that it kind of caused the owner to like be dead in because the alerts and now you have a real issue. And now you’re, you miss it. So I think technology changes rapidly, you know, and this kind of comes back to my time and some doctor as well, we look at the pace of innovation on putting more electronics into smaller places and asking like these, you know, end nodes of the network to do a lot more you rather than sending it back to some centralized server, you’re having decisions made at the very edge of the network. So reliability is like is like very important for these, these these applications. And I think with semiconductor technology, reliability is continually improving. But there’s always that risk of a component failing at the wrong time and leading to like a bad outcome. You know, so that’s why we kind of like to take the approach of kind of layers of redundancy, you know, like, so for example, like to prevent, like water loss in your basement or in the basement of a building, have a sensor to tell you, if someone left the exterior door open, then have a sensor that tells you it starts to get cold, then a sensor to tell you that there’s a water problem, you know, so you have kind of three layers of redundancy there that could kind of prevent, prevent a disaster. So So that’s kind of how I think about risk is like a technology is changing rapidly, you need a platform that could adapt to that. So you’re not kind of stuck in the stone age’s with the platform that’s, you know, out of date are no longer relevant. And then also like the kind of I say that the connectivity risk, you know, of a, that power outage happens, what happens to your system, we saw what happened in Texas, you know, a few months ago where all that led to all that damage. So that’s why we covered this a couple different places on the show today, you know, cellular i think is the right technology medium for these IoT systems and these rental property and like landlord applications, just because it’s up, it’s up when everything else is not up. So that’s kind of my overall kind of thought of you technology risk is kind of the big one and that’s how we really like to wrap your head around minimizing the impact and putting redundancies in place.

J Darrin Gross  34:54  

Makes complete sense. I you know, the redundancy is is definitely Under the belt and suspenders approach to, you know, making sure that what you’re trying to avoid from happening, you know, make sure it doesn’t happen. Thanks. That’s, that’s great. Charles, Where can the listeners go if they’d like to learn more or connect with you?

Charles Hadsell  35:15  

Yeah, sure, they could go to E property care.com. On the site, we talked about a lot of different use cases, we have like videos that kind of show how things work. And people could book a free consultation with our team there. And we’d be happy to kind of discuss use cases. And I think, as we discussed there, and like, we’d love to have a discussion with you, you know, it sounds like you have a potential for for some of these things might be able to benefit you and your personal portfolio. But yeah, we scale from single family to 1000 plus unit rentals. So we can kind of cover a solution for pretty much any landlord situation that we run into.

J Darrin Gross  35:48  

Now, we will be talking here, right after this. So anyway, well, Charles, I want to say thanks for taking the time to talk. I’ve enjoyed it and learned a lot. And I look forward to doing it again soon.

Charles Hadsell  36:04  

Absolutely. Darrin, appreciate the time. Thank you so much.

J Darrin Gross  36:06  

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  36:26  

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Investing in Manufactured Housing with Matthew Ricciardella – CRE PN #305

Matthew Ricciardella  0:00  

To these two property types are at or near the top of the list. And as a result of that there is a tremendous amount of demand from sophisticated investors to get into the space because they are recession resilient. They did withstand the 2008 2009 10 storm and now they’ve proven to be resilient during COVID. So folks want yield they want predictable, safe free cash flow. And these two asset classes have proven to deliver just that.

Announcer  0:32  

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  0:51  

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 Matthew Ricciardella. Matthew is the founder of Crystal Spring, excuse me, Crystal View Capital and has over 18 years of experience in the real estate industry. Crystal View Capital is a private equity real estate firm that specializes in acquisition and management of self storage facilities and manufactured housing communities across the United States. Known for its in house acquisitions and management team and unique company culture. Crystal View Capital is vertically integrated, disciplined to its investment strategy and has a proven track record since a firm’s launch in 2014. And in just a minute, we’re gonna speak with Matt about self storage facilities in manufactured housing. 

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, Matt, welcome to CRE PN Radio.

Matthew Ricciardella  2:42  

Thanks, Darrin, thanks for having me today. I appreciate it.

J Darrin Gross  2:45  

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

Matthew Ricciardella  2:54  

I’d be happy to I I got started in commercial real estate back in 2005. I I started off by buying manufactured housing communities and self storage facilities for my own account started off with relatively little to no capital. So you know faced that challenge that first time investors always face and that’s how to raise equity and debt to buy your first deal or your first few deals. So kind of went out to the market found some off market opportunities in self storage and manufactured housing communities and was able to rock and raise some private capital put some deals together. And, you know, figured out how to manage these assets, created some value did well I sold some properties kept some others, which I still have to this day, which I actually bought back in 2008 that I still operate and thought that I was on to something I was doing quite well but had a limited amount of capital. So what I did is, I thought to myself, gosh, wouldn’t it be great to scale up so I launched crystal view capital fund one back in 2014. And that was a $10 million equity raise. And we did quite well with that actually investors receive back two and a half times their invested capital about a 45% internal rate of return. And then we launched fund to same strategy, which was manufactured housing and self storage across the United States. And that fund is now fully subscribed, we raised a little shy of 60 million in equity on that offering. And we’re tracking about a 30% return to our limited partners. And now we’ve just launched our third fund Darren which is a $95 million equity offering. And we’ve already raised about $38 million in two and a half months. That fun, same strategy is from one in two and we’re really excited about what the future holds?

J Darrin Gross  5:01  

Cool. So, in 2005, you had the foresight to get into manufactured housing and self storage, it’s your the first time and usually it seems like people have like, migrated to that from something like they started out maybe in single family and, and then felt like something was, you know, too competitive or not recognizing other opportunities in real estate? How did you land on manufactured housing, and self storage?

Matthew Ricciardella  5:30  

You know, I wish I could tell you, you know, I did a rigorous due diligence and research process, and I did to, to a small extent, but really, a lot of it was luck, I kind of looked at all the different commercial real estate asset classes and thought to myself, which one of these are most inefficiently priced? Which one of these? Do I have the highest probability to buy at at a fair to discounted acquisition price? And where can I create value through inefficient management, identify and identify that as a result, these two property types, and kind of went across the entire country, built relationships with owners bought most of these deals off market? And, and worked out for us? So that’s kind of how I you know, I got my segue into the space.

J Darrin Gross  6:27  

So you mentioned you were kind of operating on your own there for a little while before you started the fund. How many parks Did you acquire operate on your own before you decided to go the fund

Matthew Ricciardella  6:40  

route? Yeah, we I bought personally about four communities personally, before we launched the fund and three storage facilities. Personally before launching the fund. One community one mobile home park, one Self Storage, I still don’t To this day, both of which were acquired back in 2008 2009.

J Darrin Gross  7:03  

And were those primarily local acquisitions? Or did you know

Matthew Ricciardella  7:07  

now the two that I still own today are ones in Wisconsin, and the storage facility is in Louisiana? So we kind of had a shotgun approach Darren, where we went across the entire country and said, Where am I going to find the best deal, and still do it to this day in that same fashion in that same manner, where we’re kind of agnostic to the market versus saying, Hey, we buy this asset class in North Carolina? And that’s all we do. And if you could show me how I could steal something in some other market? The answer’s no, because I boxed myself into this asset class in that market. That’s exactly what we didn’t want to do. So we’re open to looking anywhere, for the right opportunity in these two asset classes.

J Darrin Gross  7:54  

So let me ask you, since 2005, when you first started till now 2021. What have you seen is the biggest change in that that timespan as far as the I guess, the asset class and, and the opportunity,

Matthew Ricciardella  8:12  

biggest change is there’s been a complete 180. And that is, I guess the analogy I could give you is going from a redheaded stepchild to completely and utterly in vogue. When I started in the industries, capital was extremely hard to come by it was either seller financing or a local bank. Now you have agencies, Fannie Mae and Freddie Mac cmbs, life loans, literally knocking at your door lining up to finance your projects. Same thing on the investment side, you know, kind of when I got started and told people what I did, they kind of looked at you with a funny face, and why in the world would why would you want to do that? Now, you tell people what you do. And it seems like everyone has figured out, the secret’s out, these are high cash flowing vehicles, cash cows, from what they call them, little risk recession resilient. And as a result, large part of the investment community, including institutional investors have a huge appetite to get into both of these property types.

J Darrin Gross  9:22  

So in 2005, you described limited capital. did all that change kind of post? What are they called the big? I don’t even know what we call it anymore. The recession, the big risk, I mean, 2008. What the market when it went upside down, residential housing was in the tank, foreclosures, short sales, all that fun stuff. Was that kind of the turn where were, you know, institutional capital recognize the opportunity, or was it later?

Matthew Ricciardella  9:57  

You know, I think it was later you had some institutions that were getting involved. Post meltdown, let’s call it 2012 1314. But I think there was a tidal wave of interests, probably that began in 17 and 18. And now it’s just tremendous. And I think a lot of it was post COVID. Because here’s here is, in my opinion, what happened, if you look across the different four major food groups of commercial real estate, retail, industrial, multifamily, and office, look at the negative effects that COVID had on hospitality, office retail, I mean, just crushing and those asset types are in distress right now. So I think this smart investors looked at all of the different asset classes and said, which ones withstood the COVID storm, which ones continue to generate a free cash flow and ongoing income, despite the lock downs and what we went through. And I’ll tell you, these two property types are at or near the top of the list. And as a result of that, there is a tremendous amount of demand from sophisticated investors to get into the space because they are recession resilient, they did withstand the 2008 2009 10 storm, and now they’ve proven to be resilient during COVID. So folks want yield, they want predictable, safe, free cash flow. And these two asset classes have proven to deliver just that.

J Darrin Gross  11:37  

So you mentioned the returns that you were able to achieve, you know, with with the funds net, as more people migrate into it, and and you know, want to play in the space. Are you seeing that compress? returns?

Matthew Ricciardella  11:53  

Absolutely. Yeah, cap rates are compressing yields are compressing as a result, valuations are expanding and rising. And partly, it’s because of the increased demand for investors wanting to get into the space. And then also, it’s the ease of financing. As mentioned, not only is debt capital easy to source, but it’s also extremely cheap. I mean, we’re getting loans right now, Darren, at sub 3%, interest, interest only fixed for 10 years. I mean, that’s extremely attractive debt, and it does wonders for your cash flow.

J Darrin Gross  12:33  

Yeah, it is a kind of a funny thing, how that really changes the marketplace and money. So available like that. So let me ask you, not totally familiar with but the the mobile home, Park and kind of the historical stigma, but I’ve also kind of come to understand that some of the municipalities and that they don’t want them? Are you seeing any growth in the market?

Matthew Ricciardella  13:06  

I’m very limited, very limited, there’s little to no new development in the space. And that’s what makes it appealing and attractive. And in that you’ve got limited or shrinking supply, because a lot of parks come offline every year they’re converted into, you know, some other use, whether that be retail, and you’re not seeing that as much anymore, but could be condos could be multifamily. Now, relatively no new development coming online, but ever increasing demand from renters that want to get into affordable housing. And this is the lowest rung of affordable housing out there. So even cheaper than apartments, classy apartments, so you’re seeing more people downsizing, wanting to get and retiring, that want to go into manufactured housing community. And also if you think about it from a COVID perspective, you’re seeing this phenomenon of D urbanization, with people leaving these major metropolitan areas and going into secondary and tertiary markets. Well, guess where mobile home communities are relatively located exactly in those markets. And guess what else compared to multifamily where you have common areas or compare it to, you know, Senior Living where you have common areas, you’re insulated in your own home, you know, insulated from potential, you know, COVID you know, kind of contraceptive So, you’re, it’s helping from that angle as well.

J Darrin Gross  14:41  

Yeah. It seems like the ideal as far as the limited supply and you know, how to control demand, that’s, that’s where you want to, I mean, if there is a place you want to be that’s, that’s, I guess, a place you want to be a seller especially. So tell me a little bit about Self Storage. How does it operate compared to the mobile home? parks? Well,

Matthew Ricciardella  15:09  

let’s talk about supply and demand. Since we’re on that topic, you know, it’s not that way in self storage, I wish it were. But it’s relatively simple to build storage facilities. Some municipalities aren’t allowing it because they’re already oversaturated in that marketplace. But a lot of markets out there, you know, you’re in Portland, I know your market is oversaturated, Denver, Dallas, Nashville, Tennessee, those markets are over supplied. So as a result, operators are having to offer concessions, free months rent, moving specials, things of that sort. But there are other markets which we operate in, where there is limited supply. And we’re able to continually increase our rents, increase our cash flow, and as a result, increase our Property Valuation. So I think the big thing when you compare these two property types and how they operate differently, the storage, you got to be really cognizant of the supply in the market that you’re entering into. from a management side, the operations are very similar. You know, we have an in house asset management team, which manages all of our fund portfolio properties. So we oversee everything in house here from Las Vegas. So we’ve developed proprietary systems to manage all of our assets. And they are, there’s nuances to each. But we’ve developed a strategy and a procedure to operate both asset classes effectively.

J Darrin Gross  16:42  

Do you find that the the markets are similar? As far as the you know, we talked about the metro areas not being or not inviting or wanting the mobile home parks and the oversaturation are you finding that the successful markets tend to be more of those tertiary markets for both the mobile home parks and the Self Storage?

Matthew Ricciardella  17:06  

For the storage? Yes, for the manufactured housing, you know, if you could own in a major Metro and have a large community with good size lots, that would be my preference, right, as an example of you could be in Metro Dallas market, and have a newer park with larger lots. That’s a fantastic market to be in, you know, so and because there’s no new supply. On the storage side, there’s plenty of new supply coming to market. So I would say, I’d rather be in the major Metro markets for manufactured housing, and I’d rather be in the secondary and the tertiary markets for storage. That’s not to say that, you know, the major markets, you won’t do well, for storage, you just have to know what you’re doing. And that’s not to say the secondary and tertiary markets won’t do do do well, for manufactured housing, because we’ve proven to do well in all of those different markets between both asset classes.

J Darrin Gross  18:05  

Right? So you said, all of your management, you guys are in house, is that? Is it asset management? Or do you do also have in house property management? Both? Okay,

Matthew Ricciardella  18:19  

we’re an in house assets slash property manager. So we kind of oversee the asset creation, the value creation process from A to Z, all in house. So that goes from acquiring the property, implementing a value creation plan, executing upon that plan, prepping the asset for sale, and then ultimately exiting at some point in the future.

J Darrin Gross  18:43  

Gotcha. So with manufactured housing, you don’t own the homes necessarily on the ground? And the I guess the streets, basically, and what are some value add strategies and that kind of a scenario?

Matthew Ricciardella  19:02  

Yeah, so it’s a good question. And, and to reiterate, yes, we own the infrastructure, we own the underlying land, there are some homes and communities that we do own. But for the most part, they’re all tenant owned homes. But there’s several, we call them levers to pull to create value. One of them is sometimes we buy a property rents are materially below market, we simply bring them to a market level, that could create a lot of value. Other times we buy homes, we bring them to baking sites and and sell them which is increasing our occupancy, increasing the rent roll. Other times we’ll identify an expense that’s too high and it’s bloated as an example. We’ll look at water and sewer expenses, and sometimes the landlord will pay those costs. What we do is we’ll sub meter past that Spence through to the residents. And that cost savings falls all to the bottom line. And that increase in noi is going to have a direct translation when you apply a cap rate to property value.

J Darrin Gross  20:12  

Oh, I love all those. Same here fairly easy as opposed to kitchen bath and capital improvement intensive. That’s, that’s, that’s ideal.

Matthew Ricciardella  20:25  

Yeah, absolutely, we look for the low hanging fruit, we have a little saying here, we like to step over one foot hurdles, rather than jump over seven footers.

J Darrin Gross  20:35  

And I like that. I like that. So Park size, what’s an average Park size that you guys plan

Matthew Ricciardella  20:44  

for us, the larger the better due to our size, as mentioned and fun three, we’ve raised thus far about $30 million of equity. And we’ve we’ve had no issues with raising equity capital because of our track record, and because of how our property types are performing and in the market presently. But a park size typically is 150 spaces and larger for us, is what we’re looking for. And now in the Self Storage side, it’s typically 40,000 square feet and higher.

J Darrin Gross  21:17  

Gotcha. So let me ask you this. So that the manufactured housing? Is it? Do you consider the affordable housing that essentially the I mean, kind of the the threshold? Is that kind of where the entry point is? Yeah, not

Matthew Ricciardella  21:33  

only is it affordable housing, it’s the lowest form of affordable housing, there is a market.

J Darrin Gross  21:41  

So as the economy goes, I mean, obviously, it’s been the most resistant asset class as far as foreclosures, etc. Do you have any sense of or concerns? Or is there any kind of a forward look or a thought on inflationary concerns? I know, you know, I was watching the panel the other day talking about, you know, all this money that’s been printed and circulated and stuff and very low concerns about inflation. But But, you know, there’s a lot of wage, talk about increasing minimum wage, blah, blah, blah. Is there anything in that that that, you know, you look at differently than perhaps somebody that’s looking at a multifamily property? Or is there any, any thought to that?

Matthew Ricciardella  22:31  

Yeah, I mean, look, I think you bring up a good point, with all this printing that’s going on, you hear chatter, that it’s not going to create inflation, I don’t see how it’s possible to pump trillions of dollars into a system, and over the long term, not experience inflation. So I think, you know, may not be this year, but at some point within the next 10 years, and we’ve already experienced tremendous inflation of asset values since COVID, I think that trend is going to continue, if you look at the price of a gallon of milk, maybe that hasn’t experienced as much inflation. But I think across the board, inflation is going to rise. And I think the benefit for us in what we do is look at our lease terms, you know, compare what we do to let’s call it retail or office where you have 510 15 or 20 year leases or even last mile distribution facilities, which are leased to Amazon, those leases are locked in for 10 year leases with, you know, 3% bumps on them. Our leases are month, a month, or at the most year to year and what that does, it allows us to re adjust for inflation. So we could we could offset inflationary pressures by increasing our rents accordingly. So we’ve got a great hedge against inflation due to the timelines or the span of our leases. So that alone is going to be a tremendous benefit for us. Not only that, again, asset values are going to continue to rise. So what’s in our portfolio today, if you factor in, let’s say, four or 5%, inflation over the next 10 years, even if we don’t increase noi, think about how much those assets are going to increase in value just as a result of inflation. So I think I think we’ll do well, I hope we don’t, don’t get me wrong, I hope this country doesn’t enter into a hyperinflationary phase. But if that were to happen, I think we’d be a beneficiary.

J Darrin Gross  24:33  

And I think there’s definitely a benefit to having, you know, assets as opposed to be sitting in cash if you’re, you know, experienced a lot of inflation. So that’s, that’s definitely true. And it’s it is kind of a weird cycle when you think about just the the trillions of dollars that have been put into the market and, and, you know, I guess it’s kind of more of a function of the interest rates, just the availability of the capital, it’s really, you know, make crank, crank and the demand and and pushing that

Matthew Ricciardella  25:00  

up. And well, I think that that is going to be the negative. That’s the downside, I think because you know, rates are going to have to rise to offset this inflation. And now the cost of capital is going to rise. So the borrowing costs are going to go up so that that is going to be one drawback, I believe from inflation for us. Right.

J Darrin Gross  25:22  

So you’ve got the main factor in housing, parks, you’ve got the Self Storage, parks, you’ve got your your funds, are the funds. Are they segregated between the assets? Or is it you? Those are the two assets and wherever you find an asset, that’s where you, that’s where you That’s

Matthew Ricciardella  25:43  

right. That’s right. So our investors are going to be diversified across both asset classes, and across various geographies throughout the country. So there is a good amount of diversification there because of that.

J Darrin Gross  25:58  

Got it. And you said, fund one was 10 million. Did that go full cycle you return everything back to investors are

Matthew Ricciardella  26:09  

we actually have one last property that’s under contract that’s scheduled to close next month. And when that occurs, I’m proud to say it will be a complete full cycle.

J Darrin Gross  26:18  

Oh, that’s great. Congrats. And can you find the most of your investors? Once they’ve they’ve received their capital back? They look to reinvest. Give me more kind of, yeah,

Matthew Ricciardella  26:30  

absolutely. Most of most of our investors are fun, one fun two investors who have reinvested in basically reinvested all of the distributions that we’ve given them in the first two funds right back in and guess who else is included in that category? Me. I’m, I’m a large LP in all of our funds. And I continue to reinvest all of my distributions. And the reason I do it is Darren two reasons. Number one, I like to have a great alignment of interest with my partners for on one hand, and on the other hand, I do it for selfish reasons, because quite frankly, I don’t know where I’m going to get a better return. And where I’m going to mitigate my risk better than what we’re doing here.

J Darrin Gross  27:15  

Not that’s so true. I, I love the the synergy of sorts as you you have success, and the you know, because it would have kind of come to learn is that people when you’re trying to raise money that the first couple times, or maybe more of a challenge, but as soon as you have success, in return that capital people are like, hey, wait, when’s the next deal? You know, kind of thing and

Matthew Ricciardella  27:38  

exactly what you build up, you build up an investor’s trust over time. You know, when you go and launch a new fun, there’s, there’s not really many questions, they already know, our level of integrity, they know our ability as operators and our ability to execute on the business plan.

J Darrin Gross  27:57  

No, that’s great. Let me ask you, you know, we’ve talked about some of the markets that you guys look at. Are there any, you know, KPIs that you look for? I mean, you know, for the longest time, I mean, pre COVID it was always about jobs and population and in laws and stuff, but but COVID seems to have changed a little bit. You know, that that sounds because of everybody doing like, what we’re doing the zoom and and that I don’t know, is that affected your your view of things are changed at all, or is there there are some different things that you look for now, when you when you look at a market.

Matthew Ricciardella  28:39  

Um, when I look at a geography, I don’t think COVID has a material impact on us making that investment decision, I will say this, we’ve we actually outperformed during COVID, our properties across specially during, on our storage side, our occupancies actually rose. And the way that happened was that we actually built online portals where investors or I’m sorry, we’re storage, tenants can move into our units without making face to face contact with managers. We also had online portals for our manufactured housing and our storage tenants to pay their rent directly. So by being set up for COVID, we were able to actually outperform now, in terms of our investment decision, I don’t think COVID has had an impact on that certainly hasn’t had an impact on our geography. If that’s if that’s the question.

J Darrin Gross  29:39  

I just think of there’s if there’s anything that it’s effective, but sounds like it’s pretty much hasn’t been an issue for you guys. That’s no

Matthew Ricciardella  29:47  

Knock on wood. We’re not out of the woods yet. And none of us are, you know, don’t want to rest on our laurels. But up up to this point. We haven’t. We haven’t been materially negatively effective. COVID. So,

J Darrin Gross  30:01  

Got it. Hey, Matt, if we could 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 we typically consider. First, we look to see, can we avoid the risk, that’s not a possibility, we look to see if there’s a way we can minimize the risk. And if we cannot avoid nor minimize the risk, then we look to see if we can transfer the risk. And that’s what an insurance policy is a risk transfer vehicle. And I like to ask my guests, if they can look at their own situation can be their clients, their investors, the market tenants, however you want to define it. But if you can take a look at your situation, and identify what you consider to be the biggest risk. And for clarification, I’m not looking for an insurance related answer necessarily. But if you’re willing, I’d like to ask you, man record Ella, what is the BIGGEST RISK?

Matthew Ricciardella  31:15  

Well, I think it’s a great question, obviously. And I think there’s a lot of answers to that question. But I’ve, I’ve thought about this, obviously, in depth. I think, for me personally, in what we do, by far, the largest risk is overpaying for an asset. You could take a good investment and make it a poor one, by paying the wrong price. Or vice versa, you could take a mediocre investment and make it a wonderful one by paying the right price. So we focus diligently on not overpaying. And the way we do that. There’s a term actually I think, Charlie Munger had this term, which is Warren Buffett’s partner. And he said that risk is inextricably bound up in the price that you pay for an asset. And I think that rings true for me in a major way, the way we mitigate that risk to answer the other part of your question, Dan, is, by and large, we don’t compete with the rest of the buyer pool that’s out there. way we do that is we buy most of our properties off market. So we create a bond in a relationship with a seller where we’re dealing direct with them without a broker. And that’s how we put probably 80 to 90% of our deals together. Right now, as I mentioned, the two asset classes are white hot. Because of that. There’s bidding wars, there’s auctions, you have to compete in those auctions, and you offer the highest price and you win. But question I have is, Are you really a winner? Or are you a loser? I mean, you paid more than everyone else out there. So we like to focus on finding our deals without competing. And I think that’s how we lay off the risk. So as you would use the term in the insurance world where we mitigate our risk to a large extent.

J Darrin Gross  33:14  

Makes a lot of sense. Matt, where can listeners go if they’d like to learn more connect with you?

Matthew Ricciardella  33:21  

Yeah, so if you want to learn more about making an investment into the third offering, you can visit our website at www.CrystalViewCapital.com or you can email us at invest@Crystalviewcapital.com or you can email me directly at MattR@Crystalviewcapital. com.

J Darrin Gross  33:46  

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

Matthew Ricciardella  33:56  

It’s been my pleasure. Thanks for having me. Darrin. Let’s do it again.

J Darrin Gross  34:00  

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  34:19  

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Commercial Real Estate Deals Partners and Markets with John Stoeber – CRE PN #304

John Stoeber  0:00  

Well, I have been looking at Arkansas for apartments before. I really like Northwest Arkansas, where you have Bentonville and the university up in Fayetteville. I mean, like that area is booming. Little Rock is actually never on my radar. I mean, like it’s a pretty stable market. It’s a little higher and crime, but I wouldn’t say it’s like, you know, one of these high growth markets, I just had a great opportunity come my way from someone I trusted, she had a deal under contract, and she needed money and partners to put the deal together. And it’s kind of like your first job to or at least for me, like I didn’t have a ton of options coming out of school, I’d take a job so I can get experience. It’s the same thing with this portfolio where it’s like not my ideal criteria, but it makes sense and it’s just a way for me to get experience and start racking up some wins. Welcome to

Announcer  0:50  

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  1:08  

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 John Stoeber. John uses his background in finance to build financial models and analyze multifamily properties from a number of different perspectives. He currently owns and operates 34 apartments in Little Rock, Arkansas, and is looking for deals in growing markets. And in just a minute we’re going to speak with john about partners deals in the skill set you need to do your first deal.

But first, a quick reminder, if you like our show, CRE PN Radio, there are a couple things you can do. You can like, share and subscribe. And as always, we’d love to hear from you please leave a comment. 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, John, welcome to CRE PN Radio. 

John Stoeber  2:33  

Hey, Darren, thanks so much for having me excited to be here today.

J Darrin Gross  2:37  

I’m looking forward to our talk. Before we get started, if you could share with listeners a little bit about your background.

John Stoeber  2:45  

Yeah, um, you know, the short story is I’m just a spreadsheet jockey. But I went to college for you know, accounting and finance, I got a double major and I was on that w two path pretty much since the day I was born. The entire last semester in college, you know, I’m looking for a job and I finally get an offer. And at the time, there was no remote work. So I look at the like the number of vacation days, I’m going to get a look at the salary and I’m just kind of like, this isn’t gonna work. Like this isn’t gonna work for the lifestyle I’m trying to build, which led me on the search for passive income. And on that search, meaning Google, you know, I kind of fell down the real estate rabbit hole. I heard about other investment options like bonds, CDs, dividend stocks, but I was gonna need like a million dollars invested at least just to make like 50 grand a year of passive income. Whereas in real estate, you know, you get tons of other ways to accumulate wealth. Besides the cash flow, you get principal pay down appreciation, tax advantages. And I mean, I’ve always kind of been interested in real estate before getting this job offer. But I’m incredibly not handy. Like I shouldn’t be allowed to touch a hammer so that it always scared me away from it. But as I climbed down the rabbit hole, I started to realize like, okay, I can develop systems, I can hire a lot of this stuff out. So I can do that. So fast forward like nine months, I you know, I graduated college, I’m working my first job. And I had this really long commute from Washington DC to Baltimore, Maryland, and I wanted to get rid of it. So I ended up buying a two unit, you know, duplex to do what’s called house hacking, which is where I had two apartments, I rented one of them, I lived in the other and then my apartment also had a basement. So I rented out the basement so I was living for free and my downpayment on this like owner occupied duplex was like less than five grand and that included like all the closing costs, like everything like I bought a property for less than five grand which is like four or five months rent and in Baltimore like in these coastal markets. So that was awesome. And like yeah, I had to evict my first tenant. Which was kind of nerve racking, because she knew right where I slept. But you know, I evicted her, I put a new tenant in there, I put a tenant in my basement and all of a sudden, I’m living for free. And I kind of caught the bug at that point. So then I’m like, okay, I wanted to graduate and do what’s called the bar method, which is stands for buy, renovate, rent, refinance, and repeat. It’s kind of like, instead of fix and flip, it’s fixing rent, and then you just refinance, all the money you put into the deal back out. So that man, I had to, like tackle this inability of mine to like manage contractors and construction, because like I said, like, I shouldn’t even be allowed to touch a hammer. So I team up with a couple partners. And we go, and we take like the biggest, baddest flip down in Baltimore City, where you’d have 100 plus year old homes, then they’re just absolute shells. So we had one of those where it’s like, all new mechanical systems, new roofs, had to dig out the basement. And then everything else that comes along with that, now is a huge, huge learning curve for me. Like, honestly, was not ready for that big of a project at the time. But while I’m doing that project, you know, one of my partners, he had a four Plex, I had this duplex. And he ran into some issues with his four Plex where like he had to do this really long eviction. No, I had to do an eviction, and I was dealing with like a couple tenant headaches. But like, the light bulb just kind of went off in our head, we’re like, you know, whenever we make a mistake with a four Plex, or the duplex, like, really, our tenants pay for it. So like, as he’ll tell you, he’s like my tenants paid for my eviction. Whereas when we miss something in our rehab budget, like that came out of our pockets, and our bottom line. So like, while we’re doing this, we’re just kind of like, you know, like, let’s just go buy apartments and like bigger multifamily. It’s what we want to do anyways, and like, we really don’t want to work our way out through like, fix and flip and single family. And, and that kind of started this entire journey.

J Darrin Gross  7:01  

Got it? Got it? Well, that’s the you’ve got quite the library there of experience here with, you know, being a landlord with the tenant next door to doing a major flip. I mean, I’m curious on that big flip, you talked about? How long did that take you to do that? From from acquisition to?

John Stoeber  7:22  

I’m assuming you sold that? Yeah, we sold that over a year ago. I mean, we, we thought it was gonna take like three months to do the entire thing. And it took over a year to go from start to finish on that thing.

J Darrin Gross  7:34  

All right. But did you come out ahead. And in the end there, do you make a 

John Stoeber  7:38  

No we we didn’t we did not come out ahead, unfortunately.

J Darrin Gross  7:42  

So is that more of like a he didn’t buy it right? Or what was just over cost overruns? Or your budget? or What was your what it was?

John Stoeber  7:49  

I mean, it was kind of everything? I mean, I don’t think we necessarily bought it wrong. But yeah, like we definitely came in low on the rehab budget, and then the amount of time that we held it just like those holding costs, and especially because we bought it with a hard money loan, like they really into your profit margins. So when you’re thinking that it’s gonna be like a four to a six month, month hold, and ends up being over 12. I mean, those holding costs will crush you.

J Darrin Gross  8:14  

Right, right. Well, you survived, right? Yeah, I’ve always kind of looked at some of the opportunities I’ve jumped into is, it won’t kill me. Right? If it goes wrong, but lessons, I’ll never forget. But Alright, so you, you kind of had the the taste of the flipped in like that, like the landlord, but realize being in something larger than a duplex or a four Plex was really kind of the way to go. You mentioned your partners on there. Did you end up partnering with with your flip partners to get into larger multifamily?

John Stoeber  8:55  

So I still work with one of them, the guy who owns the four Plex, but on the 34 unit portfolio, we’re doing a reposition right now. He’s not part of that deal. But we’re still looking for deals together.

J Darrin Gross  9:07  

Okay. You mentioned your spreadsheet junkie and jockey, and I don’t just say jockey,

John Stoeber  9:15  

Yeah, jockey. Same, same thing. I might as well be a spreadsheet junkie because I’m always on them.

J Darrin Gross  9:21  

Right, right. Right. Um, so let’s, let’s talk a little bit about the, you know, what you saw on the 34 and what you’re doing with a 34 unit property?

John Stoeber  9:33  

Yeah, um, you know, from like, a financial perspective. Yeah, no, yeah.

J Darrin Gross  9:38  

Tell me what, what was it? Tell us about the property and what you saw? And are you doing a value add position or what tell tell us all the juicy detail?

John Stoeber  9:48  

Yeah, we’re, we’re doing actually a really big value add. I mean, this was a distressed property. The person who previously owned this was just completely miss managing it. I mean, no record. or anything, didn’t screen the tenants. But if you look at like these larger commercial properties, like as a flip, you know, like, it’s really not that much different from a single family flip or you know, a bar, it’s just the way you calculate some of the numbers are different. So like, if you’re flipping or you’re doing a bur on a single family house, you’re gonna have your acquisition costs, your renovation costs. And then your ARV, which stands for your after repair value. And like the general rule of thumb is, you know, you want your acquisition costs and your renovations to be 70%, of what you’re gonna sell it for. And then that leaves some room for like, you know, realtor Commission’s holding costs, soft costs, as well as your profit margin. It’s really not that much different when you’re looking at a multifamily property. The key thing, though, is the way you calculate your sales price. So like with a single family house, you’re going to go off of sales comps. And you don’t really have a ton of control over like stretching the market, you know, if similar homes are selling for 200k, like your home is going to sell for 200k. in multifamily and commercial real estate though, the value is based off of the net operating income, and sales, comps do come into play. But like on a basic level, you’re gonna take the net operating income of that property, which is all of the expenses except the mortgage, and then you’re going to divide that by the cap rate in the market. So let’s say you’re making $100,000 of net operating income, which again, is cash flow before your mortgage. And that market cap rate is a 6%, you’re going to take 100k divided by 6%. And that’s you should know this number, it’s like I think it’s less than $2 million, it’s probably like $1.8 million. But so that’s your ARV. And then you’re going to take your your acquisition costs your renovation budget, as well as the other costs. And you’re going to see if you have a spread. So the thing with the little rock portfolio is when a buying 34 units for $800,000, which comes out to 23 and a half k a door, we’re putting five to 10k of rehab into each unit. They’re renting for 650 to 700. Right now it’s all one and two bedrooms. And based off the cap rate, and the other sales comps in the market, we should be able to sell them for 45 to 55k a door. So it’s like you’re all in for probably like 35k a door. And you’re selling them for 45 to 55. It’s like there’s a huge spread on that. And then you’re just calculating your other numbers to to make sure that it’s going to cash flow if you refinance it.

J Darrin Gross  12:41  

Got it, got it. What in Little Rock, what was the Was there an attraction to the market? Or was it more of like a property you found or?

John Stoeber  12:51  

Well, I had been looking at Arkansas for apartments before I really like Northwest Arkansas, where you have Bentonville and the university up in Fayetteville. I mean, like that area is booming. Little Rock is actually never on my radar. I mean, like it’s a pretty stable market. It’s a little higher in crime, but I wouldn’t say it’s like, you know, one of these high growth markets, I just had a great opportunity come my way from someone I trusted, she had a deal under contract. And she needed money and partners to put the deal together. And it’s kind of like your first job to or at least for me, like I didn’t have a ton of options coming out of school, I’d take a job so I can get experience. It’s the same thing with this portfolio where it’s like not my ideal criteria. But it makes sense. And it’s just a way for me to get experience and start racking up some wins.

J Darrin Gross  13:41  

Makes complete sense. So So tell us about you mentioned that you have a partner on this one then did you mentioned somebody had a deal and needed help?

John Stoeber  13:50  

Yeah, so I have a few partners, but she had a deal. I mean, she had this deal locked up. Back in March of 2020. It fell out of contract because COVID hit and you know the partner she was going to buy the deal with ended up bailing, just put it back under contract. And then she had to raise money. And she just said to me, she had to put a team together because she didn’t have all the money to just buy it herself. And she lives in Salt Lake City. So it’s not like she’s in the market. And you know, I can I can run the numbers, I can kind of act as like, I guess like a financial analyst or a CFO on the project to add value and like I had some money to put into the deal.

J Darrin Gross  14:29  

Okay, and so are you did you come in as a as a joint venture? ditch? syndicator. How

John Stoeber  14:36  

did you guys put together? So this is just a joint venture, it’s not a syndication.

J Darrin Gross  14:41  

And so does everybody have different skill sets? Or is or are you guys missing anything? Have you been able to

John Stoeber  14:52  

No, I mean, so I’d say the skill sets are are pretty well rounded. I mean, one of our partners Well, they’re married But they’re like one group, you know, they have a lot of experience managing contractors and renovations, and they also live closest to the property. So they’re like the boots on the ground and the construction managers, my partner who found the deal. I mean, that was basically her role. Like she found the deal. And she also has the most experience managing large commercial real estate. She’s a couple other apartment complexes. I’m kind of like the numbers guy. And then our other partner, Ryan, you know, he’s out there raising money and dealing with the property manager on a daily basis.

J Darrin Gross  15:36  

So when did you close on this? You said it was under contract in March? What When did you guys I’m closing on it?

John Stoeber  15:44  

The end of June.

J Darrin Gross  15:46  

Okay. And where are you in the actually it’s back up here. What was the renovation plan the value add plan.

John Stoeber  15:55  

So the renovation plan was mean, we need to put about, you know, we’re averaging anywhere from four to 6k per unit and renovations. And that’s to put all new, you know, lvp, glue down, flooring down, if appliances need to be replaced, that’s in the budget, new paint, and then some new light fixtures and like handles for you. It’s called like, nickel. You’re not the renovation guy here. But it’s like the stuff you put on your cabinets. Satan nickel, I think. So it’s like five, five grand on average for the interior renovations. And then on one of the properties, like we completely repainted it fixed up a lot of the wood rot on the outside. And we’re installing a lot of new doors on that property too. And we had to repair a gas leak as well.

J Darrin Gross  16:44  

Gas leak needs to be repaired, that’s for sure. Yeah. So how do the rents are you would you serve as a distressed property? Did you? Where were the rents before the renovation? What do you expect the rents to be post renovation?

John Stoeber  17:02  

Great question. So it’s, it’s all one in two beds, and they were renting anywhere from $400 to, you know, 550, but definitely gearing toward like the lower end the four to 450 range. So right now on the renovated units, we’re getting 695 on the two bedrooms that we’re renovating, and 650 on the one bedroom. So on average, it’s like a $200. You know, rent bump per unit.

J Darrin Gross  17:33  

That’s, that’s strong, were there any expenses, you were able to, you know, either eliminate or pass on to the tenant.

John Stoeber  17:43  

So we’re passing on some of our utility bills to the tenants. There haven’t been any expenses we’ve been able to eliminate. Because the seller just I mean, he ran the property into the ground, like he was running it like a 25% expense ratio. And that’s why the property was like in such disrepair and mismanaged because he wasn’t putting any money back into it. So our expenses have gone up. But so has our income. And when you take you know, our current income and our projected income over our stabilized expenses, like our net operating income is going way up over what it was. 

J Darrin Gross  18:19  

Good. Well, that’s the that’s the plan. Right? Yeah. So name of the game. And so what is your your? Where are you in the timeframe here? You said, You started June, you’re seeing a rent bump, 34 units? Are you going to be renovating all of the units? Are you a part of the units? What’s the plan?

John Stoeber  18:40  

So we kind of have it broken out in phases. And right now, I’d say we’re still in phase one. Because this previous owner didn’t do any sort of tenant screening, we had really low economic occupancy when we took over what I mean by economic is, you know, people may have been living in the units, but they weren’t paying. So our occupancy was like in the 30% range 30 35% when we took over, we’ve just gotten that into like, the 60 to 70% range, and we cover all of our bills plus the debt service now. So we have a few more units that were were already renovated, and we’re leasing them up. Once those are leased up, I’d say that begins phase two. Phase Two is really just a decision we have to make, do we flip the property and make a whole bunch of money on the sale right now? Or do we go to a bank refinance out because we’re on a we’re on seller financing right now and get a construction loan, and finish off the rest of the units that need to be renovated and they just cash flow for five years. So that’s a decision that our team still estimate but both of those options are on the table.

J Darrin Gross  19:52  

Let me ask you, you mentioned the economic occupancy being low and then we’ve got COVID going on. What what’s been your? How have you been? You know, how have you dealt with a situation with people not pain? And COVID? Have you been able to evict or correct that? Or what’s the whole? How have you dealt with him?

John Stoeber  20:18  

Yeah, that’s a that’s a great question. Fortunately for us, most of the evictions we’ve done haven’t gone through, the tenants haven’t even shown up to court. So they’re cases just thrown out, and we win. And we’ve been able to evict them. For some of them. And we’ve had a couple, I think we’ve had two, who actually like turned in the CDC paperwork, meaning they’re protected by the moratorium, but they’re on month to month leases. And they’re not like very good residents to begin with. And they’re, like loud, obnoxious, we don’t really want them to be part of the community anyways. So we can, what we’re trying to do is getting is get them out on tenant holdover, like we’re just not renewing their lease. And then if they don’t leave the property, you know, we can get them out for tenant holdover, or breach of lease, which is kind of the avenue we’re going. And there’s all sorts of like rental assistance programs out there. So we came up with like a flyer that said, like, Hey, you know, here’s the numbers, here’s the emails, like you guys need to call them, and they can potentially help you pay the rent. And we actually just had our first tenant who applied for, or she like, filled out the CDC paperwork. She just got a big rental assistance check last week.

J Darrin Gross  21:33  

Did she pay you the rent showed?

John Stoeber  21:35  

Yeah, you know, no, like, it came to us. Oh, rental assistance. Yeah, they mail it directly to the landlord. Okay.

J Darrin Gross  21:44  

Like that was one of the challenges a lot of landlords have felt was the tenant get the money, but the landlord didn’t get the money?

John Stoeber  21:51  

Yeah. Like, it wasn’t like she got stimulus. This was just like some local nonprofit.

J Darrin Gross  21:57  

Gotcha, gotcha. So So basically, it sounds like you guys are coming up on, you know, completing phase one, you got it economically viable? It’s, it’s covering the debt, you’re kind of facing that question here. Do you continue or flip this thing and, and go on to another property? Is there a timeline for that decision?

John Stoeber  22:24  

Probably probably by summer, we’ll have to make that decision. Because we closed on it in June. And we don’t want to sell it within a year, because then we’ll get taxed at an ordinary rate. Or as if we wait for a year, it’ll get taxed at the long term capital gains rate.

J Darrin Gross  22:40  

Right, right. So let’s, let’s dive into this a little bit. See, we talked a little bit about your partner’s everybody. Good fit? I mean, you you guys talking about going and doing additional deals after this? Or is this kind of like a one and done everybody go their separate way?

John Stoeber  22:58  

That’s a good question. I like Firstly, we’re I think we’re all just going to wait and see, like, what happens with this deal. I mean, so far, I think it’s been a good experience for all of us. But none of us have, like 1000s of units and decades of experience. For most of us, except for the partner who found it like this is our first multifamily deal. And for the other partners who have like the renovation and construction experience, I mean, they’ve owned like a pretty large rental portfolio before, but it was in their backyard where they self managed it. So like, this is completely brand new to all of them. And there’s definitely been a learning curve. So it’s kind of like this joint venture was put together pretty quickly to get the deal close. So I guess we’re just gonna see what happens when it’s all said and done.

J Darrin Gross  23:49  

Got it. So with that, is there anything that you would look for going forward when you’re looking for partners?

John Stoeber  23:59  

Well, I think I mean, you should be looking for people who have similar values to you and then have, you know, skill sets that complement yours. So like for me, it’d be great to connect with someone who like is great at managing construction contractors and renovations because I don’t like doing that. And then capital is just a huge part of this business because if you go out and you’re buying one 200 unit properties, which is where I’d like to go, I mean, you’re talking about you’re gonna need to raise millions of dollars.

J Darrin Gross  24:31  

Right, all right. What about looking forward for deals here? We talked about you know, you’d been a couple and and realize that multiples were the, the, you know, had a much better advantage as opposed to the singles and or flipping. And you mentioned that Arkansas was kind of on your radar but but not necessarily literal rock. Is there there anything that you can point As far as lessons you’ve learned, or things you’d look for going forward and when you’re looking for a deal.

John Stoeber  25:09  

So when I’m looking for a deal, or like when I’m looking at a market? 

J Darrin Gross  25:12  

Well deal and market, I guess.

John Stoeber  25:15  

I mean, when I’m looking for a deal, and there’s a lot more due diligence, I would do going in next time, especially physical do really all due diligence, physical due diligence, and financial due diligence. And you just, you can’t know what you don’t know until you’ve actually done it. I mean, I knew a bit more about like construction and renovations now. So I mean, I’d be going there with like, multiple contractors, my property management company, and ideally an inspector and just getting all their perspectives, and really questioning the contractor like, how is how are you coming up with, with your bid, because you’re just gonna throw out a number, like, I need to know what that encompasses. So I can make my own decision, whether it’s enough to get the work done. As far as like identifying the market. It’s interesting, because like this deal, it’s not in a hot market. But I would do another one like it again, even if it’s not in like a high growth market. Just because the spread on it is so great. I mean, we’re talking about being all in for $35,000, a unit, which includes all the holding and the soft costs, and selling for 45 to 55, or refinancing at that value. Like if it works out, you know, all of our networks are going to grow a lot. So I would definitely consider something like that in a more stable market. But really like Florida, too, and I have a partner who lives there. He’s boots on the ground. And that’s just got, like all the demographics you could want in a market.

J Darrin Gross  26:50  

No, it’s that’s definitely both of those the, you know, find the deal in the markets. I mean, you know, I’m kind of curious to hear any thoughts on the market? Based on, you know, the COVID experience? Is there any as COVID changed your, your thoughts on where you might look for a property?

John Stoeber  27:15  

Yeah, it actually has, um, I was kind of really hell bent on being in these big primary markets before COVID. Because that’s where all the jobs were, and people weren’t working remotely as much. Now, though, I mean, it seems like the trend is people are moving away from these big, major cities, especially the high cost of living ones like New York City, and you know, pretty much everywhere in California. And they’re moving to places like Florida, and Texas, the southeast, where it’s more affordable to live, taxes tend to be lower. And now you have all this remote work, so you can kind of live wherever you want. And act like I moved to Denver earlier this year, because I still have a W two and like, I can work remotely now. So I’m just like, I want to live here, I’m going to move. So I think finding markets to where there’s just like things to do, and people want to live. So in the southeast, you have warm weather and beaches. In places like Colorado, you have the mountains, so like looking for attractions like that, like that, with still a strong employment base and a strong economy. I think that’s gonna be pretty key to identifying markets. And you could probably pick some great small tertiary markets that way.

J Darrin Gross  28:35  

The the skill sets, you know, what do you see as the skill sets you have to have, whether it be you personally or on your team in order to get into your first deal and be competent.

John Stoeber  28:52  

So I think there’s like three legs to be buying big commercial real estate, you have to be able to find the deal if people manage the deal, and you have to be able to raise money. So if you if your team has all those legs filled out, you’re probably a rockstar team. With the guys I work with right now at Cronos. That’s our company. I think we do a great job at identifying the deals because I think we’re really strong at analyzing the deals. And we’re definitely picking up our on our ability to raise capital. And through this experience and Little Rock, you know, now we have real asset management experience. But if you’re just starting out, at least like what I would do is I would focus on one of those legs, and then pick like a skill set within that leg. So like for me, it was finding deals. And then I’m a spreadsheet jockey. So part of finding deals is being able to analyze them and identify them. So like I focused on that. If you’re really good at developing relationships with people and networking. Maybe You know, you’re the one who’s talking with the brokers and developing those relationships, or you’re the one talking with ambassadors and raising money.

J Darrin Gross  30:08  

Yeah, no, it makes sense. Yeah, I mean, definitely three critical pieces there. And and having people that are strong in each of those would definitely propel your, the chance of your success. That makes sense. JOHN, if we could, I’d like to 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 are three strategies we typically consider. The first is we look to see if we can avoid the risk. If we can’t avoid it, then we look to see if we can minimize the risk. And when neither of those are options, we look to see if we could transfer the risk. And that’s what an insurance policy is as a risk transfer vehicle. And I like to ask my guests, if they can look at their own situation, their investments, their clients, the investors in their deals, tenants, the market interest rates, however, you want to identify, you know, then the question for the answer. But I’d like to ask you about biggest risk. And for clarity, I’m not necessarily looking for an insurance related answer. But if you’re willing, I’d like to ask you, john Stober, what is the biggest risk?

John Stoeber  31:40  

Right now, I still think COVID. And just the environment we’re in is the biggest risk, especially if you’re dealing with C class properties, you tend to deal with residents who are on the lower end of the socio economic scale. So these are the people that you know, their servers, waitresses, receptionist, they actually have to go into work. So if there’s a shutdown, like, they’re not going into work, or if they get COVID, like, and they may not have a job anymore. So I think that is a huge risk, like from a property perspective, but also with this, like the home market right now. And it you know, it’s February 2021. Like the whole market just seems crazy. If you’re, if you and your listeners have been, like paying attention. I mean, just look at gamestop, AMC Dogecoin. It’s just like it seems very unstable right now. Kind of bubbly and frothy. And like, I don’t know if the lending market is going to be the same 12 months from now where people are able to get loans so freely. And if you can’t get loans, that really drives down the number of buyers who can buy a property, which in turn is going to drive down values.

J Darrin Gross  33:00  

Yeah, that’s definitely some some things to pay attention to. And hopefully, they don’t come to fruition as far as a negative effect there, but always arrest. That’s good. JOHN, Where can the listeners go if they would like to learn more connect with you?

John Stoeber  33:21  

Yeah, I’m pretty active on Facebook and social media. So just reach out to me at john Stover or on Instagram at john underscore Stover. You can check us out at our website Kronosinvestmentpartners.com. We have our own podcast called the millennials and multifamily podcast so you can check that out. And we have a free book called How to analyze big apartment buildings and make them feel small.

J Darrin Gross  33:49  

Cool. Tell me how to spell the the coronas or the

John Stoeber  33:54  

K r o n as a Nancy Oh, S.

J Darrin Gross  33:59  

Got it. Got it.

All right. Well, john, 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.

John Stoeber  34:12  

Thank you so much, Darrin.

J Darrin Gross  34:13  

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  34:33  

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Silicon Valley Opportunity Zone with Erik Hayden – CRE PN #303

Erik Hayden  0:00  

Most capital gains events occur either from the sale of a business, the sale of real estate or the sale of stock. Here at Urban catalysts 70% of our investors their capital gains event was the sale of stock. If you have that capital gains event and you invest into a qualified opportunity zone fund, within 180 days, you’re eligible for the tax benefits. And there are three primary tax benefits. The first is you don’t have to pay taxes on that capital gains event until you pay your taxes in 2027. The second benefit is when you pay your taxes in 2027, you get a 10% reduction. So for every $100 that you would have owed in taxes, you only have to pay $90. And really the third benefit is the biggest benefit and that is after investors money seasons in an opportunity zone fund for 10 years. All of the profits from the fund itself are tax free.

Announcer  1:12  

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  1:12  

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 Erik Hayden. Erik is the founder of Silicon Valley based Urban Catalyst, named by Forbes and Sorenson Impact Center has a top 10 Opportunity Zone Fund. And in just a minute, we’re going to speak with Erik about Opportunity Zone Funds, and the potential for investors in the next 10 years. 

But first, a quick reminder, if you like our show, CRE PN Radio, there are a couple things you can do to help. You can like, share and subscribe. And as always, we’d love to hear from you. Please leave a comment. Also, if you’d like to see our answer, I guess 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, Erik, welcome to CRE PN Radio.

Erik Hayden  1:12  

Thank you, Darrin happy to be here.

J Darrin Gross  2:37  

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

Erik Hayden  2:47  

Sure. So throughout my career, I’ve been doing ground up real estate development in the San Francisco Bay Area. In general, I build institutional quality and scale projects. I’ve done several billion dollars worth of development throughout my career, and a pretty heavy emphasis on Silicon Valley and downtown San Jose.

J Darrin Gross  3:08  

And in any particular asset class that you’ve you’ve worked more in?

Erik Hayden  3:09  

I’ll tell you, I’ve built a variety of asset classes. Probably the strongest asset class I have as part of my background is multifamily. But I mean, that’s been the bread and butter of developers here in Silicon Valley, you know, for over 10 years.

J Darrin Gross  3:30  

So let’s talk a little bit about opportunity zones.

You know, you you have a fund and you also do opportunity, opportunity zones. Are you do you just have a fund? Or can you talk a little bit about how your?

Erik Hayden  3:42  

Sure, so here’s a little bit about what makes us different than other opportunity zone funds out there is we’re not just fund managers, but we’re also the developers of all of our projects.

J Darrin Gross  3:53  

Okay. And are these all local to you in the area in San Francisco then? 

Erik Hayden  3:55  

Yeah, so all of our projects are located in downtown San Jose, we closed fundraising on our first fund in December. We have those projects in downtown. We started fundraising for our second fund here in January. And we have those projects identified in downtown San Jose as well.

J Darrin Gross  4:22  

Got it. And the the essence of the opportunity zone. When we touch a little bit on that I know the basics is the tax advantage, but can you share with listeners a little bit about what the opportunity is for the investor?

Erik Hayden  4:41  

Absolutely. I’ll give you a little background on the program. So the program started as a part of the 2017 tax cuts and JOBS Act. The federal government wanted to create positive social and economic impacts in lower income areas. And what they did is they designated certain census tracts. Well, these they said here’s What census tracks qualify, that could be opportunity zones, they let the states choose 25% of those eligible census tracts in each state. here in California, the tracks were chosen in April of 2018. And the way that it works is if a developer or not even a developer, but is if an opportunity zone fund invests into an opportunity zone area investors into an opportunity zone fund, get some special tax benefits. And just kind of taking a step back. In order to be eligible to receive the tax benefits associated with the opportunity zone program, investors have to have a capital gains event. Most capital gains events occur either from the sale of a business, the sale of real estate or the sale of stock. Here at Urban catalysts 70% of our investors, their capital gains event was the sale of stock. If you have that capital gains event and you invest into a qualified opportunity zone fund, within 180 days, you’re eligible for the tax benefits. And there are three primary tax benefits. The first is you don’t have to pay taxes on that capital gains event until you pay your taxes in 2027. The second benefit is when you pay your taxes in 2027, you get a 10% reduction. So for every $100, you would have owed in taxes, you only have to pay $90. And really the third benefit is the biggest benefit. And that is after investors money seasons in an opportunity zone fund for 10 years. All of the profits from the fund itself are tax free. And here at Urban catalysts, our plan, of course, we’re ground up real estate developers, we’re going to build these buildings, we’re going to stabilize them, we’re going to hold them until we get to the end of that 10 year mark, and then we’re going to sell our assets. And that’s when we return the majority of the profits to our investors. And those profits are tax free.

J Darrin Gross  6:55  

Okay, got it. I appreciate you. And that was actually very succinct compared to a lot of the explanations I’ve got people I’ve talked to. So I appreciate that. So the idea is to attract investor funds, identify projects, build the projects, hold the projects for 10 years, then liquidate and return at a substantial substantial tax savings based on the growth. I mean, that’s the that’s the the one that I’ve I think that, you know, really caught my attention was that that growth of the gain on the gain is really the the candy there, if I’m understanding correctly, and I’m assuming if you’re in a in an area that’s been identified as a, an opportunity zone, and there’s a bunch of funds, or a bunch of investment in that area, that the likelihood of that that area, you know, appreciating substantially is what we’re all planning on. Is that that kind of the idea?

Erik Hayden  7:58  

No, I don’t think that the goal of the program is to, you know, say have land value appreciate in that area. And there were some studies that showed that in the early part of the opportunity zone programs, I haven’t seen as many news articles about it lately. But the benefit is for the people that live in these areas, it’s how our ground up real estate developments going to give back to their community. I mean, it’s not only designing buildings that the community wants and needs. But you know, for urban catalysts, it’s things like, you know, we pay, you know, millions of dollars in park fees that go towards the construction new parks, we pay millions of dollars in below market rate housing fees to create below market rate housing, we have a housing crisis here in California, it’s especially true in Silicon Valley, and anything we can do to help alleviate that is a good thing. Course, in general, the the government sees the opportunity zone program really is tax neutral. Yes, they’re giving some discounts on capital gains when they’re not collecting capital gains taxes at the end of 10 years. But if you add up the total amount of real estate taxes that we’re paying, you know, we’re building these big buildings. And before there were buildings there, there was something else that wasn’t paying as much property taxes. So you take that property tax increase over the 10 year period, and it really becomes more of a net neutral program.

J Darrin Gross  9:21  

No, that’s, that’s, again, a great perspective. I hadn’t thought of that. Like most people I’ve talked to have been more from a you know, just a pure investment side of things on how to you know, win on your investments strategy and and, you know, lessen your tax burden. But the, you know, the benefit to the community, I mean, that that’s, that’s gonna be huge, especially if you have a lot of investment in an area I can only imagine that will track Well, not just attractive, but like you say it’ll be a quality place for people to Live and create more of a community there. In the areas that you were investing in, can you describe kind of what, you know how large of an area is it and what was there? versus what you’re what you’re building?

Erik Hayden  10:19  

Sure. So, in San Jose, there are a total of 11 opportunities zones, and those are just the census tracks. By the way, when the federal government designated these census tracts, they didn’t necessarily reinvent the wheel, right? They, they pretty much said, Every census tracts, every census tract that qualify for below market rate housing tax credits is going to be an opportunity zone, or at least qualify for one. So it wasn’t some new formula. It was Oh, yeah, we already kind of have this. There are four census tracts in downtown San Jose, that cover almost all of downtown. And all of our projects are located in those census tracts of downtown San Jose in general, you know, maybe I should tell you a little bit about the story of San Jose, because San Jose, while it is Silicon Valley, and sometimes I get a lot of questions like, well, how to downtown San Jose qualifies in the Silicon Valley, isn’t this, you know, where Google and Apple and all these big tech companies are? And the answer is yes. But San Jose is a different kind of city, it was really one of the first cities to experience urban sprawl. So if it hit its peak in like 1940, is a farming community with a lot of, you know, canning facilities here in downtown generating these high rises started being built. By 1965. Downtown San Jose had died. And there was not a whole lot left here. The government came in an eminent domain, almost half of the city. They started, you know, really subsidizing development, building parking garages, building infrastructure, billions of dollars of funding went in, you know, from the public market to make downtown downtown San Jose, a place that people wanted to live. But the private markets really didn’t catch up to downtown San Jose until about five years ago, when we saw this wave of development starting to really come to downtown. And by the way, that was one of the major reasons why we formed urban catalysts that was to take advantage of these macro economic trends in Silicon Valley that are all pointing towards downtown San Jose as the next place to do development on a large scale. And for urban catalysts, we were going to do business raises fun do our projects. It was only after I started forming urban catalysts that I even learned about the opportunity zone program. And that everywhere that we were planning on doing business was already located in an opportunity zone. So thought, boy, wouldn’t it be great to be able to give our investors these additional tax benefits associated with this program. And that’s how we became an opportunity zone fund. Seeing this private market catch up with San Jose, I mean, it’s been an amazing amount of development, at least potential development coming to downtown. We’ve seen Google make a massive move into downtown. And I’ll give you a little summary of that. In the last two years, Google has purchased over $450 million worth of property in downtown San Jose over 80 acres. And plans that they’ve submitted to the city show them building roughly seven and a half million square feet of office and 6000 residential units. At build out. This will be Google’s largest campus on Earth. So we’re seeing big tech companies come downtown. And a lot of developers have come to downtown to in particular, a group called Jay Paul, they’ve spent 650 million on acquisition in the last couple of years. They’re going to do you know millions of square footage of development. And then even recently, a big Toronto based development company, West Bank has come to downtown San Jose, they’ve spent 300 million in acquisition in the last six months. So we’re seeing big developers and big tech companies all flooding into downtown. And this is what we saw urban catalyst when we formed, we wanted to really get it on the ground floor, acquire properties, and do ground development projects before these big developers and big tech companies really drove up the price of the land.

J Darrin Gross  14:14  

Now that’s, you know, kudos to you on on your timing there to be ahead of all the big guys like that. How many projects do you have in your, your queue as far as work you’re going to be doing?

Erik Hayden  14:29  

So in fund one, we have seven projects, a variety of real estate asset classes. We have multifamily office, student, student living, Senior Living and an extended state business hotel. In our second fund, we have two high rise towers in downtown right next to a mass transit station, really across the street from City Hall really on the main drag of the central business district. And that’s a large office high rise and a multifamily apartment building.

J Darrin Gross  15:02  

Gotcha. And it will the multifamily be market rate or affordable or what’s the plan for those?

Erik Hayden  15:08  

Oh, it’ll be market rate, you know, we’ll still pay, it will either pay our below market rate housing fees or we’ll build some below market rate housing into the project. San Jose has an inclusionary housing policy, and we’re going to meet that policy.

J Darrin Gross  15:23  

And how many units do you expect to build between those projects? And

Erik Hayden  15:29  

The multifamily should be well, in our fun to our multifamily project will be around 350 units. In our first fund, we have 184 unit multifamily project. And we have our student housing project, which will have 800 student housing beds. So it’s a they don’t necessarily do it by units for student houses. They do it by beds.

J Darrin Gross  15:53  

Right. So they’re like a three bedroom or four bedroom unit kind of thing. With Yeah, no. And what’s the is San Jose State or what’s the university nearby for the student housing?

Erik Hayden  16:07  

Yeah, it San Jose State San Jose State is right in the heart of downtown San Jose. And with 35,000 students, it’s the second largest university in the Bay Area behind Cal Berkeley.

J Darrin Gross  16:18  

Got it? Got it. That’s that’s pretty significant. The progress of MindTap as well as all the major investors you mentioned that are have identified and have come to downtown. And I’m not that familiar with San Jose, I’ve driven through I just remember kind of being, you know, kind of a continuation at least it felt like it between San Francisco all the way down just around the bay and kind of the the topography. I know there was there was some high rise stuff. But so is this all down in the in the downtown core is that where this all taking place

Erik Hayden  16:57  

That’s correct.  It’s all in the downtown core. And, you know, San Jose, it’s an interesting city. Like I said, it’s the 10th largest city in AmErika has over a million people. But it’s also geographically like a lot like Phoenix where it’s very spread out because that urban sprawl I was talking about. So the downtown itself only has roughly 75,000 people at night and around 100,000 people in the day when people are working in their offices. 

J Darrin Gross  17:23  

Gotcha. Gotcha.

Erik Hayden  17:24  

And the height downtown is limited by the airport. So the tallest buildings are 220 feet, which is probably why you didn’t notice them when you drove through because 220 feets like 20 stories. It’s not like other cities, we have these, you know, 50 100 storey buildings.

J Darrin Gross  17:38  

Right. Well, still, though, that’s, that’s significant. You know, number of units and and just like you said, Google and and the others that are coming in there that I’m guessing that’ll kind of really kind of give a facelift to a lot of the downtown area is it is it is the Google areas at all contiguous all the ground that they’ve purchased draws their stuff is contiguous. And it’s by the diridon train station, which is slated to be the largest train station on the west coast. Got it. So there’s a significant transit, infrastructure already built or is going to be developed as well.

Erik Hayden  18:18  

So most of the transit infrastructure has already been built. And that was a part of, you know, the government’s plans and revitalizing downtown over the last couple of decades, the only major change we’re seeing is that Bart, which is the largest mass transportation system here in the Bay, or is after 62 years, finally connecting through downtown San Jose into Diridon. Station.

J Darrin Gross  18:39  

Got it. No that, that, that’s impressive, and again, you know, everything you guys are doing, as well as everybody else. I mean, it seems like just a complete home run, to have an area that has been identified in such a large scale for redevelopment to get in on that. And and, you know, while you’re, you said, definitely the the livability celuk, that’ll improve dramatically, you know, from an investment standpoint, do you have any kind of ideal, you know, what you’re, you have a target or like a perspective, so and what you expect the property to, you know, from cost to exit? Is there a multiple there are any kind of a,

Erik Hayden  19:27  

Oh, we have all of those multiples, we don’t typically share them in public, because sec rules are associated with raising funds. But I will say that, and, you know, to your point, there is risk associated with investing in any type of fund. You got to understand that risk, and there have to be returns that are projected, that are adequate to take those risks. And our returns are right in line with where they’re supposed to be for the amount of risk associated with our fund.

J Darrin Gross  19:57  

Well, that’s great. You said that the majority of the investors you’re finding are coming from stocks. Is that right?

Erik Hayden  20:06  

You know, quite a few. And by the way, I mean, when we’re talking about opportunity zones and or opportunity zone funds in general, there’s a lot of different kinds of opportunities on funds. A lot of them are focused around ground up development like urban catalysts. But I’ve talked to a lot of funds out there that don’t primarily get their money from stock investors. A lot of our the reason why our funds are from stock investors has to do with us being here in Silicon Valley, and really because of the way that we raise money in the market. But I think the most common reason or least the largest reason why stock investors are interested in urban catalysts or investing in opportunity’s own funds is there’s never really been a safe harbor for stock investors in order to defer and reduce paying taxes until opportunity’s own funds came along. And now we’re really one of the go to ways to do that, while they’re diversifying their portfolio into real estate.

J Darrin Gross  21:01  

Yeah, no, it certainly is a significant opportunity. And, you know, I can see that anybody that’s been in the market, you know, getting out and looking for a way to shelter some other games, that would make a lot of sense.

Erik Hayden  21:15  

You know, Darrin, maybe I can make a comment about the opportunity’s own tax benefits. And that is, you know, when most people hear about opportunity’s own funds, you hear about the tax benefits. I mean, obviously, we’re big fans, the tax benefits here at Urban catalysts. But if the biggest tax benefit is you get tax free profits after 10 years. there better be profits after 10 years, really, what’s the point of the whole program? So understanding that underlying real estate and who the developers are that are doing that real estate is really important for an investor to understand when they’re looking at a potential investment into an opportunity zone fun?

J Darrin Gross  21:52  

No, I, I get it, I get it. Let me ask you, the given the, you know, the start of your fund was, and correct me if I’m wrong, but on the timeline, you were definitely pre COVID, weren’t you? When you when you started? Your

Erik Hayden  22:08  

We started? In our first fund we opened in February of 2019. Okay, we closed our first fund December of 2020. And we opened our second fund here in January of 2021. 

J Darrin Gross  22:22  

Okay, so time talk about how COVID has changed or modified or Evans had any kind of effect on what you see as far as the you know, the the go forward for you guys?

Erik Hayden  22:41  

Sure. So really, the biggest impact that COVID had on us initially, was the federal government in the middle of COVID. Really, like in May or June, they said, Hey, we need to extend people’s opportunity to invest into an opportunity zone fund. So where it used to be, everyone has 180 days from the date of their capital gains event to invest into a fund. It became anyone that had an capital gains event going all the way back to October 4 of 2019. Had until December 31 of 2020 to invest. So we’ve been raising money, people have capital gains, events, they call us, they say we want to invest, we want to diversify, we want to get these tax benefits. And we’d say great, but suddenly was no one had any reason to invest. Now, they all had until December, we thought, Okay, well, our fundraising velocity will slow down in the middle of the year, and then we’ll have a really big q4, a huge December. And that’s exactly what happened. And so the biggest impact was, it just had me you know, a little bit worried there come around August, September, gone. Boy, I hope it’s a big q4 and it really came through in a much bigger way than we’d anticipated which was great. I get a lot of questions about how the designs of our buildings will change because of COVID Or have we rethought you know, overall, our asset classes have we changed our program types and in general, we haven’t made significant changes. And we have made some significant some changes as to the types of hv AC systems that we’re looking at putting into our buildings so that we can have cleaner air. We’d already planned on having you know, keyless entry touchless elevators is really that’s the new market. But some of the Floor Plan layouts of our office, or how some of our amenity spaces or lobby areas and our residential projects work, we’ve changed those slightly. From a wholesale perspective, when we look at COVID impact on the real estate market. You know, we have a long term fund, right? We don’t get tax free profits until after 10 years. So we have a longer term vision of the overall real estate market. And what we think about is what is the demand for our tenants, you know, what would be our tenant rents 10 years from now that’s going to make the determination of the value of our products. For our investors when we sell, and those rents are really going to be driven by Silicon Valley. So when I think about, you know, changes to COVID, it isn’t so much changes because of COVID. Because I’m really looking at the long term trends of Silicon Valley, and if that is going to be favorable, and historically, it’s been extremely favorable. And in general, Silicon Valley has three aspects that no one else has had as a huge concentration of tech workers, we still get more venture capital funding than anywhere else in the world. And we have, you know, six of the largest companies in AmErika either have their headquarters or major office presence in Silicon Valley. And that’s not going to change because of COVID. And over the long term, that’s what matters.

J Darrin Gross  25:47  

No, it’s hard to argue with that, as far as just the brain trust and in the long history that the tech companies have there. And in Silicon Valley. I’m kind of curious, though, and I don’t know, you know, sometimes he read stuff, and it’s more of a national kind of a clickbait or, you know, some sort of a get you to kind of read and and make something of it, but you’re on the ground there. When I asked you about some of the, the information out there about just the political climate, the the tax climate in California, are you seeing is there, you know, there’s clearly news of companies moving out. But, you know, given the long history there, is there any, any concerns there as far as, you know, long term go forward in California.

Erik Hayden  26:38  

So really, the two, the two things that happened last year that were interesting were California’s population decline for one of the first times in like 100 years, and it went down by just a little over 1%. And in the short term, that makes a lot of sense to me, because, I mean, if you’re not legally allowed to go into your office, I can see one out of 100 people saying, Yeah, I’m gonna go work from Bozeman, Montana, or I’m gonna go work from Austin, Texas. That makes a lot of sense, I really see that as more of a short term thing. The other is, you know, the news of companies leaving in three in particular, I’ll point out, Ilan musk moved to Texas, Oracle said they’re going to move their headquarters to Texas, and HP is going to move their headquarters to Texas. So talk about those three in particular, I mean, Ilan, moving to Texas, that’s a billionaires leaving California, so they don’t have to pay taxes, that’s nothing new that is COVID. Related, that’s just kind of business as usual. Oracle, yeah, that’s not a great thing to have Oracle say they’re gonna move, they haven’t moved a significant amount of their office space, but they have moved some. And then HP man, HP, they really hit their peak, you know, a long time ago, they even split into two companies last year. And what we’re seeing here in San Jose is yes, half of one of their two companies is moving to Texas, and the other one is increasing their office space in San Jose. So from our perspective, we’re seeing an increase in workers because of that, that move, at least locally, to put into a frame of reference, because a lot of the news articles you see about companies leaving, it’s sensational, right, they want to get people to read their news, right? That’s the way it always is, if you put it into perspective, just the companies that went public in the second half of 2020, in Silicon Valley, you know, in the middle of the pandemic, just those companies have a larger market cap than HP and Oracle combined. So Silicon Valley is still generating these new companies just like wildfire, like they’ll have and having a couple of older companies, you know, go to Texas, that’s not going to make any real significant impact.

J Darrin Gross  28:51  

Right? I figured as much but again, they the headline news that, you know, grabs your attention is then the names, you know, the brands, you know, and, and, you know, the names are leaving kind of thing, but I think the the thing that I think is really hard to duplicate or, you know, change is just that the history and the you know, you also have the, the you know, Stanford’s nearby, and a lot of the, you know, just kind of like the brain trust of all of these tech companies are there and whether that cross pollination or whatever I mean, that’s, that’s where, you know, those people want to be and that’s how the ideas get started and stuff. And I would just think that would be an attraction for anybody looking for talent or wanting to, you know, go where the people are.

Erik Hayden  29:43  

To give you another kind of frame of reference. cbrt recently released a study showing that the Silicon Valley office marker they called it the San Jose Metro region, is poised to be the hottest office market in AmErika. Post COVID. And what we’ve seen here in the last six months, is we’ve seen a significant number of office building sales. So a lot of these big reads are big equity investors, they’re all coming to Silicon Valley, and they’re gobbling up office space that, you know, either record or near record pricing in the middle of a pandemic, when everybody’s saying, well, isn’t work from home gonna really impact, you know, the demand for office? The answer is here in Silicon Valley, that doesn’t seem to be the case based upon the buying patterns of these huge groups and really cvars forecasts?

J Darrin Gross  30:37  

No, no, it makes sense. And I think that, you know, COVID certainly demonstrated that, you know, there are businesses that can operate, you know, effectively or efficiently, remotely. But I think that in a creative environment, I’m just kind of hearing from others that a lot of that creativity happens when you’re, you know, together, as opposed to, you know, he’s isolated in a spare bedroom or something like that, you know,

Erik Hayden  31:05  

the way that it really is shaking out is that people have learned that they can work from home. And if 4% of people work from home before the pandemic, it’ll probably be a higher percentage, after the pandemic, there will be some offset, as far as like, the amount of office space required to socially distance are some of the new ways that people are thinking that you need to interact in an office. And will those completely offset? I’m not sure, but really, that’s a short term thing. And it is here in Silicon Valley, it is the long term view of how this economy is going to do that’s going to drive office. And I mean, that’s really what’s always driven the office demand here.

J Darrin Gross  31:49  

Well, it sounds like based on your talk, and in the care what the reporting, the market seems to be healthy. And and, you know, as long as the COVID gets under control, which it seems like it’s the numbers are trending that way, and everybody’s getting vaccinated and move on, hopefully, the light at the end of the tunnel here. So 

Erik Hayden  32:11  

That’s, that’s really what we’re seeing.

J Darrin Gross  32:14  

Yeah, gotcha. Erik, 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 we typically look at the first we we look to see if we can avoid the risk. If we can’t do that, then we look to see if we can minimize the risk. And when neither of those are an option, we look to transfer the risk. And that’s what an insurance policy is. I like to ask my guests, if they can look at their own situation, whether it be your clients, the market investors, the future projects, whatever, whatever, however you want to frame it. But if you can take a look at that and determine what you think, is the biggest risk. And for clarification, I just wanna make sure you understand, I’m not necessarily looking for an insurance related answer. But if you’re willing, I’d like to ask you, Erik Hayden, what is the BIGGEST RISK?

Erik Hayden  33:24  

Sure, and this is a great question, because this is what every investor should ask whenever they invest into a property or a fund is what is the risk versus return because that’s what matters when you’re looking to make your investments. When you look at ground up real estate development, which is really what urban catalyst is, you really have to compare it to a group that goes out and buys existing stabilized real estate assets. Because you have a much better idea of what you’re getting into, if you’re buying an asset that has a tenant, it has a cash flow, it’s already in existence, and if it’s a piece of dirt that I’m going to build a building on, and there’s a whole future. So really in, in ground up development, there are four major risks. The first is pre construction risk, and that is, am I going to be able to get building permits and approvals from the city to build the buildings I say, I’m going to build. And here in downtown San Jose, that risk is significantly mitigated, really, because the local government wants to see development happen. And they’re very clear with developers early on in the process as in way before we enter into the contract to buy the land, say, here’s what you can do, here’s what you can’t do. And they’ve been really true to their word on that. So as far as other jurisdictions here in the Bay Area in California, it’s not quite as easy in a process so that risk is much higher in other jurisdictions here in downtown San Jose, that risk is significantly mitigated. The next risk that we look at is called land development risk. That’s there are things associated with the land that you just can’t see. I mean, there’s environmental contamination. There’s liquefaction geotechnical risks, there can be underground structures that you don’t know about. There can be landslides, there can be water tables, all sorts of stuff. And of course, we do a lot of studies before we acquire any property to make sure that we know everything that we can possibly know. But I’ll tell you, one of the reasons why I like doing development in downtown San Jose is because it’s flat, I know it’s flat, I know that there’s a high water table, so I don’t build any underground parking garages. And I do all those studies to make sure I know how to mitigate, you know, build my structural systems for a geotechnical standpoint and my foundations, and how I’m going to clean up any environmental contamination that’s associated with the property, I need to be able to put, when I say put a number in a box, right, you got to understand how much your risk costs. The next type of risk associated chronic development is construction risk. And this can be a bad one. But in order to mitigate that, we do a couple of things. The first is, and this is a bank requirement, every ground development project we do, we need to have a guaranteed maximum price contract with our general contractor. So we use third party general contractors. And really the way that those work is they say, here’s the price we’re gonna build this building for. And if we go over that price, it’s on us not on you. Now, a couple caveats to that. The first is it has to be a large enough general contractor that they can handle those cost overruns, if they happen, so you can’t have them just go out of business on yet. The second is, their bidding a set of plans, those plans better be clear up your architect, let’s hope they didn’t forget to put doorknobs on the third floor. Because if they did, that cost is on you as the developer. So we have a team of 12 development and construction professionals here at Urban catalysts, where we have a ton of experience diving through those construction plans to make sure that they’re accurate and complete, so that we get the best price on our guaranteed maximum price contract. We also, of course, carry contingencies associated with the project so that there are cost overruns, we have money to pay that. And then the last thing is a risk that everybody’s going to take, which is market risk. The difference between a grounded development and a project that’s existing is we’re anticipating what is market risk several years from now, because our buildings take a while to build. So that looking into the future market is that additional risk, we mitigate that risk by doing business here in Silicon Valley, one of the best real estate markets historically in the country, one of the last places to go into a recession, one of the first places to recover. Those are the four types.

J Darrin Gross  37:39  

No, that’s that’s awesome. Very, very well stated. They’re curious, you mentioned the speed at which San Jose is willing to work with you on the permitting and stuff. I know the ground up construction usually, you know, takes quite a bit longer than just going to buy an existing building. Do you have any kind of a timeline from acquisition to completion, you have a kind of a window that you expect me as a year, two years, three years.

Erik Hayden  38:10  

So it depends on the scale of the buildings, and I’ll give you kind of a rain, it typically takes us from the day that we acquire the building to the day we start construction is between 12 and 18 months. And then depending on the scale, you know, some of our high rises are going to take two years two and a half years to build. Our smaller projects take 12 months to build, we have a renovation, it’s going to take nine months. So it’s it’s a range of time. And then of course lease up is different for all of our different product types to when you’re looking at for a market risk perspective, because it takes about three years to get an extended stay business hotel to generate, you know, its long term revenue. It’s just people need to understand there’s a hotel there, they start to do business travel, they stay there, they like it, they come back. So it just takes a little while. Same thing with the senior living facilities. In general, it takes about three years for us to lease up our senior living facility to 100% occupancy, it takes us you know, maybe a couple years or a year to two years to do our multifamily where our office we anticipate having a tenant that is going to be able to start paying rent the day that we can have a certificate of occupancy. So it varies from product type to product type.

J Darrin Gross  39:23  

I appreciate you going through that. I know it’s it’s always kind of a wake up call when you see you know something than just the the time that you you know, before any ground work has been done. I mean, trying to get your permits, and then architectural plans and, and all that stuff. A lot of times people forget about that. So I appreciate you sharing that. Erik, where can listeners go if they’d like to learn more or connect with you?

Erik Hayden  39:52  

Sure. So to learn more about Urban Catalyst, visit Urbancatalyst.com.

J Darrin Gross  39:57  

Got it. Erik, I can’t say thanks enough for taking the time to talk. I’ve enjoyed it. Learned a lot, and I look forward to doing it again soon.

Erik Hayden  40:07  

Absolutely, Darrin, thank you again for having me. 

J Darrin Gross  40:10  

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.

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