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Archives for January 2022

Elevator Maintenance Contract Management with Ashleigh Wilson – CRE PN #337

Ashleigh Wilson  0:00  

Elevator companies simply aren’t doing maintenance. In most instances, audit mate finds that elevator and escalator owners are only receiving about 50% of what they’re paying for from their elevator service contracts. So when I was in the industry, I saw, you know, high rates of cancellation, high rates of customer dissatisfaction. And and it wasn’t always the elevator company’s fault. But because there wasn’t this the an expectation there, there wasn’t the clear guidelines of here’s what you get, here’s what you’re supposed to get. Here’s what you’re not getting. There’s no transparency there was there was a general lack of understanding. So due to that, I was like, It’s not this hard. It shouldn’t be this hard. If customers had really clear and simple. This is what an elevator needs to be maintained properly. Let’s put it in your contract so that everybody understands it. And then let’s give you a simple platform to track if it’s done or it’s not done.

Announcer  1:04  

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  1:24  

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 Ashleigh Wilson. Ashleigh is the CEO and founder at AuditMate. Ashleigh is open sold multiple small businesses by the age of 20. Until ultimately landing in the elevator business. And in just a few minutes, we’re going to speak with Ashley about AuditMate. It’s the world’s first elevator escalator auditing and management software. 

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 would love to hear from me if you want to leave a comment. Also, if you want to see how attractive Our guests are, be sure to check out our YouTube channel. You can find us on YouTube at commercial real estate pro network. And while you’re there, please subscribe. Without I want to welcome my guest, Ashleigh, welcome to CRE PN Radio.

Ashleigh Wilson  2:46  

Hello, thank you for having me.

J Darrin Gross  2:49  

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

Ashleigh Wilson  2:57  

Yeah, absolutely. So I’m Ashleigh Wilson. I’m the founder and CEO of AuditMate, as you first described, where the first ever elevator and escalator auditing software. This came about because I was raised in the industry self proclaimed elevator baby. My stepdad was in the industry about 50 years, I joined myself in my early 20s, I thought that I would surely be the first female CEO of one of the major elevator corporations. And it wasn’t until, my values and morals just kept me up at night and I could no longer stay in the industry. And so I left with literally no idea what would happen and then automate was born.

J Darrin Gross  3:45  

Awesome. So he sounds like he had plenty of experience or I guess eye opening experience in the business of elevators and assume escalators to are they are they tied together as far as the the I guess the providers, the manufacturers and that is a little tied together.

Ashleigh Wilson  4:09  

Yes. Absolutely. Elevators are is just searched more on Google. Okay,

J Darrin Gross  4:15  

Gotcha. In the business that your your family had was it? Was it the sales installation service of the elevators and escalators?

Ashleigh Wilson  4:25  

Yeah, all of the above. So, so we worked for one of the big four they call them there’s four major corporations that own you know, over 80% of the market share globally. And all four of those major companies manufacture install, maintain, modernize and repair elevators and escalators.

J Darrin Gross  4:48  

And so, I mean, I think probably everybody in the audience has been on an elevator or an escalator so that’s I think we’re we’re at least have a base understanding of what they what they do take you from one level to another level. But but as far as the your business automate, I’m just kind of curious. What was it that you saw that was? What was the need that you were trying to satisfy?

Ashleigh Wilson  5:19  

Yeah, so in my time in the industry, it’s wildly apparent that customers don’t understand their contracts. And, and for good reason, because they’re built to be extremely vague and confusing. So it’s no wonder that customers don’t understand their contracts. And coupled with that, elevator companies simply aren’t doing maintenance. In most instances, audit mate finds that elevator. And escalator owners are only receiving about 50% of what they’re paying for from their elevator service contracts. So when I was in the industry, I saw, you know, high rates of cancellation, high rates of customer dissatisfaction. And and it wasn’t always the elevator company’s fault. But because there wasn’t this the an expectation there, there wasn’t the clear guidelines of here’s what you get, here’s what you’re supposed to get, here’s what you’re not getting, there’s no transparency there was there was a general lack of understanding. So due to that, I was like, It’s not this hard. It shouldn’t be this hard. If customers had really clear and simple, this is what an elevator needs to be maintained properly. Let’s put it in your contract so that everybody understands it. And then let’s give you a simple platform to track if it’s done, or it’s not done. To me, it felt very, very simple. But in the industry itself, it’s just extremely complex, apparently.

J Darrin Gross  6:53  

So I’m curious about that, you know, contracts, being an insurance broker, there’s, you know, contracts are what insurances, and you talked about the understanding of the contract. I get that. So it isn’t a matter of the the buyer, the the the building owner, not understanding what’s included in the contract, what, what they should be doing, is that kind of what I heard you say, and is it then upon them to request those services that they’ve paid for they’re not being delivered automatically by the service provider? Is that kind of the source of it?

Ashleigh Wilson  7:31  

Yeah, that sums it up. But really, what it comes down to is, because there’s only four major companies out there, and they’ve been around for all over 100 years, there’s really not much education out there, except for from the elevator companies. They’re the manufacturers, they set the OEM, they write the contracts. And so it’s not like electrical or landscaping, that it’s like, the market is so wide, that you can go out and get educated from many different sources. Or you can hire generally, you can hire a handy person that knows like a little bit about electrical, a little bit about plumbing a little bit about this. You can go from one insurance broker to another insurance broker. Well, with elevators, you get really four companies. And they all operate in similar ways. And they’re all pretty vague and confusing. So when the when it comes down to it an elevator maintenance contract, it’s still what’s being sold, which says Your elevator should be maintained this many times per year. If the elevator breaks down, here are the components that covered are covered. And here’s what’s excluded. And then testing, here’s what testing is required by the state. It doesn’t tell you that in the contract, it just tells you whether testing is covered or not covered. And this is where it gets really confusing because just because it’s not covered doesn’t mean it’s not required, which you want to talk about risk there’s thinking being a big one. So customers have these contracts that say we will periodically maintain your equipment periodic to whom periodic to me periodic to you periodic to the mechanic, who what’s the period, and that’s where it starts to get really confusing. And then the components are covered or not covered. Well, you think the customer knows the difference between a door roller and a door operator or a door restrictor and a door give? No, exactly, no. And so there’s a lot of room for open for interpretation. And I once had a customer say to me, I rely on elevator companies to explain what the work is to me to price the work fairly. And then to complete the work with literally no checks and balances. The only way I have To check if what they’ve done or not done is if the elevator works or doesn’t work.

J Darrin Gross  10:05  

Right. Right. So, so I guess one of the curiosities I have is the maintenance? You said that the contract provides periodic maintenance? Is there not a standard? I mean, it’s like, you know, you get your oil changed, it used to be 3000 miles now it’s five or somewhere, you know, beyond that, or whatever? Is there not like a standard? Is it number of hours? Is it days as his or any kind of a regular frequency on just the straight up maintenance that you should expect? On an elevator?

Ashleigh Wilson  10:43  

Yeah, it depends on who you’re talking to. Really. Um, but yeah, there are standards, their standards, especially, I mean, if you’re talking to an old school mechanic, you know, they’re gonna want a lot of labor, they’re going to want to go in. More frequently, the elevator company wants to reduce labor. So it depends on who you’re talking to what the standard is, it also depends on the type of equipment, the age of the equipment. And so that’s really what we’re trying to do at audit mate is to give the customer that baseline that we have here is what you need here is the minimum amount of maintenance to get the life of the equipment. The full life of the equipment, I should say. But when it comes to selling periodic contracts, the reason that they say periodic and don’t provide the baseline in writing is so that periodic can change.

J Darrin Gross  11:38  

Right, I can be held to the other feet held to the fire kind of

Ashleigh Wilson  11:43  

Right. And you can ask for specified maintenance, which is something that audit may does.

J Darrin Gross  11:49  

Gotcha. You mentioned that there’s there’s for manufacturers, as far as the the different types of elevators, I mean, you’ve got the I know, I’ve got some clients that own older buildings and have the old cages and and you’ve got the kind of the new shiny ones with the controls that only let you go to the floors you’re authorized to go to. Yeah, you got frayed elevators, which can be all sorts of kind of a crude thing from just a platform and, and, you know, to, to full on cage, do each one of those have similar maintenance needs? Or are each one of those different? And then if it if, if that is the case, are you at automate able to determine what that frequency should be based on those those different you know, types of elevators and and manufacturers and in the use?

Ashleigh Wilson  12:50  

Yeah, that? Yes, they do vary on on the level of maintenance needed. Generally speaking, the older the equipment, the more maintenance is going to be needed to prevent breakdowns and prolong life of the equipment. Generally speaking, the newer the equipment, the less the less maintenance it’s going to need. Except for those fancy ones that you were talking about, they go to different floors, those have those have fancier computers. And yes, audit mate does provide clients with a vertical transportation strategy, we will write the service contract on behalf of the owner. So this contract is built to protect the owner to reduce risk and liability to increase specificity and transparency. It’s the only truly enforceable elevator service contract on the market. Because it is technology enabled, every contract term has a data point that we track using technology to ensure that that work is completed. So we do what’s called a free contract analysis. So we’ll review the equipment, the age of the equipment, the vendors performance, the legal terms and conditions, and we will provide an overview of our recommended scope of work for that equipment.

J Darrin Gross  14:16  

Got it? So when when you audit a contract, I mean, that’s an existing contract between a provider and an elevator owner. Did I hear you say also that you write contracts? We do? Yes. Okay. So typically, I mean, I’ve always found that the the one selling the the product is the one that writes the contract. How is it? How has it been received with you providing the contract in reverse? I mean, I’m assuming that if you’re working with the elevator owner, right in the contract and then saying this is a contract we’re going to use with a maintenance company is that been well received?

Ashleigh Wilson  14:57  

Well, you might guess that I was probably not In the industry, and I’m also problematic with automate. So it’s been pretty well received. But it there was some resistance at first, of course, because we require transparency. If the elevator vendor doesn’t do their job, we get the client their money back, we enforced with liquidated damages. But the difference in how we have have made audit make contracts accepted by the vendors is through the power of automate. It’s always been, customers have always felt like elevator companies have held the power. They are the ones who can get the elevator running, you have to pay the bill, if the elevators down, I don’t have the expertise to push back. I don’t know what my rights are in this contract, I just know, I’m about to get fined by the Housing Authority, unless I get this elevator running again, or my tenants are gonna leave or you know, enter XYZ, the pressing issue has always been getting the elevator running, and not knowing how to push back. And that’s really where audit mate comes in. By being able to leverage the power of audit mate, grouping customers portfolios together, instead of having individual buildings, we’re able to really transfer the power back to the owner, they’re the client, they’re the ones paying the bill. They’re the ones hiring the elevator company. And by by shifting that power back to the buyer, the elevator companies have agreed to sign the contracts.

J Darrin Gross  16:36  

That’s awesome. I mean, it’s that’s kudos to you and AuditMate to be able to, you know, to win that, because I’m just thinking of other industries. It’s it’s kind of an add on I here’s here’s the contract you wanted this what we do kind of thing. Is this opened up any opportunities for additional service companies? Because I was thinking about it, like you mentioned, there’s like, basically four manufacturers of elevators. But I’m wondering, are there independent service companies that that can serve us all for different companies? Or is that pretty limited to? Like a franchise? Vendor service company?

Ashleigh Wilson  17:20  

Yeah, absolutely. There are independent vendors. And we do work with independent vendors. They’re usually more regional, there isn’t really many like national level independent vendors. But AuditMate will help them generally one of the biggest cons to go in with an independent vendors, you don’t get an online portal, you don’t get virtual maintenance records. But with audit mate, because we digitize all of their paper time tickets and all of their paper records, the customer now can have an online portal, and still use an independent vendor.

J Darrin Gross  17:58  

And in how long have you guys been in business?

Ashleigh Wilson  18:01  

Two years, two years plus now. Okay, congrats.

J Darrin Gross  18:06  

So, in that time, Have you have you found like certain providers that are more agreeable to it that have become almost like a referral source for you? Is there any build on that?

Ashleigh Wilson  18:22  

You know, it varies really region to region. People ask me all the time, like, who’s the best elevator vendor? And I’m like, in what city? In what department? Right, and modernization and existing install? What are we generally speaking about? Because it varies wildly. I don’t think any one Elevator Company is better than the other when we’re talking in general terms of maintenance providers. Because really, the local management drives so much of the success of the of the local region, you know, having a super advanced troubleshooting mechanic that can work on a specific type of equipment means that’s going to be the best elevator provider for you in that area, if you have a certain vintage of equipment. So there isn’t really any one front runner when it comes to who’s the best store or who’s been the best partner. It varies state by state for us.

J Darrin Gross  19:22  

Gotcha. So we’ve talked for merely about maintenance. In the maintenance contract. You mentioned the state. You know, and I don’t know what the governing agency is, is it the the building department or is it the Department of Transportation or who who governs elevators and escalators?

Ashleigh Wilson  19:44  

There’s generally specific office for it. So it’s, you know, going to be your up elevator and escalator office, who then governs that office varies. I think in Louisiana, it’s the same office as amusement rides, which is hilarious to me. But yeah, it varies. It varies state by state. There’s no national elevator code. So each state has an elevator code, and then a city can adopt a code as long as it’s stricter than the states.

J Darrin Gross  20:19  

Code. And so the the, the agencies that can find? Or I guess they are they also the ones that do the inspections and and is there a frequency of inspections that’s typical throughout the US or is that those vary widely by jurisdiction,

Ashleigh Wilson  20:43  

it’s generally every year. Some states, you can get to your permits, but it’s generally every year. And generally, it’s a state inspector, and you’re an approved inspection company. And you can find a list on your state website. Like if you type elevator office, California and Google, you can generally find what you’re looking for. If they allow third party inspectors, you’ll be able to find the link of improved inspection companies.

J Darrin Gross  21:16  

And then, as always, no the permit is on file and the Office for his or his or anything that you guys provide that for, for documentation digitally of those permits that are required to be listed or shown or are in the the elevator itself.

Ashleigh Wilson  21:36  

Yeah, so we’ll track those expiration dates to ensure that the client either requests an inspection, or is inspected by that date. A lot of states are really behind on inspections. And even though the owner cannot perform the inspection, and they cannot do the safety testing, they are required to have them completed. So if the elevator company’s past due, which happens if the inspectors past due, which happened and then someone were to be hurt on the elevator, all of that risk and liability falls on the owner of the building.

J Darrin Gross  22:19  

Gotcha. I’m trying to think just like on an insurance basis. I know we always ask are there elevators or escalators? But I’m not. I know, like fire escapes, or is like questions about like load inspections, and that kind of stuff? Are there any kind of what is it just a safety inspection to make sure that all the that it’s operating properly? Is there any kind of load inspection or anything like that? That goes with it?

Ashleigh Wilson  22:46  

Yeah, so every year is a no load test. So you’re testing the safety devices, every five years is a full load test. We’re speaking generally here, where you load the elevator to capacity, and you actually crash the car to make sure all of your safety devices work. This is so it’s being crashed using that term lightly, but in a controlled environment, so that if anything were to break, it’s breaking during the test so that those items can can be fixed.

J Darrin Gross  23:21  

Gotcha. And so for for this, I’m assuming that there’s like an ideal number of elevators that you would, where you would track or that a an elevator owner would lean towards working with automate, or is it from one to whatever? Is there a sweetspot?

Ashleigh Wilson  23:45  

One to whatever, honestly, most small building owners and Matt Well, really, I mean, small building owner and manager. If you were to spend the time to manage your elevator vendor, and to be able to get the most out of your contract and not pay more than you should, you would be spending an obscene amount of time tracking all of the maintenance activities, tracking the duration, trying to understand what’s covered and what’s not covered, it would spend an obscene amount of time and guess what building owners and managers that’s not their job. It’s a small, small, small fraction of their job. So we charge $65 a month. So even if you have one elevator, it’s $65 a month and we’re ensuring we’re auditing all of your maintenance, all your invoices, all your proposals and your compliance for an entire week we do annual subscriptions.

J Darrin Gross  24:39  

Got it.  So when somebody has a subscription with with AuditMate, you new you you’ve reviewed my contract. You understand what the dates are or perhaps you said hey, no, no, let’s let’s use this contract. What is the the reaction between automate the owner of the elevator and then the service provider,

Ashleigh Wilson  25:07  

were really the in between. So I like to think of us as like a property manager, but only for elevators and escalators. So we’re a vertical transportation manager. So we handle 100% of the vendor communication. And all of the invoices and proposals come in to us. So what the owner sees is they’ll see monthly checkpoints. So reports on what was done, what wasn’t done, what open items are outstanding. They will receive invoices, once they’ve been approved or disputed from us with recommended next steps. We do all of the heavy lifting, but we need the answer from the owner. So they’re still making all decisions. proposals will let them know if we’ve disputed them if we’ve negotiated them down. If it’s something that needs to be purchased now, or if it’s something that can be put into a future budget, they’ll receive annual reports on how much they’ve spent, how much they’ve saved, the compliance statuses. And the owner is still responsible to place service calls, we never want to get in the way of any sort of emergency. So we track data on the back end, but on site personnel still needs to place those service calls.

J Darrin Gross  26:23  

And do you have any kind of data? Or is there any kind of a I’m just trying to figure out a way of recognizing a, a, an elevator that has only been serviced when when called upon versus one that has been, you know, follows a maintenance schedule? Is there any kind of a, like a percentage of downtime or fines or whatever that you can show that, you know, typically a person who only waits till it’s broken to fix it is down this much time versus somebody that maintains it? Will, you know, have X amount of time down? Is there any? Is it just too wide of a question or is there anything that you can point to that? That shows? Yes.

Ashleigh Wilson  27:13  

Yeah, we’ve reduced invoices and proposals, so breakdowns. So breakdowns and then on cover breakdowns, I guess and not covered breakdowns. We’ve reduced those by 25%. And we’ve increased maintenance by about 30%.

J Darrin Gross  27:34  

Gotcha. And then I represent that also the breakdowns, the downtime, what is the typical downtime for a breakdown?

Ashleigh Wilson  27:44  

I, the typical downtime is quick is a few hours. But on a large repair will would be days and or weeks depending.

J Darrin Gross  27:57  

Right. I’ve been in those buildings were stairs, the stairs there. So yeah, too tall of a building, or I gotta go too far up. So. But that’s fascinating. I think that’s really cool how, how you’ve been able to do that and, and insert yourself as an advocate for the the property owner, and, you know, help them maintain and, and keeps their building hopper. And And I’m assuming that if most of the building owners been pretty receptive to your to your opportunity.

Ashleigh Wilson  28:35  

Yes, more. So now, it was interesting in the beginning, it’s one of those problems, it’s like way in the back of the closet, right? Unless you’re having current elevator issues that are causing you a big headache for the clients that things are like, okay, it was really interesting to, to get them to come on board. And we had to do the free contract analysis to show them what they were currently receiving from the money that they were paying before it started to click. And this was a problem that I’ve been trying to solve for years, right. I was like, Well, how are customers out rioting in the streets? How are people not so mad about all of the money that they’re losing? And when it came down to it, they didn’t know they were losing money? What do you what do you compare that to Intel, there’s a better way of doing something. That’s just the way and the more that I dug into it and dug into it. He talked to folks that are like, you just pay the bill. My dad just paid the bill. My grandpa just paid the bill. You call the elevator guy and you pay the bill. That’s just what you do. There was never another option for people and it’s back of mind and not thought about until it’s friend of mind and needs to be dealt with and you just want it off of your plate as quickly It’s possible to not think about it anymore. And so once auditMate did the free contract analysis and was able to show people how much work it is to get the full value of your contract, and how much they were actually losing, then AuditMate becomes this no brainer. But until you take a look and really dig into it, it stays back in mind and tell you, you know, the problem, really, if you go from your equipment lasting 35 years, to lasting 27 years, most people don’t look at that, that well, or property management companies have come and gone. But when you quantify it and put it in front of an asset manager, or an owner, it’s like, oh, I want those seven years back.

J Darrin Gross  30:54  

Yeah, no longer you can have some some work, pray with that owner, you know, recapitalize and invest in that that’s maintenance is always a lot cheaper than an ordinary place. So I get it. He actually, if we could, I’d like to shift gears here for a second. By day, I’m an insurance broker, as I’ve mentioned, and I try and work with my clients to assess risk and determine what to do with risk. And there’s three strategies we typically look at. To see if we can or how to manage risk, the first we look at is can we avoid the risk. And if we cannot avoid the risk, then we look to see if we can minimize the risk. And when we cannot avoid or minimize, then we look to see if we can transfer the risk. And that’s what an insurance policy is. And I like to ask my guests if they can look at their own situation. Could be their clients, the markets, suppliers COVID interest rates, however, you see the situation. And I like as an airline, I’d like to ask you if you can consider what is the biggest risk? And for clarification, while I am an insurance broker, I’m not necessarily looking for an insurance related answer. And so if you’re willing, I’d like to ask you, Ashley Wilson, what is the biggest risk?

Ashleigh Wilson  32:22  

Safety and compliance. Every elevator is is inspected, safety tested and inspected. So you need to make sure that your certificate is consistently up to date, and that your testing has been completed. Now the way that we can avoid this risk, start with your service contract, making sure that you ask your elevator company, what state required testing or city required testing is is what intervals and what tests; all of them. Because they’ll say they may say hey, you have to do this every one year in this every five years. And there’s fire service testing that the owner can do, or the elevator company can do get the elevator company to tell you everything that’s required and who can do it. And who if they can train the owner. Get that covered under your service contract, that’s going to be the cheapest way to do it. And making sure that you’re transferring that ownership or that responsibility on to the the elevator company. The second is going to be tracking that certificate expiration date, the state can be past due. So waiting for the state to come out and perform your testing is risky business, put a calendar invite on your on your schedule, so that you reach out to the state before your certificate expires, and send them an email, please come inspect my equipment. If you can’t come inspect my equipment on time, can you write me an email granting me temporary coverage or temporary certificate until you can come complete the inspection. Some generally the the state inspector will write you an email and say this email serves as your temporary certificate until we can come out and inspect your equipment. That way you have that in writing from from the inspection company and from the elevator company. So making sure passengers are safe on the equipment and making sure that your compliance is up to date with the state endorsee.

J Darrin Gross  34:34  

That’s a great tip on the reaching out to the state ahead of time as opposed to waiting for them the fine because I know when you’re when you’re dealing on their schedule, it’s a it’s a urgent emergency kind of thing. Whereas if you can reach out to them and buy yourself some time and kind of be more of a planned inspection that makes a lot of sense. That’s that’s a great, great tip there. actually working listeners go if they would like to learn more connect with you

Ashleigh Wilson  35:05  

AutoMate dot com.  We also have a YouTube channel with a few videos for AutoMate. I’m on Twitter @elevatordad. And LinkedIn is probably where we’re most active.

J Darrin Gross  35:22  

Got it? Actually, 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.

Ashleigh Wilson  35:33  

Thank you so much for having me. All right. For our

J Darrin Gross  35:37  

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  35:55  

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

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

ERIC DINICOLA  0:00  

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

Announcer  0:41  

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

J Darrin Gross  1:00  

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

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

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

NICK EARLS  2:42  

Hey, thanks for having us on.

ERIC DINICOLA  2:43  

Thanks a lot.

J Darrin Gross  2:45  

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

NICK EARLS  2:56  

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

J Darrin Gross  5:38  

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

ERIC DINICOLA  7:02  

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

J Darrin Gross  10:17  

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

ERIC DINICOLA  10:33  

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

J Darrin Gross  10:46  

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

NICK EARLS  11:39  

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

J Darrin Gross  13:40  

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

ERIC DINICOLA  13:55  

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

J Darrin Gross  15:21  

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

NICK EARLS  16:03  

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

J Darrin Gross  17:52  

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

ERIC DINICOLA  20:14  

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

J Darrin Gross  23:10  

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

NICK EARLS  24:06  

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

J Darrin Gross  28:12  

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

ERIC DINICOLA  28:37  

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

J Darrin Gross  30:26  

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

NICK EARLS  31:16  

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

ERIC DINICOLA  32:46  

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

J Darrin Gross  33:20  

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

ERIC DINICOLA  33:51  

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

J Darrin Gross  35:08  

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

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

NICK EARLS  36:13  

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

J Darrin Gross  38:07  

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

ERIC DINICOLA  39:49  

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

J Darrin Gross  42:53  

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

NICK EARLS  43:38  

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

J Darrin Gross  44:19  

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

NICK EARLS  44:31  

Hey, thanks so much for having us on.

ERIC DINICOLA  44:33  

Thank you, Darrin. Appreciate it.

J Darrin Gross  44:35  

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

Announcer  44:55  

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

Catherine Tindall  0:00  

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

Announcer  0:34  

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

J Darrin Gross  0:53  

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

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

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

Catherine Tindall  2:13  

Thank you so much for having me, Darrin,

J Darrin Gross  2:15  

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

Catherine Tindall  2:23  

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

J Darrin Gross  3:02  

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

Catherine Tindall  3:31  

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

J Darrin Gross  5:35  

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

Catherine Tindall  6:05  

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

J Darrin Gross  7:19  

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

Catherine Tindall  9:06  

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

J Darrin Gross  10:24  

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

Catherine Tindall  11:00  

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

J Darrin Gross  12:00  

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

Catherine Tindall  12:40  

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

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

J Darrin Gross  14:24  

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

Catherine Tindall  15:03  

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

J Darrin Gross  16:35  

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

Catherine Tindall  19:05  

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

J Darrin Gross  20:49  

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

Catherine Tindall  21:49  

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

J Darrin Gross  22:21  

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

Catherine Tindall  23:35  

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

J Darrin Gross  27:05  

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

Catherine Tindall  27:47  

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

J Darrin Gross  29:18  

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

Catherine Tindall  30:20  

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

J Darrin Gross  31:33  

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

Catherine Tindall  33:53  

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

J Darrin Gross  36:24  

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

Catherine Tindall  36:57  

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

J Darrin Gross  37:37  

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

Catherine Tindall  37:50  

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

J Darrin Gross  37:54  

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

Announcer  38:13  

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

Anthony Coniglio  0:00  

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

Announcer  0:51  

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  1:10  

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

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

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

Anthony Coniglio  3:11  

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

J Darrin Gross  3:18  

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

Anthony Coniglio  3:27  

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

J Darrin Gross  4:50  

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

Anthony Coniglio  5:04  

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

J Darrin Gross  5:31  

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

Anthony Coniglio  5:37  

Yes, we are an equity REIT. 

J Darrin Gross  5:40  

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

Anthony Coniglio  5:47  

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

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

J Darrin Gross  6:57  

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

Anthony Coniglio  7:27  

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

J Darrin Gross  9:04  

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

Anthony Coniglio  10:17  

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

J Darrin Gross  12:07  

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

Anthony Coniglio  12:50  

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

J Darrin Gross  14:14  

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

Anthony Coniglio  14:24  

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

J Darrin Gross  15:12  

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

Anthony Coniglio  16:12  

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

J Darrin Gross  18:44  

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

Anthony Coniglio  19:09  

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

J Darrin Gross  19:41  

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

Anthony Coniglio  20:11  

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

J Darrin Gross  20:57  

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

Anthony Coniglio  21:08  

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

J Darrin Gross  21:27  

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

Anthony Coniglio  21:43  

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

J Darrin Gross  23:21  

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

Anthony Coniglio  24:26  

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

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

J Darrin Gross  31:02  

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

Anthony Coniglio  32:12  

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

J Darrin Gross  36:05  

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

Anthony Coniglio  36:22  

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

J Darrin Gross  38:35  

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

Anthony Coniglio  38:41  

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

J Darrin Gross  39:46  

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

Anthony Coniglio  40:14  

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

J Darrin Gross  41:57  

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

Anthony Coniglio  43:43  

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

J Darrin Gross  45:35  

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

Anthony Coniglio  47:11  

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

J Darrin Gross  47:29  

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

Anthony Coniglio  47:36  

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

J Darrin Gross  48:02  

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

Anthony Coniglio  48:13  

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

J Darrin Gross  48:19  

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

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