Archives for March 2023

Commercial Real Estate Deal Cycle Interest Rates with Dan Brisse – CRE PN #399

Dan Brisse 0:00

I do sympathize and understand the market change but this is a very dangerous time to be buying if you don’t know what you’re doing very very dangerous and very it’s not the right time to be coming into a market you know if you’re a newbie investor wait for this to wait for this to blow over wait for interest rates to bottom out wait for something to be a more stable than trying to get into a market right now. So there’s the gap between the buyers and sellers. sellers want prices from June buyers are saying your price is crazy. We’re not paying that. So we’re at more of a standstill I think.

Announcer 0:31

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

J Darrin Gross 0:50

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.

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Today, my guest is Dan Brisse. Dan is the co founder and principal at Granite Towers Equity Group, where he oversees the Operations, Acquisitions, Investor Relations and Asset Management. Dan is resident of southern Washington and is also a former professional athlete. As a professional snowboarder for over 13 years, Dan took home multiple X Games gold medals, and was known as one of the top urban snowboarders in the world. Dan’s drive for excellence and success transpires into Granite Towers real estate portfolio. Dan is also the co host of the podcast, Keeping It Real Estate, and the co author of Four steps to Successful Passive Investing. In just a minute, we’re gonna speak with Dan about the multifamily marketplace for 2023.

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 our answer 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, Dan Brisse, welcome to CRE PN Radio.

Dan Brisse 3:03

Hey, Darrin, thanks for having me. I’m excited to be here.

J Darrin Gross 3:06

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

Dan Brisse 3:15

Yeah, you bet. I grew up in central Minnesota with this childhood dream of trying to become a professional snowboarder. And you know, at that age, I was 1011 years old. 12 years old. I went and told everybody about how I was going to be this pro snowboarder. And most everybody told me to get real and you know, I was like, you know, you are in Minnesota. There’s no mountains here, Dan, or maybe you should have a backup plan for that. And yeah, long story short, my parents believed in me and I told my parents and my mom, my dad told me Go for it. You know, they my parents were the biggest asset I’ve ever had in my life growing up. I mean, they basically they just said we didn’t do what we love. Make sure you do what you love as you grow up. And I never forgot that. So with their, you know, support, I had down, started snowboarding and just did it because I loved it. I didn’t you know, first 234 years of snowboarding. I didn’t want to be a pro snowboarder. I just loved doing it. By the time of 15 1617 years old. It was very clear that they were pro athletes. They were these guys who traveled around the world got paid to snowboard very well and had a career out of it. So that was kind of the background there. And as 18 years old, I moved out of Minnesota I transplanted to Salt Lake City. I lived in Salt Lake City for 10 years. Never had any financial help from my parents. I worked the most odd jobs you can imagine. As an ally coordinator at Red Lobster I worked at Blockbuster checking people’s out for movie as I was a busser at TGI Fridays, and after being in Salt Lake City for four years grinding working my tail off snowboarding every day I went to the Aspen open in Aspen, Colorado, and I my buddy actually paid for me to get in the contest and he drove me there because I was still living paycheck to paycheck. And I entered the contest, got through finals I had to get through 250 riders, they’d be the top 10 to get finals, finals, they came, I won the contest and my career took off. And I had a really great successful run as a professional snowboarder and have now since transitioned into real estate investing. So that’s kind of I’ll let you go from there, Darren.

J Darrin Gross 5:14

Well, I’m just gonna encourage any of our listeners, if they want to see some of the rides that you took, it’s pretty easy if you if you Google or search on YouTube, Dan, breezy snowboard, you’ll be entertained. It was pretty, pretty amazing stuff that you did there. Extreme. Extreme. I mean, that is the rider or extreme? Yeah. But well, awesome. I like that. I’m really looking forward to our conversation. So tell me a little bit about the the, the transfer from your snowboarding days into real estate because it’s not exactly like they’re, they’re connected other than the fact that you were snowboarding on real estate there.

Dan Brisse 5:59

Yeah, good way to put that. Yeah, real, really what happened was is as I got into my career, and I started to get to know a bunch of the other pro snowboarders in the industry who were older than me, I saw some of their careers and and it was brutal. It scared me. You know, they ended up coming into this career where you’re this huge known athlete getting paid very well traveling the world, everyone knows you, you go up these events, everyone wants your autograph, and then the career ends and you’re a nobody, or at least that’s how you feel. You’re still somebody but your identity of who you were, your whole life is gone. You’re maybe didn’t manage your money. Well, like most folks that they start making money as athletes, they just don’t know what to do with it. You know, I hear so many people say, and the money ruined me, it wasn’t the money, you just didn’t know what to do with the money. You know, you give someone a million dollars, and they’re broke two years later, you give someone a million dollars, and they’re worth 4 million, you know, two years later, it’s about what you do with it. So really what happened was I just kind of got scared and started reading books on what separates folks and what makes what’s the difference between people who do well and take their money and multiply and other folks that lose it all. So I read a bunch of books, and I started investing in real estate as I figured out I wanted passive income. That was my main goal. How can I find a way to create residual money coming in whether I work or don’t work? And then how can I get a tax savings? How can I get a tax break based on my income. And so I hired a CPA out of Arizona after reading a bunch of books. And we set up a business plan with them, including my wife, to help with the real estate investing. And we were off to the races buying smaller stuff. I bought a duplex in 2012. I bought a nine unit deal. Couple years in the year later. And then I bought a 24 unit deal. All on my own all my self education didn’t have a mentor yet, but I was just reading books and trying to find a way to invest the cash I was making.

J Darrin Gross 7:52

Cool. So the the, you know, seeking some sort of plan B passive income, you’re drawn to real estate. If I understand correctly, now with granite, you guys are doing syndication. Is that correct?

Dan Brisse 8:07

Yeah, that’s correct. After buying our first few deals on my own my business partner now Mike Roeder, one of my best friends I grew up with. He’s actually in high net worth insurance sales. He was buying a ton of single family homes in central Minnesota, and I just said, Hey, let’s buy a deal together. So he myself and one other guy that I went to high school with bought a 28 unit deal together. And then Mike and I went on to hire a personal mentor, or somebody who had been doing this for 24 years, had several 1000 doors, and had the results we were looking to, you know, move to for granite towers. So we started the company. And since then we’ve been buying, you know, 150 to 400 unit deals with private investors, you know, all value at apartments

J Darrin Gross 8:57

counted. So let’s say you said around 200 or 220 12, you buy your first duplex. What about did you start syndicating

Dan Brisse 9:09

the first deal? We syndicated wasn’t 2017 or 2018. So there was a period of time there. Where there’s there’s a steep learning curve in real estate, you know, it takes time. There’s everything takes time. So yeah, it was it was 2017 2018. We didn’t raise money until we had our really, really raise money from several investors until we had had more training

J Darrin Gross 9:37

on it. Got it. So and now how many how many doors do you guys have under?

Dan Brisse 9:42

Yeah, we’re right around 2400 units or so. Just around 300 million of assets under management that we’re overseeing as our team at Granite towers, as you know, takes the property from where it is to its new level through the business plan operation.

J Darrin Gross 9:58

So is it primarily evaluated A value add strategy that you guys?

Dan Brisse 10:02

Yeah, Yeah, it’s it’s exactly like that every every property is pretty dang similar. It’s a rinse and repeat model, you know, we don’t buy Office and storage and all the other stuff we focus on B and C, and we have one a class deal multifamily in Dallas Fort Worth in Nashville, Tennessee. And that’s really all we look at.

J Darrin Gross 10:21

Gotcha, gotcha. So in, excuse me in the the run up here told us, I mean, we’re talking now it’s it’s January 2023. The last, you know, five or six years, or even before that, I want to say back when I first started this podcast in 2010, it was 2015. I remember talking to people going like, Oh, my God, it’s you know, we’re running long, extra long and extra innings. You know, it’s the least the normal cycle of things was running kind of long from when the crash had happened. They were expecting a crash to occur, then. Clearly, it didn’t happen. We had multiple things that had kind of interrupted the normal cycles, including COVID. Your, your build up to the 2400 doors? How many? How many times have you gone full cycle? How many how many deals have you guys sold? And

Dan Brisse 11:22

yeah, we’ve gone we’ve gone full cycle on six deals, four that have been syndicated the two that I bought before I’ve sold off on my own. So that’s, that’s where we’re at currently.

J Darrin Gross 11:34

Okay. And in the in the syndication model, raising capital? How, tell me a little bit about that, as far as your experience with the initial efforts to raise capital versus where you are now.

Dan Brisse 11:54

You know, the market is changing quickly. Right now, obviously, everybody knows being we’re in is January 2023. When we first tried to raise money on our first deal, we raised 575,000 bucks on a 45 unit deal, located in River Falls, Wisconsin. And because of our database at the time in the work we had done, and the folks we had already spoken to about what we were doing, it was relatively quick, it was probably three, four or five days. And we had maybe like 10 or 15 investors who threw in 50 grand. So it was always very easily knock on wood. It’s always been very easy to raise money. I think that you’ve got some positives and some negatives. The positives are that you know, cash is looked at more I think as as trash at times you hear guys like Ray Dalio saying cash is trash on NBC News. I mean, that catches some attention. You know, what does that mean? Obviously, right now, cash feels like King. So are you still thinking cash is trash? I don’t think it is I never thought it was. But I think you have more folks that are thinking, Hey, I can’t let the dollar sit in the bank, I need to find a place to create some residual income find a tax savings? Can I be a part of the inflation through, you know, the destruction of the dollar? So I think I think there’s gonna be challenges for different groups, it really depends on you know, what do you know? And what kind of reputation do you have in the real estate business?

J Darrin Gross 13:28

Got it. So you mentioned like the first deal it took you only like a couple of days to raise the money you needed? Are you guys actively looking for for properties? Now? Do you have any under contract, or where are you at in in your acquisition phase?

Dan Brisse 13:47

Yeah. We’re always looking WE ARE WE every single deal that comes out in Dallas and Nashville, we’re underwriting and trying to see how close we can get to the Whisper price or their offer price. Right now, we don’t have anything under contract we have submitted a few offers, and it’s just there’s a gap right now. And realistically is the gap. I mean, if I’m selling, which we are, we’re selling one deal, you know, that went under contract in June, and the gentleman is still trying to get it closed. And he’s got $860,000 of non refundable money that he’s already released to us that we have in our bank account. And, you know, for us, we’re still of the opinion that you put the deal under contract in June at that price. That’s the valuation he’s of the opinion that interest rates have moved and now you know, the values come down and I i understand what he’s saying. But our noi has also massively increased. And you know, most of the time you don’t close a deal over six months, you close it in 60 to 75 days, at least we do. So I do sympathize and understand the market changed but this is a very dangerous time to be buying if you don’t know what you’re doing very, very dangerous and very it’s not the right time to be coming into a market. You know, if you’re a newbie investor what wait for this to wait for this to blow over wait for interest rates to bottom out wait for something to be a more stable than trying to get into a market right now. So there’s the gap between the buyers and sellers, sellers want prices from June buyers are saying your price is crazy. We’re not paying that. So we’re at more of a standstill, I think.

J Darrin Gross 15:19

That kind of sums up kind of what my my sense of things have been. But yet I still hear about, you know, deals being done. I’m kind of curious, have you in the deals you’ve underwritten? Has there been any change in your strategy as far as maybe some of the, you know, the points you were looking to historically for whether it be value add or always had been more of a financing? You know, Rubik’s cube on how to solve the financing.

Dan Brisse 15:52

Here, our biggest change definitely is what we’re using for debt. And how we’re going about that, and that affects your what you can pay for these deals, you know, when you’re in a very volatile market, like he are, how do you go put bridge debt on in Bridge debt where the variable rate you might get way more loan dollars, but just because you’re getting more loan dollars, and the returns look better on paper does not mean in my opinion, and our philosophy, granite towers, that that’s the way you go. So our biggest thing is just low leverage fixed debt. And if you can’t make the deal work with low leverage fixed debt in a market we’re familiar with, then we’re gonna wait a little bit, we’re gonna stack cash and and see how things play out. You know, we we bought a lot of deals over the last four or five years. And if we have to pause for six or 12 months to see what comes of this, we’re going to pause.

J Darrin Gross 16:51

And historically, your acquisitions, have you raised the capital for the value add capital improvements, or have you built that into your loan? Or have you done bridge financing? Or have you handled the capital improvement budget?

Dan Brisse 17:09

Great question. We’ve done it all. We’ve done it where it’s financed through Fannie Mae. And we’ve done bridge, when we’ve done it, where we raise the capital and just have it liquid in our bank account. Right now the last three deals we’ve bought has been Freddie Mac, fixed debt, and we raise the cap x and it’s liquid. And it gives us more flexibility. Prior to that, we’ve done some bridge debt that we’ve put rate cap insurance policies on where as rates rise, which they have now you have your rate cap insurance paying you to offset your cost and debt still very uncomfortable. Something that, you know, as we go through this cycle, probably will be very hesitant with bridge debt moving forward doesn’t mean you still can’t do well with the deal. I think I think there’s still an opportunity as long as you manage very well. And you can make it through this elevated interest rate period, how low? Did they come down? When did they come down? That’s the unknown factor. So you need cash reserves to get through that stuff. And then the other one Fannie Mae debt, with your capex finance, we’ve done that as well. It’s just a little bit more tedious and much more of a headache to get those loan dollars when you do want to use them. They’re very, very critical on seeing exactly what you did with the money was the work done perfectly, and then you get your money released? So it’s just it just depends on the deal. Depends on your your business plan.

J Darrin Gross 18:37

On those Fannie capex dollars, is that kind of like a construction loan where you have to submit all the work that was done and they inspector?

Dan Brisse 18:47

Yep, that’s exactly how it goes. It’s just part of the loan. I don’t think they consider it a construction loan, like a second loan, it’s just part of the loan that’s you can tap into when you’re ready, it’s available for you.

J Darrin Gross 18:58

Right, but those capex dollars are like in escrow and you’ve got to submit proof. Okay,

Dan Brisse 19:03

that’s 100% Correct.

J Darrin Gross 19:05

Gotcha. So, as far as the, you know, kind of the market changed, are you are you I guess what I’m trying to think is on your hold times, I’m assuming that up until now, you know, there’s been multiple people I’ve talked to if, you know, they bought the deal in January and you know, maybe January the following year, they’ve got a, an offer to sell at a multiple that they had, you know, anticipated for a couple of years. I’m assuming or let me ask it this way. Are you seeing your hold hold times extend based on you know, just the market and kind of the, the, you know, buyer seller gap? Are you do you anticipate holding your deals longer than then maybe you might have a couple of years ago?

Dan Brisse 19:55

Yeah, it one 100% will be dependent on what happens With interest rates in this recession, and how deep we go, and how long the Fed holds rates where they need to hold them, you know, I don’t know right now, that’s the part where if you want certainty of weathering a storm, you want to have fixed debt for a long period of time, because you don’t control when Jerome Powell is going to bring rates back down, or the Federal Reserve decides that it’s, you know, we’re far enough we need to help the market come back to life. So you know, going back to the chant, the biggest change we’ve made is just low leverage fixed debt. You can weather storms, yeah, you’re gonna have a prepayment penalty if you want to exit early. And it’s probably going to be a little bit painful. But which would you rather go back to your investors and say, Hey, we’re going to exit, we do have a prepayment penalty return instead of being 110 is going to be, you know, 97%. Or, you know, what our bridge debt is needing more capital put in 50 grand right now, or you’re we’re going to lose the deal. I mean, what would you rather be in as a syndicator? I’d rather be in the first position and always that position, I want boredom. I want to be bored. I don’t want to be gripped one bit when I’m investing in real estate, you shouldn’t be if you do it, right. You should. You should, it should be somewhat boring. And if it’s exciting, great. You’re just gonna sell for more because the market is good.

J Darrin Gross 21:18

Yeah, no, exciting is good when it’s the right kind of exciting that the Oh my god. Yeah, yeah, exciting. What about rate increase, not rate increases, but rent increases? In the last few years, there’s been quite a run out based on supply and demand, and inflation, etc. And, and all that. In the market you’re in in Texas and Tennessee, are you seen? Or have you seen substantial rent increases? And also looking forward? Based on kind of the economic conditions we’ve discussed? Do you have any kind of expectations for for rent increases? Or what are your expectations for rent increases?

Dan Brisse 22:08

Yeah, um, thus far with our DFW deals, and our Nashville deals, we’re still seeing very large rental increases in somewhere between you know, that 12 to 30%, which is, which is not normal, you know, based off of history, what we think is coming with the oversupply of a class is, is, is definitely gonna be less, you know, how much less again, unknown, do we have negative rent, I don’t know. As far as what we’re underwriting, we’re taking a look at costar, what they’re projecting, we’re taking a look at our one mile median income, we’re making sure we have a B or C Class DL a class, I think we’ll probably get rekt a lot harder than B or C class. And, you know, based off of what we can see with our primary data of what the other competitors are doing, and we take a look at costar and compare it, we’ll make a rent projection based off of that data of what’s coming over the next five years. This is part of real estate, though, that’s always been a challenge. What do you think your exit cap rates gonna be? What our rents gonna do? We’re interest rates going to be you there’s no way of knowing that information other than, you know, and I think you can read a lot on cycles, you know, that’s one thing I think is worth putting more time and effort into is studying real estate market cycles, and trying to better understand if you’re going into a downward cycle, what are the past cycles look like? And should you be using some numbers that are closer to what they were modeling in 2008? Nine, maybe that’s your best kind of, you know, projection of the future. As of right now, you’re in 2023.

J Darrin Gross 23:50

Yeah, no doubt. I, you know, the funny thing to me is, and this is just my, you know, brief experience in investing and just kind of observing the, the market cycles net, but, but it feels like a lot of times what happened before corrections have been made, like, Take, for instance, the Great Recession, there were measures put in place by Congress and, and, you know, other kind of real estate lender fixes that we’re putting into place. And I have this weird sense of a lot of times people when they when they look to the future, because they see certain signs they anticipate is going to happen, just like it did last time. And but, you know, what I’ve seen is that, you know, wherever the problem came from last time, those those holes have been plugged in. So now it’s not leaking over here, but it’s, you know, over there or up there down there. There’s a different cause. Doesn’t mean that it won’t be the same effect. But it’s just about where, where it’s coming from and I think also one of the challenges that I think we have this time is with all of the cash that was pumped into the marketplace. You know, there’s, there’s still I and I haven’t looked at anything recently, but I seemed like I read somewhere that, you know, the the amount of cash, whether it be savings or just, you know, just just cash that people or people are holding as cash as opposed to him in liquid. He has significantly greater than, than what it had been historically. And I should probably check out and have a resource, you know, to cite, but, but there’s like, it’s been more like a sense of like, kind of hanging on like, you know, the, we might need this. Yeah, to cash. And yeah, so,

Dan Brisse 25:47

Yeah, I don’t know if you’re familiar with Ken McElroy, he shared a pretty interesting chart on that as far as the amount of cash in people’s bank accounts, and it was very, very high during COVID. And very quickly, it’s been coming down to some of the lower levels we’ve seen in recent history over the last three, four months. So the direction we’re heading is definitely toward pain. The part that’s interesting to me is how much the Federal Reserve controls the market with these with interest rates, you know, I think the flick of the pen and they bring rates down 2% overnight, and all of a sudden everyone refinancing deals. People are able to now sell deals, people are back to buying deals, you know, people are back to building. It’s just It’s just unbelievable. And the other piece I think that’s unique now compared to the Great Recession is the amount of unrest between our the folks in their country. I am concerned as we go later into this debt debt cycle, and Ray Dalio talks about this in the changing world order. It’s a great book, if you haven’t read it, take a look at changing world order by Ray Dalio just talks about as you get late into a debt cycle like we are, that the amount of synergy and people working together goes down, and you have more fighting amongst political parties. And we’re seeing that I mean, I can tell you right now, firsthand, Portland is a different city now now than it was two years ago. And I don’t know why there isn’t more action being taken to stop what’s happening, because that seems very clear what we need to do, but it seems like it’s being allowed, and it’s trending down very quickly. So, um, you know, that’s the other piece is how, how much do people fight? Versus do they get along? You know?

J Darrin Gross 27:31

Excuse me? Yeah, no doubt the work together versus the, you know, the friction in all phases, but more, you know, more dramatically, so in the political space. And I think, you know, there’s, there’s all sorts of things you can point to that, that, probably exacerbate that. But, you know, it’s, it’s just, it’s just really a sad state of affairs, when you see, the the only thing that has been publicized is about how the other guy is all wrong. As opposed to, you know, going behind closed doors and finding out where the common ground is, and trying to, you know, come out with a solution. But yeah, I mean, Portland, right now, I don’t I don’t get it. How the, you know, just the, the leadership does understand the the value of the businesses and the people in you know, coming in the city and making your your, your city the most attractive and most wanted place, which, you know, people people, I mean, the people with money can leave. Yeah, I think say enough of this. I’m out. Yeah, those are exactly the people you want. Yeah, the if you don’t do what you need to do to attract and keep their interest, you’ll lose them. And

Dan Brisse 28:58

Yeah, and just think about as a parent, if I’m a parent, and I’m looking out the window, seeing the stuff I’m seeing with children, like, I can’t keep my kids there, I have to leave the city, you’re forcing me out because it’s unsafe. And I can’t be explaining, you know what, to them. They’re not at that age, they shouldn’t be seeing the stuff that I’m seeing. So, you know, it seems so obvious and so clear. I wonder if there’s something more it just it, you know, it doesn’t make sense. It’s beyond me.

J Darrin Gross 29:25

Yeah. Well, I’m with you there. And I don’t know what the, the answer is. But I think unfortunately, it’s one of these things where it won’t correct until it gets worse or you know, enough people leave to where, you know, somebody, somebody new in charge. changes the direction but yeah, yeah, not something they’re asking me to solve, but my two cents. Yeah. So, what is as far as looking forward here? You know, we’ve talked about interest rates and kind of the gap in the marketplace between buyers and sellers. With the information that you’re taking in the conversations you’re having with brokers, investors, you know, all of the different players, what what are you? Or where are you with expectations as far as whether it be a a new normal that people just accept? This is the marketplace? Or things change for the better to where it’s, it feels more easy to do business? Do you have a any sense of time that you guys are looking for? Or do you have any sense of that? Or is it just you keep looking until you see something that works? And maybe you find somebody that has to sell? And you’re able to pick up a deal?

Dan Brisse 30:52

Yeah, we’re very tuned into CPI each month to the consumer price index and just monitoring the pace of inflation, just to see how quickly it changes? And can they get it under control? And what does it look like? He looked back at history based off of the last 40 5060 years, then bringing inflation down, it doesn’t happen as quick as some people might think it you know, yours can take. So, you know, you’re heading into this environment. I just it’s it’s hard to say what the heck is coming? It’s hard to say, you know, with how quickly they’ve raised interest rates, and how quickly things have come to a stop, at least in real estate. You know, will it be something we haven’t seen before my not put my money on it. But what we’re really doing is we’re taking care of what we have, we’re making dang sure that the assets we do have are asset managing to the absolute best of our ability. We’re making sure all of our team members that we do have in place are trained well, and are taking care of our tenants focusing on the fundamentals, making sure that any of our debt that we do have it is variable, how are you going to exit it? What does it look like? Well, you know, Can we can we exit it sooner? And just just kind of hunkering down, you know, and seeing how far this needs to go for the system to break. I think that’s probably the next step is at some point, you think that there will be something that breaks in the system where they have to make a pivot move?

J Darrin Gross 32:17

Yeah, no, and it is kind of that I feel like more and more of the people I talked to, there’s I mean, there’s plenty of people I talk with, that are looking that are, you know, hungry that want to do a deal. But it’s again, it’s trying to get the numbers to make sense. And I’m curious when you go and underwrite a deal, and you mentioned kind of like the Whisper price. If you’re not able to get there, do you whisper back a price where you’d be interested? Or are you just kind of like, yeah, doesn’t work for us?

Dan Brisse 32:49

Yeah, we always do it. I think that’s one thing that helps you with your reputation as you go to build relationships with these brokers is they want to know where you’re coming in, you know, if you’ve got a seller who’s selling, and they take the deal out to the market, and all the buyers come back, and here’s a two and a half million dollar gap, they can at least go back to the seller and say you guys are two and a half million bucks off, what do you want to do, and see if they can get the seller to just or if he’s just holding steady. So I think the real deals you’re gonna see come to the market will because of force, you know, force of sale in the sense that their bridge loan variable debt has gone up too much. They don’t have a rate cap in place, and they can no longer make the debt payment, they need to do a capital call to investors, or they need to offload the deal wherever at whatever level they can. So if things don’t change, that seems like the most logical exit for for the deals that are distressed.

J Darrin Gross 33:43

I got it. As far as the markets you’re invested in in Nashville and Dallas. Do you are those the two markets that you’re limited to? Do you have any sense of anywhere else that you might go? If you were to what would be some of the the I don’t say the where but what would be some of the the criteria or or let me put this way? Historically, there have been there have been certain things that people look to mainly, I would say population growth and jobs and demand for housing. Has any of that change for you, given the COVID experience? And if so, what are some of the characteristics or the market characteristics that have have changed? So

Dan Brisse 34:37

Yeah, I would say one of the things that we’re more focused on than ever is just your one mile median income of what kind of demographic Are you buying in? And what kind of laws are being passed by politicians that give you know your tenants more rights than you you’re the one buying the property putting the debt on the property guaranteeing these loans? Taking the risk and building the business plan, bringing these investors together working on the property day after day, and then your tenants have the ability to not pay their rent and they can stay that just doesn’t work. So where are you going to buy so that it doesn’t matter what the government does that the people care enough about their credit, or their future to, to perform in just means pay rent? You know, I mean, at the end of the day, when I buy a home, I don’t just call the bank and say, I’m not paying this month, and they say, no worries, just stay there and enjoy, you know, they just take the house. So so, you know, it is a little black and white. But that’s, that’s the way it is.

J Darrin Gross 35:38

No, I just, it is kind of screwy. And, and, but I think as an investor, you have to be, you know, hyper aware of that kind of stuff. So that you can protect your asset. And, you know, I was having coffee with some investors this morning, we get to talking about and it’s not so much that you have the one bad apple, if he will, I mean, honestly, I made the other part of this conversation was, you know, evictions on a smaller portfolio are not something you’re dealing with all the time, it’s kind of a, you know, a rare kind of thing. But as you get to scale, it’s more of a common, I mean, it becomes more of a regular thing. But just how a, you know, a tenant that needs to go is likely causing other problems that may bleed over to some of your other good tenants that don’t want to be around, you know, that, that that situation and and so it really is it becomes more of an operational thing, and just how you can contain that and get rid of that that problem as efficiently as possible. So it doesn’t become more of a, you know, larger problem, but

Dan Brisse 36:49

Right, right. I could not agree more. I mean, that is that is something we’re evicting constantly, unfortunately, in this environment, there are, there’s more in some demographics than others. But I mean, there’s, there’s, there’s always folks that just decide not to pay, I don’t know what happens exactly, or, you know, because if they’re willing to work with us, or they give us a heads up that things are challenging, then we can work with them, but they just stopped communicating in skip or whatever, you know, it may be that they just go silent on you. And it just I’m not sure what’s going on over there.

J Darrin Gross 37:21

No, no, that’s always kind of a pain that. I mean, nobody, nobody wants to go there. But something you got to you got to have the access to it when you need it. So you can protect yourself. So yeah. Hey, Dan, if we could, I’d like to shift gears here for a second. My day, I’m an insurance broker. And as such, I work with my clients to assess risk, and determine what to do with the risk. And there’s three strategies that we typically consider, we first look to see if there’s a way we can avoid the risk. And when that’s not an option, and we look to see if there’s a way we can minimize the risk. And when we cannot avoid nor minimize the risk, then we look to see if there’s a way we can transfer the risk. And that’s what an insurance policy is. It’s a risk transfer vehicle. And as such, I like to ask my guests, if they can look at their own situation, could be your investors, your tenants, the market, the interest rates, political however you choose to identify what you consider to be the biggest risk. And for clarification, again, while I’m 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, Dan, Brisse, What is the Biggest Risk?

Dan Brisse 38:42

Yeah, I would say that there’s a couple boats the the one biggest one is get your debt right. In this market, particularly if your debts wrong, they can blow up the deal, and you can lose the entire deal lose all investors equity. So I’d say that that right now is the most important piece if you’re looking for the one biggest risk.

J Darrin Gross 39:01

I think that’s that is a pretty good answer given the circumstances. So I gotcha. Hey, Dan, where can listeners go if they’d like to learn more connect with you?

Dan Brisse 39:13

Yeah, they can just go to our website, www.granitetowersequitygroup.com. And there’s a Contact Us form. Fill it out a little email, phone number, hop on a call and we can get to know you guys better see if what we do is a good fit for you.

J Darrin Gross 39:29

Awesome. Well, Dan, I cannot 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. Yeah, thanks for having me on deer has been great. 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 40:01

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Commercial Real Estate Market Investors Sellers and Deals with Doug McKnight – CRE PN #398

Doug McKnight 0:00

If you couldn’t make money in real estate over the past decade, then you’re in the wrong business. It’s been easy. You know, from a standpoint of cost of capital and margins, obviously, we are entering it to have debt for the latter part of 22 starting to go into the 23 more challenging environment that we can certainly discuss in more detail but, but up until this point, the areas of the market that we specialize that and I will say that we as a company, we focus on what I like to call build America. So, we are, you know, for the most part, each of our platforms that we can get into, you know, we’re focusing on really your, your working families at rebuild America fordable housing and affordable vacations. And we believe that that area of our economy not only is that the largest demographic in our economy, but it’s the most resilient

Announcer 1:17

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 1:37

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’s program is sponsored by Building Insurance and Risk. When you invest in real estate. It pays to work with a real estate investor protection specialist to protect yourself and your investment from catastrophic loss. The experts had building insurance and risk focus on real estate and investor protection. They provide you with multiple insurance coverage offers and a side by side coverage comparison. To learn more, go to Building Insurance Risk.com.

Today, my guest is Doug McKnight. Doug has over 30 years experience in capital markets. He specializes in maximizing portfolio performance while maintaining balanced risk versus yield relationships. And then just a minute, we’re gonna speak with Doug about the future of commercial real estate market in 2023.

And, but first, a couple of reminders. 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, Doug McKnight. Welcome to CRE PN Radio.

Doug McKnight 3:29

Thank you, Darrin, thank you for having me.

J Darrin Gross 3:32

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. Sure.

Doug McKnight 3:43

Ignite, I am the president and partner at Rreaf Holdings. We’re based in Dallas, Texas. My background specifically really is on the institutional capital market side. In fact, Black Monday was my first day on the bottom floor so so I’m dating myself but we formed our company reef holdings coming out of the financial crisis back in 2010. We felt that we would have RTC to for those of your listeners that that remember the 80s we went through the painful experience with the RTC we thought we would just you know have a repeat. Fortunately, that did not take place. But out of that grew a thesis here at reef that I could then I’m happy to get into with you about the reef story. But But that’s really about background and you know what’s unique about it is for myself and my three partners, we all have unique backgrounds that we brought into this company, which I think has contributed to our success thus far.

J Darrin Gross 5:14

So, if we could maybe just back up for a second, the the marketplace up to this point, money has been pretty free flowing. You know, there’s been a lot of stimulus money that that always kind of is, you know, bastardized as the market based on you know, it’s not necessarily you know, just capital chasing deals, there’s, there’s another element there. If you were to to characterize the where we’ve been, how would you best describe the the market up to this point?

Doug McKnight 5:53

Well, Darrin we’ve, if you couldn’t make money in real estate over the past decade, then you’re in the wrong business. It’s been easy. You know, from a standpoint of cost of capital, and margins, obviously, we are entering into have debt for the latter part of 22, starting to go into the 23 more challenging environment that we can certainly discuss in more detail, but But up until this point, the areas of the market that we specialize that, and I will say that we as a company, we focus on what I like to call build America. So we are, you know, for the most part, each of our platforms that we can get into, you know, we’re focusing on really, your, your working families in your build America, fordable housing and affordable vacations. And we believe that that area of our economy, not only is it the largest demographic in our economy, but it’s the most resilient. Now, up until this point, resiliency hasn’t been as big of a worry. Because all types of real estate had been quite resilient. Of course, going through COVID We had some areas of commercial real estate that weren’t as resilient as others. What would those be? That would be the hospitality industry with hotels, that would be here, more of your luxury, residential, you know, luxury, high rise multifamily. You know, some of those really, you know, took a date. But other parts of commercial real estate, whether it be industrial, or whether it be more affordable housing or more affordable vacations really did quite well, you know, during the pandemic. And as we move forward, resiliency, to recessionary pressures, higher interest rates, etc. That’s going to be more of a challenge. And that’s certainly going to separate those that are more experienced and have gone through market cycles before it sort of understand the landscape better before we even get to that point. Those are the ones that are probably going to perform better.

J Darrin Gross 8:47

As far as asset classes that you guys focus on. I heard you mentioned a couple there. Are you do you have a couple lanes you Stan, are you? Are you agnostic to asset class? Or how do you guys are you set up?

Doug McKnight 9:04

No, no, we’re not agnostic. We we are coming back to that thesis I just mentioned that Bill America we we own today approximately 15 60,000 multifamily units across the south southeast Sunbelt areas of the country. These are mostly your secondary and tertiary markets. We were in this space back in 14 1516. What institutional capital just you know, just wasn’t there. So we enjoy very wide margins. And we really, you know, sort of hung out in that space when there really wasn’t a lot of capital chasing. And that’s one part of our company. One of our platforms, I like to call it that we’re still very much involved with today. I think we got up to about 2020 21,000 units at one point. But over the last 18 months or so, given market conditions, we have had some reversions where we have exited some deals that we’ve done quite well, like I said earlier, if if you haven’t been able to, you know, hit or exceed your, your projections in this market that we’ve been that we’ve been in with the with the interest rate environment, you’re probably in the wrong business. Another platform is beachfront hospitality resorts. And what do I mean by that Abby? Older outside corridor, hotels, motels, in iconic locations on beaches, whether it be the Gulf Coast, the west coast of center of central southern Florida, or the Eastern southern Atlantic coastal areas, we own hotels, motels in those markets. During COVID, those markets were what became known as drive to destinations. And those particular assets did did quite well. We also own a they resort, St. Simons Island called Sea palms, that was also given its location as being a drive to destination. But what is in common with all of those assets is, is the affordability but yet similar experience as something maybe down the road that’s going to cost seven or 800. And I wear 202 50, maybe 300, the highest season on night, same beach, same experience. And so, you know, again, speaking to Middle America, another platform that we have is what we call reef communities that we’re that is more master plan development, where we will be delivering single family homes for sale, single family homes for rent, which is known as PTR, build to rent, and also multifamily, highly amenitized, town centers, schools, parks, walking trails, lazy rivers, pickleball, all the things that are really, you know, desired in today’s world. From a lifestyle sets standpoint, when you get home, from your day at work, you want to be able to have all those experiences really within walking distance. So it’s basically building small towns. We own a little over 3000 acres to south of Dallas Fort Worth, that we’re going to be doing this. And we’re going through the entitlement stages. Right now we have another 3000 plus acres between Austin and San Antonio. So we’re very excited about that. And again, COVID really put a spotlight on the urban versus Suburban. I guess you would call it desirability, if you will. And so that is going to be a very, very large part of our company’s future going forward. The fourth platform is extended stay hospitality, where again, serving Middle America workforce, for the most part, whether it’s traveling nurse nurses, whether it’s construction workers, or whether it’s people that are going to be that are going to need to be somewhere for two or three weeks or a month or more in a particular city for their work. Those hotels were not as geographically level limited scope, we’re building those all over the country. You know, but again, very resilient, very much centered towards America. The fifth platform, which is the platform that I was just late to because of meetings all morning, it is we’re going to be rolling out RV communities. The RV space here in the United States, absolutely exploded during COVID That it was really a very much a growing market even before COVID. You know, but again, the the overriding thesis throughout all of that is really serving North America and being in very resilient times. Types of real estate. You know, we don’t own luxury high rise apartments in downtown Dallas, which is looking at behind me, we don’t know, four seasons at Ritz Carlton’s. So, you know, we try to keep our focus and our mission allied in order to be able to have that resiliency as it relates to the yield versus risk relationship.

J Darrin Gross 15:29

So if a if I understand correctly, basically, the the client tell you serve is, is the focus and in the different properties, whether it be the multifamily or the resort or the, the other properties, the common thread is that class of middle America, kind of just to the middle class kind of thing, the people something that’s affordable, whether it be a place to live or a place to vacation, kind of thing, is that my hearing?

Doug McKnight 16:05

Yes, that is that’s a fair assessment of our of our thesis here, at Reafevery

J Darrin Gross 16:11

I like it. Think there’s definitely a benefit and focusing on something I mean, you get to know that, you know, that client that prospect, you know, what their, what their wants, or what their needs are, and be able to cater to them. And I’m certain that would put you in a better position than then, you know, you’re a little bit in this little bit in that kind of this kind of that kind of thing. And, and definitely probably some some leverage too. I’m curious on on the you mentioned the the hotels, the older motels, hotels kind of properties that you guys have? Do you have a particular brand that you operate those under? Or are they boutique based on the area? Or how do you set those up?

Doug McKnight 17:01

Yes, they are boutique. In fact, we have our own brand. It’s called beachside resorts. You know, what we have found that in the locations that we’re in the approach, the approach to being unique and boutique is actually a benefit. You know, we do from a technology standpoint. And from a back office support platform standpoint, it’s very much of an institutional approach. Because your management, your operations is obviously part of the secret sauce. But in terms of the experience for the guests at those properties, they are experiencing something unique. You know, as I said, I’ll give you an example. We have two beachfront properties in Panama City Beach, okay, we are on 30 today. But when I say 30 day, most most of your listeners are probably thinking seaside or rosemary beach or Palace Beach, because it is the same highway, it’s on a different part of the highway. But it’s the same beach. So you know, our residents are going to come in, they’re going to have intercourse, they’re probably going to drive right, given the the given the geographical hole that the Panhandle has from the southern areas of the country. But they’re going to have the same beach experience. And they’re going to pay a fraction of what they’re going to pay on the other side of 30. I’ll use that as an example. And that’s the type of demographic that we serve. Gotcha,

J Darrin Gross 18:59

gotcha. So, we have a, we’ve covered kind of the, you know how easy it was to make money in real estate. We’ve got a picture of the the types of properties that you operate in. Let’s talk about going forward here and in 2023. What do you see? First of all, if you have a crystal ball, or I mean, I hear projections from this to that. And it seems like there’s a pretty wide spectrum of what people are expecting. What are what are you what’s your sense of? You know how this is going to play out in 2023? That’s fair. What are you What are you preparing for?

Doug McKnight 19:53

First of all, I wish I could find what, but you know, given my mics variance in business every time you do that you’re always wrong. Or you’re oftentimes wrong, I believe instead, what you have to do. And what we strive to do every day is that we try to weigh and measure our risks and measure that against our mission and our purpose. And if those are aligned, then it should not matter to any great extent, the economic environment that you’re in. So if you’re in if you’re in affordability, for example, and you know, that, that your residents or your guests dependent upon the type product is going to be the place to live or want a place to go to a vacation, then it all boils down to affordability from that standpoint, from the guests or resident experience standpoint, from the capitalization standpoint, which is really at the core of your question is going into a, a rising interest rate environment, coupled uniquely in the market, we’re at now, if you couple, a rising interest rate environment, with not as much of a commensurate increase in caps in cap rates, that it creates an interesting dynamic commercial real estate. Typically, if you’ve got a rising interest rate environment, prices, that just cap rates increase, and you’re able to maintain some spread, maybe it’s not as much spread, what we’ve been experiencing. And what I believe we will experience if I did have that crystal ball is that compression. And, you know, you’re getting to a point now, where you are going to have to be dealing with negative leverage. And what I mean by that is, if your borrowing rates are higher than your cap rates, then you’re going into a transaction negative with arbitrage. So, that is a very, very interesting dynamic that we have in the current market environment. And you have to not only be very strategic in the location, in the product type, but you have to be very, very key and lasered in on the operational side. The operational side, within commercial real estate, regardless of the product type, really, is what separates the successes from the failures. And like I said over the last many, many years, you know, if you weren’t as efficient on the operating side of an asset given the interest rate environment and given the overall market economy, you’ve done, okay. But now going into this that we’re faced with, it’s going to be a challenge. And us here at reef, just speaking for our company, we continue to be buyers of commercial real estate, we continue to be buyers multifamily. And like I said, over the last 1518 months, we’ve had some very successful exits, out of assets that basically reached their, their holding period, it was time to, to have an exit event for us for our investors. But going forward, we’re going to be very, very keen on making sure as I mentioned, that the mission and the purpose is aligned with the risk and if you if you keep those factors alive, then you should be okay. It the most powerful thing in real estate is being able to sit down and you know, when you’re able to say no, and you’re able to say you know what, that’s not a fit. That’s, that’s what you know, separates a lot of the successes from failures. The markets are gonna adjust they always do. You know, you see it right now in multifamily rents, for example, you’re finally starting to see a little bit of a breakdown in terms of the rent growth. So that’s a good example of if you if you are having If you’re starting to see some cracks in rent growth, and that’s going to be evident in your cap rates, you got to get back to more of a normal or positive arbitrage. That’s going to allow more deals to get done. So we’re going through a, a transitional period right now. Do I know how many times the finish is going to evolve? I have no idea. My gut tells me that we are a that we could possibly be lower reading environment at the end of 23, that we are at the start at 23. But with that said, if you were to say, okay, Doug, are you? Are you betting your company’s capital stacks in all of your assets on that assumption? No, I’m still looking at fixed rate debt on my leverage. Because I am not wanting to make that bad or that gamble, as it relates to where we’ll begin a year or two. Because it’s very hard to tell, we are coming out of an environment that that really we’ve never state as it relates to a booming economy. A very structured, safe, and fiscally sound housing market, unlike what happened back in the crisis, and then being slammed with a pandemic, that was a true black swan event, if you will. Not to mention the geopolitical climate, everything else that we’re involved in right now. That’s, that’s making it hard to get vapes into a normal type of environment. So it’s, it is unique, but at the end of the day, you’re still dealing with deflationary pressures, you’re still paying interest rates, you’re still dealing with labor, housing, all the variables that go into a market cycle, whether that market is good, or whether that markets, you’re still going through that maybe we got here for different reasons, or maybe we got here from unique reasons. But we’re still here. So you got to manage through it. And that’s what we plan to do here.

J Darrin Gross 27:23

Yeah, no, I think the transition is always kind of the the challenge. And it’s I believe, there’s opportunities in every, every market, it’s whether or not they’re recognizable based on, you know, what you’re used to what you’re expecting, versus, you know, where it develops. And, and, you know, I believe that a lot of times with these financial crisis, the powers that be try and plug the hole, so that doesn’t happen again. You know, so, but there’s an expectation, I think, a lot of times that people think, Well, it happened like this last time. So that’s what we’re looking for this time, when the reality is it comes from some other direction, because that whole has been plugged in. And so but but I think it’s human nature, that there’s this expectation of it’s going to replay itself. And I think more more than anything, is that it’s that the dynamics in play the, you know, the marketplace is just not settled, right now. And that’s, that’s the kind of as we work through, like you were saying that, you know, how long will it be? Or who knows what it exactly it’ll be? It sounds like you’re you’re committed to being conservative with your, your estimates and and and also the ability to say, No, that can’t underscore that enough, as is, you know, the power of that, as opposed to having to do something that’s that’s not as favorable. I want to ask you, you mentioned, you know, exiting a couple of multifamily deals sound like at one point, you’re up to like $2,100. Now you’re down run like 16 1600, if I understood correctly. Are you are you doing those through syndication? Or how is your what’s your investment structure model there?

Doug McKnight 29:11

You’re? Sure? Yes, yes. I’m happy to walk through that. We. As I said, we we had one point back meeting months ago, we owned as many as 22,000 multifamily units. We have had a number of successful exits, I believe we’ve probably exited a little over a billion dollars in in AUM during that timeframe, just in the multifamily sector or platform. I believe we’ve averaged in the mid 20s. In terms of IRR, we’ve averaged around a 2x Multiple on equity on those exits. Most most all of them had really gone through their whole cycle three to four years. So it was really in the normal course of business. However, it was in a very good market, right there. You know, we’re coming out of a market before COVID. And to a certain extent during the COVID, where there was what I like to call stupid capital out there overpaying for assets. But to answer your other part of your question about from a capital structure standpoint, we probably owe today 80, or 90 different assets, each of those assets are in their own LLC, each of their each of those have got unique debt partners, sometimes those assets are combined into portfolios in order to be acquired. And occasionally, it’ll be a one off or a two off, if you will. But from a capital structure standpoint, here at brief, we do not have a fund, an equity fund or a debt fund in house, we don’t have capital that we have to deploy, I sort of look at that as a card pulling a horse. You know, you tend to, at times, make mistakes when you have to keep your capital out. There’s nothing wrong with that model, from the institutional world, needing to find sponsors at GPS library. That’s their model, that model works for them. Because they’re looking for the opportunities that the sponsors like REITs go out and buy, and then they team up their capital. For us, we want to be a whole lot more opportunistic and nimble in our decision making, to just to make sure that we’re not being forced to do something. So with that said, our capital structures really typically look like the following, you’ll have a debt partner or a third party debt partner, whether that’s Fannie Mae and Freddie Mac, on the multifamily side, whether that is a commercial bank, whether that is a REIT, or whatever type of lender fits that particular asset or portfolio, then you will layer in your equity. That equity for us, typically, we will have a preferred equity partner, that will be a third party institutional partner, whether indicated whether that is a find or re or, or private equity. And then we also layer in our own equity. So, we have here at reef a very robust, what I like to call a retail equity platform where we have well over 2000 accredited investors that invest directly with reefs, in reef sponsored deals. That allows us to get, as I said earlier, it allows us to be very nimble, very opportunistic. And it also aligns everyone’s interest, because we’re investing along with our other capital capital partners. And ultimately, we do well after they are when they and we don’t have any institutional capital partners at the corporate level. Basically, our company is for families, myself, and three other partners, their families were privately held. We like to keep that simple.

J Darrin Gross 34:06

Gotcha. With the changing environment, how do you see investors in their expectations? Are they receptive to the story? Are they resistant? Are they saying I’m gonna I’m gonna wait this one out or what’s been the, the, how they perceive

Doug McKnight 34:29

you, I think that the smart investor today, in today’s environment, they’re going to be cautious, and they’re going to be a little bit more hesitant to venture into a new type of asset or to a new type of structure or maybe even into a new sponsor that they don’t have experience with. And I think that is the proven because like I said, it’s we are in a for challenging real estate environment that we had, and I think that understanding the mission and the purpose for why that asset is being acquired, and why me as an investor are considering putting my money into it does all that lineup? And does the projections and the business plan the business thesis for that particular investment? Does it make sense? And then where can you make mistakes? Where can you maybe not do it exactly the way you think you can do it and still be successful. That is where a company like our US, that’s why we live to be in that build America space, because there’s still some room there for markets to move. And for some dynamics, to get a little bit out of whack, whether it’s, you know, debt rates and cap rates, or whatever the dynamic is, but as investors in today’s market, or I’ll speak for our investors, our investors, for the most part, continue to programmatically that’s with us. But I think one reason for that is they are not seeing us trying to venture into new spaces and new territories to go get yield, just for the purpose of going to get yield, you know, we are staying within our lanes, we’re staying in the types of assets that fit our thesis. And so far, our investors are continuing to invest alongside us. But I think the environment we’re in and the environment, we’re probably headed into whether it’s near term, or whether it make it longer than what my gut tells me. I think the prudent thing to do is for any investor is to do their homework, understand the sponsor, understand the asset, understand what the business plan is, and, and diversify. And I think diversity, whether it’s asset type, or whether it’s a geographics, that’s going to be very important because real estate, when you get into a tight environment, and you get into a more constrictive environment, then real estate becomes less commoditized. It’s very easy for real estate to be more commoditized in a very favorable market. But in today’s market, it just is not the case, if that makes sense.

J Darrin Gross 38:00

Yeah, no. And that’s a perfect little segue, I was going to ask you, how do you see sellers expectations? You know, as as we kind of transition into this marketplace for more where we’ve been?

Doug McKnight 38:15

Well, obviously, we’re buyers and sellers. And we, we prefer to be in a position obviously, where we don’t have to sell. And that is the position that we’re in with our assets that we owned advantage, I believe today, we’re a little bit over 5 billion in aum. And we enjoy the flexibility of being able to since we are a vertically integrated company, everything’s under one roof, whether it’s acquisitions, underwriting, due diligence, dispositions, capital markets, property management, asset management, legal accounting, all the different components of a real estate transaction from the start to finish is under one roof here. So you, you really don’t have opposing forces that are making you make a decision that maybe you otherwise wouldn’t have. And, and our our investor base has the same thesis, it may understand that that’s the way we operate out just I’m just able to speak for us. So as a potential seller, we are going to do from a fiduciary standpoint, what is best for our investors. And one of the ways to be able to do that is to as you said, Be conservative in the way that you put together your capital stack. You know, I like to say for example, that debt is a asset that sounds weird sounds backwards. But from a standpoint of a capital structure, your debt component, instead of it being a means to an end, it actually is an asset as part of that structure, because your debt is going to be worth more or less, depending upon your interest rate environment, when it comes time to exit that asset. So, when you’re selling an asset, if you have a very attractive capital structure, and debt structure, oftentimes that asset could be worth more money. And sometimes when you go back to the car pulling the horse analogy, sometimes you have sellers, especially in the environment we’re in now that are essentially being forced to sell, whether it’s because of constraints within their capital stack, whether it is a mandate with their fund that they have to exit in a certain period of time. So we are seeing that, but those that can be nimble, those those that can be flexible, those that are in good quality assets, that are opting to not sell, I believe that would be the better situation. But, but with that said, there’s still very good opportunities in the marketplace, from a buyer and a seller standpoint, you know, like I said, we, we’ve exited over a billion dollars over the last 18 months, we’ve acquired over $2 billion in the last eight to 24 months. So we still remain net buyers, as a, as a company, even though we have taken opportunities to exit.

J Darrin Gross 41:54

Now, I think that’s all been a great perspective and kind of again, speaks to your, your philosophy and in the power of the ability to say no, you know, the sellers, they can’t say no, or, you know, gonna have to take what they can get to get out of their situation. Whereas if you do have some, some debt with some runway, you’ve got a good operating property. You don’t necessarily have to get out right now. So why would you unless you had some silly offer, which I’m guessing a lot of the silly offers are not happening right now. But, hey, Doug, if we could, I’d like to shift gears here for a second. By day, I’m an insurance broker, and work with my clients to assess risk, and determine what to do with the risk. And there’s three strategies we typically consider, we first look to see if there’s a way we can avoid the risk. When that’s not an option, we look to see if there’s a way we can minimize the risk. And when we cannot avoid or minimize the risk, we look to see if there’s a way we can transfer the risk. And that’s what an insurance policy is. It’s a risk transfer vehicle. And as such, I like to ask my guests, if they can look at their own situation, could be clients, investors, interest rates, the political environment, however you choose to 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, Doug McKnight. What is the biggest Risk?

Doug McKnight 43:41

Well, you know, when I think of risks, just in general, I think of what I said earlier, I think of what is my mission? What is my purpose? what’s the end game, and then I try to measure the risk that’s involved can achieving that. And I’m really, you know, at the core, that’s what risk is right? risk reward. It’s another way to say it. We are quite risk averse. Now. Let’s face it, real estate is a risky investment. Now, that dirt is going to be worth something, right? It’s not like it goes to zero. But a real estate course over the years, it’s been considered an alternative asset. It’s really become more of a mainstream asset over the last seven or eight years, but it’s still a risky investment. And it’s an illiquid investment if you are an investor in the real estate itself, versus maybe a REIT stock. And you’re investing in something that actually has risks but as don’t quit, right So, you know, those are variables that you have to weigh as an investor. As an owner operator, there is potential risk in every single element of the lifespan of owning that asset. From the day that you can begin your underwriting and your due diligence, if you’re not conservative enough, if you’re not realistic enough, if you’re not understanding the market, or the data that you’re being provided by the seller, whatever the case may be, if you’re not doing that properly, that is a big risk. If you underwrite the asset, incorrectly, you know, there’s an expression that you always want to make money on the buy, right? And then when you’re after you’ve acquired Well, during the acquisition process, you have the risk of not putting the capital stack together properly, which is what we’ve already talked about, what kind of debt do I want to buy? What variable debt? Do I want fixed rate debt? If I’m going to do floating rate, debt, variable debt? Am I going to go buy red caps in order to protect that exposure to interest rates? Certainly, with the rise in interest rates, you know, that is sort of, you know, and then, and then during the lifespan of ownership of that asset? Have you managed it properly? What’s the risk of mismanagement, and that is a huge risk. It’s also add, it’s not a risk that can really be measured. Now I like to call the operational side is that is the secret sauce, because you can buy an asset, right, you can have phenomenal capital structure, which you can manage you right into the ground. So that’s a big that that is a big element of risk. From an asset management standpoint. That is where insurance comes into play. We often joke that we’re probably over insured in every asset we have. But I will tell you an interesting story. So we own a hotel in Pensacola Beach down in Florida. And it was one of those 70s 80s Vintage outside of corridor hotel that we basically took off why we just did it, we revitalized it, we put in a lazy river, we put in all these different, really cool features. We put a restaurant tiki bar out of the beach, we did all these things to this property, and it was performing amazingly well until the hurricane came along, okay, well, the hurricane hit the property, but really, visually didn’t do any damage. Now, it messed up the pool, Lazy River, brought all the sand and brought all the rain and wind knocked a little bit off the roof, but really no big deal, we thought. But given the quality of the insurance that we had on the property, you know, our inspectors and adjusters come ahead and add to their credit, they found moisture within the walls. And they deemed it that it needed to be much more extensively repaired. Well, given that is back in the 70s and 80s, prior to current building code. The bottom part of that hotel was below sea level. Well, you can rebuild below sea level, right. So the the short part of the long story is that we completely tore down that entire property. And we’re now in the process of finalizing the high rise, it’s going to be an amazing property. We’ve already returned our equity to our masters, we’re still going to own it, it’s going to be newer, fresher, and it’s going to be a whole lot more bad. And the good news is is not only did to no one can hurt, which is that’s the best part. But our investors, us you know we have a new a new asset. And if we did not have the proper type of insurance. In that situation, everybody would have failed. And that speaks I believe to the focus that has to be put on insurance because often times you And of course, it depends on your lender depends on what you’re required to go out and do but, but sometimes you’ll see situations where assets are not properly insured, whether it’s a fire at an apartment community, or whether it’s a hurricane at a hotel or etc. So we are a big believer in being properly, properly insured. So, you know, I’m a big fan of insurance.

J Darrin Gross 50:33

One of the few, but for the right reasons, you know, I appreciate that example there. Because that’s, that’s what that’s what insurance is. It’s meant to get you back and and be a capital source to, you know, keep your business going. And so teltik worked well for him.

Doug McKnight 50:51

Well, what needs insurance? Until they do.

J Darrin Gross 50:56

Yeah, nobody wants it until they do they don’t have? Yeah. Hey, Doug, where can listeners go? If they’d like to learn more connect with you?

Doug McKnight 51:08

Well, they could certainly visit our website@rreaf.com. By the way that spelled R R, E, A, F. So a little bit of an unusual spelling. The way we spell it goes back to some of the predecessor companies, or the roots of the company. But it’s R r e a f.com. You can contact me through the website, you certainly email me at specific doug@rreaf.com. Feel free to call us at Dallas at Town. Feel free to come by and visit us. We love it when people just show up and want to learn more about our company. So I’m not hard to get.

J Darrin Gross 51:46

Awesome. Well, Doug, 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.

Doug McKnight 51:58

All right, Darrin, it’s been my pleasure. Thank you. And thank you to all your listeners.

J Darrin Gross 52:03

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

Announcer 52:29

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Private Lender Funds Equal Win – Win For Real Estate Investors and Lenders with Jay Conner – CRE PN #397

Jay Conner 0:00

You know, the traditional way of borrowing money is you go to the banker and you get on your hands and knees and you put your hand underneath your chin. And you go, Mr. Banker, Mr. Banker, please give me a mortgage, please loan me money, please fund my deal. And in this world, it’s the opposite. You see, we don’t ask anybody for money. I’ve never asked anybody for money. I got 44 private lenders funding our deals right now. I’ve never asked him for money. I’ve never pitched a deal. And they say, Jay, how did you do that? Well, I put on my teacher hat. And I teach individuals. We’re not talking about institutional money here. I teach individuals, human beings just like you and me, what private money is how they can get involved, how they can get high rates of return safely and securely, all backed by real estate. And when they learn our program, they’re chasing us. You know, I’ve got more private money chasing me now than ever before on this side of COVID.

Announcer 0:57

J Darrin Gross 1:17

Today’s interview is sponsored by Building Insurance and Risk. When you invest in real estate. It pays to work with a real estate investor protection specialist to protect yourself and your investment from catastrophic loss. The experts had Building Insurance and Risk focus on real estate investor protection. They provide you with multiple insurance coverage offers and a side by side coverage comparison. To learn more go to Building Insurance Risk.com.

Today, my guest is Jay Conner. Jay is a proven real estate investment leader and is known as the “Private Money Authority”, without using his own money or credit, Jay maximizes private money to buy and sell properties, with profits averaging $71,000 per deal. And in just a minute, we’re gonna speak with Jay about how to find and access private money to grow your real estate 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. Jay Conner, Welcome back to CRE PN Radio.

Jay Conner 3:10

Yes, Darrin, it’s great to be back. I tell you, I must have done an okay job the first time you had me on you wouldn’t have me back. But it’s so good to be here with you. And while I’m so glad you’re having me here to talk about my favorite subject private money in this very interesting market that we’re in.

J Darrin Gross 3:30

Yeah, I’m looking forward to it in a big way. As we, as you alluded there, the market has changed. And private money is definitely more of an option now than then, you know, in the recent past where the banks are given free money. But hey, before we get started, if you could take just a minute and share with listeners a little bit about your background.

Jay Conner 3:52

Sure. Well, my wife, Carol Joy and I we live here in Eastern North Carolina, in a relatively small town called Morehead City, North Carolina population 8000 people, our total target market is only 40,000 people. And we do two to three single family houses a month. But our average profits now are actually not 71,000. They’re 78,000. Now as of the last 12 months, so we’re not in a big market. But the point is, if you can do two to three deals a month and average a profit of $78,000 and work in the business less than 10 hours a week, then, you know, that’s those numbers, you know, seem to work out okay. Anyway, I’ve been full time in real estate investing since 2003. We’ve rehabbed over 450 houses in the local area. And Darren I know your audience is primarily interested in commercial deals. I’m so glad you had me on here because private money it’s all the same money whether you’re doing a commercial project or you’re doing single family houses. It’s all The same private money. Of course, the deals are just structured a little bit differently. Well, as I said, I’m in full time since 2003. From 2003 to 2009, I relied on local banks, institutional money mortgage companies to fund our real estate deals the first six years. And then in January of 2009, I had two houses under contract to purchase. And I called him a banker. I’d been doing business with my banker for six years. And I learned very quickly that my line of credit had been closed, I had no way to fund my deals. And that was with no notice. And I had an 800 credit score. But of course, you know, Darrin, and your audience, you recall what was going on in 2007 2008, and 2009. And you know, for many, many different reasons, we’re sort of back into that place, again, where money is tightening, tightening up. So anyway, didn’t have a way to fund those deals. Well, my definition of coincidence is God’s way of staying anonymous. And less than two weeks, I learned about this world of private money and private lending. And I tell you, it was the biggest blessing in disguise that I’ve ever had in our business, and that is being cut off from the banks. You see, if I hadn’t lost my line of credit at the bank, you and I wouldn’t even be visiting today, I wouldn’t be here on your show. Because it was because of that necessity, that I had to find another way to fund my real estate deals. And so I learned about private money private lending. And you know, this way of doing business and borrowing is 180 degrees different the opposite direction than the traditional way of borrowing money. You know, the traditional way of borrowing money is you go to the banker, and you get on your hands and knees and you put your hand underneath your chin. And you go Mr. Banker, Miss banker, please give me a mortgage, please loan me money, please fund my deal. And in this world, it’s the opposite. You see, don’t ask anybody for money. I’ve never asked anybody for money. I got 44 private lenders funding our deals right now. I’ve never asked him for money. I’ve never pitched a deal. And they say, Jay, how did you do that? Well, I put on my teacher hat. And I teach individuals, we’re not talking about institutional money here. I teach individuals for human beings just like you and me, what private money is how they can get involved, how they can get high rates of return safely and securely, all backed by real estate. And when they learn our program, they’re chasing us, you know, I’ve got more private money chasing me now than ever before on this side of COVID. So back to the background, I learned about private money, you know, since 2009, I’ve never missed out on a deal for not having the funding. In fact, I’ve got a problem. My problem is I got more money than I know what to do with, right, people don’t know what to do with their investment capital or their retirement funds, which they can use one or both to invest in real estate as a private lender, and they don’t know what to do with it. You know, as of right now, the average interest rate at a local certificate of deposit for 12 months is still 0.97%. A year ago, it was 0.17%. So it’s almost 1% national average. But you know, I come along and pay so much more than that, and give them high rates of return safely and securely. You know, this world of private money puts you in the driver’s seat, because you make the rules as the borrower, and it fixes your cash flow. I never take any money to the closing table, always bring money home. I mean, you can tell in this market. I’m really excited about private money.

J Darrin Gross 8:49

No, I love it. Excuse me, this. So let me let me ask this because I think, you know, your little timeline there. Of when you got started in Oh 3209. Most people remember that was when the kind of the world stopped when, you know, the big the big banks failed. And then, you know, Congress and tarp and all the all these other things that happened in in basically the, the, you know, the Great Recession occurred. If you if you look at those times when when you prior to that money was available, traditionally to where money wasn’t available, and, you know, caused you to have to kind of turn Do you find that the private money is doesn’t have a season? Is there? Is there a time when it’s more in demand? Is it more of a need? Or is it more of a matter of it’s always there, it’s a matter of understanding how to find it, how to recognize it, how To access it.

Jay Conner 10:03

Yes, it’s always there. It’s always there. Here’s what’s interesting. The people that have it, most of them don’t even know that this opportunity exists for them to be a lender. He see, again, we’re not talking about institutional money, we’re talking about doing what I call business with relationship money, right? Doing business with individuals, you know, if you’re doing a commercial deal, you may do syndication, you may, you may create a fund, and you have individuals invest in that fund, to fund your project or your deal. If you’re into single family houses, then we do funding what we call one offs. So a one off is you have a private lender, or a couple of private lenders that are funding a single family house or, you know, can be a duplex or whatever. So you may have just one or two private lenders that are funding that. But the money is always there. When people are the time when potential private lenders, individuals really get excited about the opportunity is when the stock market is so volatile. The stock market’s always volatile, but particularly when they’re starting to see values come down in the stock market, what you see in the stock market, it is a security. But what is your security, a piece of paper, called a stock certificate. When a private lender is funding, real estate, if they’re funding single, a single family house, then they’re actually getting a mortgage or deed of trust, like the bank does to protect their interest. So they’re just not loaning money out unsecured. They’re loaning money out as a private lender, getting the promissory note getting the mortgage or the deed of trust that collateralize is the promissory note. They’re being named on the insurance policy as the mortgagee just like a bank would be they’re named on the title policy, just as an additional insured, just like the bank would be. So the money is always available for us real estate investors. And it’s you and the people that like all 34 of my private lenders, they never heard of private money. They never heard of private lending. They never heard of self directed IRAs, until I taught them about it. So is the money always available? Yes. Are we as real estate investors always interested in that private money? Whether the answer’s yes, because it puts you and keeps you in control of your business. So it’s always there. We as real estate investors, if you really want to be in control in the driver’s seat, you want to have a private lending program, ready to teach other people how they can get involved safely and securely earning high rates of return, and have your private money program ready to teach other potential private lenders how that works.

J Darrin Gross 13:29

So I get that it’s always available. And you mentioned, you know, having some sort of a program where you can teach, you know, investors are not certainly investors, but but potential lenders, you know, the opportunities, what are some reasons that that a, an individual would be interested in, in lending money to you or I or, or any other real estate investor?

Jay Conner 14:00

There’s really three big reasons, three big reasons why a potential private lender or individual would be interested in learning about this and doing business with us. First of all, they gonna make a lot of money in comparison to what they can make elsewhere. So, you know, where can an individual investor money well, there’s lots of places you can invest, but most people are either gonna have their money sitting around, you know, and money market account earning zero, or they’re gonna have it on a certificate of deposit at the bank, earning, you know, maybe 1%, or they’re gonna have it invested in the stock market because they don’t know any better, and then and only different. So when we come along, when you come along, and offer an opportunity to first by the way, by the way, I want to make a really, really important point before I finish answering the question on why would they be interested in doing business This, first of all, unless you are unless you have created a fund and you’re doing syndication and you’re raising money for a project, okay, that’s great. But if you are a full time real estate, maybe in single family, maybe in commercial, you know, the best time to raise private money is when you don’t need it. The best time to raise private money is when you don’t need it. So I’m all the time teaching people, you know, giving them my 60 minute audio, teaching them about private money, so they’re gonna make a lot of money. Now, what’s the definition of a lot of money? Well, first of all, right now I’m paying 8%. So if I’m on pay a lender 8% Well, that’s, you know, eight times more than they can get at the local bank right now. And so, you know, particularly these private lenders, the older they get, the more important it is for them to be investing in something that’s not volatile. Right. So number one, they’re gonna make, they’re gonna make good returns. Number two, the second reason they want to do business with us is that their investment with us, their, their loan to us, it’s safe, and it’s secure. And here’s how, number one it is safe. And here’s how it’s safe. We do not borrow more than 75% of the after repaired value of a property, I did not say 75% of the purchase price. I said 75% of the after repaired value. So they’ve got a they got a 25% equity cushion between what the property is going to be worth when we finish, you know, getting it all ready for market and what we’re borrowing against it. So it’s conservative. Secondly, I said it’s safe and secure. It is secure, because we’re not borrowing unsecured funds. Now, can I borrow unsecured funds? Sure, it’s legal to borrow unsecured funds, I can just give somebody a promissory note, and they loaned me money, or, you know, they loaned me money from their retirement account if they have moved those funds over to a self directed IRA. But that’s the second reason safe and secure, right, backed by the real estate that we’re borrowing against. And the third reason I alluded to their investment, and the value of their investment is not volatile, in contrast to the stock market. You know, when someone invests in the stock market, they already lost money, there’s fees, there’s commissions, etc. Well, in this program of private money, there are no fees or no commissions. And here is a writer downer, the principal loan amount that we borrow remains the same until cash out, meaning I’m not paying principal and interest payments, neither letting the interest accrue, and I’m making any payments until the property cashes out in sales. And then I pay back the private lender, all their principal investment amount along with a crude interest. You think that’ll help you cash flow rate as the borrower or I might be making their payments? And that’s fine. I mean, I’m happy the way I let the private lender decide what’s their objective, you know, I’ve got some elderly private lenders that are relying on the monthly income on their investment with us. And that’s okay. So I’ll leave that up to the private lender as to how often they want to get payments, or if they will allow me to just let the interest accrue on the project until we cash out if they’re not relying on that income. So the third reason that they want to do business with us is that the investment and value is not volatile, in contrast to the stock market, so in the stock market, as I said, there’s always fees and commissions, and the value of that investment can be last the principal value of it can be worth less tomorrow than it is today. Well, you see in this program, nothing comes out of their principal loan amount their investment with us, and they know exactly what the returns are going to be. So just in recapping, they go make a lot of money. Number two, safe and secure. Number three, the investment value is not volatile.

J Darrin Gross 19:38

Excuse me. All of that is is and I like the way you make it. It’s the simple 123 it makes a lot of sense and it’s easy to remember and definitely all pertinent. I’m curious, two things, one on the number two the 75% Have the repaired value. So there’s that that’s kind of a flip kind of a flipper kind of a jargon that I’m familiar with. How in that situation with market doing what it’s doing, are you gauging what that future market value is, given the the change in the marketplace with, with, you know, interest rates from from institutions, and that.

Jay Conner 20:33

That’s why we don’t borrow more than 75% of the after repaired value. So most of the deals that we’re doing are not buying hold. In fact, today, none of them are, none of them are buying hold, as far as the single family houses go. Because the market is changing. Now, here in eastern North Carolina, I’ve had, I’ve had no reduction in values. Now, that’s not the case. That is not the case. In some other areas of the country. Other areas of the country, as of today are experiencing some pullback, in values. But that’s why we don’t borrow more than 75% of the after repaired value, typically, on the single family houses that we’re going to be involved with, we’re going to be in those deals somewhere between I mean, depending on how big the rehab is the renovation, I mean, our average renovations now are around $40,000. But you know, I’m doing another one on Pearson circle in Newport, that renovations 175,000. But that’s way out of the ordinary, right. So we’re going to be in and out of those deals, typically within nine months. You said, What, Jay, if the market still hot in your area? Why would you take nine months? Well, I’ve got so many projects going on, I might have a property sitting there for three months before we actually start, you know, the renovation. So with that said, since we’re typically going to be in and out within the nine month period, well, when we borrow no more than 75% of the after repaired value, the odds and the chances of values coming down 25%, when that within a six or nine month period, is pretty slim to none. So that’s why I defined this program as a conservative loan to value since we’re only borrowing 75% of the after repaired value.

J Darrin Gross 22:34

Got it? You mentioned kind of the source of capital that your your lenders have available. Obviously, if somebody has it in a savings account or or in, you know in cash, that’s one option. But you mentioned the I can’t remember this now it’s the IRA is that the seller make the direct directed Yeah. Talk a little bit about that, if you would, and I guess, you know, how one goes from a traditional 401k into to a self directed? And then also, are there any kind of limitations for that vehicle for the for the lender? Or were in certain routes? Or were any kind of things that they should be aware of?

Jay Conner 23:31

Well, this question you’ve asked me Darrin is like really, really important. And here’s why. Over half over 50% of my 44 private lenders are using their retirement funds to invest with us. And so why that’s so important is, if I didn’t know about self directed IRAs and how that works, by the way, none of my private lenders that are using their retirement funds to invest with us had ever heard of self directed IRAs, until I’ve taught them about self directed IRAs and introduce them to the company that we actually endorse. So if I didn’t know about self directed IRAs, I would be missing out on over half of the funding that I’m using for our deals. So what in the world is a self directed IRA? Well, a self directed IRA is an IRS approved company. It’s also known as a third party custodian that the IRS has approved to where someone can take current now that’s an important word right there current retirement funds. Now, what’s the definition of a current retirement fund? They can be a 401k. It can be a pension. It can be from a previous employer that you still have invested, you know, in their funds, you know, wherever they have their funds invested. You could have pulled those retirements, retirement funds out And you can have those invested in the stock market, you know right now, but they are dedicated retirement funds that that, you know, the IRS has approved and that you are not paying taxes on that, you know, those retirement funds, the lender is either got deferred taxes are tax free, etc. So their current retirement funds now these retirement funds could also possibly be where an individual is currently working. You know, a lot of people think that if you are with a current employer, and you’ve got retirement funds and the 401k, you can’t touch that. Well, that’s not necessarily true. Case in point. I have a private lender. His first name is Bruce. And Bruce worked for Fannie Mae for 30 years. This is really funny. I got a private lender that worked for Fannie Mae. That’s funny. Anyway, so Bruce, he and I were eating barbecued our fried chicken and pork BBQ here in Morehead City for lunch a few years ago. And I was telling about my private lending program and about self directed IRAs. He says, Well, I’m working with Fannie Mae, and I can’t touch my retirement funds to do business with you and invest with you until I retire. So I can’t do that for three years. Well, I’ll tell you, I said if I tell you what, Bruce, here’s what I recommend, contact your plan administrator at your company, for your retirement funds, and ask them if you have the option of moving a percentage of your retirement funds because you’ve been with him for 27 years. Guess why they allowed him to move up to 50% of his retirement funds out of the plan with the current employer, Fannie Mae, and go investors retirement funds anywhere else. So anyway, these retirement funds, whether you’re currently employed or previously, boy, the IRS allows you to move those funds over to an IRS approved, self directed IRA company. And it normally takes two to four weeks to move it. And guess what, where you’re going to move it to that self directed IRA company actually will do the moving for you. There is no tax effect, there’s no penalty effect. You’re just moving it to another custodian. Once the account is established, and you’ve moved those, the private lender has moved those retirement funds over, then guess what? Now they can they can use those retirement funds to invest in real estate. They can go buy real estate, renovate it, sell it, and there is no limit to the profit that that individual can make either tax deferred or tax free. Now most people don’t want to mess with what we do. They don’t want to market for deals, find deals, negotiate deals, renovate deals, whether it’s single family or commercial, or whatever it is. They most people just want to sit back and be passive. Here’s an interesting statistic, Darren 71% of people that have retirement funds, that they’re moving over to a they’ve already moved over to a self directed IRA company, want to loan those retirement funds out on real estate secured by real estate over 70%. They want to be passive investors sitting back doing nothing, but getting nice returns safely and securely. So these retirement funds that these people use, it’s a great way for them to get involved in real estate without having to be, you know, doing the work that we do of finding deals negotiating and rehabbing. So here’s the actionable item. I said all that to say one thing, I said all that to say one thing, as a real estate investor, if you want to not miss out on over half of the funding, and here’s what’s interesting. Before COVID There was 18 trillion. That’s what the tea before COVID, there was $18 trillion, sitting in cash in cash in people’s retirement accounts here in the US, on this side of COVID $31 trillion are sitting in cash in people’s retirement accounts because they are scared to death of putting those retirement funds in the stock market. Because it’s so volatile. When you come along, and you offer a way and a pathway for them to invest those retirement funds safely and securely. And you know, any of those funds that are Roth IRAs, they can earn unlimited money in returns tax free. I’ve got one private lender in just one year because of using their retirement funds investing with us or $65,000 in one year tax free. So yeah, here’s the actual item, if you don’t want to, if you want to get more funding for your real estate deals, whether it’s commercial, single family stablish, here’s the writer, downer stablish a relationship with a self directed IRA company, to where you can refer and introduce new potential private lenders to that self directed IRA company, to where your new lender can transfer and move their retirement funds over to them tax free penalty free no penalty, and start doing business with you and funding your deals.

J Darrin Gross 30:48

Excuse me, that’s, that’s great. I think the Helen mechanic she went through there about, you know, you have this for one candidate, most people probably led to believe that they can’t touch it until they retire. But the fact is that they hidden in most cases, I think the employer gets to dictate, you know, when

Jay Conner 31:11

You sign Some plans may not may not allow you to pull out any, until you leave the company or until you retire. That’s why they just got to ask, they just got to contact the plan administrator and ask Does the plan allow me to pull any or percentage out prior to retiring or leaving the company?

J Darrin Gross 31:32

Right. And then the the other thing, and not that this applies in this example is that but I think that sometimes people they get, Oh, my God, I can I can move this money over there. And then I can do this. And I can do that. I believe there are some some arm’s length transaction requirements, so that you avoid any kind of potential, you know, penalties, meaning you can’t lend to your children, you can’t lend to your parents or something like that. But, but investors, like yourself, or anybody, it’s unrelated. Investing in one of their deals for lending money, in one of their deals, is a totally allowable opportunity and a great opportunity. I mean, when you when you talk about the differences between 1% versus 8%, he talks about the difference of the security of the principle. And, and, you know, suddenly you’re you’re doing an interest only loan, which is typical for a lot of the, like hard money or short term loans kind of thing. The fact that the the investor or the lender, in this case, is going to receive all their principal back and they’re going to receive the interest back, they’re probably going to say, Hey, Jay, wins the next deal.

Jay Conner 32:53

They never want it back. Yeah, they don’t want it, they never want it back. They want they want to keep the money working. So and you know, and that’s an important thing, you know, these lenders are relying on you, as the professional to keep their funds at work. You know, when I teach someone about how they can move their retirement funds, to a self directed IRA, and they move those funds over there, they’re not earning any money until you put their money to work. So you know, I don’t want I don’t want to teach anybody about moving their money over to a seminar I, you know, company, unless I know I’m on be able to find a deal for them to invest, and just not let their money sit over there. And you know, or nothing. Right? Right. But but But you bring up a good point there. And who can you borrow money from? And who can you not borrow money from? Well, here’s really, it’s really easy. It’s vertical versus parallel. Vertical versus parallel. Vertical means any vertical relationship you have, you cannot borrow it from those people. What do I mean by that? Parents, grandparents, children, grandchildren, you can’t borrow it from those people. As far as retirement funds. Now, liquid capital you can borrow from anybody you want to. I’m just talking retirement funds now. Parallel, you can borrow from anybody. You can borrow from brothers, sisters, cousins, uncles, aunts, nephews, I’m talking in retirement funds again, if they’re just investing with you and lending you money from investment capital, you know, it doesn’t matter that so we’re just talking about that, that nuance of self directed IRAs.

J Darrin Gross 34:39

Right, right. Right, right. Nine angels. I just know that that’s that is a something to, to be aware of. Because if you only heard part of this, and you thought like, Oh, this is great, I’ll put the money in the self directed IRA and then I can lend it to my son or, you know, somebody that is vertical.

Jay Conner 34:57

Yeah. Hey, and you cannot loan it to yourself. Right, right, right. You can’t lend it to yourself. However, why would you loan it to yourself? If you’re going to invest in real estate, take the retirement funds and buy the real estate with your retirement account? And all the profits come back into your retirement account? Again, either tax deferred or tax free.

J Darrin Gross 35:21

Right. Right. As long I think the only situation there is if as long as you’re not borrowing money that I think there’s there’s potentially issues there. But but if you’re if you’re buying it in full lease, my understanding is is that, you know, the profits would roll back into your account and No, no issues here. So. So, So, Jay. You know, I think historically, before we would have had this conversation, I think most people would think, well, you know, I don’t have any rich uncle’s or I don’t have anybody of that has just a mattress full of cash or, you know, something that where I could go borrow the money. What I’m what I’m hearing you saying, I think this is probably the aha for most people in you, you’ve kind of set it as much is that anybody with a retirement account? is a potential lender, if they understand and are looking for a better rate of return, and a secure investment, like real estate?

Jay Conner 36:21

Absolutely. As you know, people ask me when they’re starting out to attract and raise private money. So Jay, where do I start? Well, you just said it there and start making your list of people. I mean, they’re in your cell phone, they’re on your email, list, your social media, who do you go to church with? Who do you go to the Rotary Club with? You know, who do you play poker with on Thursday night, I don’t know. But you know, you know, make your list and start with people that are retired people that are retired, there’s a pretty good chance, they got retirement funds, and they’re always looking for something safe and secure, that gives a high rate of return.

J Darrin Gross 37:00

Right? That’s great. Hey Jay, if we could, I’d like to shift gears here for a second. By day, I’m an insurance broker. And I work with my clients to assess risk and determine what to do with the risk. And as such, there’s three strategies we typically consider, first, look to see if there’s a way we can avoid the risk, when that’s not an option, and we look to see if there’s a way we can minimize the risk. And when we cannot avoid nor minimize a risk, we look to see if there’s a way we can transfer the risk. And that’s what an insurance policy is. It’s a risk transfer vehicle. And as such, I like to ask my guests, if they can look at their own situation. It could be their clients, investors, tenants, that interest rates, political, whatever it is that you identify where 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, Jay Conner, what is the biggest risk?

Jay Conner 38:08

So let me get a little clarification on that there. And so are you asking what’s the biggest risk from the standpoint of the borrower or real estate investor? Or what’s the biggest risk from the standpoint and perspective of the lender, the private lender?

J Darrin Gross 38:25

There’s no no framing of this. It’s how you choose to frame it.

Jay Conner 38:30

Well, so I’ll quickly I’ll quickly answer both. All right. So what’s the biggest risk for you, the real estate investor, that you’re borrowing money? Well, one big risk is you better know what the real value of that property is? How are you determining what the value of the property is? Well, in my case, I’ve been doing business with the same realtor since 2004. My realtor tells me the after repaired value of my property, so you’ve got to have a firm grip, and and credible way of establishing wants to value the property number two, what’s the risk? You need to know? What’s the maximum that you should pay for a property all cash? What’s the maximum you should pay? I mean, what is your formula? Right? You know, so you need to know. And of course, I got the formula. What is the maximum you should pay for a property? What’s the third risk? Who’s on your team? Who is on your team? Like, I still don’t do this business by myself? My team. I mean, I’m like the orchestra director. Right. So who’s on my team? Well, I can’t do this business without my realtor and a relationship there. I for sure can’t do this business without my real estate attorney. I mean, my business is that big risk, if I don’t have a good real estate attorney, I’ve been doing business with the same real estate attorney firm since 2003. I get my title searches in less than 24 business hours, you know, speed, you can’t make money in this business and you know, in slow motion, right? So I gotta get my inform, I gotta get my title searches quickly. Thirdly, if I’m in doing rehabs, who’s who’s on my team, as far as my general contractors, who’s getting the job done. So my biggest risk, your biggest risk is number one, who’s on your team number, and the team member is gonna give you the value. And number two, you got to have the knowledge on what’s the maximum that you should be offering on a property, those are the risks for you, the real estate investor and borrower. Now let’s talk about the risk for the private lenders, right? Number one, the private lender, better know what kind of loan to value they’re loaning on that property. Right? You got a property that’s worth $300,000. But they better not be loaning $300,000 on that after repaired value. That’s why we give them we’re only borrowing 75% of the after repaired value. Number two, what kind of security and again, are they really getting a deed of trust or mortgage, it’s recorded on public record. I mean, I’m a private lender, I don’t care who my relationship is, whether I’m not borrowing unsecured funds, I want my funds secured by the mortgage or the deed of trust. Thirdly, as the borrower I want and I require to be put on the insurance policy as the mortgagee. And guess what, as the as the as the lender loaning money out. If there’s a claim against a house, I want my name on that insurance check. Along with the owner of that property, as the mortgagee, I want them to have the right to sign off on that check. Before who I loaned the money to get set check, I want to be named as the lender on the title policy, I want to be protected. And here is my final word on that. And that is depending on my relationship with the borrower, I may require as the lender a personal guarantee. Okay, so you know, when I loan money out, depending on my relationship with the borrower, I may or may not require them to sign a personal guarantee. Again, that’s going to come down to how well you know that person and you know, in this world of private money, I don’t care how many safe safeguards you got in place. There’s this thing called trust, tr ust between the borrower and between the lender and so that level of trust is going to determine as to whether I require a personal guarantee on that note or not.

J Darrin Gross 43:10

Now definitely a well thought out you know, risk avoidance program there I appreciate that. A jig where can listeners go if they would like to learn more connect with you?

Jay Conner 43:23

Absolutely there and thank you for allowing me to share I tell you, I am so excited about the recent private money guide, the private money guide that I have written and you can download it for free. The name of the private money guide is seven reasons why private money will skyrocket your real estate business and help you build incredible wealth. The private money guide is absolutely free. download it at www.JayConner.com/moneyguide.. Again, I’m an ER not an O R. So that’s WWW.jayconner.com/moneyguide to get on the fast track to getting all the private money you need for your real estate deals.

J Darrin Gross 44:20

Awesome. Jay, I cannot 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.

Jay Conner 44:31

Thank you so much, Darrin. God bless you.

J Darrin Gross 44:34

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. Till next time. Thanks for listening to Commercial Real Estate Pro Networks. CRE PN Radio.

Announcer 44:53

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Physician Real Estate Investors with Pranay Parikh – Cre PN #396

PRANAY PARIKH 0:00

When I, when I was in med school, you know, I didn’t expect to be some real estate tycoon. But I just wanted to make sure that the hard work I was doing at in medicine paid off, you know, and paid off relatively soon because I was, you know, I’ve been in school for 20 years, right? So, I’ve had enough of that delayed gratification. So, you know, I wanted to see some of the fruits of my labors. And I saw real estate as a good path, you know, and initially, like, it was just a way to make a little money to on the side. And then eventually, I realized that there were so many people that wanted to do the same, but didn’t have the opportunity or the desire to do it. You know, I feel like any doctor could, if they spent the time and effort and went out made the connections, they could do this, you know, they’re all very intelligent, resourceful. But, you know, most people don’t and, you know, that’s kind of the thing in the world. A lot of people want to follow but don’t necessarily want to be the one to start, you know, someone has to do it. You know, honestly, if someone else said it, I would have, you know, I would have just invested in them, but no one else was I had to kind of step up.

Announcer 1:10

J Darrin Gross 1:29

Today’s interview is sponsored by Building Insurance and Risk when you invest in real estate. It pays to work with a real estate investor protection specialist to protect yourself and your investment from catastrophic loss. The experts have Building Insurance and Risk focus on real estate investor protection. They provide you with multiple insurance coverage offers and a side by side coverage comparison. To learn more, go to building insurance risk.com.

Today, my guest is Dr. Pranay Parikh. He’s a medical doctor serial entrepreneur and a podcast host. His unconventional journey to medicine helped him learn the skills to excel in entrepreneurship and real estate. Over the past 16 months, he’s bought over 200 million in real estate and helped hundreds of others invest in real estate without being a landlord. And in just a minute we’re going to speak with Pranay about time management, real estate and entrepreneurship.

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, Pranay Parikh, Welcome to CRE PN Radio.

PRANAY PARIKH 3:24

Hey, thanks for the opportunity. Super excited to chat.

J Darrin Gross 3:28

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.

PRANAY PARIKH 3:36

So I’m a medical doctor still practicing in the US. And you know, when I graduated residency, so became a full fledged doctor, I knew that it was not as important how much I made, but what I did with my money, you know, and I didn’t want to wait, you know, 2030 years put all my money in retirement account to kind of enjoy the fruits of my labor. You know, as doctors have been doing delayed gratification for long enough. So I looked around and saw real estate. So bought my first property four units a year out of residency, and thought I’d just buy one a year, you know, and retire in 10 years. But I the market here in California, Los Angeles, pretty tough. And it took me a while to find my second property. And so I decided, you know, there has to be something better. And that’s when I found passive real estate syndications. And no one was really teaching much at the time. Now there’s some books, the hands off investor, a couple other books, but at the time, there wasn’t that many resources. So we created a course had 1000s of people take it than we thought we were done. You know, we taught everyone how to invest and they can go out and find great deals. But people realize that they still didn’t have the time to do it or maybe they were so too busy at work. And so they said hey, Pranay, you you guys are investing in you You guys are finding, vetting and investing in deals, why don’t you just let us come together? And maybe we’ll get better terms, we’ll find better deals. And that’s how we created a cent equity group. You know, first, we just did a small piece of a very large deal. But over time, we got enough people. And now we can take down hold deals by ourselves.

J Darrin Gross 5:19

Wow. So on that progression? Are you now the GP? Or are you coming in with just larger capital to where you’re able to more partner with a GP.

PRANAY PARIKH 5:30

So we’re in a pretty unique position. So what we do is JV equity. So that means we’ll bring in about 90% of the capital. But because we’re bringing pretty much all of that other than the skin in the game of the sponsored operator, we get major decision, right? So you know, we get decide when we buy, sell the property, even stuff like the name or what color stuff is. But it’s, it’s powerful to have that, because it’s really showing alignment of interests. And so what our, what our company has evolved to do is we do capital raising, we raised the money on one side, but we have actually a full Asset Management Operations team. So we go in and we help the sponsors. And that’s why, because we do both of those, and we don’t just disappear after bringing the money. Sponsors bring us deals that we think are great, like we closed in August of this year, a deal that had a fixed interest of 2.9% for nine years. Yeah, yeah. When everything else takes and now,

J Darrin Gross 6:33

Today, a 2.9%. That’s some

PRANAY PARIKH 6:35

Yeah, well, we’ll talk about risk mitigation, but a lot of risk mitigated right there.

J Darrin Gross 6:40

Wow. Well, that’s, that’s amazing. So I want to back up one second, you, you mentioned something, talking about your path. And you said a 108? I don’t know, I’m not familiar with the use of your physician. And then I thought I heard you say one away. And I didn’t know if there was a code word for that, or

PRANAY PARIKH 6:59

No. So when. So I’m a physician, I still practice. And when I graduated, I really took some time to figure out what to do with my money. Don’t

J Darrin Gross 7:13

the maybe saving went away? Maybe you went away? Maybe did you go away? Maybe that’s what I heard, because oh,

PRANAY PARIKH 7:19

Oh, I went away from active real estate. I said, you know, because the goal was just to buy one property a year, right? And retire in 10 years, right, and start paying them off and then just have, and, you know, 10 properties pretty manageable for a single person. But it wasn’t, it wasn’t, you know, and two, there’s just acquisitions is its own beast, you know, finding properties, working the sellers. That’s its own business. And, you know, we can kind of break down what I do. So commercial real estate, I think it’s really three businesses, its acquisitions, so finding the property, negotiating all that stuff, to asset management, making sure the property is doing what the business plan is, and three capital raising. And it’s really hard to find a company that does all three of them. Well, I find that most want to do to either acquisitions and asset management or just capital raising, and then we do you know, we’re kind of the unicorns that do Asset Management and capital raising.

J Darrin Gross 8:23

Yeah, no, that’s, that’s, that is unique. I’d say that the acquisition capital raising are probably the two that I’m most familiar with people do. Exactly. Just kind of because they, they do go hand in hand. Asset Management, I think is it’s, a lot of times it’s understood in that, but it’s not necessarily I mean, asset management is truly its separate thing. I think a lot of times people, you know, blurred the lines between just operations and property management, but to really manage the property and achieve the goals that you’ve set. Or to meet the investor goals that you’ve, you’ve essentially don’t say promised, but you’ve projected, paying attention, the asset management and how to get there is really kind of where all that happens. And it’s really, really critical that you have that, you know, no

PRANAY PARIKH 9:13

one’s gonna care about the property as much as you, you know, and investors. So, you know, for example, we’re on the phone with property management every week, right? And a lot of times, they’ll be like, oh, yeah, you know, there’ll be super happy that they hit pro forma, right, the rents that they wanted to hit, and we’re like, Okay, so let’s go above pro forma. They don’t necessarily want to do that. Because you’re making the life harder for them, right? If they hit their numbers, they get their bonus and all that stuff. But we’re talking about more like, Okay, let’s see how far we can push this because every small increase in noi ends up being a ton of value on the back end when we sell the property.

J Darrin Gross 9:51

Yeah, and even now, I mean, more. So. The importance of that is going to bear out tenfold based on just the capital markets and interest rates and all that autobackup here second, so you’re a physician. It’s not an easy path, lots of school lots of time. How did you go from, you know, the goal of being a physician to real estate. So, it,

PRANAY PARIKH 10:25

you know, it didn’t. When I, when I was in med school, you know, I didn’t expect to be some real estate tycoon. But I just wanted to make sure that the hard work I was doing at in medicine, paid off, you know, and paid off relatively soon, because I was, you know, I’ve been in school for 20 years, right. So, I’ve had enough of that delayed gratification. So, you know, I wanted to see some of the fruits of my labors. And I saw real estate as a good path, you know, and, initially, like, it was just a way to make a little money to on the side, and then eventually, I realized that there were so many people that wanted to do the same, but didn’t have the opportunity or the desire to do it, you know, I feel like any doctor could, if they spent the time and effort and went out made the connections, they could do this, you know, they’re all very intelligent, resourceful. But, you know, most people don’t, and, you know, that’s kind of the thing in the world, a lot of people want to follow, but don’t necessarily want to be the one to start, you know, someone has to do it, you know, honestly, if someone else said it, I would have, you know, I would have just invested in them, but no one else was, so I had to kind of step up.

J Darrin Gross 11:39

Now I get it, I get it, I, you know, interesting to me, I know, you know, just the the amount of time you put into become a physician through awards, or, you know, most most people look at his, uh, his, the, the income, from the position has kind of the reward. I mean, you know, being a piano specialist, being a doctor, clearly, you know, as revered in the, in the society and community and, and, you know, well paid. I think one of the things that’s been kind of opening for eye opening for me, is recognizing some of the debt, that a lot of a lot of physicians end up, you know, accruing. While they’re, you know, going to school and paying for that. I know, I was talking with one who basically recognized as, like another house payment, in order to pay off his debt. For me, it was just kind of built into his, his, you know, his plan, you know, work, make money, pay off, pay off the debt. And, you know, you mentioned that, you know, if somebody else had had been willing to go forward and do this, I’m kind of curious in, in the physician community, do you find there a lot of people that are asking you about what you’re doing? Or are they kind of, you know, more interested in wrestling with insurance companies to get paid more?

PRANAY PARIKH 13:18

Yeah, well, you know, every day, people are saying, hey, you know, how do I be a general partner? Or how do I raise money for you guys? You know, I think a lot of people see the opportunity, you know, and one take one step back, you know, really the reward in medicine is being able to take care of people, you know, and I think when you can detach that, from the money, right, where you can take care of people for free. That’s, I mean, that’s my goal, like, have, you mentioned, talking to insurance companies, you know, and I know you deal with that. But if I, if I could take care of people not worry about insurance companies, and be able to provide for my family, that would be that would be ideal, you know, and that’s kind of where I want a lot of people to be and help them where, you know, if someone comes in, they can’t pay, you’re like, oh, shoot, that’s fine. You know, I’m still going to take care of you. So and that’s actually how I trained so I trained at a county hospital. We didn’t didn’t care about anyone’s insurance, right? Coming door, we’re going to take care of you, you know, and that, that’s medicine, you know, that’s what I enjoy. That’s, that’s how I think we should take care of people. But you know, the real world is not like that. So we can provide for these physician families. And you’re right, this debt burden is ridiculous. I mean, think about coming out of school and having 345 $100,000. Right. And it’s not, it’s not at a 2% interest rate. It’s at a 7% interest rate, right. So you know, that’s a 35,000 you’re paying and just interest payments per year. Right. So, you know, that’s one of the issues. That’s why you hear that there’s an issue of Problem with finding primary care doctors because primary care doctors make, you know, 150 200,000, which is a lot of money. But if you come out with your debt of 500,000, how long are you going to take to pay off that right? So a lot of these people reasonably go to these high pain specialties cardiology, orthopedics, even though they love primary care, and they love taking care of people, seeing people watching them grow up, it’s just not financially viable. So, you know, our goal is to if we can provide some passive income, income that will help them you know, support themselves in their family, then they can perform medicine for the love, you know, and that’s, you know, I tell people like, do you want to be taken care of the person who’s working three days a week? Who loves their job has time to read stay up to date? Or do you want the person that’s just barely surviving working six days a week, 12 hours a day, you know?

J Darrin Gross 16:01

Yeah. Sad, sad reality of things. I think it is perplexing, and, and you know, just how it’s become such a money thing. I think that’s really the the, you know, boggles the mind on how one can incur so much debt, to get the education. And then, you know, the Forever pay back program to, you know, what, what’s, you know, like you said, Really, the ultimate goal is to be able to care for people. But I think that, you know, what gets blurred a lot of times is the money. And I still question how insurance companies have made health care better, and I don’t know, that’s the case. But but other topics, another conversation,

PRANAY PARIKH 16:47

you get a lot, a lot of money. And I can tell you, it’s not us, you know, when we do it, we’re not, you know, there’s very few doctors out there and Ferraris, and, you know, Rolls Royces. And even like the high end Mercedes, you know, I drive a Honda. So,

J Darrin Gross 17:03

well, I’m just always amused by you get the statement from the, you know, physicians talking about, hey, this is the bill and it’s, you know, 1000s of dollars and says we’ve applied to your insurance company for or kind of payment. And then you get the statement from the insurance company, and they say, this is not a bill, you were billed, you know, $3,000, or whatever it was, and we settled it for $89. And you’re nothing. So, anyway, how did you do that? And I think a lot of people in myself, I’m like, well, shoot, it was only $89, you know, whatever, that I could have paid that. Insurance to, you just helped inflate the cost and, and, you know, you work the physician down to a, you know, a prize winner. But anyway, that’s always been an equation, I have not understood how, how it’s gotten to be what it is, but, but we’re getting off track here. But so, you, you know, you’re trained as a physician, you look, you find real estate as an opportunity, you know, essentially financial freedom. So what I’m hearing you say is, you know, not being, you know, obligated to, you know, charge or like we said, Russell with insurance companies to determine the level of care you can provide for somebody. But you also, you know, sound like you have an entrepreneurial spirit in you. Are there other things, you’re doing entrepreneurial? Or is it you related to real estate? Or?

PRANAY PARIKH 18:38

Yeah, so, you know, we have the real estate company, we have a podcast, from MD to entrepreneur kind of Chronicles, my journey. And my partner, created a company called passive income MD, which is kind of an education media company. So you know, I help him with that. And, you know, just try to see, you know, a lot of times, and this is what I’ve realized, you know, the people, the serial entrepreneurs, Mark Cuban, all these other people, you know, a lot of times we’ll walk by, and we’ll be like, Oh, hey, here’s a problem. And then you think someone should do something about it, you know, but it’s the other people the entrepreneurs are like, Hmm, is this a viable business? Can I make money doing this? Right? Is there enough demand and you go and start it and you know, 90% chance of it failing but you only need one to really blow up and it’ll change your life forever?

J Darrin Gross 19:33

Yeah. Well, in just you know, being aware of that and and looking for those opportunities as opposed to just having to have your head down to the grindstone, you know, kind of thing I think that’s, that’s really a level of freedom that I don’t think most people are able to achieve. Just based on need, you know, there’s like a, if you’re working for the man, and you only get paid when Your work, you know, you gotta go to work. And the job is a job as a job, whether you’re, you know, going to Starbucks or or selling insurance or, you know, taking care of other people as a visit physician, if you’re not able to have a path that the that provides for you outside of that, that job that you’re so dependent on for your existence. It can be a, it can be very limiting mentors, you know, where do you find the time to look outside of that? So, let me ask you, I mean, based on all of your you know, all of the activities, you’re involved in health care, real estate. Sounds like you do some consulting, you get your podcast. What is it? I mean, time management is a piece of that. Do you are you? Do you have a routine? Do you? Do you selectively? I mean, do you say no more than you say? Yes. How was it? You manage that? And do you work with others on on that type of? Problem? Or

PRANAY PARIKH 21:25

it depends on where you are in your career. You know, so five years ago, when I was just starting to say yes to everything, everything, you know, and I think that’s the right way to go. You know, and over time, you can start saying no to stuff. You know, I still say no, still say, Yes, we’re gonna watch anyone’s podcast, I’ll jump on 20 episodes, you know, 30 episodes? Yeah, you know, I’m happy to help. Because I was offered help in the beginning. Right. But I think there’s a couple of things and you know, you hear about these often. And you’re like, yeah, yeah, yeah. Try them out. Right. So time blocking, this is something that I am starting to do. I don’t do that much. But I was doing and I was doing podcasts every day, you know, it’s, we spend so much time switching between tasks, and then I just record on one day, you know, and people will ask me to be on my podcast, and I’ll be like, Yeah, sure. I think it’s going in March. But that’s what happens, because I only record one day, you know, and then you can have other days. So you know, you have a full schedule. And remember to schedule time for family, you know, I put it on the calendar. It sounds kind of lame, but you know, if it’s on your calendar, it’s going to happen. Right? And so there’s, there’s time blocking. And you know, Derek Severs says, when you’re looking at something, it has to be either hell yes. Or hell no, you know, or no. So, look at, especially when you’re kind of mid to late career and entrepreneurship, like, do you really want to do this? Because it’s easy to say, yes, you know, and we all have that thing. We’re like, ah, still have to be on this podcast. Or, for me, it’s more travel, you know, I have a young son and another on the way it’s like having to leave them for a couple of days. sounds horrible. You know, traveling, I get sick. And so it’s easy to say yes. Now, but think about in the future like so, you know, an easy way to think about that. If this was tomorrow, would I say yes, if I was free? And they said, Hey, this is tomorrow, would you go? You know, and that takes some of that recency bias or future bias away? So time blocking Hell, yes or no. And then I just tried to really take some time and look at what your priorities are. Right? And not just money, but family time, right. And we do this for business, but I don’t think we necessarily do this for ourselves. And so what do you really want, you know, and a lot of times and you know, it’s a little woowoo with like, the manifestation stuff, but, you know, the quick story on that I had cooked some chicken last night at like, 9pm. And I heard the beep and I completely forgot about it. Woke up in the middle of night for 4am. I was like, oh, shoot, I gotta go put the chicken away. You know. And I think our subconscious mind works on that. Like, we have stuff that our brain is processing, and things that we want our subconscious is trying to figure out how to happen. I don’t know why it took six hours for my subconscious to remind me about the chicken. But it did you know, and a lot of times you get that epiphany, right where you’re like, Oh, this is how I solve this problem. So sit down, think about what you want and let your subconscious do his thing. You know, you have all the skills, and you’ll be surprised. And then a corollary to that is one You forgot what you want, start telling people, you know, we, we were looking for a very specific hire. And I told my partner, I was like, Hey, you start talking to people, literally in the next half an hour, he talked to someone, and that person was like, I have the perfect person for you. And we ended up hiring her. And it’s just, you know, figure out what you want, let your subconscious work and tell other people because they want to help you, they want to see you succeed.

J Darrin Gross 25:26

No, I hear that. And I know that, and I think the the challenge sometimes is, is doing it on regular basis. So that you do, you know, achieve the things you’re you’re you’re trying to achieve, I think it’s one thing to get all excited about something, you know, this is great, I’m gonna do it. And, you know, you start off and it’s like, the New Year’s resolution, I’m gonna go to the gym every day, you know. And, you know, about week two, it’s also high, I get it, you know, it’s easy to say no, to the thing that you want, you know, that you’ve identified and next thing, you know, you’re, you’re back to where you started. And, and you’re not getting the results you wanted? You know, it’s no secret as to why you’re not doing the work. Right.

PRANAY PARIKH 26:15

You know, one, one trick I’ve found against that, and I’ve been using this recently, you know, so a lot of people have heard the Seinfeld, you know, closed chain, kind of where you have a calendar and you X off and you, you know, you don’t want to break the chain of axis. That is that works great for some people, but I found it to be too, too strict for me. So I, I heard this rule about to you, You never let two days go without doing what you said you were gonna do. So for let’s take working out, for example, you know, I’m super tired, not going to work out today. Okay, not a big deal. I’m not going to beat myself up about it. But tomorrow, the rule is I just can’t go two days, you know, and that gives yourself a break, right? One day. And you’re like, and make it a rule. So you know, I don’t eat. I don’t eat past 7pm. You know, and that’s a rule because there’s nothing healthy, you can eat past 7pm. You know, it’s like, you go to dessert, and people bring fast food. And it’s just a rule. And once you have a rule, and it’s a rule, it’s not, oh, I’m trying to lose weight, it’s no, I have this rule. And I always do this, you know, I heard this other rule, like, I’ll need dessert, if it’s like super fancy. So it has to be from like a, you know, Michelin star restaurant, otherwise, he doesn’t eat dessert. And it’s not because he’s Gucci. But it’s because he’s trying to avoid 95% of the, you know, the bad stuff. And that rule just works. So, try to come up with a rule that fits you, you know, and most of the rules are very draconian, that’s why I like the two day rule. Because it gives yourself a break, you know, like, you’re exhausted, you deserve a day off, right? That’s fine. Don’t take two days off, and that I find works really well for me.

J Darrin Gross 28:09

No, that’s, that’s awesome. I appreciate that. Because it’s, I think the, I’m a routine person, if it’s something that I get in the routine, and it’s a good routine, it’s just my MO I’m like, uh, you know, time of the day and clock on or the calendar, you know, that’s, that’s his time in that routine, could be on a monthly basis, weekly basis, daily basis, however, but it’s just something that kind of, it’s helpful to have a routine and, and, you know, I know that some days are better than others. You know, sometimes as you’re going through the motions kind of thing could be, you’re just not feeling well, or whatever, but, but, you know, I think having that routine, because I think one of the things I’ve come to realize is that, in order to really get somewhere, you’ve got to be consistent, you know about it. And if, if on one day, I you know, do it all and like said, if you’re, you know, letting multiple days go by, and then I’m gonna do it all. And you don’t have any consistency there. So any kind of gains you may have, that you may have created on day one are lost by the time you get back to it again. Whereas if you go to steady, there’s just this incremental improvement, you know, and, and, you know, I think that’s, that’s one of things, it’s really hard to see that on the front end, the importance of that. I know, like, I had an injury in back in college and, and, you know, knew what I was supposed to do, but rarely did I do it until finally I got older and it became an issue. And then I started doing the exercise that I was prescribed back, you know, when the injury occurred. And when I do that every day, and it’s not a big time. You know, Ragu doesn’t work. Quite a lot of time doesn’t require a lot of space, I don’t have to go anywhere to do it, I can do it right where I am. But if I do that every day, the outcome is that all of the the negatives that I was facing for not doing that are gone. And, you know, it’s just, it’s amazing to me how simple something like that is, but but, you know, again, it’s, it’s the benefits of doing the work. Even though it’s it’s a little bit of work, but it pays off big dividends. And so, I like that, that the two day rule thing that that makes a lot of sense to me. Because you know, you do have the days when you’re traveling or, or, you know, you’ve got family commitments or something that can take you out of your, your deal there.

PRANAY PARIKH 30:46

Something for something like that, you know, that’s stretching or whatever. One, one trick that I have seen is attach it to something you’re already doing. You know, for me, it was putting on sunscreen, I’d always forget, you know, brown. So sunscreen wouldn’t be the first thing that came to mind. But it’s important, you know, and people of all colors still get skin cancer, right, and aging and all that stuff. So you know, find something that you’re already doing and attach it. So for me, it was brushing my teeth, right, I always brush my teeth, in the morning and at nighttime. So in the morning, put the sunscreen right there. So as soon as I brush my teeth, I put the sunscreen and you know, after a couple of weeks of doing that, I think most say about 21 days, then it becomes a ritual in itself. So, you know, a lot of people will do stretching in the morning. So you know, brush your teeth stretch, you know, or everyone goes to the bathroom first thing in the morning, so you know, attach it to something like that. Or taking medications, right? A lot of people forget to take medication, so attach it to, you know, going to the bathroom in the morning or brushing your teeth.

J Darrin Gross 31:55

Now, no, I definitely haven’t. I mean the Makita needs I guess kind of the you know, the sociation errs are already doing this, you know to answer that, that’s really easy. Hey, I want to talk to you a little bit more about the real estate and the syndications and stuff. So you mentioned the three things acquisition, asset management, and capital cabarets. And yeah. So in what you’re doing is you’re basically you’re raising the capital, and then your your JV and with with the general partner on these. Tell me about some of the properties and because you mentioned that, you know, you’re being approached as a source of capital, it sounds like because you’ve identified a big become recognized as a, as a potential partner and these things, tell me a little bit more about some of the properties that you guys are in and and some of the, you know, the the people that are investing, are these physicians that are investing with you, or where are you guys raising capital? Tell me a little bit more about that.

PRANAY PARIKH 33:08

So we have a pretty narrow lane, we do value add multifamily. So we’ve we identify properties where we know we can go in and we can renovate, we can increase rents, and you know, sell for a premium. So that’s kind of our lane, we buy properties in low tax to know tax states don’t Florida, we’ve done Texas, Arizona, Oklahoma, and our investors are all accredited investors. So you know, they have to make more than $200,000 per year for two years, or 300 as a couple, or have a net worth over a million dollars or less. See, there’s a couple of tests, you can pass the series seven series 65 A good portion of them are doctors, because that’s our kind of our audience, but we have a lot of dentists, lawyers, pharmacists, and you know, engineers, people of all types, but our story kind of resonates with doctors. So, you know, they, they like to get into our deals.

J Darrin Gross 34:08

Got it? Is there any kind of a minimum investment that you you seeking? Are you doing a fund or is it your is it

PRANAY PARIKH 34:19

individual deals, individual individual deals, and we try to try to keep our minimum very reasonable. So it’s somewhere between 35 to 50,000 per deal, because, you know, there’s people of all different types, and we want it to be pretty accessible.

J Darrin Gross 34:34

Got it. And you mentioned the various states there that the tax friendly. How many deals have you gotten fullcycle on?

PRANAY PARIKH 34:45

So we’re two years old. So we haven’t had any full cycles yet. We’ve done eight deals. We bought over a quarter billion in real estate. We’re hoping to get a couple of early ones, but the economy change so We will probably have our first exit either next year or 2024.

J Darrin Gross 35:05

And as far as the returns, are you hitting the projections that were were presented in the beginning?

PRANAY PARIKH 35:17

We are. So we are hitting all our pro forma, right. So the types of brands, you know, we plan on going in renovating, increasing rents and all that stuff. The interest rates have gone up, as you’ve heard. So the real estate markets a lot different than what we expect. So, you know, fortunately, we have, you know, the loan and all that stuff is long enough that we expect to hit what we projected and maybe even better, but it’s going to take a year or two, with interest rates.

J Darrin Gross 35:51

Yeah, no, that much time or somebody else just about the hope that the rents increase enough to, you know, outpace the interest rate and flexion and stuff. And, and, you know, I think that what’s interesting is how interest rates affect the market so dramatically. In that, and I don’t know, it’s kind of more of a, a reset, as we’re going from one point to the other point. Is that in between area that’s hard to figure out, I mean, our interest rates, is this where they’re going to be or they’re going to go higher, you know, is this Have we reached the the top is, uh, you know, because I think what that does is it, it throws off any development, any additional supply, which, you know, if you’re an investor and you’re holding something, having no more development, in the pipe, maybe is a good thing, because it doesn’t dilute your investment, because it hopefully the demand is still there and is growing. So, and then I suppose, as things kind of level out once that, that new equilibrium is understood, and the market can say, Okay, here’s, we can go forward from here, and build again, and, and, you know, great, more supply, but the demand hopefully, you know, stays, stays strong behind that. So it is an interesting time, and just kind of the, as we go from where we were to where we’re going, just kind of the, you know, are we there yet, kind of thing is, is the challenge we’re all facing. So we’ve got the the entrepreneurship, we’ve got the time management, we’ve got the real estate, what do you have any new deals in the pipeline that you’re looking at, or, you know, talked about not,

PRANAY PARIKH 37:54

we were looking at a couple, they’re pretty early to talk about, but what is happening is a lot of REITs Real Estate Investment Trusts, or other institutional people are having to rebalance their portfolio. And you know, they’re worth billions, so they’re willing to take a haircut of 10 20%. So there’s going to be a lot of assets that we’re going to be able to get at a, you know, big discount. So there’s two of them, that we’re looking at fairly large discounts, and we’re pretty excited about that.

J Darrin Gross 38:31

Now, that’s a that’s an interesting point. You know, I think a lot of times people forget, you know, the requirements of the law, not necessarily requirements, but just the business model, and kind of, it could be their their loans are coming due, and they’re gonna have to refinance if they, you know, keep the loan or, or, you know, maybe their original investment plan was to exit on a certain timeline for their and, and capitals, II or whatever. I mean, there’s still an exit that they need to they need to act on. And I would think being situated like you are with the capital stack and being able to go into syndications provide you an opportunity to take advantage of some of these deals where others have to exit. And that’s good. Are you seeing Is it is it based on just the the the sellers need to exit the property? Or is it or is there a kind of what what is it because I just, you know, as we’ve talked about the interest rates and stuff and the uncertainty in the market, it seems like either there would be fewer sellers because it’s like, they don’t want to sell at a reduced price. You know, if you just if you didn’t have to sell right.

PRANAY PARIKH 39:54

Yeah, so it’s distressed. So it’s people that have to sell so maybe this is the They have a fund. And they are, you know, they’ve been killing it for the past couple years, and maybe they own one or two more assets, and they’re willing to take a haircut or a loss on those to close off their fund. Because remember, as a real estate person, you get paid at the end, you know, you get paid when you have a successful closing. Or, say you’re a big Goldman Sachs or you’re a big company, and you, your investors, your paperwork, your legal structure requires you to have a certain asset portfolio, right, you’re a hedge fund. And because the stock markets down 25%, you’re over allocated, and it’s a real estate, you know, so and your bond market, so your stocks and bonds are down 25% over. So it looks like this, right? You have way more real estate, so then you have to get out of your real estate to, to balance that out. And that’s your charter, that you know, that’s a legal requirement for you to have to do. So now people are trying to figure out how do I get out of this? This real estate because they have too, right? They they’re not allowed to have that portfolio that’s out of balance for too long.

J Darrin Gross 41:14

To that you mentioned the one you got here a little while back with the 2.9% interest for for nine years going forward? Are you finding opportunities to take over the the debt obligation? Or are you

PRANAY PARIKH 41:27

so we are and you’re exactly correct. It was a loan assumption. So how do you get a loan in 2.9%? For nine years, it was created three years ago, right? So you assume the loan, you go in and you pick it up? And we are seeing that? And that is a premium right now? Were you able to take the loan that was originated or started a couple years ago, or even six months ago? That’s ideal right before interest rates or 567 percent. So that is something we’re looking at, we actually did two of them already this year, to loan assumptions. And we’re hoping to do a couple more.

J Darrin Gross 42:07

No, that’s great. I am thinking is that kind of more of your what you guys see is the opportunity as opposed to originating in a new loan?

PRANAY PARIKH 42:15

Yeah, definitely, definitely. Because people are, our rates right now are, you know, you can potentially get a fixed loan for high fives if not low sixes, a few can even get something in the fours are probably it’s it’d be hard to get a three but in a high, low fours that that would be, you know, killer.

J Darrin Gross 42:38

And when you when you’re able to get a property with the existing financing in place, is the the asset sale price, then is that prevented from being discounted substantially, or you heard me know who that is?

PRANAY PARIKH 42:54

It’s actually the opposite. So because the reason that loan assumptions actually normally aren’t very attractive, because there’s a prepayment penalty. So the seller wants to sell, but they’d have to pay a couple million dollars to get out of this loan. Because if you think about if you’re giving out a loan, right, if I give you $10, you underwrote me, you spend all this effort all this time you looked at the property, and tomorrow, I’ll give you $11 You’re gonna be like, What the heck, I was expecting, you know, $1 a year for the next 10 years. Right? Give me those $11 of interest that you want it right. And over time that prepayment penalty gets goes down. So they because what are they going to have to do take that money and put it out again, and that includes that involves a lot of risk, right for the same amount of money they already go to gotten. So as long as you’re able to qualify for the loan assumption, it’s a win for the seller, and a lot of times you will actually get a discount. So we got a $5 million discount on a loan assumption we did earlier this year, because we would have had to pay a prepayment penalty of $5 million.

J Darrin Gross 44:06

Wow. When when for the good guys, right?

PRANAY PARIKH 44:09

So that’s good. Now now that’s looking great. Because if interest rates go up, that prepayment penalty goes down, because, you know, the bank wants to take that money and give it out to someone else at a much higher interest rate.

J Darrin Gross 44:23

Yeah, now the bank’s calling you Hey, really? Yeah, exactly. Exactly. Yeah, well, you know, those counter loan No, no penalty. Yeah. Yeah, it’s funny how that works. That is interesting. And really thought through the both sides of that, but definitely I could see now the next call is coming from the bank. offer no point where your your penalty. So the the play then is basically the the existing loan. I mean, at least that’s that’s really where the the opportunity is. In a lot of these these opportunities. That’s, that’s, that’s really cool. I mean, kind of the creative, creative financing there. Calm.

Hey, Pranay, if we could, I’d like to shift gears for a second. My dad, I’m an insurance broker. And I work with my clients to assess risk and determine what to do with the risk. There’s three strategies we typically look at, we first look to see if there’s a way we can avoid the risk. When that’s not an option, we look to see if there’s a way we can minimize the risk. And when we cannot avoid or minimize the risk, we look to see if there’s a way we can transfer the risk. And that’s what an insurance policy is. It’s a risk transfer vehicle. And as such, I like to ask my guests, if they can look at their own situation could be their clients, investors, the market, political interest rates, whatever you see as the biggest risk, but identify it. And, you know, let us know what you think is the biggest risk and what you’re gonna do about it. And again, for for clarification, while I’m I’m an insurance broker, I’m not necessarily looking for an insurance related answer. But yeah, if you’re willing, I’d like to ask you, Pranay Parikh, what is the biggest risk?

PRANAY PARIKH 46:20

So for commercial real estate, it’s always debt, right? I mean, if you think about it, that’s your biggest obligation every month, right? Every month doesn’t matter. If there’s a fire, there’s a tornado, you have to pay the lender, right? Otherwise, they take the property back. So you can get that risk to zero by paying all cash. And that’s possible, but you’re gonna get a couple percent return. So you got to figure out where in the risk spectrum Am I comfortable, you know, and we, our last deal was about 60%. So we put a downpayment of about 40%, which you know, you and I would put down about 20% for our house, so this is much higher, but what that does is it decreases your loan payments, so your obligation is a lot less, right, you can get fixed debt, or adjustable debt, you know, within adjustable debt, you can get up by a rate cap means you pay money upfront, almost like points, so that the interest rate won’t go above a certain amount. And you could do that for two years, you can do that three years. So you could make that very tight. So you know, that you have an interest rate of three, and it can only go up to four, or you can get looser, where you get have started off at three and it could go up to six. So there’s a lot of ways to try to, to, one, get rid of it pay cash, pay as much cash as you can to, to mitigate it right? Doing a fixed interest rate. So the rate, the risk of interest rates going up is on someone else. Or you can transfer it to someone else by buying a rate cap where if it goes above a certain amount, someone else is going to pay that interest. So I think debt is super important. In 2008 multifamily commercial real estate actually did okay. But the people that did have problems were the ones that had bad debt, or they had debt that was coming due, and they couldn’t refinance or get out of it. I think we’ve learned a lot of lessons. And I don’t think that’s going to happen again. The debt markets are a lot better. 2008 was just we, we didn’t know what to expect, you know, and it was an issue with the debt because the debt was the biggest issue. No one else was giving out debt. Now we have supply chain war, all this other stuff, but it’s not the debt markets that are having issues. So if you’re looking at your own properties, if you’re looking for an investment, really dial in focus on the debt and ask them about it like what what about this, do you think is going to minimize our risk of the bank taking the property back?

J Darrin Gross 48:56

No, very, very true, especially in today’s changing interest rate environment. That’s, that’s great. Hey, Pranay, where can listeners go if they’d like to learn more or connect with you?

PRANAY PARIKH 49:12

So the our website you can sign up for our newsletter where we send out new deals is AscentEquityGroup.com. My podcast is From MD to Entrepreneur Podcast. It’s on Apple, Spotify, Google podcasts, I talk all about entrepreneurship and interview guests that are experts in their fields.

J Darrin Gross 49:38

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

PRANAY PARIKH 49:48

Awesome. Thank you so much. All right.

J Darrin Gross 49:51

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 tweak until next time, thanks for listening to Commercial Real Estate Pro Networks CRE PN Radio.

Announcer 50:09

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How TIF Bonds Help Developers and Municipalities Finance Development with Xiao Yuan – CRE PN #395

Xiao Yuan 0:00

You know, a developer would go to a municipality and say, hey, look, you know, my project currently cost x. And you know, it has a return of y. But this return is too low that my bank is not willing to do it. My equity partners aren’t willing to do it. It’s not a bankable deal, right. So in order for me to go and engage this project embark on this project, I need some invisible incentives. And so you know, TIF is just a form of a municipal incentive for the developer to build a project. So you can kind of think about think about it is it’s really buying down the amount of equity needed to really sort of create a more robust real estate return.

Announcer 0:42

J Darrin Gross 1:02

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 to provide their experience and insight to help you grow your real estate portfolio.

Today’s interview is sponsored by Building Insurance and Risk When you invest in real estate, it pays to work with a real estate investor protection specialist to protect yourself and your investments from catastrophic loss. The experts had Building Insurance and Risk focus on real estate investor protection. They provide you with multiple insurance coverage offers and a side by side coverage comparison. To learn more go to Building Insurance Risk.com.

Today, my guest is Xiao Yuan Xiao is the managing director of Hagmann Capital and manages the day to day operations as well as leading all bond structuring and negotiations or Hagmann capital portfolio. And in just a minute, we’re going to speak with Xiao about TIF bonds. That’s the Tax Increment Financing bonds, and what they are and how they’re used.

But first couple things. If you like our show, you can help us out. You can like share, and comment on our on our podcast here. We always 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, Xiao Yuan, welcome to C R E PN Radio.

Xiao Yuan 2:56

Thanks for having me. I appreciate you taking the time to learn a little bit more about what I do.

J Darrin Gross 3:02

Well, I’m really looking forward to this. I did a little research before or in preparing for this. And it was kind of fascinating and I’m dying to learn more about it. So but before we get started, if you could take just a minute and share with the listeners a little bit about your background.

Xiao Yuan 3:21

Sure. I’m Xiao Yuan. I am the managing director of Hagaman capital. So Hageman Capital is a entity that we created in 20, late 2020 To purchase developer backed TIF bonds. So prior to really creating Hageman Capital, The Hageman family’s farming family out of Remington, Indiana, who feed Hageman, the the patriarch and family started a seed company and sold it in 2013. And so that created a liquidity that for us to really invest in our traditional commercial real estate, and some private equity plays as well. And so our focus, originally Hagaman was mostly commercial real estate. We were LP and JV investors and a lot of multifamily deals. But what we realized was that we saw a trend in the commercial real estate space in at least in Central Indiana and a lot of the Midwest was that developers were asked to essentially buy their own taxes or refinancing bonds. So the way that municipalities used to do it is that they would use you know, really all future property taxes of a maybe a very large TIF district or an entire municipality itself to incentivize the project. But really, the last few years, municipalities realizing that that’s not something they wanted to do. They didn’t want to put their credit on the line. And so instead what they did was asked Developers will support their own projects by essentially promising the future tax revenues generated from their project. And so that created a void and that, you know, what was, you know, municipal that TIF bonds have a pretty high rating, you know, typically very high investment grade rating. What developer bad projects are, is that it really is, I mean, the credit of the developer. And, you know, there, there really isn’t much more to it, right. So it’s, you know, if the developer or the private property owner can pay your taxes and the taxes stay high, you know, you as the bond bond holder, we get paid. And typically, you know, that is not a that’s not a very marketable security, or it just lacks a lot of liquidity. So what you’re going to Hagan realize is that, you know, we were typically really good at understanding commercial real estate risk, all we’re really doing now is applying it to, to, you know, Tax Increment Financing bonds, that, you know, we we understood property taxes, we understood, development risk, we understood construction risk, you know, we’ve taken on those risks ourselves. So, you know, what’s the difference, if we were to essentially do that with a bond that so that’s why that’s how you’re gonna capital was created was to both provide liquidity in a space that lacked liquidity or not a lot of folks were, were engaged in that, you know, our, really our expertise really is not just real estate, but it’s also you know, bond structuring, as well. So my background was in capital markets at a large regional bank. And my specialty was in high yield municipal finance. So prior to joining Hagen, and that’s what I was doing, and TIF really was, was a big part of it. So that’s just a little bit about us. And, you know, kind of how we operate, and really the history of the company.

J Darrin Gross 6:55

Now, I appreciate you sharing that, because it’s kind of fundamental to understanding what you guys are and kind of what to talk about. So, I want to first kind of differentiate them and make sure I understand so. So bonds are debt. Right. I mean, the so the, the TIF bonds. You mentioned the developer back TIF bonds, where they previously be I thought I heard you say that primarily, they were municipality backed bonds. Was that Did I hear that? Right?

Xiao Yuan 7:29

Yeah. So you know, the way that most developers can get incentives on the project, you know, back in the day, you know, what, what ultimately would happen is, you know, a developer would go to a municipality and say, hey, look, you know, my project currently cost x. And you know, it has a return of y, but this return is too low that my bank is not willing to do my equity partners are willing to do it. It’s not a bankable deal. Right. So in order for me to go and engage this project, embark on this project, I need something that’s more incentives. And so you know, TIF is just a form of a municipal incentive for the developer to build a project. So you can kind of think about think about it as it’s really buying down the amount of equity needed to really sort of create, you know, a more robust real estate return, right. But back in the day, what a municipality would do is, they say, hey, we’ll give you the Tax Increment Financing incentives. But so we’ll go out and issue a bond. But if let’s say the property taxes from your bond, doesn’t cover the debt service, because you know, for whatever reason, maybe your project is delayed, or the assessor’s office is, you know, very generous to you, for whatever reason, you know, there may be sort of a shortfall between the bond debt service and the, you know, the revenues that that are generated from just one project. And so what municipalities used to do is say, if that were to happen, we will pledge other revenue sources, typically sort of the gross collective property taxes of the of this plant taxing district to repay the bonds, right. And so, it, you know, obviously, the cost of financing and dosage situation, but it’s really kind of a credit of Municipal Credit at that point, right? The backstop is the municipality. And so while the financing costs were extremely cheap, the risk component for the municipality is much higher, you know, they’re really taken. They’re really taking on higher risk, more risk. By doing so, it especially if a project you know, ends up maybe not being what it what it was built to be. And so, the recent trend at least into Indiana is that municipalities have kind of gone away from the structure. But instead, you know, they’re telling the developers that gay will give you the TIF, you know, the tax the future taxes generated from the property that you’re about to build. But if there’s a shortfall, and you can’t pay your pay the bondholders, we’re not going to back in. Right. So you developer will end up having a back end with your balance sheet or having a back end with you know, sort of it seemed more of like non recourse dad recourse the real estate but non recourse to developers themselves, right. And so, so that’s really the distinction. It’s overnight, you know, you went from these, you know, double a triple eight municipalities that are supporting Tax Increment Financing debt, to really these are just developer support bonds, which, you know, does it just haven’t traded well in the marketplace? And so, so, what we decided to do was essentially invest in the ladder pool, right? Because we understand the risk, we understand, you know, what is what really, what is our worst case scenario if somebody doesn’t pay our bonds? Right. So that’s, that’s kind of the, I would say, the high overview of, you know, what municipalities used to do when they were back in the bonds versus what they’re doing now.

J Darrin Gross 11:26

Got it? So a couple of questions from that. So the, my understanding, and I do a fair amount of like, performance bonding for contractors now. And so having to, to be familiar with their balance sheets, and, and you know, how the, the underwriters always want there to be more cash than they need, you know, so they can pay all their debts. And, you know, not not have a claim against a bond on a performance bond, I’m assuming to be some similar underwriting that you guys look at when you’re looking at these, these contractors, you mentioned, you know, they have enough of the balance sheet to to pay the potential shortfall. Is that? Am I reading that? Right? Is that what a lot of what you guys do when you’re when you’re looking at a bond to buy? Is that? I mean, cuz you’re essentially, are you not providing the capital to the contractor? Or are you are you buying, you’re buying the obligation for a rate of return from the contract? Or how’s that? How’s that structuring?

Xiao Yuan 12:31

Yeah, so I mean, what we’re really doing is we’re providing capital to the developer that is getting this tax increment financing incentives. And so you do have to underwrite plots or risk, but at the end of the day, right, I mean, the project produces income, you know, it’s not just, you know, I mean, these are commercial real estate projects that are income producing, you know, we’re not going to go buy a bond on a, you know, a single family home, that they’re not sort of this perpetual income. And, you know, like, most commercial real estate developers, especially the good ones, right, is that they, they’re, they’re gonna pay their taxes on the property with the income from the property. So we actually, I mean, we spent a lot more time looking at that the actual development project itself, as opposed to, you know, maybe the sponsor Now, granted, sponsor reputation. And sponsor risk is a real thing, that we do really, you know, heavily scrutinized that, but at the end of the day, you know, if it’s a good project, and, you know, good sponsor, good developers, you know, those are really the the aspects that we’re underwriting.

J Darrin Gross 13:36

Got it. So it’s more like just a commercial bank loan, from a standpoint of view, the project, the viability of the project, more so than the than the actual the contractor.

Xiao Yuan 13:48

Correct.

J Darrin Gross 13:49

Gotcha. And, and so that the debt, is there a lien position against the project? If there was a, something went wrong? Are you in a position where you have any kind of a lien against the property?

Xiao Yuan 14:08

Yeah, so taxable refinancing is essentially taxes, right? So you don’t, you know, these are just future property taxes that are generated from from your project. So the debt service on these bonds are correctly correctly from the taxes generated from the project. So, you know, if you don’t pay, you know, that service on your bond, you know, typically what happened is you just didn’t pay your taxes. So, in that sense, we do have a lien, right. We have a, you know, we essentially had a tax lien that if you didn’t pay your taxes, then you know, the there could be essentially a trigger foreclosure or tax sale. Now, what’s more likely happening the developers construction lender or first mortgage holder is probably going to pay those taxes. Just because they don’t Want to be wiped out by a position that is, you know, essentially maybe 10 to 15% of the capital that. But But ultimately, you know, it’s treated like a tax lien. Now, the only caveat is that if, you know, let’s say the assessor assesses the properties lower than what the debt service would be, then you technically wouldn’t have you know, how to tax lien in those situations unless you have maybe some sort of a side agreement or a taxpayer agreement of some sort. So that’s the caveat, right? That if there’s enough taxes to pay debt service, and somebody doesn’t pay their taxes, then that’s a tax lien. But if there’s not enough assessed value in taxes to pay the debt service, and somebody does pay their taxes, that’s not necessarily a tax rate.

J Darrin Gross 15:54

So in just a brought up a couple of things, that is a bond, it’s a debt, but it’s, it’s strictly through the taxes that are that the payments to the bond are being made. Is that understood that? Right? Correct. Okay. And so, if there’s a lender, like you said that if the taxes aren’t getting paid, the lender would likely pay those. So your your position in the the discharge of the, the property, if it were to go to foreclosure, you’re not in first position, I assume that the lender would be in first positions that

Xiao Yuan 16:36

No, you are in first position, because it’s a tax lien.

J Darrin Gross 16:39

it’s above taxes, that the lender can’t. So I thought that

Xiao Yuan 16:43

Which, which is always the case, right? I mean, right. Right. It doesn’t matter, you know, you don’t pay property taxes on your house. I mean, it doesn’t matter how big your mortgage is, your mortgage lender is gonna get wiped out. And, you know, that is kind of the nuance that, I think, you know, you have to understand, when you’re looking at these deals is that each different state has, you know, slightly different sorts of tax do procedures. In Indiana, it’s generally pretty favorable, who, you know, I would say it’s more municipal municipally favor? And so, you know, we have really well, we say, you know, we have first position, you know, we do right. Now, granted, the, sort of the other side of it is our capital comes in before the construction lender, you know, it’s really TIF capital, TIF equity is really treated as, you know, equity in the capital stack, and chances are that that lender is going to want to see that money comes in first, right? So it’s not sort of this, you know, you’re in the super protected position, it’s that, you know, taxes for whatever reason, if your project under taxes don’t, don’t tend to do well, you know, or the set values decrease, you know, you’re subject to those types of risks.

J Darrin Gross 17:59

Got it? So, as far as the, the the capital that you guys are, are putting up, and, you know, it’s used, is it, is it designated on more like infrastructure? Or is it or is it just a part of the whole project? Or is there any primary way that that the funds are used?

Xiao Yuan 18:24

Yeah, so my answer is yes. Or, hey, that’s the joke is it, you know, tip kind of falls in the gamut of infrastructure use. So, you know, if you, let’s say, you build a commercial warehouse, and you need to have roads leading up to it, you know, TIF dollars can be used for that, or it can be used for parking garages. That is, you know, resonant and creative, to your multifamily deal. You know, but I mean, typically, would also go as far as potentially supporting bricks and sticks. So as really just kind of a part of the capital stack. So it’s, there’s a wide range to it, that also kind of change the taxability of the income from the bonds. So if you’re essentially buying a bond that is only supporting infrastructure, there’s some tax advantages compared to if you’re buying a bond that potentially supports bricks and sticks, where you really, really can’t get tax advantages from that at that point.

J Darrin Gross 19:23

Got it. And the bonds who so you guys are putting up the capital, the bond? Is that? How is it I guess what I’m trying to understand this, the municipal agreement is just baked into the tax or is there is part of what you’re doing? Is that going to affect tax rates? You know, if I’m a member of the community, am I affected or is it strictly related to that property and the tax base or the access to buy the property

Xiao Yuan 19:54

that’s strictly related to the property itself? Right. So you know, the really Uh, you know, we kind of joke, the best thing for the community is, you know, some developer, getting a tip that falls off after a certain amount of years. Because all that tax base is gonna go back to the community. And so, you know, you as the, you as the resident is really not impacted by, you know, it says the developer back bond, right? If, if there’s a shortfall for any reason, if they can’t pay that service, you know, your property taxes are gonna go up, because you, you know, you own a house, that’s, you know, three blocks away. But, you know, ultimately, that’s kind of an advantage, right? That is really sort of more more on the developer shoulder. So it’s not, it really doesn’t impact tax rates. It’s more just, you know, what is the actual taxes generated from the property you’re going to build?

J Darrin Gross 20:50

Got it? Okay, well, this is all starting to make more sense now that it is specific to the property. Because I was thinking when I was preparing for this more like, you know, a tax bond, measure that you you’re, you know, you vote on, based on they’re gonna do new schools, or roads, or whatever it is, or renew a bond for whatever it might be, and you the public votes on that. But in this case, it sounds like, is there a need for a vote? Or is it more about the just it’s the municipalities able to grant the status to the property itself? And that property then carries the weight of the bond? And I say, the municipality, but I want to make sure I understand, doesn’t municipality have to grant any status? Or is that something strictly between you? And the issuer of the bond and the payer? The developer?

Xiao Yuan 21:52

Yeah. So a couple of couple of answers. I, you asked a couple of questions. So the first question is that there need to be a vote, the answer is not from the public, because it doesn’t impact their pet tax rates, it doesn’t impact how much taxes they’re going to be paying as a result of this development. So there doesn’t need to be a vote from the public. The second part is, you know, the municipality ultimately needs to grant you the right for the for TIF, right, because what you’re really taking aways are taken away their future taxes for a number of years that you get to monetize. So so the only way that you can do that and use essentially going through a municipal process that they’re in which they’re granting you the ability for TIF, right, because you know, what, what’s ultimately happening is, you know, on day one, if you just have a vacant piece of land, that doesn’t generate a lot of tax revenue, the increment really comes from the fact that you build something that is more than just, you know, dirt, the you know, let’s call it 300 units of apartments. You know, in that case, right, the taxes on 300 units is a lot more than no units. And so the difference of those taxes is the increment, right? So if you didn’t do the project, you know, what, what, what would have been the what would have been the taxes, versus if you did do the project, what other than the taxes and the difference in that is increment. And so that is really what the municipalities allowing you to capture. So it’s not that, you know, they’re really taking money out of their pocket, in that sense, it’s that there has to be development in order for taxes to be there. And by allowing you to capture the increment, they’re allowing, essentially building their their tax base in the future, right, because once the sort of the test period runs off, the municipality captures the taxes that is generated from your development.

J Darrin Gross 23:50

No, makes sense. I am kind of slow at this, but I’m getting that as we’re going through it here. It’s just an interest. So it basically it’s the part of the capital stack, you get it by appealing to the municipality to grant the status, and then that allows the developer then to do they then, you know, engage with somebody like your firm or, or who who issues the I mean, because it’s capital at that time. I mean, it’s, it’s, it’s debt, you’re part of the project. So they, they have a plan, they have a budget. They have a lender that says they’ll meet, you know, this much, or they’ll, you know, lend this much. I’m assuming they have to come with some sort of equity themselves, so that the developer, the owner of the project, and then you’re a part of that, that stack in my mind, is that yeah, my writer, okay. And then my next question would be so if, if a project does have a TIF bond that you guys are the issuer of what’s the right person Sure, okay. Yeah. So that’s the, I’m not saying a word right there. But because you’re putting the capital up, right? Or you’re,

Xiao Yuan 25:09

we’re just buying the bond. Yeah, I’m not lending against that we’re buying the bond.

J Darrin Gross 25:15

But when you buy it, then you’re gonna receive payments from the revenue right? Now, you own the debt. Correct. So who issues the debt than originally say, is it that the municipality?

Xiao Yuan 25:27

Yeah, that’s part of the that’s part of the granting process, right, is that they, they allow the issuance of a bond? So this, you know, what a bond is? It’s like a no, right? I mean, memorializes, the obligation. And so what we’re doing is we’re essentially buying that obligation.

J Darrin Gross 25:44

So is there any coordination between you and the municipality? I mean, what have, you know, so that they don’t over obligates the property?

Xiao Yuan 25:53

Yeah, you know, typically, what we’ll do is we’ll sort of limit that. Based on any TIF obligation, our bond is really the only obligation that can be encumbered on that, you know, on that property itself. Right. So, I mean, there’s definitely some coordination. You know, also, there’s really through throughout the throughout the deal. I mean, we’re really negotiating the terms of the bonds. You know, what we like to see what is our repayment source? How long the bond is, right, sometimes they’re statutorily, you know, you’re only allowed a certain number of years for TIF, just because the municipality needs to be able to capture the future increment at some point. So there’s, there’s definitely some there’s definitely some high level coordination between the developer and the municipality. But really, I mean, the way we see it is, you know, the developer who’s potentially getting the equity getting the capital, you know, those are the folks that I think we interact with the most.

J Darrin Gross 26:55

Yeah, now, it makes complete sense. And again, it’s, I appreciate you walking, walk me through this, because it’s, I get the concepts, but some of the way the the money moves or the obligation moves. takes little hammer and through there. So you mentioned the length of the term on these, what is an average length of a, of a term on a TIF bond?

Xiao Yuan 27:20

I vary state by state. In Indiana, it’s 25 years. In Ohio, it’s 30 years. You know, Illinois, I think

J Darrin Gross 27:27

you said about how many years in Indiana? 25 or 25. Okay. And it’s like a commercial loan, as far as the length of the of the bond payback time? What is the is it a fixed rate all the way through it, then? Or is there a,

Xiao Yuan 27:47

a Yeah, for us? It’s a fixed rate, you know, what we can’t do is, you know, we’re not buying a floating rate debt. So sort of on day one, right? You you already have, you have to have kind of the capital stack already in place. So the rate floats, right, even though your revenues don’t change, you know, you you can’t really have a situation where there’s essentially less bonds, right? So for at least for us, at least, I mean, we’re our money than there for 25 years, and it’s fixed.

J Darrin Gross 28:16

Got it? So on the commercial lending side of things, a lot of times, you know, loans get sold, or, or not so much on commercial, I guess, but, um, you know, like, residential, there’s been a lot, but is there a market for them? The bonds? Or do you guys you issue them? Or you buy them and hold them? Or do you ever sell them? Or,

Xiao Yuan 28:39

you know, historically, no, we we, you know, our intent really, is to buy and hold. And, you know, I think, I think folks kind of like that as well, just from the sense that we’re really long term money, you know, this is not a sort of, get it in, flip it out, you know, get out type of play, you know, the kind of the way that we’re structured to, you know, we’re a family office, we’re very long term money, than the way that we look at, you know, a lot of these transactions have very long time horizons. So, you know, because of the lack of liquidity and the fact that, you know, we, you know, that’s really not the investment thesis, you know, we we really have a we have full intent that we’re going to keep them.

J Darrin Gross 29:21

Yeah, that’s, that’s interesting. What’s a an average rate on a on a tiff bond?

Xiao Yuan 29:29

So, you know, I think that question really kind of comes down to a couple of factors, right? The the easy way to answer that is, you know, we’re really going to be about between what a commercial lender is going to charge on a first mortgage, versus what your preferred rate on equity is going to be. You know, the reason is, you know, what a preferred lender what a first mortgage lenders really going to get is, you know, their money is going to go in last and they kind of take the least amount of cash such a risk. But you know, we’re so so we really, you know, our rate really needs to be a little bit higher than theirs. But on the other end is, you know, we were really not getting the press upside, you know, from from an equity position. And you know, our capital is just not as risky is that is equity, right, especially kind of based on based on where we are in the tax lien. So my comment has always been really that’s the sweet spot, right? It’s between what a first mortgage is and what equity is.

J Darrin Gross 30:33

Got it. And as far as the repayment of the bond, does it have a a declining principal owed? Or is it just a length of time? Or is there a, you know, like on a on a, on a regular commercial loan, amortized over, you know, X number of years? Here’s a declining balance. Is that similar in the bond?

Xiao Yuan 30:56

Yeah, I would say, you know, bonds typically have like, six domination. So really, what we’re doing is, you know, we’re sizing to, you know, we’re sizing to the amount of revenue is available every year. So, you know, typically be looking at Bond amortization schedule the, in the earlier years, right, where if you have a set number of fixed revenue amount, you know, you’re going to pay more interest than principal. And you know, as you kind of move down the amortization schedule, is going to be more principal than interest.

J Darrin Gross 31:28

So in the type of projects that didn’t sound like you’re really limited, it’s all about the revenue side of the, the end use of the project, because I’ve pretty much what what dictates?

Xiao Yuan 31:43

Yeah, you know, we we are selective in the project that, you know, we may be interested in buying the bond for some typically, we don’t like to buy anything that is too special use. So, you know, if you want to build a building that looks like a basket, you know, maybe not right, but if, you know, if it’s just traditional, you know, commercial real estate, retail, multifamily. You know, industrial, I would say, you know, we were very interested in that. So, you know, rule of thumb is nothing too specialized, but generally sort of bread and butter, real estate, the type of stuff that people want to build. You know, those are, those are kind of the deals that we like to see on when we’re buying the tip as well.

J Darrin Gross 32:31

Got it? And is there a sweet spot as far as the size of the tip that you guys purchase?

Xiao Yuan 32:38

Yeah. So, you know, typically, the capital stack tip is anywhere from 10% or 15%, of the full project cost. So, you know, while theory we can buy a 15, or $20 million bond, there’s just not that many 150 to $200 million projects. Right. So traditionally, our thought had the sweet spot have been, you know, any anywhere north of a million a half, you know, some of the larger deals that we’ve done have been in the 12 to $15 million range. But what’s that average? It’s about five, five to $6 million, which equates to anywhere from a 40 to $60 million project.

J Darrin Gross 33:17

So on that, on that percentage basis of the total projects of the say, You guys are coming in at 15%? I’m assuming is the the lender, are they coming in at 80? Or 75? Or how much? How much is the developer willing to come in? Yeah, how much do they are they required to bring? Because I’m assuming that this, this kind of you help the project? I’m thinking?

Xiao Yuan 33:44

Sure, sure. Yeah. So you know, it really just depends on what your what the commercial lenders willing to do in terms of loan or cost. So some lenders back in the day, were maybe willing to push 80%. But, you know, I would say these days, you know, maybe we’re closer to 70. So let’s say worth 15% of the capital stack, and the lenders 70%, then, you know, the developer needs to find another 15 somewhere, and typically, it’s from them or, you know, they’re their LP investors, for example.

J Darrin Gross 34:18

That’s fascinating. The, just the, the whole, you know, kind of the nature of the capital stack and, and, you know, just the, the TIF bonds, I mean, I’ve heard of TIF bonds, but I never really paid that much attention to him. And you mentioned that, that the, at least in Indiana and kind of the state you’re working in that this has changed from more of the municipality back to the to the developer back. Is that a trend nationwide? Are you seeing that?

Xiao Yuan 34:50

You know, I would say some states or maybe even further along, just you know, just because I would say, you know, if you look at deals in Illinois, I mean, there’s traditionally always been You got the TIF, but you didn’t get the municipal backing. So it kind of just depends, you know, in cities and towns that are that are further along in their development cycle, you know, there’s just more attractive places to build, you know, they’re sort of less likely to give you really, really strong incentives. Right. And so those municipalities may have already been, you know, sort of pushing developer back bonds for years and years. So it’s, you know, it’s, I don’t want to say it’s a nationwide trend, you know, because we’re right now is we’re still pretty focused on the Midwest. But it’s, you know, if you think about it, from a policy perspective, it probably makes sense, right, that, you know, you, what you don’t want to happen is to have a failed commercial development project, and the rest of your tax base has to pick up, you know, so. So that’s been the appeal for a lot of municipalities that they don’t have to give, you know, sort of a big credit enhancement in order for deals to still happen.

J Darrin Gross 36:03

Right. And like you said, the goal, their goal is to have the project where you have a, you know, potential downstream tax benefit, as opposed to just the raw ground, and also it fills a need, and that there’s likely a need for the project. If you’re talking about multifamily, or, or, I mean, just the just the nature of demand, and, and also its jobs, jobs and housing, and whatever else. So yeah, yeah, I’m guessing there’s a lot of support from municipalities for this type of financing.

Xiao Yuan 36:41

Yeah, exactly. You know, you’re spot on in that.

J Darrin Gross 36:47

Way shall if we could, I’d like to shift gears here for a second. My day, I’m an insurance broker. And as much I work with my clients to assess risk, and determine what to do with the risk. And there’s three strategies we typically considered, we first look to see if there’s a way we can avoid the risk. If that’s not an option, we’ll see if there’s a way we can minimize the risk. And when those are not options, we look to see if there’s a way we can transfer the risk. That’s what an insurance policy is. risk transfer vehicle. And, as such, I like to ask my guests if they can look at their own situation, could be clients, the economy, the political market, however you want to identify and whatever you considered be the biggest risk. And, again, for clarification, while I am a insurance broker, I’m not necessarily looking for an insurance related answer. And so if you’re willing, I’d like to ask you, Xiao Yuan what is the biggest risk?

Xiao Yuan 37:50

Yeah, you know, like any financial product, I mean, it truly is interest rate risk. So, you know, it’s not something that you can eliminate, you can, you know, transfer to some extent, you can minimize, to some extent, but, you know, on a day to day perspective, I mean, we do have a fee, it is, you know, anytime we buy a bond, anytime we, you know, look at look at any type of these financings day to day, you know, proceeds can essentially get diminished simply because, you know, 10 year Treasury goes up by 1520 basis points, right. And so, you know, that’s something that, at least we spent a lot of time thinking about is just how do we minimize the interest rate risk, and we do have kind of a few vehicles that we, we utilize that minimize interest rate risk, both for ourselves and also for the developers that are, you know, seeking our capital. And, you know, kind of a big way that we do that is, you know, we created a rate lock mechanism, anytime we buy a bond. So, you know, whatever the interest rate is on the bonds, what we would do is, you know, we can say, hey, we can lock in the rate for the next five to six months, and typically, the way we do that is through kind of a series of different slots, and, and then, you know, sort of other interest rate management tools, right. So, but, you know, on any given day, I mean, what I think about the most is, you know, how do we minimize interest rate risk, because that’s ultimately sort of the, you know, volatile interest rate risk is really the sort of the enemy of, you know, slow, solid, consistent return.

J Darrin Gross 39:26

Yeah, no, sounds like some challenging times right now, just based on you know, the, as the rates are changing and how it’s changing the market. I mean, that’s, that’s a real challenge. And it’s funny, because I know that historically rates have been you know, higher. But having been so low for so long, kind of that adjustment for people to to adjust to in the market to adjust to where the, you know, whatever the market is, and will be so that it functions as kind of the challenge and so I get it, I get it. Hey, shout, where can listeners go if they’d like to learn more or connect with you?

Xiao Yuan 40:13

Sure, they go on our website, HagemanCapital.com. To learn more about, you know what we’re doing in the TIF space. If they want to learn more about the family office and our operations, then go on HagemanGroup.com and I am on LinkedIn under Xi AOUYUAN.

J Darrin Gross 40:33

Awesome. Xiao, I cannot say thanks enough for taking the time to talk today. I’ve thoroughly enjoyed it. Learned a lot. And I look forward to doing it again soon.

Xiao Yuan 40:45

Darrin, thank you so much appreciate you having me on and appreciate and hopefully your listeners can get something out of this as well.

J Darrin Gross 40:53

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

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