Archives for October 2023

Interest Rate Risk Caps with James Gosse – CRE PN #429

James Gosse 0:00

So a typical three year cap 3% cost $98,000. This is for $100 million loan. It costs $98,000 in 2019. The two by two, two by that same cap today cost 3.4 million.

Announcer 0:18

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 0:37

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 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 experts and 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. learn more go to Building Insurance Risk.com.

Today my guest is James Gosse. James is an is Executive Managing Director of transaction services at NXT CRE. NXT CRE supports commercial real estate lenders find properties for their exiting borrowers that match their exiting 1031 needs. And in just a minute, we’re going to speak with James about how the price of interest rate caps is making it near impossible for borrowers to use floating rate debt.

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James Gosse 2:32

Thank you, Darrin, nice to Nice to be here with you.

J Darrin Gross 2:36

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

James Gosse 2:46

I’ve been in commercial real estate since I graduated college while back now over 20 years, and I’ve been on really all sides of the transaction, right. So I learned the business on the buy side as a principal, and then certainly had involvement on the sell side. I was at the Carlton group for 10 years, really trying to doing that intermediary role. And most recently, more recent things as I was at 10x running the institutional group. And then I was a founder of of oke x, which is a a marketplace. But now I’m running as Darren, you relate, I’m running the transaction services for next care and look forward to the discussion.

J Darrin Gross 3:34

Awesome. So I think the ideal place to start is if you could describe what next ERP is, and how it works.

James Gosse 3:45

So next, cre we are a platform that effectively what we do is provide I think you touched on it, but we provide to our lender partners were able to generate, we’re able to generate not much by investors we call them, right do you mean effectively, these are 1031 investors who are looking to reinvest their cash. And they’re identified and sent to us by our lenders. And so by the time they get to our platform, these are, you know, we call them verified, whatever you call it, there, but there must by investors, that’s why we call them MPIs. They have a certain timeline, you know, typically 45 days to identify, and then there’s a bit more time afterwards to close. But that identification process is happens quickly. And so what we do is onboard them once their lender sends them to us they have a specific criteria. I would like multifamily and Los Angeles or retail in Ohio, whatever whatever it may be. And then we’ll work with them to match. Our system has a pretty intense algorithm that matches sort of the first cut of, of assets. But it’s it usually just starts there because the reality is is once you’ve matched someone’s assets you need to then take that next step. up and sort of listen to what they’re saying, I like these five out of the 30. Let’s go further that so we help them find assets and meet their their reinvestment needs.

J Darrin Gross 5:09

Got it? So the platform in and help me make sure I understand this right. So you guys receive the the borrower information from the lenders who have these loans with the placed loans already in a property with their their borrower, the terms of the loan are coming up, or is it a matter of just the the borrower’s is just expecting to exit? Regardless of the the terms of the loan?

James Gosse 5:42

Darren, you’re asking good questions. I like it. The, it’s both, right. So there’s there’s the maturity, notice, if you want to call it that, so someone effectively is coming down the pike, they’ve had a loan for 10 years or whatever, it might be a fixed rate loan, yes, if the loan is coming due, they’ll there’s a, they’re gonna get notified for that reason, right, that we will, they’ll be on board for that reason. But typically, if that’s the case, they’re already planning to do something people don’t typically let these loans just expire, without a plan. So it’s really more the other one, it’s more, these are people that maybe in year 789 10 have this have this timeframe of their loan, but they’ve made the decision to sell, right, that decision happens before we’re involved before their lenders involved. I mean, it’s that’s owners who are making these decisions every day. So once they make that decision to sell, you know, as required by loan documents, you may be familiar, you know, you often have to give them, when you have a pay off requests to pay down your loan, you need to give them at least 30 days, so the lenders get an additional 30 days sort of heads up, if you want to call it that. And that kind of is makes it so we’re able to have a 75 day window, instead of a 45 day window. Right. So you know, that’s kind of the crux of it.

J Darrin Gross 7:06

Got it. So it’s a pay off request is kind of the cue to onboard.

James Gosse 7:11

That’s sort of an early warning signal, as we see it, and that’s, that’s sort of the value in our, in our partnerships with with our lenders, is obviously they want to, they want to know what’s going on and help that borrower, you know, find a new property, and then make a loan on that new property. That’s what their skin in the game, that’s what their interest is. But it lines up well with what we want to do. And ultimately, what what their what their borrower wants to do. So got it.

J Darrin Gross 7:39

And I guess that that was what I was trying to figure out is like, is this just you you have the whole portfolio of loans in your, your system? And you’re, you know, looking for activity? Or? Or is this like a we’re getting closer, you know, but this is that request is where it’s it’s actually generating the the, I guess, we don’t

James Gosse 8:01

know exactly how many or, you know, are coming from who and when, just that they’re coming? Right, if that makes sense. And there’s sort of an ongoing flow with these. And we, you know, again, some of it to maturity driven, but it’s very rare, you find one lender that has a bunch of loans all maturing at the same time, they try to spread them out.

J Darrin Gross 8:22

Gotcha, gotcha. So and then from there, you’re basically following the the 1031 guidelines, you know, what is it 45 days identify, and, I mean, so you’re getting the queue that they’re going to sell, which then gives you the bank, when you said 30 days, they have to at least 30 days notice. If you’ve got 30 days plus the 45 days, that’s a minimum amount of time,

James Gosse 8:48

right? So we’re able to communicate then with, you know, the borrower is able to excuse me, the lender is able to communicate with a borrower and say, Look, are you planning to reinvest? If they are great, you can go fill out this questionnaire and go look at your at some opportunities on on next care? And if not, or if they’re not planning to obviously, they don’t come to our site, right. I think it’s, you know, it’s certainly, you know, we have the right incentives, if that makes sense.

J Darrin Gross 9:18

Got it. Now, the next property, are you involved at all? Or do you have a portfolio of listings that are available? Or is it more of just the communication with the borrower that they do intend to, you know, reinvest. And that’s kind of cueing it up for your your lending client, who is actually if I understand, right, the lender is your, your true client, because that’s the one that you’re trying to get them the next loan or the get the borrower to use that lender again for their next loan. Is that my understanding that right?

James Gosse 9:54

Yes, a little bit. I’ll clarify. I mean, the the lender The benefit for the lender, and one of the reasons we talk about this sometimes is the digital line of sight. Right? So most lenders when they, when they make a loan, they’ll make that loan, and then they may hear back from the borrower, they may not. Right. I mean, the reality is, is you may hear from them, you may not you may get a pay off request. I mean, typically, that’s a, that’s a, something they have to do by the documents. But you may have my point is you may hear back from them and have a sort of report, and you may not. So the point is, is once that borrower says, I’m great, I’m selling my property, you know, as by asking for this loan, pay off request, that’s kind of them telling you that I’m selling this property. Well, it kind of alerts that that lender, I’m about to lose a loan, right, again, not lose a loan, but it’s you want to retain that borrower if you can. That’s the name of the game for all lenders. So from that perspective, yes, we’re trying to help them. Ultimately, that’s what they’re, that’s where their head is at. That’s where the, the skin is in the game for them. Because they ultimately want to be in a position to help that borrower again. Right. So from from the other side of the coin, you know, I think you said you just you matching, or just helping, you know, once they get here, it’s a fully curated list, right? We are not a marketplace, we’re not a listing site. So when someone goes on our website, let’s say, you know, John broker goes on our website and uploads 50 properties. That’s fantastic. Now you go on our website and go, I can’t find any these properties, James. That’s because no one can we by design, if you upload a property, the only, the only, so there’s, so there are a lot of properties uploaded, but people can’t see them, except when they’re matched. So once you’re matched in again, this is the idea behind keeping some of this stuff anonymous, we found a lot of our institutional clients like it because they can market assets without marketing assets, right, they can sort of get price discovery without having to come into the market and say, you know, I’m definitely going to do this kind of thing. But it lets us then have a have a wide swath of properties to which we can match. And when we’re able to match them with properties that are on the market, we can match them with off market properties. And so it’s been, you know, we’ve been, we’ve gotten a very, here, I say, dare I say, rave reviews so far from the MBI. Because ultimately, it’s not just what we do in the initial match, it’s then the follow up, right? Someone may say, great, you sent me 83 properties, but I’m not really that interested in 75 of them. These five are interesting. And here’s why when the five is interesting is great. But here’s why is more important, if I like them, because they all have $20,000 a month in income, which I need to support this new loan, or they’re, you know, none of them are more than 10 units if they’re multifamily, because, you know, I want it to be enough that it’s, you know, that it can generate the income, but not so much that it you know, I don’t want 30 units, because that becomes a headache. Right? So but I don’t want to units either, because that means if I lose one tenant, I’m at 50% occupancy, right. So it’s kind of like, you know, finding things that that make sense. And what we’ve we’ve found is that they really, you know, ultimately, these investors, by the way, the 1031 buyers, these are very sophisticated investors, right? It’s not like you’re dealing with someone that you have to explain, Well, this is how a cap rate works. I mean, these guys know exactly what they want. So it working with them. Obviously, it makes our job easier. But, you know, ultimately, our job is to bring them as many suitable replacement properties as we can. They then have to pare through that and say, These are the ones we like, but ultimately, you know, we look at our job as being successfully completed with that MBI. Once we’ve identified a match that they say, Yes, I’m moving forward. And this kind of goes back to something you said earlier, it’s not just the 45 days, when you say 45 days for identifying and we can extend that, as I said, the 75, when we get the loan payoff request comes in arlena. But it’s 45 days is a little bit, it’s a misnomer, because it’s not like you just need to identify something in 45 days, you have to, you have to find it. You have to do the due diligence, and you have to tie it up, right? I mean, that’s a very different than, hey, do you have four properties you might buy? Because anyone can do that. But that doesn’t actually accomplish what you need, right? Because you have to then say I have identified XYZ property. And so to be able to say I’ve identified it, you really at least need to have had, you know, that contract discussion, you want to have the thing tied up so that now it’s just a closing function. So what we found is that the buyers, the MBAs these guys are extremely motivated. They don’t let the paint dry on anything. They’re asking for information right? We try to explain this to we did a CCI M webinar yesterday, I was trying to explain it to some of the brokerage community. You know, by the time they’re matched to a broker and to a seller, saying, Hey, you’re one of five people that this NBI is interested in their asset, you’re already three quarters of the way down the sales funnel, right? I mean, they’ve already said no to 75, other deals, they’ve probably gone through your materials. And now at that point, they just have questions and want to talk about price, right? Because they don’t have time to play around. They need to get into do the due diligence, and get the process going.

J Darrin Gross 15:35

Yeah, done the answer. But no, I haven’t done a couple of exchanges. I mean, 45 days is fast. And I would think, Oh, yeah, no, I would think that the, the, you know, this must by investor would welcome the the kind of the narrowed funnel of the opportunities that kind of match their criteria.

James Gosse 15:59

Otherwise, it’s really hard for them to sort through all this stuff.

J Darrin Gross 16:03

Oh, yeah. I mean, you’re literally going, you know, I remember a guy saying, it’s kind of like standing at the ocean with a Dixie cup, saying, you know, go ahead and empty the ocean, you know, it’s like, there’s just so much, so much information, and just, you know, you can try and narrow it narrow and narrow it, but there’s still, too to have kind of more of a systematic way to, to, you know, find a replacement property. I didn’t, I mean, I knew about the the matching thing from the lender thing, or they understood that, and this piece, I guess, was kind of new, but, but to me, it’s making a lot more clear on the value of that. For the borrower, the investor that’s doing the exchange has to have that. And let me ask you, so your CCI M group that you were working with yesterday, has been well received in the broker community,

James Gosse 16:56

unbelievably, I mean, I’ve got to give a big thank you and shout out to CCI M, we joined the member Advantage program, I think it was May or June of this year. And CCI M has been fantastic. I mean, as you being, you know, a broker of any sort, right insurance or what have you. You can certainly appreciate CCI M and sort of the way they have the education system. I mean, they’re looked at, certainly in the brokerage community. As you know, the this kind of a leader is at least on the you know, in terms of knowledge base and those kinds of things. Now, granted, are there other brokers that are not CCM that have done huge volumes, of course, that said, I, you know, we love CCI n because I feel like they take the time they listen, we were on that we had a webinar we had scheduled for them, right kind of just talking about us and our services, and we had, you know, almost 260 people sign up for the thing. And, you know, we had went out once because we had too many people in the first call. So it’s been very well received. I think Darren, it kind of goes to the point. I mean, think about the discussion we’re having here today. And you said, you know, I know a bit about you. But you know, as you’re making it clearer as the light bulbs go on, you can see what the value is. Right? So, yes, there have been instances where I’m having to talk to, you know, so so and so, you know, a brokerage firm and explain to them, you know, understand that, and basically make the light bulb go on for them. Because once they realize, you know, you have someone that’s interested in one of my assets, this person is already qualified, doesn’t need to do the proof of funds doesn’t need to do a lot of this has a loan, right has a lender that wants to lend. And, you know, those are

J Darrin Gross 18:48

two big pieces right there. Round three. If somebody wants to make the deal, you’ve got the vet them the capital, and you have the lender. Everybody’s Greenlight, those are three, those are big, big pieces to do a deal.

James Gosse 19:02

Those are the important components. And so when you have those, you know, you can sort of see the light bulbs go on, and if people understand as well. I mean, with with all respect to all of our MBAs because we love them all. You know, I think they would be the first to tell you, they can be a little bit less price sensitive than a typical investor, right? I mean, Darren, if you and I were gonna go buy a multifamily property. And we said, let’s find a deal that really is juicy and is great. I send you three or four deals and you sent me a couple we’re gonna we’re going to be bargain hunting, right? We’re going to be beating up the sellers trying to get the best price we can get. And that’s great. We’re probably gonna make a great deal. The reality is, is yes, these are still savvy investors, they still want to make a good deal, but they’re not going to go to the level of brain damage that you and I will write only because they don’t have the time but they just don’t have they can’t play around. They can’t waste two weeks negotiating.

J Darrin Gross 19:59

Right? Right. Not that’s, that’s definitely a critical piece of this. And I appreciate you clarifying for me that that piece because I like so did understand the front end working with the the lender and the borrower thing but the the value of the portfolio of opportunities and the way that the the borrower can’t see them until they are, you know, rolled or they’ve they’ve answered the question or whatever to, to quantify or what you know, they’re not going to see the whole A to Z, they’re gonna see the portion of the dead fits their exchange, correct.

James Gosse 20:42

Only that Right, exactly. So and then they’re going to sort of self select the ones they that they liked, versus the ones they don’t. And it kind of you know, it that starts the second search, if you will. And ultimately, we try to have conversations, as many as we can, with these, these viruses are coming on, because oftentimes, they’ll tell you stuff that you can’t put on a questionnaire, right? Like, yes, I put down Los Angeles County multifamily, but what I really meant was Studio City, right. I mean, it’s a big difference between Well, geez, okay, so it’s not 100 properties, we should show you it’s 20. But right, that’s actually helpful, because now all 20 are and guess what? Studio City? Right? So it just depends on there’s something to be said the relational part of it is, is certainly interesting and important as well.

J Darrin Gross 21:30

That’s good. So let’s talk just a little bit here about interest rate caps. Oh, yes. fun talking. Yeah, the topic we started with. So describe for the listeners, what they are, and who uses the interest rate caps?

James Gosse 21:49

Well, interest rate caps for those that don’t know, and it’s, it’s to me, I mean, this is not something that they teach you in, you know, business one on one or anything like that, this is this is a little bit of an obscure product, like interest rate swaps. Interest rate caps are used by owners of buyers of property. And they can either be required, or they can be, you know, elective. So you can choose to get this if, if you if it helps you sleep well at night, or it can be required in many cases, I know that Freddie, Freddie Mac will require them for any free floating rate loan. And again, it’s just a risk mitigator. So what is it, let me let me start with that. An interest rate cap. Again, for floating rate debt, it basically limits the amount of limits the amount of differential we’ll call it, that you can that you can have. So if I have a 3%, if I have a 3%, floating rate debt, deal with a with a spread of whatever it might be 200, or 150, means that if I buy an interest rate cap with a strike of three means that anything above three, I that I’m not, I’m not gonna have to pay for it. If that makes sense. I basically have kept my interest cost for a set period of time. Now there’s a few things that make it up, I’ll just run through this quickly. There’s the notional, which is the size of the cat, right? So it makes a difference if I buy a camp, obviously, for a $50 million loan or $100 million loan. And it but it’s kind of linear, except on the extremes, right. So typically $100 million, interest rate cap is about double that $50 million interest, again, all else being equal. So that’s typically the rules except on the extremes. So that’s one component that kind of built into it, then there’s a term, obviously, if you want, the longer the term, the more expensive it’s going to be. And then the third is the strike rate, as you sort of have the rate at which, above which the rate the cap kicks in, and I mentioned that one before, if you’re, hey, it’s three? Well, let’s talk about today’s interest rates, right, five, five and a half. So if you put if you bought an interest rate cap at five and a half, you know, if the rate went to six, you’re still paying five and a half, if that makes sense. And again, these are floating rates at that. So I’m using sort of, I’m using exact numbers, but you know, roughly speaking, so what that means is the lower the strike rate, then the higher the cap, price is typically these things are typically bought and prepaid at one time, right. So, you know, at the beginning of a loan, they’ll typically do it and sometimes in some cases, and we’ve seen this recently, Darren, I think this is this is why it’s pertinent that some of these floating rate debt deals that are coming due because I mean, oftentimes these are these are used when you were doing a bridge loan or things like that, where you’re just trying to transitional situation or you’re stabilizing a property. We’ve seen where these these caps are. I mean, literally, it used to cost you 98,000 or something? For a property? I was using? I was looking at an example I did before. Yeah, so a typical three year cap 3%. Cost $98,000. This is for $100 million loan, it costs $98,000. In 2019. To buy to buy to, to buy that same cap today. Cost 3.4 million. Yeah. Right. So it’s not only not affordable, it basically has put the heavy brakes on that market. In terms of what’s what’s doable. Ironically, this kind of goes back to what, what you mentioned before Darren, which is, people are still moving forward. So, yes, they need to adjust to the new normal. But I mean, I think that’s the reality is, we’re still in an interest rate environment, that’s very reasonable, on a historic basis, right? If you look at historic levels, I mean, 1980, we were 15%. So this is not, this is not crazy, but by any stretch,

J Darrin Gross 26:05

reasonable on a historic basis, but shocking, compared to a recent historical, you know, basis. And, and, you know, we were talking before we started recording, but you know, the the market, the market goes forward, just like the sun comes up every day and Saturday night. You know, it’s going to go on with or without you. But for the the rate cap, I would guess that this is more of a situation where there’s the those that purchased them previously, and they’re setting or they’re getting ready to expire. And they’re their financing is coming due for either a balloon payment or or refinance, which sounds like it might be a good cue for next era. Right. But

James Gosse 27:00

it’s interesting, you say that, because what I’m saying, I’ll give you an example, we actually have a real life example. Sorry, that we saw recently, and I’ll leave the names and all that stuff out so that it doesn’t identify anyone. But we’ve we’ve been seeing, ironically, we had a large tender one. Replacement need, it was over 100 million actually of equity. And so the deals that we came across were, you know, sporadic in terms of, you know, we’re having a look at different markets. But ultimately, some of the deals that the system matched to, there was a couple where we can these are, these are beautiful Class A, or double A, in some cases, multifamily built in the last two, three years. But again, some of these were built like again, think about it, if you built something in 2020 or 21, you probably weren’t putting on long term debt. Right? You were putting on short term debt to try to get it stabilized, and then you go get the long term debt. Right. So what we’re finding now is that, you know, we have one case where it was north of $100 million loan in place. And it’s a floater. Right. So there are extension options, but the extension option includes guess what, you have to buy an interest rate cap, and something that I believe, I don’t want to miss misquote what it was on this one. But I mean, it was somewhere in the neighborhood of seven $8 million for an interest rate cap. And when you think Well, geez, okay, yes, it’s a large deal, did it? Well, but if you’re buying these deals with 20 $30 million of equity, then then $8 million of equity, just just to continue to hold it exactly like it is nothing’s changed. That’s sometimes a tough pill to swallow, right? I mean, we’re seeing Brookfield, and we’ve seen a lot of the big owners around around the country as well started giving the keys back on deals like this, right saying, Look, we can’t, we’re not going to go and buy the interest rate cap. Because we can’t, and we can’t continue to have the loan if we don’t buy the cap. So here you go. Lender, you figure it out, right. And then the reality is, as most of these lenders are going, then then in a slowdown, we let’s let’s work on something, right? Because they don’t want to be stuck having to sort these things out by themselves.

J Darrin Gross 29:21

Certainly the the, you know, the example of if you have a, you know, a five $5 million dollar loan, that’s a huge problem. If you have a $500 billion loan, that’s a bank problem kind of thing and

James Gosse 29:37

you get to some level, then then all of a sudden, you’re exactly right. I mean, they would take your $5 million loan back, no questions asked and foreclose and go figure out a way to sell it. You could try to give them a $500 million loan back they’re going Oh, hold on. Yeah, right. They they want your expertise involved. So

J Darrin Gross 29:57

yeah, that’s That’s it And I’m guessing that those larger ones with institutional borrowers and that there’s a little bit more flexibility to work out that kind of thing, as opposed to the, you know, mom and pop or individual investor that’s, that’s got a smaller property that

James Gosse 30:19

you say that is the case by and large Darren, but i On the flip side, remember I mean, this is not like 2008 or, you know, more recent periods of pain or tightness, if we want to call it that in the credit markets. So, you know, it these extensions, you know, we’re seeing them done, but we’re seeing them being done very selectively, and situationally, so, you know, six to 12 month extensions, we’re seeing instead of the typical one and two year, and, again, why? Because, you know, I may be your let’s say, your life company, and I’m one of your fantastic relationship borrowers who you’ve done business with, yes, you’re going to do everything you can to help me continue to do it. But guess what, I probably if I’m a Life company, borrower, I probably only borrowed 60%. Anyway, right? Because that’s what you guys lend. So this really speaks more to the bank’s CMBS the high leverage borrowers, right, where there’s less space in the deal for any blips, they’re more sort of financially structured. But, you know, by and large, yes, the big guys tend to, you know, get get favoritism, or what are you going to call it, they tend to have more options to them. And again, oftentimes, these institutions have, you know, we know this, you know, as you probably do as well, they’ve got opportunity funds. So oftentimes they have lending capabilities through those funds, that, typically, they’ll they’ll go in and lend, you know, aggressively, but they have, they’ve already sort of thought this through, they’ve seen this before, so they have GAP funds that are sort of ready to go. So they may be able to delay their own pain, if that makes sense, or delay the situation, I say pain, it’s not really pain, they may just be able to delay the situation. Because right now, that’s, that’s really what most borrowers want and need, is I just need some time, there’s nothing wrong with my asset, but the market don’t make me some of this market. Right, people can get new financing to buy the loan, or there’s so few deals, you know, that have gone on. And then what we’re gonna see at the end of this year is the opposite. We’re gonna see everything coming to market. But the bid ask spreads still has to come in a little bit, right? I mean, there’s still a gap between what people think their assets worth what someone can pay, based on and a lot of, it’s based on financing. If I’m, if I’m out there today, trying to get a loan, I used to be able to get 70 80% leverage, I can probably get 50. Right, just based on loan size. And so it’s making it harder to do deals. But again, that’s a function of at somewhat driven by the pricing, as that adjusts, we’ll see the market go back much more normal. I mean, I You’re exactly right. The people that want to do business are going to do business, there’s going to be people that sit on the sidelines and kind of go, Oh, I missed the the cheap capital, but it’s gone. everyone’s on the same on the same playing field.

J Darrin Gross 33:16

Right, right. No, I get the, you know, the, it’s gonna go on. And I think the I think the hard part for, like most people, myself, definitely included, is the reset of the mind to what the market is, as opposed to what it was based on the numbers that I entered the market on, when, you know, I thought everything worked. And, you know, accepting that either now the values decreased, or the loan cost has increased, or, you know, everything’s changed and my number, the only one that’s not working as well as I’m not, you know, I’m not benefiting like, I originally thought I was going to because of all the recent and the numbers. And for the short term, that may be true, but I was talking with somebody earlier this morning, just about, you know, it’s more of a long horizon kind of thing, if you’re able to have a longer horizon. You know, you can get through these things, but if you have loan maturity issues and and you’re forced to, you know, sell or make a deal or refinance or whatever, then you’re going to have to come to the reality sooner. But many

James Gosse 34:29

like, I mean, again, many of the things about if, if you’d bought something a few years ago, and you bought it based on, you know, hey, I think we’re getting a deal. We’re buying this at a seven cap in a six cap market, right? And today, you’re looking at it and say, Well, we’re sort of bearing down on this on this loan maturity, and I think I’m going to sell Yes, it might be painful as you get out into the market and realize I’m actually gonna have to sell it at a seven cap or a seven and a half cap. You know, So, now I’m not instead of making instead of having equity and making money in this deal, I’m, you know, I’m just going to have the cash flow that I got along the way, and the pay down of debt and all that kind of stuff. And but but here’s the silver lining to that is, yes, but now you’re when you go to buy, you’re gonna get that deal on the going back in. Right. So, right. That’s the long horizon mentality to it. And again, all investors? Well, most of the investors, we we’ve dealt with, you know, they may, they may look at, you know, individual deals on us, you know, timing and situation, but everything they’re doing is on a long term horizon. So, I mean, that’s the flip side.

J Darrin Gross 35:42

So I think it was before we started recording, you had mentioned kind of the activity in the market. quarter to quarter. Can you speak a little bit to what you’re seeing in the market as far as activity? Yeah, I

James Gosse 35:59

mean, I think we’re probably seeing much of what what others have been seeing as well. There, at least from a, you know, investment sales perspective, we’ve seen a, I mean, it’s, it’s, I don’t want to say it’s come to a grinding halt. But it’s been pretty close, right, the first half of this year has been pretty lackluster in terms of what everyone had hoped for. But it’s really because, and again, that that kind of comes off last year, as well, we weren’t exactly going gangbusters last year in terms of volumes, but volumes just dropped off a cliff this the the first half of this year, but it’s mostly again, in our opinion, it’s mostly uncertainty, right? The uncertainty where interest rates gonna go, how they’re gonna go up to eight. So once we kind of got to June, around that, that that time period, we started to get some some clarity on, okay, interest rates, you know, we may end up at five and a half 6%. But that’s going to be it. Right, that’s kind of the end of it, at least in the short run. And then investors start to reset. So what we’ve been seeing now, you know, the beginning of, you know, end of June, beginning of July, we’ve seen a huge volume of deals coming to the market. And it’s important. The reason I mentioned when, is, you know, if these deals were all trickling in, and you know, April, May, June, it means less, it’s the fact that these deals are coming in July, after the market has now said, Okay, here’s some certainty for you. Right. And so these deals are now coming out. And I mentioned that because it’s not just deals are available. These are deals with, obviously not in every case, but a lot of realistic sellers, right, if someone is bringing an asset to market now, they, you know, if you think about it, Dan, why would you sell an asset you have right now, unless you have to? Right? So you wouldn’t is the answer? So, you know, these are motivated sellers, that realize they have to do something, and, you know, they’re trying to try to not be the last guy to figure it out, we’re seeing we’re expecting, you know, that the volume is going to continue in terms of new deals coming to market and listings available, I think it’s gonna be we’re not going to see as much activity as we’d like, you know, just from a from a macro standpoint, in the third quarter, because we’re still trying to find that bid ask, you know, that that sort of happy place, right, that. And right now, there’s still that gap between the bid ask spread. But as you’ve seen, in that I’ve seen previously, investors are pretty savvy. And so it may take, you know, a couple of months, but it won’t take a couple of years, right, is the point, investors don’t like to lose when they’re bidding on deals. So they’ll quickly become accustomed to the new normals. And you know, hey, if I don’t like it, I don’t have to play certainly is the case. But we’re expecting the fourth quarter of this year, as you know, some of these extensions are burning off. Now. As we’ve talked about, you know, lenders are having to be very selective about where they choose, because it’s not like I have cheap capital, and I’m just withholding it from you. If I’m a lender, right? It’s, I don’t have access to it. So it’s not even an option. You know, they’re only able to, that’s why they’re doing shorter extensions, right. They, you know, to the extent we can manage that we want to start making higher interest loans. So, you know, we have to, that’s, that’s what we do. So,

J Darrin Gross 39:32

yeah, no, I mean, and they’re kind of in the same position, their cost of capital has increased, so they’ve got to lend it out an IRA, and they still want to make money

James Gosse 39:42

and they want to loan money, right. I mean, this is yeah, so

J Darrin Gross 39:45

if if everybody sells and nobody buys that’s, you know that that’s not exact. I mean, that couldn’t couldn’t work period. Yeah, yeah. You gotta sell on the buy. There’s two people on Wall there. So but no, It’s interesting. Well, I do I do believe that, you know, we’re I hope, let me let me ask you this way. You know, everything we’ve talked about kind of the and especially this this activity you’ve seen in the second quarter, and as you kind of indicated, the fourth quarter, you expect more activity? D you Do you sense that? Are there any more potential surprises? Or do you feel like we are we have reached or about to reach? What the The equilibrium or the you know what the market is? And that’s what’s that’s where people are, are getting comfortable? Again, like I said, realistic sellers, on valuations, is this kind of reassurance to investors in, you know, buyers and sellers that this is the market and we can go forward?

James Gosse 40:48

I think so I think that’s that’s one of the reasons the Fed. I mean, obviously, they’re they’re speaking a lot to a lot of constituents. But Jerome Powell, specifically mentioned commercial real estate, because, again, I think they’re aware of what’s going on. I mean, you’re exactly right, lenders want to lend money, they’re certainly trying to adjust to the new norms. You know, our expectation is that once this uncertainty was removed, and again, it’ll be, you know, completely removed when we when we get to that last rate cutter, or rate increase scuze. Me. You know, I guess the surprises could be, if they, if they didn’t raise the rates at all, more might mean, we’re expecting to more 25 basis increases now. Or, you know, they were just to do one of them. Theoretically, if they decided that things were going so well, they were going to do a rate cut, I don’t think that’s very possible, but I guess anything’s possible. So, other things, and I think that’s what you’re getting at other things affecting this, or what else can happen, that would, would sort of change things or shake the market. Obviously, there’s geopolitical things. But to some extent, that’s even been baked out of it, right. I mean, we’ve been living in, in sort of this new normal, where were all the markets are connected and tied together. You know, not just economic, but political and all this kind of weird stuff. So I think, to some degree, a lot of that’s already been baked in. That said, you know, obviously, there’s, there’s a handful of things that could, could play a role and could change the direction of, or trajectory of kind of the, the pull out. But I don’t think what we have here, I mean, I almost said recovery, but the word isn’t recovery. Because if you think about it, this is not like 2008, it’s not like these prior ones, where, you know, properties are sucking wind, and things are really struggling. And everyone’s property is now worth less kind of thing. The reality is, is you’ve got a lot of properties that are chugging along, are doing exactly as they’re supposed to. I mean, that’s the, that’s the tough part is you have some owners that have done exactly what they’re supposed to do. But they finance the deal with 3% leverage. So now, when they go out and try to refinance at five and a half, you know, their loan no longer meets that one to five coverage ratio.

J Darrin Gross 43:22

Right, right. No, I get it, I get it. Hey, James, if we could, I’d like to shift gears here for a second. By 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 we typically consider, we first look to see if we can avoid the risk, when that’s not an option, then we look to see if we can minimize the risk. And if we cannot avoid nor minimize the risk, and we let’s see if we can transfer the risk. And that’s what an insurance policy is. And as such, I like to ask my guests, if they can look at their own situation. Could be your clients investors, the Fed political supply chain? Well, you know, whatever you believe, right, you identify as the biggest risk. And again, for clarification, while I’m an insurance broker, I’m not necessarily looking for an insurance related answer. Right. And so if you’re willing, I’d like to ask you, James Goss, what is the BIGGEST RISK?

James Gosse 44:36

Well, a great question. And certainly, you know, the topic we were just touching on by the way, Darrin, I think, you know, oftentimes, so people are aware interest rate caps are often referred to as insurance policies for your interest rate. So I just found that an interesting aside, the biggest risk for us and this is a good question. You know, it’s one of the things that If I’m honest, sort of this probably keeps me up at night more than other things. It’s, you know, it’s not making people aware of who we are, it’s not not being able to get our message out to the right people. Right, that that’s the risk I see. And again, we’re obviously doing what we can to eliminate, mitigate, minimize all that kind of stuff. That said, you know, to us, that’s the biggest risk, obviously, there’s, there’s other market forces and things like that, but just from what we can control. You know, to me that that’s the biggest risk is we have something that when we explain it correctly, and when we have the right, people were talking to light bulbs go on. And when we have the discussion with lender partners, they go, of course, we want to do this with you, right? Of course we’d like so, but it’s just a function of the risk is that we don’t communicate it right. Or the risk is that we don’t communicate it to the right audience or, you know, whatever the case. So, to us, it’s a an exposure again, and I see this very much. So we’ve got a guy, I think the gentleman who set me up to this, Tim, is outstanding, and he’s spends all of his time trying to figure out how do we make sure the market is aware of us has the right perception. And again, that’s one of the reasons we were so pleased to join CCI M, their member Advantage program? Again, for us, it’s a, I would say an exposure or, you know, making sure we get enough exposure is our Biggest Risk.

J Darrin Gross 46:30

You know, that’s well said if you have the, the, you know, the solution, and nobody knows you. That’s not a good, not a good recipe for success.

James Gosse 46:42

Well, and history is littered with, you know, with people that had a fantastic product and couldn’t communicate it. So we’re making sure we, we try to communicate

J Darrin Gross 46:54

again, James, where can listeners go if they’d like to learn more connect with you?

James Gosse 47:00

Yes. Obviously, you can get started our website. It’s NXTCRE.com. If anyone has questions or would like to talk to me, I’ll, I’ll just give my email here as well. It’s James at NXT cre.com. Certainly, you can have if you want to follow us on LinkedIn. That’s a good way to keep up with our newsletter. We posted that webinar. I think the recording is going to be posted to that here this week sometime. So lots of information out there. But certainly NXTCRE.com NXTCRE.com would be the place to start.

J Darrin Gross 47:36

Got it. Well, James gas I cannot say thanks enough for taking the time to talk today. I have you enjoyed it. Learned a lot and I look forward to doing it again soon.

James Gosse 47:46

Do All right. Thanks. Darrin.

J Darrin Gross 47:49

You got it. 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 48:09

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Commercial Real Estate Investing 2023 with George Pino – CRE PN #428

George Pino 0:00

You know, even though someone may have a good chunk of change, you know, I spoke to someone earlier today, they said that they had $500,000 that they wanted to invest. And when I told him well, maximum price is about million five that we can find. And realistically with that service coverage ratios and the rents and the cap rates where they are right now, probably about 1,000,002. He was shocked, you know, he thought he could buy a two and a half million dollar property going out and it’s just not there at that point. So, you know, we do have sales though, that are you know, less than that and when and we’ll you know, we have sales 20 $30 million, as well for some of the larger investment stuff.

Announcer 0:39

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 0:58

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 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 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 George Pino. George is the CEO of Commercial Brokers International, a full service commercial real estate firm, headquartered in Los Angeles, California, with over 27 affiliate offices around the US. And in just a minute, we’re going to speak with George bout Keys to Getting Started Investing in Commercial Real Estate in 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 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, George Pino. Welcome to CRE PN Radio.

George Pino 2:44

Thank you for having me. I’m excited to be here.

J Darrin Gross 2:48

Well, I’m 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. Sure.

George Pino 2:58

You know, I’ve actually been in real estate for my entire career, I went right out of college, I’ve been in doing, I’ve been lucky enough to be able to do it full time successfully for over 30 years. And, you know, in 2005, my business partner and I, we broke off and we opened up our own company, we’ve been situated in Los Angeles in the Brentwood neighborhood of Los Angeles since then. So we’re 18 years running. A few years ago, we created an affiliate network for our offices. Now we have 27 affiliates around the country, and a couple others also internationally through France, London, South Africa, Bangladesh, Canada. So we were really, when we designed the company we wrote wanted to be a company that addressed the concerns that we saw with investors with our clients that a lot of commercial real estate companies didn’t do. You know, a lot of commercial companies back in the day, they would just try and look after transactions were more of a relationship based and as well as myself. So for us, it’s really about what’s best for the client.

J Darrin Gross 4:08

Awesome. Well, I appreciate you sharing that. And when we jump in here real quick. So we are recording this in July of 2023. The current state of the market is how would you describe the current state of the commercial real estate market? frothy?

George Pino 4:33

You know, I think that and the reason why I chose the word frothy, is you know, I grew up around oceans. So you know, when you see the turbulence in the ocean, you know, the right by the beach, it’s kind of frothy, but if you go out a little bit it can be clear if you start delving in and going into the water. So I think a lot of people are seeing the froth and not really looking underneath and what’s happening. So you know, there’s a lot of changes going on a lot of things. You know, a lot of people were talking about adaptive reuse, of course. the office market is pretty soft numbers just came out a couple of weeks ago that they’re about 60% of occupancy based upon pre COVID levels. And it stabilized for the first time at 60%. For the last two quarters, it hasn’t gotten really gone up hasn’t really gone down any incredible amounts. So a lot of concern on that. So a lot of talk has been about adaptive reuse on those office buildings. And from there, though, you know, we’re seeing other markets, though, that are just on fire, you know, I do a lot of investment properties with single tenant net lease, I’m still pretty active in it, we’ve seen a drop down probably about 30% of transactional volume over year over year, and last year was really good. But, you know, that is also starting to pick back up. I think a lot of there’s a lot of concerns with interest rates, what was happening. And right now, you know, we are probably looking at my guesstimate is that we are going to have at least one more increase. Luckily, for commercial real estate, it doesn’t necessarily, you know, we’re using the loans use different metrics to for their interest rates. So it doesn’t affect us as quickly as it does on the residential side. So but I am seeing that, and I think that we’re looking at probably one more increasing than the next, but we’re seeing a lot of people hold back. And then when you look at certain sub markets, we’re also seeing a lot of issues where, because of new laws going into place, people are pulling back, you know, for instance, there’s what was called in Los Angeles, the mansion tax, and this was supposed to raise 600 to a billion dollars in additional tax for, it was a very high tax rate that was put on for properties that were $5 million or more. The interesting part is, you know, since its implementation over two months, it’s only raised about 15 point 5 million. So a lot less than they anticipated, because a lot of the owners have actually pulled back. So we’re seeing a lot of properties off market or not as much on market. So there’s less supply, which, you know, if the laws of economics apply, eventually, when supply demand still stays the same pricing should go up or in a declining market, we stay stable.

J Darrin Gross 7:16

Yeah. Now, the it’s interesting how, you know, the public policy seems to be almost blind, to the effect of the policy on the market. The assumption is, is that everything will continue as is and not recognizing when you create pain, the natural reaction is to avoid the pain. And, you know, I but I do, I do believe like, you know, the tax code, often the the tax code is, is introduced in a way to to create behavior wanted behavior, you know, if you give a tax credit, you’re hoping to stimulate investment kind of thing. But I it is interesting, the I find that a lot of times at the state level, the kind of the blind, not understanding what they’re going to the yang of the Yang, or whatever you want to say kind of thing, but yeah,

George Pino 8:08

absolutely. It ultimately will get passed through to the tenants and will then will pass through to, you know, to their clients. So, you know, it’s really not. Yeah, as they positioned it, we’re only we’re only going after the money of the PEEP rich people.

J Darrin Gross 8:25

Right, right. Right. Right. Right. Yeah. Oops, I missed. So, historically, you know, there have always been benefits recognized for investing in real estate, cashflow, depreciation, equity build, and, and more recently, I think kind of like a hedge against inflation people recognize or be invested in, in a hard asset as opposed to holding cash. What in today with just like you describe the market as being frothy? How do you see or what are the I guess the questions? Are investors questioning the benefits, given the high interest rates? You know, and like you said, the legal climate as an insurance broker, I know the insurance, increasing the insurance cost. You know, and and all of that, are you seeing are these the these things affecting the the investor interest? Are they are they the direct effects, or are they kind of aside you know, a not necessarily a focus but a part of the puzzle as far as what’s, how it’s affect how the market has been affected?

George Pino 9:50

Well, I think it really depends on who and the type of investor that we’re looking at a lot of the mom and pops they, it causes them to put the brakes on, but I think as astute investors are Esther’s who have done this for many years, and understand that, you know, the markets are cyclical, they understand that it’s not so much of a pause or so but more part of the bigger picture, how do we make it and structure the transaction so that it all fits with what the expectations are, for the immediate future, the near future and down the road for long term, what you’re planning is for the disposition of the property. And that’s really the puzzle piece. So a lot of people don’t even look at that, you know, as far as you know, they just look at today, what am I getting return wise today, but not looking at necessarily the value add opportunities that that property or that type of asset may play in the future, and then also down the road? 1015 years, a lot, especially the long term holds a lot of people just don’t plan for that.

J Darrin Gross 10:50

And I’m glad you brought that up. Because I think that is a fundamental distinction between, say, a market investor in a stock market investor, as opposed to a real estate investor, at least the the, I’d say the the really significantly successful investors, I know, it’s something they’ve been doing forever, and they plan to do forever. It’s not like the new shiny object kind of investment, like, you know, they they heard somebody else made a bunch of money, so they want him kind of thing. And so you mentioned kind of the the viewpoint, you know, immediate near and, you know, down the road. Is as commercial real estate goes? Is there a horizon that you’d typically guide your your clients to, or prospective investors to look, you know, how far in the future do you do you suggest they consider looking?

George Pino 11:49

Well, how I work with my clients? Actually, I have a kind of an intake interview, and I’m really asking them, what are their plans? What are they trying to look at almost getting a financial a better financial picture of what exactly their goals are, for this type of investments, whether it’s asset preservation, whether it’s cash flow, whether it’s potential for a much larger equity build or appreciation. And then with that, we start finding the right type of properties that can then fit into that timeframe for their whole period, you know, some investors, I have quite a few investors that literally, they buy it, and they say, You know what, I’m just going to give it to my kids, I’m never going to sell it. And in that scenario, depending on their age, we may actually even start looking at different types of assets that may have bones depreciation schedules, because you know, with the tax code, money today is worth more than money tomorrow. So if you can actually depreciate the property faster, that means that cashflow is, is worth more, and they don’t have to worry about if they’re not going to sell it. And then when the heirs take over the property, they get a stepped up basis. So it’s actually better for them to fully depreciate it. So depending on their age, it’s really a factor. And the way that we look at investment is, it’s personal to every individual, you know, some are also just looking at, you know, if they want the value add or the exit, so depending on what they’re looking at it typically I look at a five to seven year investment horizon for myself. That being said, you know, I’ve held properties a lot longer, because it was not the right time to necessarily sell at that point, or there were no opportunities to exchange it over into something better, and it was doing very well. So it’s really an analysis that’s ongoing, I think that when you go into it, you should have a business plan of here’s what we’re planning on doing, here’s what we’re looking to do. But if this doesn’t happen, then we’re going to go this route. And then we’ll finally exit strategy, you know, especially, you know, and I get this quite a bit with our, my investors on single tenant net lease is, you know, yes, they’re buying a really nice asset that’s really good for one mitigating, you know, the inflation increases, because the tenants are solely responsible for the maintenance repairs and property tax and insurance. So it can mitigate that you still have the increases and you also typically have a very long term lease 15 to 20 years, that is typically guaranteed by either a strong franchisee, or or a corporate guarantee. So it’s, you have a really good revenue caching that’s guaranteed, but the problem is, what happens when they vacate? Who are we going to return this with? And that’s where we come in and start looking at, you know, even if they’re planning on holding it forever, we’re still giving them an exit strategy like if the tenant does not renew the lease or exercise and option. What are your plans? Here’s what we’re going to do prior to that, we’re going to do do this, this, this this, but even before that, on the acquisition side, I’m gonna Looking at this tenant is great, I love this tenant. But what happens if they go out of business? Who am I going to return it with? Who’s going to want this location? So I’m actually doing that analysis ahead of time trying to mitigate that risk? By finding out everything from traffic counts demographic patterns, what are the growth patterns in the area? Both for income and population? What are other traffic generators that are irreplaceable? Like, is there a high school immediately next door to the property units a fast food location? Or is there a hospital that’s not going to go anywhere, and you’re looking at drugstores or dialysis centers, things like that, we’re looking at what what are traffic generators that are going to always be there, a football stadium, you know, I saw a great property that was a Circle K with gas right next to the Atlanta Falcons football stadium, hard to beat that location, and more than likely always have a tenant for that location. So, you know, that’s what we look for. We’re always looking at just not just the acquisition, but the exit. And I think all investors should be doing that. But a lot don’t.

J Darrin Gross 16:07

You know, the exit strategy, I mean, eventually, you know, at some point, you’re going to exit it, whether you exit it for the next world, or you choose to sell or whatever. But there is, I mean, to have some sort of a plan or a strategy or, you know, like, I like how you said that plan A B and, you know, then or, you know, have some sort of an idea of what’s going to happen, because I think, you know, what we’re, what we’re seeing right now, and, you know, it’s likely going to continue to affect the market for a while, I would think would be just how the interest rate reset, you know, for the not the institutional lender or the investor so much is, it is more likely to the mom and pops and in smaller investors, when you’re going from a raid environment of, of, you know, sub five to now, you know, what, I don’t know what her rate is right now. seven or six, seven? Probably some seven.

George Pino 17:06

Yeah. Right now for commercial?

J Darrin Gross 17:10

I know that it, it certainly makes a difference in your in your you know, your your actual cash flow? And I guess it all depends on what you’re coming into the, the property with first down payment, and, and, and, and that. But speaking of that, in the the asset classes you deal in, what’s the primary asset class to you? You mentioned, the triple net.

George Pino 17:37

lease is my primary asset class. Although I, you know, I still do some multifamily sales in Los Angeles for clients. And I also, for a lot of repeat clients and referrals, of course, I will handle leases as well. Generally speaking, though, 90% of my business is investment grade properties, investment sales counted. So and then we have other agents, though, that also that I oversee, that do all aspects from the leasing to regular sales to owner user sales, all that

J Darrin Gross 18:07

in your activity? Is it primarily sales? Are you doing a lot of leasing as well?

George Pino 18:12

Yes. For me, okay, property wise, it’s probably about 5050. For me, it’s 95% sales. Got it.

J Darrin Gross 18:22

And in with that, on the sales, can you describe kind of a range or kind of the, the average of what what the size and type of product, you’re, that you sell?

George Pino 18:35

A range is probably from on average, two to 10. You know, and then there are some investment properties or first time investors getting into the getting into it, that, you know, because of the down payment, you know, commercial requires a much heavier down payment and residential investments, you know, you’ll get minimum 35% plus a debt service coverage ratio that you have to worry about. So, you know, even though someone may have a good chunk of change, you know, I spoke to someone earlier today, they said that they had $500,000, that they wanted to invest. And when I told him, Well, maximum price is about million five that we can find. And realistically with debt service coverage ratios, and the rents and the cap rates where they are right now, probably about 1,000,002. He was shocked, you know, he thought he could buy a two and a half million dollar property going out and it’s just not there at that point. So, you know, we do have sales though that are you no less than that. And when will you know we have sales 20 $30 million, as well for some of the larger investment stuff.

J Darrin Gross 19:40

And so for for like a $2 million single tenant type property. What kind of square footage with that, would you expect that to me?

George Pino 19:49

Well, typically speaking it’s it’s interesting that single tenant net lease is not typically traded on square footage, but based upon income and cap rate, which is a factor. The income is also factor of the demographics and area traffic counts everything that we talked about a little bit earlier. So you know, what you’re typically looking at, though, in the $2 million range is something along the lines of maybe a smaller AutoZone or QSR, fast food restaurant, about 2000 to 3000, square feet, Autozone are probably four or 5000, you could get a 10,000 square foot Dollar General, in a tertiary market as well, I wouldn’t necessarily recommend that. But, you know, so that is that ability as well. So it’s a lot of that is also a factor of what kind of rents that you can achieve. For instance, you know, I did re tenant a old wienerschnitzel in Los Angeles for a client. And, you know, this was, the building itself is only about 450 square feet. But we got some very good rents over $200,000 a year. And realistically speaking, if we were to put it on the market, we’re probably getting about 4 million due to the location right now. So, you know, we’re looking at over $1,000 a square foot, which, you know, it all varies. So, yeah, so, you know, it’s harder to say, actually, we will get 10,000 A foot for 4 million to 400 square feet. Sorry.

J Darrin Gross 21:19

Just just two decimal points are not a big deal. Yeah, just

George Pino 21:22

one decimal point. Rounding here. Yeah. No, I

J Darrin Gross 21:26

appreciate you kind of sharing that. Because I think one of the things that, you know, we talked a little before we started recording was recognizing that, you know, given the market, and for people that are looking to get in, maybe they’ve been curious, or they’ve been kind of paying attention a little bit up to this point. You mentioned the the downpayment, kind of the, you know, what the investors expectations were, how much he thought he could buy, as opposed to the reality of the change in interest rates, and also what the banks now are in more of debt cover, or debt service coverage ratio, I think, is that, are you finding that the, you know, the DSCR is kind of driving the, the, the limit of what someone can purchase based on what they have to invest more than, you know, when interest rates were

George Pino 22:21

lower, right now, especially, you know, because we’re dealing with properties that, you know, with the cap rates, where they are, they’re still compressed more than what the interest rate increases have been. So they have not increased as much. So it’s also about affecting how much they can borrow. When you start looking at that, and then we’re, you know, we’re already talking about how, you know, there’s an article out that the back to work for office, is going to cause roughly an $800 billion loss in value. Because a lot of the value of a property is based on the income, not just the square footage, you know, if you have a vacant building, no one’s going to pay you as much as if you haven’t fully occupied. So it’s not just the square footage that people are looking at. But what we’re looking at is also the income and the potential for income. So when we’re writing into these situations with the debt service coverage ratios, if you have a building that was 80%, occupied when you purchased it, and is now 60%, occupied, and your loan comes due, because what also what investors don’t realize is, almost all commercial loans have a due in 10 clause. So they’re typically amortized over 25 years with a balloon payment at the end of 10 years. Now, they do have fully amortizing loans. But those are typically on a 15 year amortization, which most investors don’t get, because it kills the cash flow. And then yeah, and it’s different for multifamily, but we’re talking about straight commercial here. So when you look at that, and I’m looking at a 80%, occupancy down down to a 60%. And also when in a declining market, you know, obviously, again, I’m a big, big believer in economics and the basic laws of economics, you know, so if you have now an increase in demand or supply, because there’s so much more available, but demand really is actually even going down, your rental rates are gonna go down. So even though it’s only a bout a what

J Darrin Gross 24:20

least a 25% is at dropping

George Pino 24:23

to 60% occupancy, a drop is about 25% or not about it is exactly 25% Drop in your income. But then, in addition to that, your expenses don’t change for the running, operating the building. So it’s really equates to about a 30 35% and your net operating income, which then allows if you have to refinance now, and you just bought the property seven years ago, when it was fully occupied, you likely will not be able to refinance for the amount that’s due. And that’s the issue that we’re running into right now is you know, that debt service coverage ratio, and that’s all about that. It’s you know, it’s been Because the property is higher vacancy, less income, less opportunity for rent growth right now. And that’s the issue that we’re running into with the lenders and getting loans in place. So in that case, you’re probably looking at about 50% if not higher downpayment.

J Darrin Gross 25:17

Right. Right. No, and having to come up with cash to refi. Yeah. Or, I mean, have you? Have you seen any of this play out? I mean, I understand the scenario. And I know, there have been some larger syndications that, that, at least with multifamily I’ve heard about that have had some issues. But I would think that as the as the calendar continues to move forward, more and more of these that had a, a very favorable interest rate, you know, based on the terms of their loan are going to come to maturity to where they’re going to have to refinance or sell. And this, this valuation, just like you described, is going to become, you know, not just a theory but a reality. And, you know, people are going to be faced with this, have you seen it play out recently? Or is it more of like, what, what a raise expecting to come?

George Pino 26:15

No, I mean, we’re definitely seeing it right now. And had been seeing it for the last six, seven months, where people were looking to refi. And there are notes that are coming due that very large property owners purchase, but they can’t refinance it at this time. I mean, there’s one of the largest landowners in Los Angeles just made news to, you know, they’re in already in default, because the loan came due, they’re trying to do a workout and they just requested a big workout. And we’re, we’re talking 100 million plus homes. The, so we’re seeing that happen already. But typically more on the largest sale, and lenders are a little bit more open to do workouts at that point. And you know, so a lot of those investors are developer investors, what they’re doing is, you know, a developer typically gets a shorter term loan. So what you know, they’re not planning on staying staying that long, or if they’re doing an act rehab, or acquisition rehab, you know, you’re doing a different type of loan that has to be refinance out, and that is where they’re getting caught a lot of as well, and they’re having to restructure. Lenders are open to some restructuring, but it has to make sense for them as well. You know, ultimately, it doesn’t do anybody good for the banks having to take back and foreclose on all the properties. Because that way, you know, in that scenario, almost everybody will lose.

J Darrin Gross 27:34

Have you seen any of the workout terms? Or do you have any kind of sense of what, what workout terms might look like?

George Pino 27:42

Not really, you know, I wish I had I’ve been knock on wood, here. My clients have not had that experience. At this point. A lot of my clients, I tend to be as Bert, and for myself with my investment portfolio, I tend to be very conservative, so I don’t do high leverage. I am always looking at exit strategies, I always tell people I buy for cash flow. So even in a down market, I’m not worried, I’m going to cash flow, I’m going to be happy, I’m going to be fine. I’ll wait for the market to come back up until I sell, am I going to sell I always tell everybody, I’m not a seller in the market. But if somebody comes in and offers me the right price, yeah, I’ll look at it. And I’ll sell it. In fact, I mean, the last property I had was that I sold was one in Texas, that was a seven, two unit apartment building. And, you know, we had unsolicited off market offer that came in, when we looked at the numbers, our plan was, we’re actually going to raise part of the building and redevelop it. Because the large lot, and when looked at the what they’re offering, most of our profits were already built into it. So it was like done, took the awkward ran

J Darrin Gross 28:55

the risk off the table don’t have to like, get into the construction. Absolutely. You know that stuff? Yeah.

George Pino 29:02

So you know, it’s, and I think that’s how most people should look at their investments. A lot of them get a little too attached to it, where it becomes more of a, you know, I love this investments that and you know, ultimately, you should always, as an investor be analyzing what your returns are, what your properties are doing, or your investments are doing at any given point. And can you do something better, you know, especially with the current market conditions and changes, putting your head in the sand and not really addressing what’s happening in the, in the near future. And mid future is one of the biggest issues I see with a lot of the mom and pop investors, you know, they just don’t it’s like, Oh, it’ll come back. It’ll come back, but not really having a plan of action in case it doesn’t.

J Darrin Gross 29:47

Yeah, and, you know, putting your head in the sand is not going to work. If you do decide to do something, you’ve got to have a pretty good sense of what the options are. So I get it. Let me ask So the the, you know, we’ve talked a little bit about how the, the markets frothy, we’ve talked about how, you know, some of the conditions and and specifically with the lending environment and and you know what’s affecting borrowers and investors for somebody that that’s looking to get started in investing here in 2023? What’s the most critical thing that you would encourage somebody to look? Or to start? Or what are the critical pieces of real estate investing in commercial real estate investing that you see that somebody has to has a has to have a firm grasp of in order to, you know, move with some sort of a sense of certainty or, you know, to be to be up to speed to actually be successful in commercial real estate? Well,

George Pino 30:58

you know, great question. I think it also it depends on the asset class, and what you’re looking at, you know, if you’re doing Commercial Investments in multifamily, one of the reasons multifamily is so popular is almost everybody has rented an apartment one time in their life, they understand how that works, how the lease works, how the tenancy works. Commercial real estate is like a true straight commercial retail office, it can be a lot more complicated, instead of dealing with a lease that’s five, eight pages long, you’re dealing with leases that are anywhere from 25 to 150 pages long. And that scares a lot of investors coming in, like, well, I don’t know how to do this. So it’s really a matter of making sure they have the right team around them. Because, you know, if you’re investing in property, even some very astute investors I know, you know, and that are attorneys, they still hire their, you know, their specialized attorneys to work with them on their acquisitions. You know, it’s finding the team behind you to be able to make sure that you have everything going in, all buttoned up, so to speak. And you know, that starts with the agent, the broker, making sure that they understand exactly what you’re looking to accomplish and what you’re looking to do, then it goes into your title, or title and your third party vendors to mitigate the risk ahead of time going through the title survey, environmental reports, doing your due diligence ahead of time, but then also having your team for any legal issues that are in there as well, like, know, who am I going to go to, you’re not going to go to a transactional attorney, if there’s an eviction that needs to be done. So make sure that it’s all in place, and understand that you’re not going to necessarily be there. But more importantly, I think investors really need to understand the commercial leases, what they can do, and you know what they’re allowed to do, you know, commercial leases, there’s a lot less protections for the tenants than on a residential lease. And as such, you know, there and a lot of commercial leases, the tenants are reimbursing the landlord for a lot of these costs that they may have to incur. But some landlords don’t understand that. They never recharge it back, or they do the work that they do, nor do they or they won’t hire the attorney or do something because they don’t want to incur the costs, even though they would technically get reimbursed.

J Darrin Gross 33:17

No, I liked the answer there have a team that knows what they’re doing, because there’s a lot a lot of moving parts. And, you know, I think real estate, to me is one of the most tried and true ways to accumulate wealth. But the risk is there and without having a team

George Pino 33:37

millionaires were created with real estate than any other form of investment.

J Darrin Gross 33:41

Yeah. And but again, to the to the point there having a having a team of experts on your team, to help guide you through the, the kind of the uncertainties or the the unknowns is is just, you know, priceless, you got to you got to make sure you got that if somebody was looking to get into commercial real estate is perhaps a real estate professional, whether it be a you know, real estate broker or lender, property manager, something like that. What are some of the things you would encourage them to, to do in order to to be successful in commercial real estate? Well,

George Pino 34:24

again, firm believer and organization, so I’m always even agents, our new agents that come on board, I tell them what’s working on our business plan. Let’s see what we’re going to do and and really find, you know, the way I look at it as well, especially when it comes to sales here, we’re not high pressure sales. I’m not a salesman that’s going to try and force a deal through or whatever, but rather, I’m of the firm belief. Find what you’re passionate about which asset class what you’re doing, and that passion will be conveyed to your clients and that will then in turn, have them Come on board as opposed to just selling, you know, if you’re going out there selling and it’s like, I don’t believe in it and whatever. But one of the first things that was told to me when I first got into my career in real estate was, how can you recommend to somebody to invest in this property? If you’re not investing in any properties? And, you know, that really sunk in? It’s like, okay, and you know, frankly, um, I don’t do stocks, you know, my stocks or some retirement accounts in stocks, but they’re all like more mutual funds stuff, because, you know, I think it’s gambling. I think it’s too risky, it’s and whatnot. But I understand real estate, and I understand it, I think very well. So all my investments are in real estate. And that’s how I look at it, you know, when you’re getting into the business, have that business plan, if you’re, if you want to be an agent, what do you want to do? How are you going to go about it and understand that, but also look for companies that will be able to give a mentorship style, versus a, you know, to me that I think works a lot better than a company that is like, Do this, do this, do this without explaining it. So find, find a company that fits your personality that’s going to help you learn. But at the same time, don’t be afraid to ask questions, wherever I mean, my business partner and I, we actually do training, or he does, he does not so much we do training in our office, he actually trains agents around the country. And, you know, and I always throw it out there as well, when I’m talking to an agent, if I’m recruiting them. And speaking to them, I’m saying, Well, you know, here’s what we’re doing, let’s meet and TOF no expectations. Worst case scenario, you come away with a couple ideas that we’re doing that you might be able to incorporate into your business. And then we likewise here, at, also, I think, the biggest thing, network network network, not just with the clients and people who can refer business, but other agents, you know, I have a pretty good network of agents around the country that if I needed to pick up and find out what was going on in Miami, I could pick up a phone call, they’re gonna do it, and they’ll actually do some work for me and do some research and send it back to me, Well, within a day or two, if I have agents that are sending me off market deals for my clients, around the country, and that’s just from networking, being in it for so long. I also, you know, we some seminars we go to, I recommend that we’re especially when you’re starting off one for networking, but also learning what the top agents are doing in their marketplace. And you know, if you emulate emulate success, it’s going to potentially increase your chance of success.

J Darrin Gross 37:40

No, I love it. I love the if you’re selling real estate, it’s good to invest in real estate. And once we have a Zig Ziglar if you’re selling Fords, and you’re driving Chevy’s you got it all wrong, you got to know the know what you’re doing. That’s good. Hey, George, we could I’d like to shift gears here for a second. Sure. By 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 are three strategies that we typically consider, we first look to see if there’s a way we can avoid the risk. If that’s not an option, we’ll see if there’s a way we can minimize the risk. And when we cannot avoid or minimize the risk, we’ll see if there’s a way we can transfer the risk. 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 clients, investors, tenants market, the political error, the you know, the Fed, however, and identify what you consider to be the biggest risk. And again, for clarification, 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, George Pino, what is the BIGGEST RISK?

George Pino 39:01

Biggest risk? Um, I’m gonna answer that as the biggest risk I see for investing in real estate when you’re just getting started. Because that’s kind of what we’re talking about as well. And the biggest risk there, I think, is, we see this happen a lot. And you’d mentioned like jumping on the bandwagon. You know, I’m constantly getting calls and our offices getting calls over the last month and a half about adaptive reuse for office space. And yet people have no clue what that is or what to how to go about it. But they hear about it, and they read it and I want to do this not understanding the whole business of it. And that right now, at this point, it’s just too cost prohibitive for the most part. It may not be especially if the government’s come in and give some incentives. So you know, I think one jumping on the bandwagon but I think that correlates into the ultimate answer, which is not doing your homework or due diligence ahead of time. Just here’s my investment money. This is what I heard was going to happen. This is what I’m going to do. You know, I I think the program that you’re looking at, you’re talking about as far as an insurance company, you know, identifying the risks, mitigating the risks, transferring the risk, absolutely correct in any type of aspect, and investors should be looking at that as well, you know, identifying what the risks are, and then mitigating and we’re transferring it. Part of that is also not understanding what’s going on in the future or reading that. And, you know, we don’t have crystal balls, I don’t have a crystal ball, no one has a crystal ball that I’m aware of, was at the Magic Castle a few weeks ago, they had a crystal ball there, but I don’t trust it. So. But when you’re looking at the future, though, you can still kind of see what’s happening, you know, what laws are going to come into place, you know, if it’s going to be a headache, if you know if you know, right now there’s, you know, insurance industry, at least in Southern California, we’re having some issues, you know, there’s a lot of carriers are pulling out of California. And that’s going to cause an increase in your insurance rates. Now, if you’re in a single tenant net lease or net lease property, sure, you’re looking at what the tenants are going to pay for that. But you have to think a little bit further, if your triple net expenses are too high, and they’re going to offset by trying to lower the rent. So it can’t just be a complete passer, you have to think about what’s going to work for everybody. And also, the last thing you want is to pass through expenses that cause your tenant to go out of business. So you have to really think about how to go about that and how to plan for that action. And a lot of people don’t don’t really think about that. I mean, speaking of insurance, I just got a insurance person, I had a company that just denied insurance on a property because the neighboring property had too many homeless people based on aerial photos. So the insurance companies are getting very picky and pushing and that’s been an issue. But you have to understand that going in if you’re investing that this is going to just be part of my investment strategy here my expenses, they may be this today. But in reality after I close escrow, it’s going to be here, and a lot of people don’t really look at that and have a plan for that action. They’re just kind of looking at that snapshot today. And I think that’s the biggest risk that they have if they’re just not taking the whole picture in.

J Darrin Gross 42:17

Now very, very well said, taking the whole picture and and make sure you have a good idea of what you’re getting into. I like it. Hey, George, where can listeners go if they’d like to learn more connect with you?

George Pino 42:32

Absolutely. Best way is my website CBI Commercial.com. It’s Charlie Bravo India and then the word commercial.com. Also, Instagram is GPIO care that’s also do quite a posting but more LinkedIn these days. And just always reach out. We’re always here to help out and I don’t mind any questions whether they are first time investors or very astute investors. Awesome.

J Darrin Gross 43:03

George Pino, I cannot say thanks enough for taking the time to talk today. I have enjoyed it. Learned a lot. And I look forward to doing it again soon.

George Pino 43:12

Well, thank you. I enjoyed it very much. So thank you so much for having us. All right.

J Darrin Gross 43:17

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 43:36

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Commercial Real Estate Construction Cycles with Scott Lyons – CRE PN #427

Scott Lyons 0:00

The nature of commercial construction is, you know, usually when you’re heading into a recession, we’re just speaking really on behalf like, kind of an industry thing. Generally people have backlog and that backlog is and we’ve got ample backlog we’ve we, in both commercial and the company such that we’re, we’re in a really good spot through colic q3 of 24. And so, through our lens, we’re when we’re pursuing work. And there’s still great work out there in the commercial world. It’s just, you know, less opportunities than before, we are really zeroing in on those projects that could break ground at the end of 24. First part of 25. And so so from that perspective, we’re pretty, we’re pretty darn stable plus, you know, as a company, we scaled quite a bit over the last four years, even through COVID. And we’re really, in this kind of concept of marching in place is a good thing for a year or two. And so we’re not trying to scale another 25%. So this there’s called a silver lining to this a little bit of a slowdown is is okay for us.

Announcer 1:21

J Darrin Gross 1:40

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 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 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 Scott Lyons. Scott is with the global commercial construction firm DPR. And that’s where Scott is the national commercial core market leader where he is directly responsible for understanding the needs of DPRs customers and delivering predictable results. And in just a minute, we’re going to speak with Scott about leading your commercial construction team through these volatile economic times.

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 this on YouTube at commercial real estate pro network. And while you’re there, please subscribe. With that I want to welcome my guest, Scott Lyons Welcome to CRE PN Radio.

Scott Lyons 3:30

Morning Darrin.. Pleasure to be here.

Well, I’m delighted to have you and 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.

Sure. I’ve been in the industry for about 26 years the the first 16 years of really rotated around the southeast building large commercial projects on various cities. The following 10 years I reside in Central Florida within Orlando, and I lead our Orlando and Tampa offices here at DPR for the last decade. And really kind of a growth mode and through a couple of challenges, but really had a lot of fun doing that. And about a year ago, I rotated into leading our commercial market here at DPR. And so as you mentioned, you know, commercial is really it’s one of five markets that DPR operates in. We operate in life science market health care, higher ed in advanced technology and commercial and so I head up a team that really just connects a lot of dots across the company in our commercial market.

Gotcha. And just to be clear, is DPR strictly a general contractor or do you guys have any kind Out of a portfolio.

We are a general contractor we operate in, in the United States as well as abroad in Europe and Southeast Asia. But we are we’re a builder at heart and primarily a general contractor.

Got it? And in the construction world, especially as a general, is any of that? Are you doing any of the the construction directly? Or if most of this, hire out the subs and you guys manage the construction direction of the project?

That’s a good question. So we’ve been in business for 33 years. And really, Darren, when the company was founded, we always wanted to be a builder first and not a broker. And so we do self perform a lot of the trades primarily concrete, drywall, and a lot of other things. And so maybe paint a picture differently. So we’ve got 10,000 employees or a little over. And more than half of those are skilled craft. In other words, people that put the work in place in the field. So that’s something that we we embrace and support and really trying to change, change the world and the industry by way of doing that.

Yeah, no, I know. There are those that are strictly paper. And it’s I like the ball. I mean, it works different for different projects in that, but it’s always nice to know that you’ve got some sort of direct controller, or you’re performing actual saliva. So in the asset classes, you you will focus on you mentioned there’s five commercial life science, health, healthcare, education. And was there one other one

advanced technology that is primarily data centers? In this day and age?

Got it? In? Are you 100% new construction? Or do you also do any kind of tenant improvement betterments?

Good question. Yeah, we do. About 15 to 20% of our business every year are projects really kind of under the five to $8 million range. And, and a lot of those fall into a tenant improvement, kind of project type. And there’s a strategy behind that, really, we want to be able to service customers for both projects, large and small, which, depending on where the market is, that helps us stay pretty nimble. So we do do ti is a good part of our business.

Gotcha. And as far as, you know, construction, I’m always kind of amazed I, you know, just all what all is involved in construction. I mean, you drive by these large buildings and, and every day and and assume that, you know, they’ve been there forever kind of thing. But, you know, from optioning, the ground to, you know, getting the plans that permits financing material labor time. Seems like it’s quite the hurry, I guess what it asked you is, What’s your perspective on the time it takes to build something and I guess even back up just one more step is the size of the projects that you guys are doing. These don’t sound like they’re, they’re smaller projects. There’s one like they’re significantly larger projects? What’s a what’s a small building for you versus a large and then kind of what’s the sweet spot?

So, back to your first Yeah, the larger projects, obviously, do take a significant amount of time and momentum before it breaks ground. But, you know, a small project, again, I think our average size project, because we do so many, is probably an $8 million range, you know, as a company. But that’s because we churn a lot of the smaller ones just on an ongoing basis for existing customers. You know, call it a sweet spot is, you know, 50 to 100 million in really any of our markets, that’s, it’s a spot where projects of that scale, tend to get built once once there’s a decision at some level within a customer organization. And then, you know, you can kind of churn through those in an 18 month timeframe fairly regularly. You know, the larger projects, Darren, and these are the ones that we’re seeing, you know, kind of hit pause over the last 18 months, especially the very large ones, right, because because of just the amount of an investment and say, a $500 million project and the commitment, the planning and the entitlements, like there’s so much that goes into making those project just To get to a groundbreaking in in our economy today that that’s caused a lot of our customers to pause right and reevaluate for for a multitude of reasons. But when they do hit the ground, I mean, it’s they’re phenomenal projects, they’re the 500 million or a billion dollar project is a different animal than a 70 or $80 million project. It’s kind of a, almost a business within the business and we thrive on him, we very much enjoy him and think we’re doing pretty darn well.

So going back to kind of where I was trying to get to, and you kind of hinted at is the time that’s involved before you even break ground, if it takes 18 months, approximately, to to go from the first shovel of dirt to the completed project. How, how much time are we talking from, from that option of the ground before? Before the first shovel? But what would you expect? In a go forward? economy as opposed to kind of where we’re at right now?

Yeah, sure. So for you know, an 18 month project and I’ve got several in my in my head bouncing around, it takes a year Darren kind of like to get some alignment around hiring the design, firm hiring the contractor, evolving the design over the course of various iterations to get from a concept all the way to construction permit docks. And so that takes a year to 14 months for a project of that scale. And, you know, you didn’t ask at all for anyway, one of the critical things that’s happening, which, you know, COVID, really exacerbated was just supply chain issues that we’ve all heard about. And so during that timeframe, there’s certain pieces of the building that need to get ordered and released before even hit, before you put a shovel on the ground, just because of it takes electrical gear to show up these days. And that’s, and that’s critical to finishing your building on time. And so some, some activities do actually happen during the design timeframe.

Now, it’s, it is crazy. And just, again, I think the, I’ve always had the picture when I have the contractor coming to my house to do some work or whatever liver model or something like that, that he’s going to show up with the toolbox in the morning. And they’ll be done. You know, by the time he the end of the day, maybe the end of the week or whatever. And, and next thing you know, there’s a backhoe on my front yard, and there’s piles of dirt, and it’s like, Oh, my God. And just that that time element is something that I think a lot of people don’t necessarily consider when we look at big project. So we’ve we’ve been through COVID. And I assume we got the bell rung the other day that we’re officially done with COVID. But what are some of the biggest changes that you’ve seen in the commercial construction? Prior to COVID, as opposed to what we’re looking at right now.

As we started off, it’s these are interesting times. In so you know, pre COVID, Darren there was, depending on what geography you’re talking about, there was a lot of ideas in developers, you know, a lot of momentum behind the so called new office, corporate customers that were thinking about new headquarters buildings. And, you know, a lot of that has been put on pause to the extent, like, we measure it pretty rarely. But you know, since the beginning of 20, to 50% of our awards are in a holding pattern right now. And I’m really talking strictly about commercial office, right. So the changes are, you know, multifaceted. I think corporate America is trying to figure out their workplace strategy and their work from home, are they going to, you know, require people to come back five days or three days or, you know, certain customers maybe not very much at all. I think the other challenging challenges that are presenting themselves really not COVID related is if you look back back in the 80s, just there was a ton of office building development right? In just zero in the Reagan area era, there was a lot of tax changes that really incentivize massive amount of development. And so all those buildings are now you know, 4045 years old. And so there’s this, you know, this, unfortunately, you know, all of these buildings are going to be obsolete, right? If they’re a Class B, class C, office space, when when corporate America renews their leases that are coming to over the next several years, there’s probably this decision to, you know, either downsize their footprint to move to, you know, call it what we call, like, the trophy office buildings are really Class A, which we do see a continual trend that those projects are, are getting built, and there’s momentum behind those, those trophy office buildings, but it’s gonna be tough. You know, if you’re, if you’re a building owner of those, you know, 4050 year old buildings, class B, class C, and just what do you do with it? Right, if you can’t reposition it, if you can’t really, you know, invest in it, but the amenities in there that, you know, the the companies and in the talent think they want in an office building, it’s gonna be a tough couple of years, I think it’s just gonna take some time to really turn through what happens in the office market over the next, what we’re thinking it’s going to take, you know, three to five years to kind of get through it.

Yeah, this dramatic view that change. I mean, there was a, being, like I said, before, COVID. And in going back to the 80s, I remember, growing up in the Midwest, how these big suburban office parks were kind of the rage and, and massive Instructure I mean, just all the square footage, and, and but kind of a neat, little setting, as opposed to the downtown office kind of thing. But now, I was just in one here in Portland here. Just last week. And I mean, I think I walked, you know, a couple miles to get to the, the party I was trying to meet and I was amazed at all the empty square footage. You know, it’s like, it’s, it is kind of a it’s just a weird thing. And like you said, if if the if the, you know, corporate America decides they don’t want that or cannot be repositioned or I mean, it’s, it is it’s it, it’s just, I can’t conceive what, you know, would they knock these things down? Do you think that’s that’s potential? Or is it do you think it’s more of, like, reposition into a different asset class? Or is that even a possibility?

Well, I do think it’s probably going to be you know, it’s going to be a little all of the above you know, so if, you know, if you’ve owned the building for quite some time, and you’re forced to, you know, refinance it here in the next you know, 12 months, but the valuation is gone down and you don’t really your tenants aren’t, you know, resigning their leases or your vacancy rates are incredibly high you might not have the cash flow you might have to give the building back to the bank and that’s unfortunately probably going to happen right? Yeah. Depending on how much you read or listen to the the concept of repositioning buildings is you know, think Pacific Northwest think your gateway City, San Francisco, New York, definitely. I mean, there’s a lot of towers there that people are, you know, studying really hard to see if they can, you know, turn those into converted office to a multifamily and for some it works. Because maybe like the floor plates small enough, but you really can’t have apartments without windows, right. And so a lot of these office towers are designed such that the space just doesn’t really work for a conversion and so and so that’s tough. So necessarily answer your question, but really, I think it’s just gonna be you know, Can Can Can some landlords just wrestle through it and refinance and maybe you know, reduce their rates just to kind of keep keep the cash coming in and then get on the other side of it and let interest rates come down and be in a better position on the other side, so it’s gonna be multi.

A lot of different things are going to happen. And I, you know, your your perspective of time and just You know, it’s a matter of time to figure out hey, what, what are the people want and and whether or not you can hang on to your building. If you’re, you know, if you are facing refinance situation right away that’s that’s going to be kind of testy time if you can empty building so interest rates, have they affected a lot of your work than to or is it more a matter of? Well, let me ask it this way. Do you think the 52% of your work that’s on pause right now? Is that more interest rate driven? Or is or do you feel like it’s more of a COVID? Work? Relationship? situation?

That’s a great question. Because I think it’s both. The it’s almost obvious, I think, to our customers, who put their buildings or I’m sorry, the projects on hold. Obviously, everybody has a different crystal ball, and nobody’s really exactly sure you know, how high the Feds gonna go, but generally speaking, what our crystal ball is saying, is that, okay, you know, they’re gonna cap out maybe at some point this year, and they hopefully start coming down at some point next year, and say, say it’s, but this time next year, we think that ahead those those 50% of the projects that haven’t started yet, you know, a good portion will go. And we think we believe that because they’re, they’re more of that call it the trophy product. They’re positioned in cities and locales, that, you know, it kind of checks all the boxes, it’s live, work, play. And so the adjacencies of foodbev, retail, fitness, and all the amenities, you know, the indoor outdoor space, the sustainability built into design, we think there’s going to continue to be an appetite for those buildings such that, again, corporate, I mean, those who signed leases are gonna, there’s still a war for talent out there. And so they’re going to want to move to the to the building with the phenomenal views right? Now, it’s not going to be all of them. And so. But we, we just are anticipating that by the middle of 24, back after 24. Some projects are going to crank up again, and we’ll get on an upswing. And luckily, because our business isn’t solely based off of commercial, it’s really 1/5 of what we do, or other markets are really there’s several that are up right now. And so it’s kind of just this cyclical thing that we’re hopeful that it bounces back, you know, back half of next year.

Got it. And I failed to to ask you, the commercial segment. Commercial to me, it’s kind of a broad spectrum. Are you going strictly warehouse or big? What’s a I mean, office warehouse?

Commercial for us there? Yeah, you’re right. It’s it could be defined different ways. For us. It’s really office and hospitality projects. So hotel projects are something that we do we do a little bit of residential multifamily. In primarily Texas, but primarily office and hospitality, we don’t really do much retail unless it’s part of, say an office tower. Right. Right. We do some industrial in terms of warehouse, but it’s not a main focus.

Got it? And on top of some of the challenges, we’ve discussed the supply chain COVID and interest rates, are you finding are the banks? Are they hesitant to loan on projects that are ago? Or is is that even an issue right now with projects kind of in a pause?

Well, they’re their restrictions and probably haven’t been tighter, since, you know, maybe 2010 or so. And I think banks are requiring more and more equity. And they’re, they’re asking for executed leases or you know, at least 50% of the space is kind of the environment that we’re seeing and the banks are seeing the same thing we are you know, who’s going to come back to work and

in how many and so it’s it’s going to be tight for a while. Yeah,

yeah. So let me ask Skin and all this, you know, you mentioned DVRs employment force of 10,000. How, how are you? Are you able to keep everybody busy in the commercial sector? Are you do you have enough work to retain your, your staff and, and, you know, keep the pipe full of projects.

Yeah, the, you know, the cult and nature of martial construction is, you know, usually when you’re heading into a recession, we’re just speaking really on behalf like, kind of an industry thing. Generally, people have backlog and that backlog is massive. And we’ve got ample backlog we’ve we, in both commercial and the company such that we’re, we’re in a really good spot through call it q3 of 24. And so, through our lens, we’re when we’re pursuing work. And there’s still great work out there in the commercial world, it’s just, you know, less opportunities than before, we are really zeroing in on those projects that could break ground at the end of 24, first part of 25. And so, so from that perspective, we’re pretty, we’re pretty darn stable plus, you know, as a company, we scaled quite a bit over the last four years, even through COVID. And we’re really, in this kind of concept of marching in place is a good thing for a year or two. And so we’re not trying to scale another 25%. And so this, there’s called a silver lining to this, a little bit of a slowdown is is okay for us.

Yeah. And you mentioned that you guys operate nationwide and even over in Asia. With that ad, or those markets, where you you have offices, is that primarily where you see most of your work? Or do you have like a distinct kind of distinct footprint where you guys try and do your work?

Right, so in, we’ve got 28 offices here in the US, we really love to operate in a called 100 mile radius of those offices. 50 is even better, we, we want our people to sleep in our own beds at night. And so. So maintaining that discipline is important to us. We know, for certain customers, we will go to remote locations, but that’s called the exception not the rule. Really same thing over in Europe, I’ll be at Europe is primarily an advanced tech market for us in some life science, but so for instance, we’re not really doing commercial work in Europe, we’ve, and we’ll see what happens, you know, over the next decade, Darren, but that’s more of just being very strategic and to markets at this point in time.

Got it? And in the as far as the demand, are you seeing certain regions that have more demand than others or or he or pretty much all of your offices equally busy?

They are in depending on the market. So if we’re talking about commercial commercials fair to say is, you know, down obviously from say two years ago, you know, across the board right there’s there’s some micro economies in Austin and in Tampa, and you could argue that Dallas still has some pockets that that are still going strong. But you know, California is pretty pretty slow right now in the commercial market and Pacific Northwest or northwest, I should say is, is has been it’s been a tough six months up there as well really across a lot of markets. But we think that’s just take a little bit of time to work through and it’ll bounce back next year.

So let me ask you that the you know, the nature of commercial construction least from my perspective there, there’s a boom bust kind of cycle to it. When when you know rates are good and demand is good. Then it’s you know, cranes everywhere and, and build, build, build. And then you reach to a point where it kind of like where we’re at now where there’s uncertainty Interest rates are high demand, not so much. I wouldn’t say it’s necessarily a bust. Yeah, but we’ve talked a little bit about potential for, you know, excess square footage, either be returned to the bank or pre positioned or whatever. Do you anticipate when things do settle? And then we get figured out that there will be kind of a, a boom of sorts? Or do you think it’ll be kind of an ease into kind of a steady, go forward?

Well, obviously, we think it’s gonna be more of a man, even if it’s developer, they’re leasing to Fortune 100 type companies that we believe like corporate America is pretty passionate about putting their people in a phenomenal place to work. Sustainability is probably finally becoming more front and center than it probably ever has been moving forward. And so again, we think, call it the class A plus the trophy Office product will still be out there. It will be a boom cycle. And so we’re probably gonna be building because the amount of the market and and we and so we’ve seen this before, and we’re seeing it, again, to an extent where hospitality projects are starting to do okay, and they’re coming through probably more than they were last year in terms of opportunities moving forward. And we also honestly see this repositioning market Darren, where we’ve done a decent amount of them, but we think over the next decade, these repositioning, it could be warehouse to Office, it could be office to hotel. We’ve done all the above that that’s going to be probably a larger chunk of what we build moving forward.

Yeah, I? Well, I’ve seen a lot of a lot of pushing big box retail stuff, either be demoed or, or repositioned. Kind of thing. And I just, I’ve always kind of had the concept of God, if you get four walls and a roof is or not a way to repurpose the, the building is posted to DOS and start over. And I guess it’s always a matter of, you know, whatever makes the most financial sense. But, well, it sounds like there’s there’s work you have worked. Now you’ve got, you know, it sounds like there’ll be opportunities in the future. And, and I guess we’ll all kind of find out, you know, what, what the office looks like here in a few years, and, and who’s who’s in an office and who’s working in a back bedroom? And I guess we’ll figure that out.

It’s gonna take some time now.

J Darrin Gross 32:58

So, Hey, Scott, if we could, I’d like to shift gears here for a second. But my day, I’m an insurance broker. And as such, I like to ask my guests a little question about risk. When I work with my clients, I try and assess risk and determine what to do with the risk. And there’s three strategies that we typically considered, we first looked to see if there’s a way we can avoid the risk. When that’s not an option, we’ll see if there’s a way you can minimize risk. And if we cannot avoid or minimize risk, and we look to see if there’s a way we can transfer the risk. And like I said, as such, I like to ask my guests, if they can take a look at their own situation, could be the market, the Fed your clients, tenants, supply chain, what, whatever it is that you are focused on as far as a risk where the biggest risk? And again, for clarification, 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, Scott Lyons, what is the BIGGEST RISK?

Scott Lyons 34:14

So I think the biggest risk for us Darrin is is is making decisions around in kind of moment of duress, and let me kind of explain what I mean there. So what you won’t get imagine that, hey, you’re going into a recession will or we think there might be a recession? Maybe it’s soft landing, who knows, but guess what interest rates are up there and a whole lot of is many projects opportunities out there, we better sell a bunch of work. We better just, you know, be the squirrel that goes out and just grabs, you know, every night that we can. And that rarely works out. And so what we’re doing to mitigate risk really, Darren is just like, radically just discipline decision making. And so in other words, don’t go out and overextend ourselves, don’t go remote, don’t take on projects, for customers whom we don’t know. And because histories, you know, history is a great teacher, and just a lot of times that doesn’t work out. And so what we’re trying to do is, stay the course, be disciplined, make great decisions, work with customers, whom we just value and really can deliver for and who wants to, you know, and that’s, you know, the risk is just panicking. And so we’re not, we’re not going to do the opposite of that, and just stay steady. Because of the macro factors, you know, of interest rates and economy, hopefully, this debt ceiling deal gets, you know, done by Congress. We can’t control that, but we can control our decisions.

I love your answer that I’ve that’s one I have not heard, but it’s probably the most. I mean, it makes the most sense, in the standpoint of, you know, in a panic around with hair on fire, it’s not exactly a good way to respond. But if he can slow down and and think it through and make a good, a good decision that, you know, will not sink the ship or will allow you to continue that’s, that’s a great answer. He’s got where can the listeners go if they’d like to learn more or connect with you? Sure.

My email is Scottly@dpr.com S CO T T L Y at dpr.com can also track me down on our website and our leadership team@dpr.com. And yeah, be happy to connect and certainly appreciate the opportunity to chat with you this morning.

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

Sounds great. Appreciate it.

J Darrin Gross 37:34

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 37:52

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

Trust Asset Protection with Bruce Mack – CRE PN #426

Bruce Mack 0:00

We have the ability for tax avoidance because it it is legal, and tax evasion is illegal. So when we talk about tax avoidance that is absolutely in the black, not in the gray. And when we talk about tax evasion, of course that’s in the red from the Department of the Treasury IRS handbook for special agents for 12. Tax avoidance is not a criminal offense. Any attempt to reduce minimize or alleviate taxes by legitimate means is permissible.

Announcer 0:32

J Darrin Gross 0:51

Welcome to Commercial Real Estate Pro Networks CRE PN Radio. Thanks for joining us. My name is J. Darrin Gross. This is a podcast focused on commercial real estate investment and risk management strategies. Weekly we have conversations with commercial real estate investors and professionals 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 investment from catastrophic loss. The expert at 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 Bruce Mack. Bruce is an in demand national speaker real estate investor involved with over $90 million in transactions. He’s an author and the founder of Platinum Trust Group has a licensed financial advisor at trust expert, Bruce empowers investors to achieve significant tax mitigation plus bulletproof asset protection through his proprietary IRS compliant trusts. Over 80% of his clients are real estate investors, ranging from owning just a few doors to over 3000. He educates on the ideal alternative solution to 1030 ones for capital gains treatment, as well as the best entity for holding assets that hands down are superior to LLCs, or corporations. Bruce has an exceptional relevant training for newbie investors as well as seasoned pros with multimillion dollar portfolios. And in just a minute, we’re going to speak with Bruce, about how a trust can protect you and your assets, provide tax mitigation and help you transfer your wealth to the next generation.

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 one. Welcome my guest, Bruce Mack. Welcome back to CRE PN Radio.

Bruce Mack 3:26

Well, thanks so much. Darrin. It’s been a long time.

J Darrin Gross 3:30

It has been last time I think we talked you were either skiing or getting ready to go skin. But you were having a lot of fun in the snow. And I’m assuming based on that this last season you you had a good one based on the record snowfall.

Bruce Mack 3:43

Record season. Unbelievable year, grade snow. It’s the perfect place to be during the Winter Park City. And frankly, this summer too. It’s great up here.

J Darrin Gross 3:55

I love it. Hey, before we get started, Bruce, if you could just take a minute and share with listeners a little bit about your background.

Bruce Mack 4:03

Oh my gosh, well, I’ve been a very active real estate investor. And that’s really what precipitated my getting involved doing. In the trust business as a as the founder of platinum trust group. I bought rehabbed and flipped 160 properties in a three year period of time and as Darren said, have been involved in over $90 million worth of transactions. And I will say that 99.9% of them went well. But there was that 100th One, there was a real bingo. And that bingo cost me about $175,000 which I can assure you if I would have had a trust at the time that that happened, then there would not have been that $175,000 loss. It could have been far worse. I could have been completely wiped out. But a trust which you will find out during my presentation and discussions today is superior solution, which can save your bacon absolutely has saved my bacon ever since I got my trust way back when. So that’s really my background is trial by fire, if you will, being a real estate investor, like many of you are, that are on the call today and just enjoying life now that I had the assurance that I’ve got the asset protection that I need.

J Darrin Gross 5:28

Awesome. Well, Bruce, if I understand right, you have a kind of a slideshow, that might be a good way to talk a little bit more about your, your asset, trust protection. Do you want to take over the controls here and kind of lead us through that. And as I work,

Bruce Mack 5:49

let’s try that. Okay. I’m going to try and get my screen up. And here we go. And can you see that okay, Darren?

J Darrin Gross 6:00

Yep, no, I’m looking at your Bruce Mac trust advisor, licensed financial advisor got it.

Bruce Mack 6:07

Fantastic. So, folks, I’m going to go through my slides, you’re going to learn today about trusts a very specialized type of trust, not the type of trust and or trust that you’ve heard of before, which I will also explain the difference between and at the end, I’m going to give you an opportunity to if you see value in the presentation, that you’ll want to set up a one on one with me and it’ll be a complimentary consultation for us to discuss how a trust might be a viable tool for you and your family. Platinum trusts are must for real estate investors for asset protection, tax mitigation, general well transference without a doubt. And completed privacy is something that we are all concerned with as real estate investors. So let’s talk about the trust that you may currently have. A lot of people say when I first chat with them, well, I’ve already got to trusts on covered. Well, you may have a trust, and it would likely be a living trust or living well, which is created for your life for probate avoidance, naming beneficiaries has very limited, if you will, usage they were created because they do not offer asset protection and or tax mitigation, which are trusts do rather they’re good tool for probate avoidance. They’re also a good tool for naming who your beneficiaries are. But that’s where those types of trusts. And now we constantly work with people who do have a living trust or living well. And we incorporate those components into our trust. So if you’ve got one, that’s great, if you don’t have one, that’s we also will incorporate those components of probate avoidance and well transference. So in a nutshell, this is where we shine. And this is where the rubber hits the road. When we talk about the ability to eliminate capital gains, as we go from left to right, you’ll see C’s and S’s holding companies and or land trusts, which you may currently be holding some of your properties in, and or that traditional type of trust that many people have a living trust. And you can see No, no, no, no, no. And then yes, with our trust, the ability to defer income tax on passive income in perpetuity. Absolutely. We do that the others the other solutions do not avoidance of lawsuits, avoidance of judgments, liens, reaching your business and or you personally probate upon death. There are some yeses there, as you see gift tax, estate tax beneficiaries, asset transfer, multi generational wealth accumulation and transference and the avoidance of annual fees. So these are what we’re going to be focusing on. These are the advantages of what the platinum trust offers to our clients. ironclad asset protection is the first section that we’re going to talk about for your business and for you personally. Just when you think everything’s going great, believe me, I’ve seen it time and time again over the years and over the decades, you can lose it all. We want to change that equation, so that could never happen to you in years. Statistically, property owners are liable for injuries incurred during hazards associated with their property, whether home or a business slip and falls annually are the number one most common personal personal injury lawsuit and since 1980, they have increased by 30%. Right around 25,000 of these happen a day. And asbestos claims that you may be on the wrong side of when you’re selling a property if and or lead based paint. Believe Give me I’ve seen it all with real estate investors getting tagged for huge, huge lawsuits because of these types of claims, as well as, again, lead based paint. Another huge one, which I’m sure you’re aware of, is the dreaded mold. That could be behind walls you may not even be aware of that could come back to haunt you later. When you sell a property. Statistically, according to ifwg Serve services. As Joe Blow American, you stay in a one in three shot of getting sued. If you are a surgeon, a two and three shot, I know it’s over 5050 If you’re a real estate investor, especially if you’re been in the in the game for a long period of time, it’s a numbers game at some point in time, you will hit a bingo. It’s just the way it is. Unfortunately, because real estate investors are easy to find easy to source their assets and therefore are a big target. 109 lawsuits filed each and every day in the US. The average business lawsuit, not only is time consuming, and there is no cost that you can put on that. But it’s very dollar consuming to with the average being $72,500 91,000. Pa lawyers out there, always looking in prospecting for new clients to be able to go after other people, multimillion dollar lawsuits. Dog bites. Maybe you heard about the hot coffee spill with McDonald’s where the lady was awarded $3 million. But here’s an interesting statistic $2.7 million of that $3 million lawsuit settlement was in punitive damages and punitive damages. Oftentimes far Eclipse with the underlying award is as was the case with the McDonald’s lawsuit. Now I’m sure Darren would bear me out that even with a personal umbrella, which I totally ascribe that you get a personal umbrella for underlying lawsuits that could could happen to you. The fact is that no umbrellas cover for punitive damages, which unfortunately, is the case. So yes, get the umbrella and then have the trust on top of that, for the ultimate in asset protection is what we ascribe to lawsuits can tap into business and or personal assets and pierce the corporate veil, to get at lawsuits. And we’re going to show you how that’s not going to happen. If and when you so choose to move forward with a trust closely held LLCs and corpse do not protect you the owners created what’s called a facade for controlling the entity entity. And it’s used in a lawsuit. They call it alter ego. And it’s a very effective, very simple thing to prove. Because if you have an LLC, it’s either you personally or you and maybe your spouse. So you’re it’s an LLC partnership or you may have a exterior partner, but it’s usually a couple of people and utilizing the alter ego is perfect for when you have a tightly held entity, as real estate investors chronically do. corporate formalities is another way to invade and pierce the corporate veil. If your your records are not up to perfect snuff. That’s a way that you can pierce the corporate veil. Small business owners often also mistakenly write checks from company accounts to for personal payments, and that is a major nono. And then another way to pierce the corporate veil without an LLC, a C or an S, which is what we’re going to be talking about. You don’t have to worry about corporate veils being pierced. And as you can see, utilizing alter ego at the Wake Forest law review study shows that 46% of the time when litigated using that, utilizing that as the premise, they were able to pierce the corporate veil that’s like one and two, reverse veil piercing is even worse, and reverse veil piercing has become a very popular additional strategy that prosecutors use because a lawsuit against you personally can allow the plaintiff to recover damages by reverse veil piercing the corporate veil. The thought that most of you have is that I’ve got an LLC and if I use a sin if I use a single LLC for single property, the maximum exposure that I have is I’m going to lose that one LLC and the contents in it. Well reverse veil piercing that is now very popular. wipes that out up, not only are they going to be able to get what’s in that, LLC that, that where the problem was with that particular property, but when they introduce reverse veil piercing, they can go after all other LLCs, that you may have to be able to get reciprocity to settle a claim for a lien levy or a judgment. This is huge. This brings in a whole level of additional exposure that you’ve got.

I say shield your work and protect your business yourself and your family against lawsuits, judgments, levies, liens, claims and divorce. And this is what a trust does. And we’re going to show you how it does it over the next couple of slides, ironclad asset protection for you personally, as well as your assets. In this case, this was a guy who had an umbrella. And thank God he did because it was a million dollar plus umbrella. And they took it in an award and a bad car accident that he got into where he was found to be at fault. But they also wanted to make an example out of him, and he had to pay a $250,000 punitive damage award. This is what I’m talking about in real life. And in this particular case, this guy who’s mad, his son, 17 years old, got into a very bad car wreck. And he was getting harassing phone calls from a potential prosecutor saying that I’m gonna get you for over a million dollars, so on so forth, and blah, blah, blah, blah, blah. Well, Matt got sick and tired of it. He had one of our trucks and met told him Look, my son is a minor, the the automobile is in a trust, and I have a trust, so you’re not getting anything. And this is why he never heard from the attorney again. Properties and assets cannot be seized. Further, the trustee and the beneficiaries are never liable for debts of the trust if there are debts of the trust. Don’t let this be you. As I said in the beginning, I lost $175,000 from a bad house deal. I wish I had known about the trust. If it happened to me, it could happen to you. With our trust, you are not subject to tax liens. levies are issued against beneficiaries, trustees divorce or alimony, child support creditor governmental agencies or third party claims not subject to court’s jurisdiction for turn over orders except for fraudulent conveyance. So let’s talk about that. Our trust is impenetrable. There is one exception. That exception is if you are found to have fraudulently conveyed your assets. I’ll give you an example. You got a lawsuit, you got served. You knew about our trust, but you didn’t have one. And then you want to get a trust, which we would not give you. But you wanted to get a trust at that particular point. And you conveyed your assets to a trust and with willful knowledge that you are already in a lawsuit. That could be certainly alleged and proven that you fraudulently conveyed your assets, therefore, they could set a motion to set aside the trust and likely be successful. Other than that, bulletproof asset protection, there has never been one of our type of trust with the provisions that we put in, pierced or gotten into, it cannot happen in all states, CS, SS and LLCs are recognized as the equivalent of a person and the courts. They can be filed against people or the legal equivalent of a person, which is what they call it. Conversely, our trust is a contract and it’s not recognized as person, therefore our specialized trust cannot be sued. It’s as simple as that. Let’s move on to tax mitigation. Because this is another big consideration. With our trust that we can provide you excellent tax mitigation in various different streams of income that you have as a real estate investor. You’re planning to sell your property or your properties your business, you may have a side business, your home or any other assets. With our proprietary trust. You have the ability to exclude 99 depending upon how we set it up to 100% of the capital gains taxes. That’s us huge using our IRS compliant trusts. No need for 1030 ones matter of fact, we call ourselves the anti 1031 company because you can exclude 99 to 100% of capital gains utilizing IRS compliant trusts. If you’ve done a 1031 exchange before you know a 10 three One is a tax deferral strategy, but I call it a tax bomb with a delayed fuse, because at some point in time, when you go to sell that next property, you’re going to have the combined tax hit from the previous property that you deferred and the existing property that you rolled it into. So rather than having that hanging over your head, utilizing our trust strategy is a superior solution. Because we’re talking about excluding that tax liability, legally reduce taxes using our one of a kind registered a copyrighted trust, deferring taxes legally per IRS trust code, deferring the minimize, minimize income and estate taxes to the fullest extent, IRS allows, in most cases between seven, eight and 100. Now I did say 99 to 100, on capital gains, but you may have other types of income as well, including active business income. That’s why we say 78 to 100. Likely it’s much more than 78. And again, depending upon your situation and how we structure you, we will get a better result. But again, this is part of the reason we need to meet with you one on one, there’s zero gray areas zero capital gains until distribution and simplifies the accounting process. We have the ability for tax avoidance because it it is legal, and tax evasion is illegal. So when we talk about tax avoidance, that is absolutely in the black, not in the gray. And when we talk about tax evasion, of course, that’s in the red, from the Department of the Treasury IRS handbook for special agents for 12. Tax avoidance is not a criminal offense, any attempt to reduce minimize or alleviate taxes by legitimate means is permissible. Matter of fact, here’s picture of the handbook. And any attempt to reduce minimize taxes, as we said is permissible. 60 of the largest companies including Amazon, Netflix and IBM paid no taxes on pre tax income of 79 $79 billion. This is huge. I attribute this to the fact that they have fantastic well to be able to afford the brightest legal minds to be able to avoid taxes and tax, therefore mitigating their tax liability. And this is really what our trust does. We’ve got enrolled agents with the IRS, we have tax attorneys, we have CPAs. Certainly we have seven, a large bevy of trusted advisors. So with our full team, we can get a great result for you too. But let me show you some of the results that some of these major companies have. Before I do that, let me just show you again, that in two cases, the courts ruled that persons may adopt any lawful means for the lessening in the burden of income taxes, that’s in the Edison case. And in the week’s case, the courts ruled that a spendthrift trust organization is not illegal, even if formed for the express purpose of reducing or deferring taxes. We believe in full transparency on whether it’s your business income tax return, and yes, we do returns for you and or we can work with your current CPA trust, income tax returns, personal income tax returns, with all the tax professionals that we work with. And we’ve worked with over the years with our trust, having prepared countless 1000s of returns, we’ve only had one client have an audit, it was roughly a year ago to the day, she has 70 properties. And she was audited for her 2017 return, which by the way was two years before she got her trust, that trust that audit came back, no change. The auditor asked to go through 2018 They did that came back no change. The auditor then asked to let’s take a look at 2019 that was there at the beginning of the years when she got her trust. So she had a full year of, of trust, if you will, utilization and trust usage. So with that in mind, that was a full year of audit on her trust, and that audit came back no change, which is of course the best that you could hope for. So we’ve had great results. This is this is how our trust works. And this is the result that we’ve seen over and over again where we don’t get audits, which is one thing because our returns are very clean. And because we are the returns are going to the trust department, which has a much lower audit, if you will, by the numbers than going to the regular department. Again, we can discuss that more on a one on one call. But getting back to how the big boys play, Amazon paid zero on $11 billion in profits, and actually got a refund for $160 million.

Millionaires I’m sure you’ve heard of, such as Joe Kennedy and Mitt Romney and Donald Trump. They all have trusts. And this is how these guys do the best job that they can with maximizing tax avoidance. Forbes did an article back in 2014. And this extrapolation, this is a quote from the article that talked about that said capital gains taxes could potentially be deferred for forever. So this is not a weird or obtuse if you will notion on tax deferral and tax advantages utilizing certain types of trusts. According to Forbes magazine, this is another article that they did this was on Rockefeller, they maintain that the family still maintains a substantial fortune of $11 billion due to the fact that they have multiple trusts. Matter of fact, I happen to be doing some channel surfing. And I saw this interesting, right, Camilla Harris keeps assets in a tax advantaged trust. So here’s an opportunity for it to be for me, not just for the is what I always say. Now, let’s talk about some expenses, giving you an idea how the trust is superior to a not having a trust solution, which is the one you’ve got today. As you can see in the first column, virtually everything is zero, because you can’t use those for deductions. And on the right column, everything is 100%. But I’d like to zone in on home expenses currently have one expense that you can deduct, which is the mortgage interest portion of the mortgage payment. If you’ve got a mortgage Well, I’m here to tell you that the entire mortgage payment is interest expense, the entire property tax payment is a trust expense. The homeowners insurance is a trust expense, all of your utilities including your internet bill is a trust expense. A domestic if if they come in is a trust expense, your pool cleaner, your gardener all trust expenses, repair, replacement of furnishings, renovations that you may do for potentially hundreds of 1000s of dollars. These are all trust expensable, along with educational expenses, medical expenses, and many, many more. This is not a complete list by any means this is a partial list just to start to give you an idea of how fantastic A trust is and how it works. Trust expenses versus taxable distributions. Let’s talk about how you are not going to have your child get a k one trusts can pay for your kids education, you can do it two ways, you can either give them a check, which is in the second, if you will, taxable distribution column, where you write a check to your daughter or your son and tell them then they put it in their bank account to go down and pay their tuition, you’d need to give them a k one. However, if you wrote the check directly from your new trust account, to the college on their behalf as a beneficiary, you now have a trust expense, ergo, no k one to your child. So this is a little bit of a adjustment. And we show you how to do this. So it makes it really simple to operate your trust and get the maximum amount of trust expenses rather than taxable events. How do I get money out of the trust? It’s a question I get asked all the time. Very simple steps you convey your assets to the trust you use your trust to pay your business and personal expenses, you now enjoy access to trust as x assets such as cars, properties, yachts and more. You pay expenses for beneficiaries, like I just said for education, medical maintenance and support. And another great plus is the actual investment in the trust is a trust expense. So the President administration, here’s some of the things that we’ve seen. I’m sure you’re aware of them, but let me just bring them back to the front of your brain for discussion purposes. They have increased taxes. They have created inflation which is a hidden tax on everything. And three years, you may not know this, but the estate tax cap is going to go from $12.9 million to $6 million. Now for those of you who have a large amount of properties, there’s no doubt that you will exceed that $6 million cap. And you certainly do not want to be setting up your heirs for a 4550 55% loss right off the top, from the estate taxes, should you not have the right type of trust, like we have to protect you from this administration, you’re implementing the new cap, which is half of what the old cap was, or the current cap, zero assets in a trust or assets, I should say. And trust zero capital gains, whether it’s stocks or bonds, again, that’s not just real estate is really what this slide is all about. currency trading, Bitcoin, crypto selling assets, to another trust real estate acquisitions that you’re involved with buying or selling of businesses that you may be involved with federal or state probate, no gift tax, again, zero capital gains on the growth there’s of trust owned assets, the sale of assets, the trust your non taxable events. So you don’t have to worry about make when we move assets over that you’re going to be getting a big tax bill not going to happen. There is no cap on the amount of assets that you can move from you personally or your LLC that you currently have, or CS or SS or however you’re currently holding your properties or even if they’re in land trusts, they can all be moved over. And there is no cap on the amounts and there is no tax on making that transition. Let’s briefly talk about generational wealth transference. And then we’ll wrap up, our trust had been an effective vehicle for passing on wealth to future generations or trust, minimize the state taxes due to the waterfall effect that is created as the trust passes from one generation to another. Our platinum dynasty, multigenerational trusts are also useful in sheltering assets in divorce settlements, and from other creditors and can easily last for hundreds and hundreds of years. Now, there is other types of taxes that you currently are incurring, which is taxes on your rental income, if you have a rental portfolio. Let’s talk about that briefly. You currently have your properties on a 27 and a half year depreciation table. And if you had them for over 27 and a half years, that depreciation is all gone. Now, the opportunity to have a trust is superior to a 27 and a half year depreciation table because all passive income, whether it’s your rental income, or whether you’re involved in let’s just say, an LP a limited partnership, or you have a notes that you’re holding or any other type of passive income that you’re involved with, until the trust distributes which I’ll tell you about that in just a moment. The tax is not do. So when does the trust distribute the trust distributes in accordance with the laws of perpetuity. And for our trust purposes, it says it distributes 21 years to the day after the death of the last sole surviving beneficiary to the last sole surviving heir. So this likely is going to be hundreds and hundreds of years from now because you’re going to be the trustee. Kids going to be the beneficiaries or whomever you want or or not. They’re going to end up becoming the trustees after you pass. And you’re gonna keep down streaming the trust multi generationally until at some point in time in your legacy, folks stop having kids, in which case the last in line grows, will they die, that starts the 21 year clock. And then after everybody’s dead 20 and 21 years has passed, the trust distributes. So any tax liability that there might have been that’s accrued over the generations will be due and paid to the IRS from the estate. But the good news is it’s not going to come out of anybody’s pocket in your lineage. And this is what we ascribe to because this is a superior solution.

Maximum privacy, you’re all concerned with privacy. This is a big, big issue. And we have the ability to structure it so that when a snooping eye or eyes want to find out how many assets you’ve got, when structured with our trusts, you have the ability to completely mitigate their ability to find out what your estate is worth not subjected to public record or trust prevents any information about your assets, liabilities and errors from becoming public sharing the highest level of privacy or trust has the same constitutional rights as any individual, right to privacy, freedom, freedom from unwanted search and seizure from and all other rights. Again, this is a quick recap, now you can see in a better light and understand how our trust is truly a superior solution to having a C, an S, an LLC, a holding company, a land trust, and or a living will, or living trust. We have multiple strategies to get you set up properly personal and business trusts, which we discussed today, private family foundations, which is a whole other discussion, which we may want to bring into the mix, or not possibly private, holding trust, again, not one size fits all, is our strategy. And we need to meet with you one on one to see what’s the best strategy from where you are, and what’s important to you and how we want to proceed with our vast experience and expertise, we can sign the right strategy for you. And we’re offering you to get a complimentary consultation at zero charge. So I always like to ask, what would your future look like if you were able to control what you earned, I think you already are getting a great insight into what that’s all about. And here’s how you can get in touch with us, you might want to take your phone and take a picture of this so that you can jump on my private calendar, the one on one will be with me should you decide to do that. And I’d love to chat with you. Also, having been a seasoned real estate investor for many decades, I have something else for you as a real estate investor. And that’s an opportunity. If you’re wanting to grow your portfolio, I have the best strategy for having massive inbound leads for you, right to write into you directly. And you can sit there and literally pick and choose the leads that you want to follow up on to acquire and increase your portfolio and therefore your wealth. So please feel free. Let’s jump on a call. Let’s talk about it. And let’s see what’s the best strategy for you. And if it makes sense for you at all, moving forward with the trust. So let me turn this back over to you. I think we’re right back. How’s that?

J Darrin Gross 37:44

Now he did it, he managed to shift gears, and that’s pretty good. That’s a lot of information, but very informative. And I’m sure the listeners will appreciate all that. You know, one of the challenges we face as you try and grow your wealth is how to keep it from whether it be, you know, taxes, lawsuits, and or, you know, to transfer to next generation and a lot of good information there. Hey, Bruce, if we could like to shift gears here for a second. Sure, of course, by day, I’m an insurance broker. And I work with my clients to assess risk and determine what to do with the risk. And there’s three strategies we typically consider, we first look to see if there’s a way we can avoid the risk. And that’s not an option, we look to see if there’s a way we can minimize the risk. And if we cannot avoid nor minimize the risk, we look to transfer the risk. And that’s what an insurance policy is a risk transfer vehicle. And as such, I like to ask my guests if they can look at their own situation. Could be your clients, investors, tenants, the market public policy, Federal Reserve, you know, whatever it is that you believe to be the biggest risk. And I’d like to see if you can identify what you consider to be the biggest risk. Again, for clarification, 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, Bruce Mac, what is the biggest risk?

Bruce Mack 39:22

I think, for me and for my clients. undoubtably the biggest risk is to not have a trust because the the exposures that are out there in today’s litigious environment are so massive that you unfortunately, if you don’t have one, you could be wiped out. And therefore, without a doubt that would be my my direct answer.

J Darrin Gross 39:51

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

Bruce Mack 39:59

If they Want to know more, and they didn’t, I’m not going to go back to that slider. Actually, let me quickly go back to that slide. And if you didn’t take a picture, please do take a picture of this slide. Let me just blow this back up. You can go to Bruce dot platinum trust group.com. That’s Bruce dot platinum trust group.com, which brings you into my interactive calendar. It’s on on my desktop, and therefore, you’ll be able to pick a time slot, I will call you at the appropriate time that you choose that works best for you. And or if you’re having problems getting on the calendar or what have you. I did provide my direct line. And that is 702. Area code 371-2345. Again, that’s 702-371-2345. Yeah,

J Darrin Gross 40:59

Bruce, 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.

Bruce Mack 41:09

Thank you so much for the opportunity there. And it’s been a pleasure. And it’s been way too long. It’s been a couple of years like you said and and it’s great to have that opportunity again to work with you and and you’re fine, folks.

J Darrin Gross 41:21

Wow. Awesome. I appreciate that. 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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