Daniel Cocca 0:00
It’s really that we grew this group. It’s a private capital network, everyone who’s part of it has been invited by one of the founders or has come in from an existing investor. And they go through a process where they get to meet one of the firm’s principles, they do really exactly what we’re doing here, just kind of telling each other’s other story. And we want to make sure those people continue to have access to the projects that we’re going to share on a going forward basis. Right. You know, there is a limited amount of equity, and projects that we think makes sense, particularly in this market today, right? And so for us, like we’re happy, you know, deploying, you know, 100 100 $50 million a year with the group of people that that we have, and that’s really what we’re trying to do just kind of build this network and keep keep doing right by the folks who have kind of helped us get to where we are.
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 experts.
J Darrin Gross 1:09
Welcome to Commercial Real Estate Pro Networks, CRE PN Radio. Thanks for joining us. My name is J. Darrin Gross. This is a podcast focused on commercial real estate investment and risk management strategies. Weekly, we have conversations with commercial real estate investors and professionals who provide their experience and insight to help you grow your real estate portfolio.
Today, my guest is Daniel Cocca. Daniel is a New York corporate attorney by trade. And he co founded Alpha Investing a private capital network that connects investors with institutional real estate private equity investments. As a firm Alpha has invested in over 4 billion of real estate assets. And in just a minute, we’re going to speak with Daniel about some of their investments and how they go about investing at Alpha.
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Daniel Cocca 2:36
Thanks for having me on the show. Darrin, excited to be here.
J Darrin Gross 2:39
I’m looking forward to our conversation today. But before we get started, if you could take just a minute and share with the listeners a little bit about your background.
Daniel Cocca 2:49
Yeah, absolutely. So I came out of law school, arguably the worst time you could possibly come out of law school and in 2010. You know, the, the market had more or less crash, the you know, I was a corporate lawyer attorney are slated to be a corporate attorney and, you know, the credit markets were basically shut down the IPO markets were not existent, like not the best time. That being said, I find myself in a really interesting high yield debt practice. You know, working on a variety of these, like small little mid market transactions in that space is, you know, you’re probably looking at, you know, 200 to $750 million, you know, debt offerings, which seems like a lot, but in the grand scheme of that world, not not all that large. And then, you know, over time as the credit markets opened up, the IPO markets started to get more active, you know, worked on more of those types of capital markets transactions. So as a security lawyer, at my core, I never really had the lawyer mindset about me. It was a fun job and a great experience a lot of really interesting transactions and people and personalities. But I was much more interested in kind of building my own firm and I headed over to another shop called Goodwin Proctor, another law firm in New York City. And they had a pretty well established what they call the technology companies practice, but was really a venture practice. Right. And so I started representing a lot of very early stage companies. And that’s kind of the point where I met my co founders at alpha. And we started to kind of hash around this idea, because all of us were in this position where we were we were high earners, right. I think they call us Henry’s, you know, high earning not rich yet, right. And so we were trying to take our money that was pretty much parked in the stock market or investing portfolios and get it into real estate, but we wanted to do it with, you know, institutional, very experienced and seasoned owner operators. And unfortunately, we weren’t in a position to write seven figure checks into the system. transactions. And so we’re looking for a way to, you know, basically get the best of both worlds right high caliber operating partners and low minimums. And, you know, this all happened kind of on the heels of the jobs act in 2012, which led to, you know, real estate crowdfunding really starting to become popular. And when I was at the law firm, I saw a lot of those real estate, crowdfunding FinTech platforms, really start to get off the ground, a lot of them, you know, financed by venture capital, and good and bad to that, they definitely broke down down the door, they got people as a whole, very excited in real estate investing, there was finally access because, you know, we all know, historically, it was a country club, friends and family, right? If you weren’t writing seven figure checks, you had to find the smaller, more local operator that maybe a new or your friend knew or your colleague knew. And that’s how you invested and you know, your options are just very limited. And that’s why as a country, we are or have been multi, massively under allocated in real estate, just the access didn’t exist, right. And these platforms popped up. And all of a sudden, there were these big marketplaces where you could look at transactions from hundreds, if not 1000s, of different, you know, real estate sponsors, owners, operators, and potentially invest in them if you wanted to. And, you know, in theory, that’s a really good thing. The challenge, of course, is that, you know, a marketplace concept benefits, the sponsor side, and the people putting those deals together much more than it does the investors who are kind of forced into this weird world where they’re term takers, but force term takers, right? You know, a deal pops up, get three hours, if you don’t say yes, and commit your money in three hours, you’re out. Right? And, you know, listen, I’ve been doing this for a while I can’t underwrite a real estate transaction in three hours. I think most people probably can’t. And so it created this weird set of rules that didn’t really work for investors. And that’s where my partners and I decided, hey, let’s start Alpha investing and create something that’s really designed for us. We were working professionals at the time, we said, hey, we want to invest with top caliber groups. But we want to do it in a way that works for us. And that’s effectively what we’ve done, I can, I can obviously talk a bit more about the specifics of alpha. But that’s my story, you know, leading up to the last, I guess, seven years of my life now.
J Darrin Gross 7:19
Awesome, I love the kind of the background story. My guess. And yours is clearly kind of a timing thing. Like you said, when you entered law practice and just the economic cycle we were in and in, I think it’s, it’s, it’s really key, and you kind of hit on that, I know that a lot of what we talked about, and how real estate is invested in now is central to the Jobs Act. You know, it’s funny, I remember that, but I don’t always think of it that way. And I appreciate you bringing that up. Because that really did kind of, you know, open the floodgates as far as the opportunity for non accredited or even accredited, but just just be more of a public unknown opportunity kind of thing. So I appreciate you sharing that. So let’s talk about this. So you knew you wanted to get into real estate selling, he also knew you didn’t want to be dealing with small, less professionally managed opportunities. So how did you, you know, you frame your, your kind of go forward point, or, you know, when you guys started out? What was it that you guys were looking for? What were the types of opportunities or the properties of asset classes that you were you were looking for?
Daniel Cocca 8:48
Yeah, for better or worse, you know, as I guess, at the time, I left a mid level senior associate at the law firm, you know, I had very little time outside of work, right? You know, we always joke that we’d often more likely than not, we would leave the office on a different day than we arrived. Right? And so that was just kind of my life. And, you know, I wanted to invest, but the question is, when you have very limited free time, how do you go out and you know, go through the normal iterations of, Oh, I’m gonna buy a rental property, maybe I’m gonna buy something, I’m gonna fix it up, I’m gonna flip it. You just don’t have the time. There aren’t enough hours in the day. And you always have to remember like, hey, my core competency, what allows me to make money and be a high earner is not investing in real estate, right? It’s being a lawyer or being a doctor or being a professional, whatever, right, you know. And so that’s kind of what we were sitting at. And for us, it was really important to be able to be passive investors and to create an environment whereby I could look at a transaction, I could evaluate it, but outside of making an investment decision and funding my capital, I wasn’t obligated to do anything. Now all the information was available to me, I could pour through rent rolls and lease audits and run scenario and sensitivity until I was blue in the face, right. But I didn’t have to, if I didn’t want to, I could focus on whatever my core competency wasn’t. And that was really the impetus for trying to create alpha and what we did. And I think as we think about, you know, how do we invest in real estate, our strategy at a very high level, like most high level strategies is fairly simple, right? We’re need based residential, real estate investors, and we believe people need a place to live, people need a place to grow old. That’s true in a good economy. It’s true in a bad economy. It’s true, and whatever, we’re, whatever economy we’re in today, none of that should be controversial, right. And we focus on acquisitions of properties that have in place cash flow, so we’re not doing you know, development deals or new construction, you know, even though I think those those deals can make sense. We want to buy properties, typically in that small mid market space, where we can partner with an institutional operator, and buy from a mom and pop or at the very least an unsophisticated seller, hopefully find ourselves an off market deal or pre marketed deal. But always outside of whatever value add renovation business plan, we may put into effect, we want to be able to reduce the expense side of the financial statement, that’s where you create a lot of value as well. And I think a lot of times that gets overlooked, because people think about renovating, and increasing rents and increasing revenue. And that’s certainly important. But you know, these properties all trade, you know, based on their net operating income, and so whatever we can do to improve that number is a good thing. And so in that small mid market, which used to be 25, to $50 million assets is probably more like, you know, 70 to $100 million assets, today, that’s where we think we’re able to find those types of opportunities, the ones that we believe, create a bit more alpha, and you know, hence the name Alpha investing.
J Darrin Gross 12:05
I like your, kind of the way you broke it down there for the strategy, I mean, need based, haven’t heard that, per se, but that’s, I mean, it’s very clear, a roof over one’s head is a need shelter. And then also how you, you distinguished you know, your your value add, mindset is more to look in a way to cut expenses, as opposed to full, heavy lift, renovation, you know, capital improvement type type of thing, which God, I mean, what I’ve learned over time, is, that’s where you can really make some monies, if it’s just a matter of, you know, reducing some expenses, as opposed to becoming, you know, too friendly with a plumber or electrician or contractor kind of thing. That’s, that’s definitely a better way to go. So, with that being your strategy now, and clarify for me, are you guys taking possession of and acting as an asset manager? Or are you are you looking for others who have syndicated a deal and and participating as a, as a, an investor or in raising capital for that deal? How is it that you guys are set up with respect to a particular property?
Daniel Cocca 13:29
Yeah, so we go out, and we find what we consider to be best in class operators. And these are the folks that are boots on the ground in any given market. They’re the ones that have the right relationships to source these off market deals. And then they’re the ones who are typically executing the strategy that, you know, we kind of come together collaboratively, right. And you know, our team plays an asset management role. We’re going to go out, we’re going to obviously tour all the properties in the comps. We’re going to underwrite the deal collaboratively, we’re going to select debt with our partners, what have you, our investor network will bring the majority of the LP equity into any given transaction. And you know, what comes with that typically will be control or approval rights over major decisions, sales, refinances, budgets, what have you, right. And that that’s effectively the role that we play in these transactions. We have maybe four or five of these operating partners that you know, we work with in joint venture agreements, really on a recurring basis, sometimes more programmatic, but basically the idea is we want to be in long term partnerships. We’re not out there searching for individual deals or transactions to invest in we’re looking for groups that have foundations that set up well for long term partnerships because real estate at the end of the day, it’s a relationship based game. You know, it’s something we talk about a lot. We joke about, you know, in the in the public markets, you trade on insider information and you get caught You know, you’re getting fined, maybe you’re going to jail if it’s bad enough, in real estate, you just head to the bank. And that’s kind of how it works in this space relationships are very, very important information is very important. These are private capital markets, right? And so that’s that’s kind of the game that that we’re playing. And then, yeah, we work with this number of groups. And people often say to us, alpha, like, when are you going to start doing your own deals like you understand how these things work, you put the strategies together, you you help find and select the day you asset manager on the property management calls, like you’re doing all this work? And the answer is, the boots on the ground is incredibly important. And it’s also requires a ton of work that I don’t think people fully appreciate. You could fly into a city like Nashville and talk to some brokers, and they’ll show you four or five, six, you know, multifamily assets that might be for sale, and they’re probably going to be within a few miles of downtown. But all those deals, they’re they’re marketed, you’re going to pay top dollar for those assets. And they may end up being good investments. But usually the opportunity there is not the same as when, you know, you have someone who can tell you the difference between know the east side and the west side of any given Street, right. That’s where you really find these embedded opportunities. And for a group like us, we’re not trying to deploy capital into 100 transactions a year, we look for eight to 10 that we think present really well on a risk adjusted basis. And that’s why you being able to minimize expenses or reduce expenses or increase the role of the manager and these transactions is really important, right? That’s a risk mitigation. Measure, rather, you know, we’re still doing on a lot of these assets, particularly on the multi side, you know, we’re renovating, we’re increasing rents, we’re improving the way the property looks, what have you. But that’s all upside stuff. What what the the other side is really reducing your your downside. And, you know, when you buy, right, you take a lot of risk off the table. And that’s one of the challenges in the current value add workforce space is that going in yields are just so low cap rates are in many markets sub 4%. And so your margin for error is not the same when you’re buying a five and a half cap deal. Right? And so you need that downside protection in order for these transactions to make sense.
J Darrin Gross 17:20
No. And like you said, to the boots on the ground, the local knowledge, I mean, you can’t be more. I mean, there’s nothing more clear than actually knowing the neighborhood and knowing, you know, the opportunity or don’t buy on that side of the street. I mean, that’s, I can’t tell you how many times I’ve had the opportunity somebody presented, somebody started looking at it, and, and Something’s just not right. And then you find out, you know why. And it’s clearly something with local knowledge, he would, you know, wouldn’t struggle to make that decision. So definitely a good point.
Daniel Cocca 17:58
One thing I’ll say to that, I think is important that when you’re a sponsor, you’re an operator, right? You develop expertise in one very specific thing, right? If I buy apartment buildings in the Pacific Northwest, I do that when it makes sense to do it, then I also do it when it doesn’t make sense, right? Whereas a group like us, we’re out there finding these groups, but we’re only investing with them when it makes sense. We invested a ton in the Pacific Northwest and 1415 and 16, haven’t written a check into a deal. They’re probably three years, right. And if we were a normal sponsor, where that was our core business, we’d have had to fire the whole team. And you know what, none of us would be making any money anymore, right? But the ability to kind of jump around, not just from asset classes, but sponsor partners markets, even deal types, you know, focusing on cash flow versus appreciation in certain markets. That flexibility is what allows us again, to go out and achieve that idea of alpha.
J Darrin Gross 19:00
No, that makes a lot of sense. As such, your internal structure, are you are you a fund? Or do you have a fund where people invest? And then you deploy capital from the fund? Or is it a one one deal, one raise cooperation,
Daniel Cocca 19:18
investors can participate with us in two ways, we do have a fund that we basically do one every 12 months, give or take whenever the capital from the prior fund has been deployed. That’s a smaller portion of the total equity we deploy in any given year. But it’s a product that works for folks who say, hey, look, I want to write one check. And I want to get exposure to 678 real estate assets over the next year. I don’t really want to pick them out. I’m going to give you guys discretion to do it. That’s a model that that works well. And I think we’ll continue to do that in perpetuity. The vast majority of our capital probably 80% Give or take is deployed. what are called individual transactions, they really are set up almost like single transaction funds, right? So we aggregate the investors in our network who want to participate in any given deal, we create a new investment vehicle, where they’re all housed. And really, the sole purpose of that investment vehicle is to deploy capital directly into one of these transactions. And so, you know, our investors in the aggregate, in our writing multimillion dollar checks, you know, typically our equity checks are anywhere from five to $20 million dollars per transaction, right. But you as an individual, maybe you only wrote $100,000 check, but you get the benefit of tagging along with all these other investors, and you’re getting the same terms that you would get as if you were a much larger investor in these deals.
J Darrin Gross 20:52
You mentioned kind of the recycling meaning, you know, investors, they they exit one dealer, I guess, a deal sold, and then they, they typically, what’s the percentage of persistence as far as your your clientele as far as reinvesting in, in the next opportunity?
Daniel Cocca 21:11
Yeah, the significant majority of capital that comes into our network, after a sale of an asset is redeployed. So you know, you get a million dollars back, you’re gonna pay your long term capital gains. And then the rest of that is likely being reinvested, there are some folks in the network who, who are a bit older, and either in retirement or approaching retirement that, you know, are investing to generate cash flow to fund their lifestyle, but I think the vast majority of people that are network, you know, this is capital, that they’re kind of putting in an account or putting an investment, and they’re just gonna keep rolling it over and over and over and over again, until they get to the point that maybe they need to down the road, or more likely, it’s going to end up, you know, being inherited by their children or heirs, or what have you done down the road. And so the vast majority of capital that’s returned, comes back into the network. And it’s interesting, because it does create some challenges, right? When you have a deal cell. And you know, let’s say we put $5 million into a deal, and now $10 million comes out. And there’s a new opportunity that needs $15 million. Well, now, there’s going to be a massive overflow of capital, right? We have to figure out well, how do we, you know, a good problem to have don’t get me wrong, but we have to figure out, hey, how do we get all of these existing investors from, you know, the last 2345 years? How do we get their capital back into this new deal, and we have other investors coming in. And that’s a big part of the reason why we’ve done what many people think is crazy wishes cap our network, we we have a somewhat arbitrary cap of 1000 investors. And, you know, we very infrequently let new people into the network. And it’s not because we don’t like new people, it’s not because, you know, we have some weird idea that, hey, we don’t need more money, we don’t want you know, more investors, it’s really that we grew this group, it’s a private capital network, everyone who’s part of it has been invited by one of the founders, or has come in from an existing investor. And they go through a process where they get to meet one of the firm’s principles, they do really exactly what we’re doing here, just kind of telling each other’s other story. And we want to make sure those people continue to have access to the projects that we’re going to share on a going forward basis. Right? You know, there is a limited amount of equity, and projects that we think makes sense, particularly in this market today, right? And so for us, like, we’re happy, you know, deploying, you know, 100 100 $50 million a year with the group of people that that we have, and that’s really what we’re trying to do just kind of build this network and keep keep doing right, by the folks who have kind of helped us get to where we are.
J Darrin Gross 23:51
I love the fact that you, I mean, just the concept of capping an investment or have been the number of of investors. One of the things that’s always kind of rattling around in my head is more of just that. More is not always more when you have when you’re answering to more and more, you know, more and more people kind of thing, but actually kind of, you know, foster that relationship, and continue to grow together, and kind of create more of a community kind of a thing, as opposed to just constantly be out looking for new investors. And I’m assuming that that, that speaks volumes to the work you guys have been able to do and the returns you’ve been able to provide, and that people continue to reinvest with you and are pleased with the outcome and and, you know, the relationships you’ve created with them, as well as the relationships you’ve created and maintained with your investment are your syndicator the deal sponsors. So that’s, that’s great.
Daniel Cocca 24:54
Yeah, I think that’s exactly right. You know, when we bring people in, we always say, hey, let’s We’re gonna chat on the phone for an hour and get to know each other. And this may not be what you would typically do with an investing partner. But understand if you do invest with us, we’re going to be in at least a three, probably five, maybe seven plus year relationship, right? We hope we’re in a 30 year relationship, but at the very least, we’re going to be in a three to five year relationship. And so let’s make sure it makes sense. Today, let’s get on the same page on day one. And the weird thing or the funny thing, or maybe it’s more of an unfortunate thing is that that whole idea is very foreign to most of the people we speak with, you know, it’s usually this business is transaction based, like, hey, like, Sir, Ma’am, you want to invest in this deal? Awesome. I’ll sign you up you’re in. And that’s the end of the conversation. And especially when you’re dealing with investors who are not professional real estate evaluators or investors just don’t know how this space works. There are so many things that come up that people have questions about people don’t understand their expectations were off. And that’s always the issue, right? If you expect something and it doesn’t come true, or it’s different than what you’re told, that’s where you start to develop a bad taste in your mouth and right or wrong. You know, that’s just what we’re trying to avoid that right. And, you know, at the end of the day, having the smaller network allows us to have personal relationships with everyone in the network. Do I spend a ton of time on the phone? Yes, I do. Right. But it’s for the best, I think, in the long run. And yeah, it’s just part of our model.
J Darrin Gross 26:32
Yeah. I’m curious. See, in the beginning, your fundraising, how did you? How did you go about? I mean, clearly, it sounds like you’ve been successful now. And you’ve got a track record. And and people are referring others to you? How was it in the beginning?
Daniel Cocca 26:52
Well, it’s funny, because we often joke, once we started telling people, the network was capped, and we were only going to be able to take in a few people a month, like everyone’s come out of the woodwork, and all of a sudden, you know, once you join the network, and invest with us, like where were these people in 2014, when, you know, we were, we’re begging every, you know, friend and colleague and former professor to invest $10,000 with us, right. And that’s really how it happened. It started out with a group of about a dozen people who, you know, we’re closer friends, family, you know, immediate work colleagues mentors that we said, Trust us, we think this works. And then the challenge in our business is that you’ve got this constant chicken and egg problem, right, you have investors, but then you also need investments and deals to deploy that capital and to and when you only have, you know, a dozen investors who maybe are writing on average $50,000 checks, you’re looking at half a million dollar investments. And that’s not interesting to institutional private equity. And so what we had to do was leverage our personal relationships with these operators and say, Listen, cut us out a piece of your deal, give us an allocation so that we can go out, build a track record, use it to bring in more investors show people why this makes sense. And yes, we can only send you a half a million dollars today. And it’s probably going to take us two and a half to three months to pilot together. But we’re telling you down the road, we’re going to be writing you 510 15 $20 million checks on these deals, and we’re gonna have a great long term relationship. And fortunately, we didn’t prove ourselves to be liars. And we were able to ultimately get there. But I think it was really important that we set out understanding has to be a constant balance, there’s been periods of time and alpha, where we’re saying, We really need new capital, we need new investors, we have great deals, we need to get it out there. There are other times where we say, we have so many, so many investors, and we just don’t have enough equity for them. We need to pump the brakes, like we have to stop bringing new people and I think that’s kind of the world we’re in today. Not because we’re not finding interesting deal flow like we certainly are. And again, we’re looking for eight to 10 Interesting deals a year, I don’t think I could find 50 or 100 Interesting deals a year in this current market, at least in the asset classes that we invest in, but eight to 10 we can find. But you know, when you deal with small and mid market acquisitions, your equity checks, checks could be anywhere from like eight to 20 25 million, you know, in total. And so, you know, there is a ceiling on the amount of equity and capital that can be deployed in any given year. And you know, because of that we operate in the way that we do.
J Darrin Gross 29:41
Oh, it’s awesome. So today, we’re in February of 22. As we as we record this, how many deals have you seen go full cycle that you guys have been in?
Daniel Cocca 29:57
So I think we have invested I think it’s like 57 or 58 transactions. Now transaction could be a single property acquisition or it could be a portfolio, you know, property acquisition, right? We recently started doing a lot of single family rentals. And so we have a lot, you know, the, the numbers of properties are very high right now. But within the our more traditional multifamily or senior housing, assisted living memory care, but where we’ve done a lot of work, I think out of, let’s say, 60 properties, I think maybe 12 have gone full cycle. You know, we’ve been in a very, very good period over the last five or six years, to the point that, you know, we actually don’t share our weighted average returns, because they set an outrageous benchmark, right. And that’s not to like, low key kind of tout our success. See that there’s a lot of people have been successful. rising tide raises all ships, I think that’s the the phrase, you know, a 20 IRR deal on the sale in 2021, is probably some amount of execution failure. And that sounds crazy. And I hate saying it, because all we try to do is benchmark people that you should be happy with 1214 IRR deals, particularly if you’re getting them in perpetuity, it makes all the sense in the world. But you know, and your listeners know as well as I do, you know, you throw a bunch of 4050 100 IRR, deals, you know, all of a sudden, you know, a 15 IRR isn’t that appealing. And so we do spend a lot of time trying to make sure we’re framing the people in our network. And another reason why having a smaller private network is important because we actually get the opportunity to explain to our investors and get feedback about this is what we’re doing. And this is why we’re doing it. We’re not marketing to people in our network, right? We’re, you know, writing strategy, white papers explaining why we’re taking a certain course of action. And I think because we get the opportunity to get in front of these people, they know who we are, it makes it much easier for us to actually communicate why we’re doing the things that we are.
J Darrin Gross 32:17
Yeah, no, I think that that makes a lot of sense is that just having that community community that has kind of a sense of expectation and an understanding of the way you operate, and in some sort of realistic expectation is, is, you know, key to that. I think that, you know, a lot of times the social media and just, you know, the wave of real estate right now, it lends itself to you know, everybody’s just picking up gold. I mean, there’s, there’s, you know, nobody’s having a problem, nobody’s struggling, it’s all just like, homeruns. And, and, you know, it’s a lot of times it’s when you have the problems where you really learn the lessons and, and kind of course, correct and make certain you don’t do do that again. But that’s great. What your due diligence process, you talked a little bit about, kind of, you know, finding the the sponsors and a little bit about deals, how involved do you guys get with the due diligence process?
Daniel Cocca 33:17
On average, we spend around six months between the time we first meet an operating partner, and when we’ll start looking at potential investment opportunities with them. And one of the challenges is that this isn’t a process where we get on the phone, I send you a six page diligence request, and a week later, you send me back absolutely everything I need, right. When I was an associate at the law firm, that is exactly what happened. And it was very efficient. And we could churn through diligence on deals in you know, a week or two, right? That’s not the case. In our space, there’s usually a lot of back and forth getting information we need. And I think it’s also important, you know, this is not a space where every operator looks at or evaluates or tracks performance in the same way. Right? You know, you may have to go back and look through a bunch of, you know, case studies, models, financial statements to get the data that we need. And the goal is really always to make sure that, you know, the groups we’re working with have certain tangible and intangible qualities, right, we want to make sure that they’re able to execute. We don’t want to take the risk that something’s going to get messed up outside of, you know, the broader economy or the market, that your renovation pace is going to be off or you’re not going to be able to source materials or, you know, if you plan to refinance the debt on a property in year three, you don’t have the net worth to do it. Right. You know, those types of things are incredibly important. And you know, we’re never going to take any amount of risk as it relates to those you know, specific components, right? And then part of it too is just, you know, when, when you send me a document and I follow up with some questions, how do you respond? Are you quick to respond? Are your are your answers thoughtful? Have you thought through the intricacies and the details of these things in the same manner that that we are, you know, if I ask a question, you know, to you about, here’s your deal, and here’s your rent premiums. And we noticed this, one thing happened, that seems inconsistent with the rest of the data, when you say, oh, I need to go back and look at it, that’s usually a sign to me that you’re not quite as involved in the process as maybe we we want you to be right. And it’s always a bit of a balance, because, you know, that doesn’t mean that group or that person can’t be successful, they absolutely can, right. But the folks that we try to work with, and again, it’s four or five operating partners at any given time that we’re looking at investment opportunities from, so we don’t have to go out and find 1000s of very, very different standard that that we’re applying, but we’re looking for groups that you know, we think get it like and we say best in class, we don’t just mean you’ve acquired $2 billion worth of properties over the last five years, that’s a part of it, right? Experience does matter. But we want to actually believe, from our conversations that hey, like you get it, and the stuff that you don’t get you acknowledge it, you explain why you made these mistakes in the past, and now give you reasons or solutions that you’ve come up with the fix these things, right. That’s a much more important part of the process. And I think a lot of people think about, and that’s one of the challenges too, and full transparency, and just being an individual investor who’s writing a $50,000 check, right? You can’t get 40 or 50 hours on the phone with a real estate sponsor, when you want to write a $50,000 check, right? But our team does, because we’re writing substantially larger checks. And that’s where we really get through a lot of it. And, you know, if if I met 100 operating partners, you know, this year, let’s say, you know, probably, I don’t know, 70% of them would immediately be written off off the bat, either they don’t have the right experience, don’t have the right pedigree, you know, they’re too new, they’re in the wrong, you know, sector, they’re not doing markets, we think makes sense, etc. And then when you really get into the weeds with that remaining 30, by the end of the year, there’s maybe two or three that you say, okay, like, there’s some opportunity here, right. And then out of those groups, you know, everything has to kind of align right, like, we have to find a transaction that we think makes sense that we think on a risk adjusted basis, works for not just our investors, but ourselves. Because, you know, we’re invested in these deals as well, right? And it just, it takes a while. And so when you find these partnerships, they’re long term in nature, right? Like we didn’t, we didn’t invest six months, you know, building this partnership to invest in one deal with you, and then never again, right. And then on the other side of the coin, what’s what’s great about being in multiple transactions with the same groups is that, you know, I see all your performance data, right, I’m tracking your actual verse, you’re projected every single month on every single asset. And so when you bring me a new deal, and we underwrite this transaction, we can feel really comfortable that the numbers we’re using the assumptions we’re making, are as close to what should happen as as possible. Right? And these are projections, they’re not, you know, we don’t know, anything could happen, as we’ve learned over the last couple years. Right. But it does provide a great framework by which we can more confidently underwrite deals.
J Darrin Gross 38:46
Yeah, it’s an interesting balance you have there with having to, you know, continue, continuously search for a new deal sponsor, somebody that you can, you know, deploy capital with, and then also, that the investor side of the thing and on, you know, continue to nurture those relationships and possibly look for additional investors. That’s a little bit of a balancing act there. So that’s great. If we could Daniel, I’d like to shift gears here for a second. By day, I’m a real estate insurance broker, also do a little bit of real estate myself, but I work with my clients to assess risk and determine what to do with the risk. And there’s a couple of strategies we typically consider as an option. We first look to see if there’s a way we can avoid the risk. When that’s not an option, we look to see if there’s a way we can minimize the risk. And when neither the avoided or minimized strategy will work. We look to 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. It could be their clients investors, the market interest rates COVID. However you would like to frame the question. But take a look at your situation and try and determine what is the biggest risk? And for clarification, while I am an insurance broker, I’m not necessarily looking for an insurance related answer. And so if you’re willing, I’d like to ask you, Daniel Cocca, what is the BIGGEST RISK?
Daniel Cocca 40:39
So as a, I call myself a former lawyer, I guess you’re always wire risks are near and dear to my heart, right? You’ll see 10 pages of risk factors in the documents that we send out. It’s something we think about a lot. The over simplified answers, your question is that we look at deals really, with a matrix with two columns. One column is execution. The other column is market driven appreciation, right? Execution is something that we can mostly control. There are some things like supply chain and whatnot that may fall outside of our control. But usually, we can figure out ways to get ahead of the curve on those things. And the partners that we work with, we have zero doubt about their ability to execute. These are not newcomers to the real estate world. These are your tried and true groups with with long track records of success, right. And so that leaves the other column, the market driven appreciation, and that’s the real unknown. And there are a lot of factors that go into that. But I think in this present moment today, you know, February 2, the thing that we’re all thinking about is interest rates, right? And, you know, it was a day or two ago, that Bank of America shocked the world and said there’s going to be seven rate hikes this year. And everyone said, like, what, like who like what’s going on over there, right? And it wasn’t, though that long ago, like, four or five, six months where, okay, rates are gonna hike up the middle 2022, maybe we’ll see one or two. And then it was like three, and then it was like maybe three or four. And so we’ll see what happens with with interest rates. Because, you know, as I’m sure your listeners know, the cost of borrowing is a very important component of pricing, whether you’re a buyer or a seller, right. And in the historical wisdom has been that interest rates and cap rates move together, right? Meaning, you know, interest rates go down. So to cap rates, because your cost of borrowing goes down, you can pay more for a property, right. But what we saw and 1718, give or take, especially during that period of time, where we had seven rate hikes in a quarters was that that really wasn’t the case, you know, rates were going up, but cap rates were still compressing. And I think what a lot of people concluded is that there’s a lot of dry powder in real estate right now. Some of that is from the crowdfunding world, a lot of that is from no just general real estate, private equity that has record amounts of money on the sidelines. And so the real question is what will happen? You know, once rates really start to pick up, will you see, cap rates start to go up? If that does happen, I actually think would be a good thing, particularly for folks in our position, because, you know, we underwrite pretty heavy cap rate expansion into our deals. If cap rates stay flat, or compress, that means a home run, right? Investors get a ton of proceeds at exit, right? But also means it’s very challenging to redeploy that capital, because pricing is so aggressive. And so there’s a happy medium where you’re getting really strong returns, but then you also have places to redeploy that capital, where where it makes sense, right? And what we’ll find out over this year is really what happens to pricing. You know, a lot of the deals that we invest into, are you know, floating rate variable rate debt, right. And people like that type of debt over agency, you know, government, Freddie, Fannie get because there are very seldom are very small prepayment penalties, which allow us to exit much faster when you’re in a rising price environment, right. But will people then transition to longer term fixed rate agency debt again, like that’s certainly certainly possible. And so, that’s a long way of saying not just interest rates, but the response to interest rates is, you know, the biggest risk to this space. The worst case scenario, and this isn’t a bad worst case scenario, but but it is a worst case is that rates continue to move upward and cap rates stay flat or continue to compress because what that means is that when you’re buying a three and a half cap today You’re buying a really a two and a half cap at the end of the year, right, you know, apples to apples. And so that just starts to get really uncomfortable. there supposed to be a positive spread between interest rates and cap rates. And so, you know, if you buy, you buy to two and a half, and you have four and a half or 5% debt, you know, even a cash flowing deal effectively looks like new construction, right? Because there’s no cash flow in the first year or two. And you’re basically making a bet on the residual value. And so long answer to your question, probably not a particularly unique answer, but in this moment in time, February 2 2022, you know, interest rates and pricing response to interest rate change, that’s the biggest risk that I see.
J Darrin Gross 45:47
So stay tuned. We will see where it goes. But I think they’re here right on that as, as much as a lot of people are, you know, kind of thinking the same thoughts and and wait and see just exactly how the market responds. And, and we will know when we know, I guess. Daniel, where can the listeners go if they would like to learn more connect with you.
Daniel Cocca 46:12
So you can check us out? Our website is alpha i, the letter i.com. alphai.com We have a lot of information on there to share with potential new members. If you’re interested in joining, you can please feel free to request access mentioned, you know, you heard me here today. In full transparency. We’re not admitting a ton of people to the network right now for the reasons we talked about today. But you know, we do have a pretty lengthy waitlist, where we’re happy to chat with people who seem like they could be a good fit. And we’re always happy to make, you know, connections and introductions, you know, we’re people too, and we’re always trying to be helpful. But that’s where you can find more about us.
J Darrin Gross 46:50
Awesome. Daniel, 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.
Daniel Cocca 47:00
Thanks, man. Appreciate it.
J Darrin Gross 47:02
All right. For our listeners, if you liked this episode, don’t forget to like, share and subscribe. Remember, the more you know, the more you grow? That’s all we’ve got this week. Until next time, thanks for listening to Commercial Real Estate Pro Networks. CRE PN Radio.
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