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Benefits of Green Healthy Buildings with Zach Flora – CRE PN #348

Zach Flora 0:00

There’s a various ways you can think about green and healthy buildings. And if you tend to bubble to the surface as ones that are easy for for people to look at, and one of those might just be simple as accessibility, are our commercial properties industrial office multifamily, are they in walkable neighborhoods, pedestrian accessible access to public transportation and bike infrastructure. These type of things kind of promote physical activity, promote mental health outcomes that optimal mental health outcomes. But also the use of public transit and active transportation can help reduce things like air, air pollution and congestion and just create overall greener environments.

Announcer 0:43

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

J Darrin Gross 1:03

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

Today, my guest is Zack Flora. Zach is the vice president of market growth at the Center for Active Design, and Active Design Advisors Inc. And in just a minute, we’re gonna speak with Zach about how commercial and industrial building owners can increase their property valuations through green ins initiatives.

But first, a quick reminder, if you like our show, CRE PN Radio, there are a couple of 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 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. And you can find us on YouTube at commercial real estate pro network. And while you’re there, please subscribe. With that, I want to welcome my guest, Zack, welcome to CRE PN Radio.

Zach Flora 2:22

Darrin, thank you for having me. It’s a pleasure.

J Darrin Gross 2:24

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

Zach Flora 2:34

Sure, absolutely. So I have been working for the Center for Active Design and Active Design Advisors Inc, on the kind of fitwel platform, which is a healthy bidding platform for the last four years. And my primary role is to work across the real estate community with some large real estate investors, owners and managers on how they can optimize their properties, looking at green and healthy building initiatives to kind of maximize value or or maximize impact and how to bake those things into some broader sustainability or, or ESG initiatives. And, you know, in my background is is not necessarily in in commercial real estate directly. I have some experience and then health and wellness and well being and working for some real estate related platforms and research sites. But I’ve been able to, in the last four years really help that real estate community better understand what it means to be a green or healthy building, and how that translates into kind of a return on investment for their stakeholders, whether it be their occupants, themselves or their investors.

J Darrin Gross 3:42

No, that’s great. So talking about green versus conventional, there’s, you know, I guess a plethora of, of whether it be systems or you know, ways you can implement this. Are there some examples that are like some go to examples that that are the easy kind of the low hanging fruit that you typically recommend building owners employ?

Zach Flora 4:16

Yeah, so I think there’s a various ways people can think about green and healthy buildings. And a few tend to bubble to the surface as ones that are easy for for people to look at. And one of those might just be simple as accessibility. Are our commercial properties industrial office multifamily. Are they in walkable neighborhoods, pedestrian accessible access to public transportation and bike infrastructure. These type of things kind of promote physical activity for most mental health outcomes that optimal mental health outcomes. But also the use of public transit and active transportation can help reduce things like air, air pollution and congestion and just create overall greener environments. Secondly, I think nature and just access to nature and prioritizing that. So having things like street trees and neighborhoods or in public spaces or creating well landscaped public spaces, and outdoor spaces, again helps to decrease stress can also often times improve physical activity by making those kind of pedestrian infrastructure more more exciting or or more accessible, but also again, having that natural elements such as trees helps to reduce the exposure to pollutants by controlling some things like air quality. And finally, things like like safe siting, so are you able to locate projects away from environmental hazards such as landfills or power plants or, or contaminated sites, again, going along the lines of helping to reduce kind of stress and anxiety and improve mental health outcomes of your occupants, whether they be commercial office industrial or multifamily, but also kind of its cutting your exposure to those contaminants or pollutants that might be in the air and pose a danger to to your health. Those are three that I think are come to mind for a lot of people. But when we talk about green buildings and healthy buildings, it’s a much more I think, dynamic and comprehensive viewpoint, especially over the last few years, I think COVID-19 has really changed our view of what it means to be a green or or healthy building. Many years ago, there was a study, I think, by CBRE that looked at, you know, what do occupants one buildings and natural daylight was one of the main things and that’s another, you know, aspect of green and healthy buildings access to a prioritization of natural, natural light indoors. But today, I think things like indoor air quality and cleaning protocols are really front of mind for a lot of our for a lot of employers and their employees, in terms of what does it mean to be kind of green and healthy, healthy building or green and healthy sight?

J Darrin Gross 7:11

That’s funny. Everything you mentioned, there was not on my radar as far as what I thought you might, you might identify I had like, like light bulbs, and you know, or some sort of like, more of like a, an energy kind of thing, as opposed to the green. I mean, the actual, the physical green space. I mean, it’s basically about, you know, like I said, creating more of a, I guess more of an environment where people are able to, to kind of interact more with nature and all that, or just having more of that connection there. And and like imagine that, that is a person in that environment that you all sudden, it’s just there’s a, there’s a level of calm or a just a more desirable place to be has that that kind of what I guess the question is kind of what I’m trying to reconcile it. So in the efforts to make more of a green design? Is there something that you can measure or that there’s a way to measure something that’s more green, less green as it is it? Is there a scale? Or how do you how do you measure that?

Zach Flora 8:22

Yeah, I mean, I think at the end of the day, the idea of green buildings has really evolved, right? So from the 80s, thinking about sick building syndrome to, you know, the early 2000s, when we’re thinking really about kind of light bulbs and energy efficiency. Today, when we think about green buildings, we take, I think, a much more human centric approach to say, how are green buildings improving our environmental metrics, or the environmental KPIs that we have set for us, which might be things like, energy use, or waste or and water, things like that. But it also has to have a human component to it that’s much more tangible. So a lot of those things I mentioned earlier, things like accessibility, access to nature, a lot of times are much more tangible to the occupants inside. And they help to really add some texture to the things you’re doing for those to create green and healthy buildings. And they’ll again, the last couple of years have really shifted the conversation from I only need to think about energy efficiency, because that’s going to help reduce operating costs for myself, or reduce operating costs for or reduce kind of occupancy costs from my tenants. But how do I actually look at and think about the tangible aspect of creating environments that improve mental health where tenants or employees can see the things that we’re doing to create environments that are green, and healthy? And I think you actually hit something right on the head there, which is you have to be able to kind of measure the impact on health and the fit well system is really the platform is is crucial to a lot of companies kind of really understanding what it means to be green and healthy building because it allows them to take those evidence based design and operational strategies that are part of the fitwel standard. And use those to prioritize health and green building initiatives across their across their buildings across their sites across their communities, and then ties those strategies. So things like creating access to outdoor space, or having having accessibility to transit or improving indoor air quality. And taking that and showing that there’s a measurable impact on health to through various kind of a health outcomes or various kind of health impact categories, I would say. So if we take mental health for, for example, if you are in buildings that have access to outdoor space, if you have views of nature, from your worksite, if you have access to natural daylight, you can show a true positive impact on the health of occupants. And that positive impact can be shown in things like productivity. Even things like indoor air quality, if we’re able to optimize indoor air quality practices within buildings, were actually able to show not only an impact in things like mental health or or occupant health, but we can also look at things like occupant productivity. And these types of kind of measurements allow companies to really create a strategic plan to prioritize health and prioritized green initiatives and move them one step forward into some broader kind of sustainability or ESG agendas that their investors and the financial community is really looking for, as they evaluate their options and opportunities.

J Darrin Gross 11:48

Right. And again, from an investor standpoint, you know, just basically about, excuse me return, I mean, you know, from just a dollars and cents thing, although baked into that is the the fact that people want to be there, whether that be your your tenant, as a company or the company’s employees, or, you know, that there’s some sort of an inviting space, I would think would be kind of the key to any kind of creating an undesirable environment desirable property. So, I’m curious, as this conversation has changed from like, like, you know, we mentioned the kind of the energy consumption to now more the green space and mental health. In like the energy space, there were like incentives that were there were made available to property owners, through the utilities, and possibly even code change was implemented to kind of promote this and implement this. Are there any similar type? I mean, are you seeing building codes kind of create this space? Or require it? Or are there any incentives for building or for building owners to create these spaces?

Zach Flora 13:16

Yeah, so you know, healthy buildings are really cheap.

J Darrin Gross 13:19

I’m sorry, when I say incentives, I want to make sure that obviously, the incentive to create a nice space for the occupants, but I, but more of like, some sort of financial incentive, where there was like, like a, like some of the the utilities had some sort of money available for, you know, building owners that would convert their their energy. Use it.

Zach Flora 13:43

Yeah, absolutely. So I mean, healthy buildings are relatively new. And this idea that a building can impact your health from the broader real estate community or or investment community, it’s relatively new and green buildings have, you know, that idea has been kind of proliferating for the last couple of decades. So when we think about green buildings, and we think about, you know, incentives, yes, there’s always there’s those regulations or those, you know, financial incentives about, you know, a tax breaks or, or things like that, to help drive the development of kind of your your typical green buildings. But the financial incentive, I think for for traditional green buildings has always been around things like operational protocols. So if you are creating more energy efficient buildings, you can reduce your kind of operation, operating expenses, through savings on that, on those aspects. I think we also when we look at Green buildings, we’re starting to see more and more over the last decade, that they actually can drive higher occupancy rates. So we’re seeing that more and more these buildings that are considered green, are seeing higher sales prices are they’re seeing higher leasing prices. They’re seeing more stable tenants. They’re seeing tenants that are signing on for longer lease terms. And part of that goes back to his operating census, right with the with the growth of triple net leases. Green buildings offer more stability, I think for those employers and those tenants of commercial office and industrial spaces to say, we can reduce our risk of fluctuating energy prices, or of maybe issues related to climate change. So you certainly have those reduced operating costs both for the owner and the employer. And then that’s leading to, I think, some more stability in terms of occupancy rates. And that’s a thing a huge, a huge part of the scope that I think stakeholders and investors are looking at when they’re identifying these different properties. But part of the, the new part of the conversation is what we call LSA, brown discounts. So buildings that are not kind of building to these green codes are retrofitted to be energy efficient. In order to include some of these healthy building practices like access to transit, outdoor amenity spaces access to natural daylight, we’re seeing that those owners are actually struggling to keep and retain tenants. And they may actually have to provide discounts on leasing out space or or renting out that space. And if they’re not willing to make the investment and updates to these buildings, to be able to show those green building practices with those healthy healthy building practices, they actually have to, you know, unload these properties at a discount, because they’re really a, you know, become a risk to their portfolio and a risk to their investment. I’m based in New York. And you know, recently they passed the climate mobilization Act, which you know, there can be fines and fees for properties of a certain size that don’t hit certain kind of emissions caps. So now, some of these additional assets, especially in the office market, there are even fines, and then some legal action risks that can come from the building not being optimized for kind of these green and healthy outcomes. And I think that the financial community is really taking a look at that and saying, there is an incentive not only from the bottom up, so tenants are asking for more of these more of these amenities and more of these kinds of operational savings by having energy efficiency by having access to amenities. But we’re also seeing the kind of financial institutions asking for how are you minimizing risks related to things like climate change, but also health? You know, and COVID-19 has certainly shown us that, that healthy buildings are a must have now and not a nice to have. Because we’re, you know, we’re still kind of going through the, I think the recovery, I mean, many of the office market is only 30 to 40% occupied right now. And they’re struggling to attract employees and attract employers back to the office. And part of that is, these real estate owners and operators and managers are going to have to find ways to build trust among the occupier community, and get back to the office by saying we have considered we are considering your health, your safety, we’re creating more resilient spaces and bring them back through that kind of trust building in that communication. But, you know, a silver lining from the last two years with COVID, at least from my perspective, is that we have a much more

a knowledgeable set of employers and employees and residents who are understanding the link between health and the places they live in work. And they’re understanding how green building practices and healthy building practices are, affect them. So whether it be your office or your home, or the places you learn or the places you shop. There’s they’re asking for more, and they’re demanding more from kind of the real estate community on how they’re delivering, designing and renovating the spaces. And that’s certainly an incentive for a lot of these companies in the financial markets. And the investors have noticed that and they’ve taken into account in their own kind of scopes, you know, how do we ensure the stability of our assets, and they’re saying they have to be kind of looking at their environmental impact, they have to be looking at their social impact in terms of health and, and how it’s impacting occupants, because this rise of maybe ESG, or environmental and social governance issues and standards are really playing a role and the proliferation of green buildings and healthy buildings and changing the markets as as we come together.

J Darrin Gross 19:29

So do you see that the majority of the green is in new construction or is it is there a healthy retrofit for existing buildings?

Zach Flora 19:45

Sure, so I think in many cities and in many municipalities designing to green buildings is becoming the standard I mean, look at across and designing to healthy buildings becoming the standard I look across a lot of fit well users and a lot of fit well. I Um, the real estate companies were using fit well, and they are baking them into their their design centers, they are going to build to be able to stand against the fitwel standard. And they are going to design new developments and new sites or complete major renovations or major repositioning of buildings and sites to be designed to leverage things like fitwel, or other green building certifications and platforms like like LEED. So that I think is definitely a growing body of knowledge that we have to build to the standards, because that’s what the new crop of employees and employers gonna be asking for. One of the real benefits of the fit well platform is that was actually designed for existing buildings. So fit well was developed by the CDC and the GSA between 2010 and 2015. And it was designed for existing buildings. Because when we think about kind of making green buildings or healthy buildings, a part of your just operational protocol and a part of your standard and culture as an organization, whether it be an occupier real estate or developer, you need to be able to use it across your entire portfolio to really show those impacts. And to get back to something we talked about earlier, which is to really measure the impact you’re having on those environmental metrics, or to measure those impact measure those impacts are having on kind of occupant health and safety, you need to roll it out across at scale, it can’t just be on one or two flagship new construction buildings. Because most portfolios out there are going to be you know, 90% existing assets that have another few decades left in their lifespan. So if it will have been designed for existing buildings was really a game changer for the industry to say we can look at not only our new construction projects, but we can also look at all of our existing buildings and find ways to optimize those do some low cost but high impact strategies. You know, we talked about things like having transit or or outdoor space, or even kind of opening up stairwells to allow individuals to circulate at the building. Using stairs, instead of setting the elevators, a lot of these things are low cost to implement, but they have a huge impact in the occupant experience or a huge impact in occupant satisfaction rates and can really drive some those metrics you’re looking for. And because they’re low cost, I think you see some of those financial returns being at a much kind of higher premium, you can roll this out across your portfolio, you can begin to measure and manage, you know, if I’m doing these things at my across all my commercial office assets, are we seeing increased stability in tenants? Are we seeing longer leases, are we seeing higher tenant satisfaction rates, being able to use those things to measure what your investments will be in the future, I think is truly key to to rolling these out.

J Darrin Gross 22:51

All right, you know, a frustration of mine that I’ve seen as more in the consumer space, but it’s just, you know, a lot of the energy efficiency products, they use less material in the manufacturing, but they only last, you know, half or maybe 25% of what the the old traditional conventional product was, whether it be a refrigerator, a washer, dryer, whatever it might be, kind of thing. But I’m curious in in this conversation with with the kind of going green? Is there a cost? I mean, if you had to two projects, one being a conventional one being more of a green model, is there a cost difference in the actual implementation of the the two methods or the two two types?

Zach Flora 23:47

Great question. So every location is going to be different based off the size of the project, region, location, access to materials, I’d say the sooner you bake in things like healthy building practices, or standard like fit well into the design and development of a project, the more you’re going to reduce the the capital cost of implementing those kinds of brain building operational protocols. So there’s green building, or there’s healthy building design elements. So we’re seeing a lot and again, another reason why these companies are baking fit well into their their design programs is because they’re trying to reduce the cost of creating healthy buildings, there’s always going to be a little bit more of a premium if you’re kind of renovating a building to meet green standard or meet a healthy building standard, like fit well. I think the beauty of fit well and the platform that we’ve built is there is a ton of strategies about 70 Plus across each of our different asset level scorecards, and you as the consumer get to choose based off your occupant profile, your budget, your location. How do you want to create a healthy building what strategies will mean the most to you? or occupants, you know, again, a building in downtown Manhattan versus a building out in in Westchester County versus a building maybe in a more rural location, they’re going to have different needs based off their occupants based off their budgets based off their space considerations. So being able to choose strategies that work for you, I think is key to keeping those costs down. And fit was designed, again, some really low cost, high impact strategies that will move the needle and showing how you’re impacting health. But also based off, you know, 100 years of public health research. You know, we tend to think about healthy building practices. Maybe we kind of entered this earlier, and we talked about LED lighting versus, you know, accessibility to transit. Some of these things are not new, some of these things are not, are not things we haven’t thought about before. I mean, it was based off 100 years of public health research, it’s really about how he implemented in buildings to design in a way that it improves the occupant experience, and that it allows companies to roll it out at scale. And being able to use some do something across your entire portfolio, like indoor air quality practices around ventilation or around cleaning protocols, or emergency preparedness is incredibly key. And as we look at you know, our, you know, the industrial developments that are coming down the pipeline, and how they’re optimizing for, you know, occupant safety or occupant health, the more you can bake those things in, in the early stages, the the less expensive, it’s going to be to think about these things. And the the less expensive will be to kind of renovate buildings in the future to meet the to meet this demand or to meet this, this this need.

J Darrin Gross 26:43

Now, it’s great. You continue to mention the footwell thing, and so make sure that I’m understanding you’d said something about CDC and then the GSA created this, but then it sounds like your your group is halfway or partly involved in this. Can you kind of explain the relationship and and what the fit? Well, I mean, the overall concept of

Zach Flora 27:09

Yeah, absolutely. So football is a healthy burning platform that helps the real estate communities and designers kind of understand how a building’s operational and design, operational protocols and design practices are going to impact the health of occupants. And we take a holistic and interrelated approach to helping companies understand and prioritize the health of their occupants and the communities that they serve through evidence based strategies that are proven to remote health. And then we take those strategies and we show you through a series of metrics and health impact data. How exactly you’re impacting the health of your occupants through certain strategies or protocols, and how you can measurably track changes in occupant health outcomes by implementing certain building practices. So if it was actually again, this, like I said, designed by created by poor leading practitioners at the CDC, and piloted across a portion of the GSAs portfolio between 2010 and 2015. And then the Senate rep resigned, the organization I work for was was chosen to bring Phil out to marketplace. So centerback design or I’ll call it C fad from now on C fad is responsible for the platform’s development and growth end. And maintenance and accurate design advisors was rolled out in last year, to help kind of implement our scalable strategy a fit well, and drive kind of market transformation. Our goal is to really motivate the entire real estate design industry, towards thinking about healthy buildings and thinking about how we can include this idea about health, healthy buildings and green buildings into every kind of stage of decision making. Our organizations still still work closely with the CDC to help us kind of provide and understand research alone about it, you know, a dozen other kind of academic and research institutions. And we’ve been very successful, I think our last four years helping to communicate what is what does it mean to be healthy building and what does it mean to utilize our resources to understand how your portfolios are impacting health and how you can make changes to further drive that that impact and how you can measure that impact? So that you can use it for your sustainability or ESG reporting or financial reporting?

J Darrin Gross 29:41

Got it? Is the fit well model designed to apply strictly to to like the office asset class or does it does it have information you know, across the investment spectrum, you know, industrial retail Does it fit all of the all of the different asset classes?

Zach Flora 30:06

Yeah, absolutely. So we’ve got different. We call them scorecards, but different scorecards for kind of the commercial office, asset class, retail, multifamily, residential, senior housing. And we also have one specifically for kind of commercial and industrial sites. That’s been designed for the industrial asset owners and investors to ensure that the sites they develop and manage are tailored to promote health and well being amongst their tenants. So we can we have different scorecards for different asset types. When we you know, the workplace scorecard is certainly our longest and Legacy product. With industrial and senior housing being some of our most recent, we also have scorecards for individual occupiers real estate, so really looking at the tenant and how they can fit out their own fit outs, whether it be within industrial spaces, or retail spaces, or within kind of multi tenant, commercial office buildings. I’ll say our industrial sites scorecard is one of the few available certifications for those industrial sites. And there’s been a lot of interest from that kind of asset class. As they look to kind of better communicate or strengthen the things that they’re doing around healthy and green buildings. There’s also a huge opportunity now to differentiate your products through health and well being. I was reading a report yesterday from from dodge that said, they’re forecasting about 53 billion in construction starts and kind of the warehouse and distribution market this year. And that’ll account for about a third of the entire US commercial construction construction sector. As we see a lot more of that kind of square footage of industrial space warehouse and distribution and logistics hit the market, being able to differentiate yourself through product like fit well using, whether it be commercial office or industrial, that’ll be huge to making sure that you are still accessing those top tier tenants that you’re still being able to stabilize your tenants that you’ve already signed, and continue leasing with them and continue working with them.

J Darrin Gross 32:15

So do you find that most of the the interest comes from the landlord? Or is it is there a drive from the the tenants, too? Are they pushing the market based on what they’re what they’re most likely to lease? Or? Or is it? Is there an action reaction?

Zach Flora 32:36

Yeah, it’s kind of a perfect storm, right? I mean, we actually did a survey of the real estate investment community during and I would say between September of 2020. And they released the report released in March of 2021, looking at, you know, investor sentiment around healthy buildings. And we found that, you know, 87% of real estate investors responded that they were experiencing increased demand for healthy buildings. And that that demand was really being driven by their tenants, particularly in office and residential, that those tenants were demanding things around healthy building practices and protocols. And that was kind of driving them. But at the same time, we found that there’s this rise for kind of ES more kind of material ESG related data. And while I think green building certifications and things around energy and waste and water have really solidified that the E or the environmental component of that kind of reporting, companies and large real estate investment trusts and managers were looking for ways to better solidify that s symmetric, and they found that health and well being and the kind of metrics that fit well provides, through their kind of through the online platform, were great ways to further strengthen that reporting on us and really show how health and well being are kind of becoming proxies for that kind of that s symmetric, if you will. So tenants really driving demand, but I think the need to respond to their financial investors and really show a more material assessment of assets was also a huge driver for that. And I think, again, I’ll say you know, as COVID has changed the perceptions of individuals, individual employees and residents alike, they’re demanding more from their, from the place they live in the place that they work. So we’ve always had a large number of real estate owners and investors using the federal platform. In the last, I’d say, a year or so we’ve seen a huge increase from the multifamily asset class, from the industrial asset class, but also from those kind of individual occupiers and real estate saying we want to make sure that our HR policies, our operational policies, the way we’re designing our own workspaces, are going to optimize employees health, especially when it comes to mental health outcomes or social equity or In, you know, industrial spaces occupant safety and in those environments?

J Darrin Gross 35:07

Hi, it’s fascinating how, you know, these things that, you know, can can affect just the well being and, you know, one’s just having a good day or not kind of hearing, you know, inviting space. That’s, that’s great. The Can I ask you a question, and it’s like golfing slipped my mind here? Well, let me do this. Let me shift gears here for a second. Sec, by day, I’m an insurance broker and, and I work with my clients to assess risk and determine what to do with the risk. And there’s there’s three strategies we typically consider, we first look to see if there’s a way to avoid the risk. If we can’t avoid it, we look to see if there’s a way to minimize the risk. And then if we cannot avoid or minimize, we look to see if there’s a way we can transfer the risk. And that’s what an insurance policy is, is a risk transfer vehicle. And I like to ask my guests, if they can look at their own situation can be their clients, investors, the market? Government, however, you know, you choose to frame the question, but I like to ask my guests, and I’d like to ask you to what you consider to be the biggest risk. And for clarification, like I said, Well, I’m an insurance broker, I’m not necessarily looking for an insurance related answer. But with that, if you’re willing, I like to ask you, Zack Flora, what is the biggest risk?

Zach Flora 36:39

Yeah, Darrin, absolutely. And I’m going to come at it from the point of their real estate community. And there’s this growing need to be able to kind of measure and implement green and healthy building initiatives. And I think the biggest risk to the real estate community today is to not understand what it means to be a healthy building, not understand what it means to what those concepts are around creating a healthy building and to neut to narrowly focus in on kind of one set of aspects. So if it’s an industrial to narrow to narrowly focusing on maybe things like workplace injury or commercial office space, to narrowly focusing on things like indoor air quality, or to say we’re doing energy efficiency, and that’s going to be enough. Being the healthy buildings are this idea of healthy buildings are relatively new, even though the evidence base has been around for for 100 years, companies and the real estate community specifically, they need to understand exactly how their buildings are performing against a set of related metrics. So that they can begin to figure out how to manage and measure the risk related to health. And, you know, we can come back to that, that office environment, we have low occupancy rates, still, we’re struggling to get people back into the office, if you don’t know how your properties are actually impacting health right now, you’re not going to be able to make the effective changes to build that trust and reduce and mitigate that risk moving forward, you’re not gonna be able to figure out how do I prevent reduced occupancies in the face of maybe a future contagious or respiratory infectious disease outbreak like COVID-19, we are not going to understand how do I control for mental health issues and social equity issues that my employer that my tenants and their employees are asking about. So not being able to kind of look at the broader picture, understanding where you are, where you’re starting from. So you can make a really strategic and informed plan moving forward is, I think the biggest risk to saying you’re not gonna be able to see some of the returns we talked about, unless you know exactly where you’re starting from and setting goals and being able to meet them, you’re not going to be able to see those kind of the suitability of tenants, you’re not going to see that return on investment. Because maybe you were too narrow in your focus, or maybe you didn’t know where to start, and you didn’t know where you are. So you didn’t start appropriately, in kind of retrofitting or designing or implementing healthy buildings in your culture.

J Darrin Gross 39:09

No, it’s certainly a topic that, you know, I’m certain every investor wants their property be the most desirable. So they can, you know, track the highest rents and the highest sale price kind of thing. But it’s it’s not a I think there’s a lot of times when you have some sort of new concept or just kind of a, a kind of trying to get your hands around or you know, try and understand exactly what it is. But it certainly like you said with the old COVID experience, it certainly raised the awareness overall of just how impactful the the environment is an unwanted Health Net. So that’s, that’s great. The question I meant to ask you and this kind of ties in as we wrap up here. The fit well system is Is this? Is it a platform that anyone can access? Or is it something that they have to go through a vendor to get to? Or how can one learn more about the fit wel System?

Zach Flora 40:14

Yeah, absolutely. So anyone can utilize that way. You don’t have to utilize any specific vendor or any specific consultant. Anybody can find out more by going to www.fitwel. That’s fit w e l.org. There, you can learn more about kind of what is fit well, how does it work, and access our kind of our proprietary online technology that will allow you to, like I said, upload your entire portfolio, understand assess your property against the fit, well standard, access some of those health metrics, and be able to make informed decisions about how to kind of improve the performance of the impact that your real estate assets are having on on their occupants. But yeah, open everybody and if anyone’s interested in learning more, from me specifically, they can email info at fit well.org To find out more about myself for or how the platform works or how they can get started with it. And just to be clear,

J Darrin Gross 41:12

fit well as fit W E L is or not two L’s

Zach Flora 41:17

there’s one L so fit W E L your crown. Okay.

J Darrin Gross 41:20

Okay, my sure heard your answer. Awesome. Well, Zach, I have learned a bunch. I appreciate you taking the time to talk today. And I look forward to doing it again soon.

Zach Flora 41:33

Yeah, Darrin, it was an absolute pleasure. Thank you so much. And I look forward the next time we we chat.

J Darrin Gross 41:38

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.

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Commercial Real Estate Investors and Deal Matchmaker with Daniel Cocca – CRE PN #344

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.

Announcer 0:50

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.

But first a quick reminder, if you’d 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. And you can find us on YouTube at commercial real estate pro network. And while you’re there, please subscribe. With that, I want to welcome my guest, Daniel, welcome to CRE PN Radio.

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.

Announcer 47:22

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

ERIC DINICOLA 0:00

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

Announcer 0:41

J Darrin Gross 1:00

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

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

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

NICK EARLS 2:42

Hey, thanks for having us on.

ERIC DINICOLA 2:43

Thanks a lot.

J Darrin Gross 2:45

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

NICK EARLS 2:56

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

J Darrin Gross 5:38

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

ERIC DINICOLA 7:02

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

J Darrin Gross 10:17

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

ERIC DINICOLA 10:33

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

J Darrin Gross 10:46

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

NICK EARLS 11:39

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

J Darrin Gross 13:40

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

ERIC DINICOLA 13:55

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

J Darrin Gross 15:21

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

NICK EARLS 16:03

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

J Darrin Gross 17:52

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

ERIC DINICOLA 20:14

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

J Darrin Gross 23:10

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

NICK EARLS 24:06

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

J Darrin Gross 28:12

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

ERIC DINICOLA 28:37

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

J Darrin Gross 30:26

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

NICK EARLS 31:16

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

ERIC DINICOLA 32:46

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

J Darrin Gross 33:20

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

ERIC DINICOLA 33:51

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

J Darrin Gross 35:08

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

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

NICK EARLS 36:13

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

J Darrin Gross 38:07

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

ERIC DINICOLA 39:49

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

J Darrin Gross 42:53

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

NICK EARLS 43:38

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

J Darrin Gross 44:19

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

NICK EARLS 44:31

Hey, thanks so much for having us on.

ERIC DINICOLA 44:33

Thank you, Darrin. Appreciate it.

J Darrin Gross 44:35

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

Announcer 44:55

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Real Estate Deal Sponsors Verification with Lance Pederson – CRE PN #328

Lance Pederson 0:00

It’s been great because we’ve been on a historic Bull Run. So everyone looks like a genius. But at some point, some point that stops, right? It’s these these markets, real estate is cyclical, and it will cycle and they’ll, you know, I just don’t want to see a situation where a bunch of people raised a bunch of money did a bunch of deals based on you know, fabricating sort of their claim. So we allow sponsors to pay us to verify their track record, right. So my whole thing is, listen, pay us once we’re an independent third party and just keep paying us to verify the things you do, you now have a living track record. So when you make the claim that you’ve acquired half a billion dollars worth of real estate, you can literally say, well, don’t trust me, just go look on my profile on Verivest and you can see that you know that that they’ve already checked it.

Unknown Speaker 0:46

J Darrin Gross 1:05

Today, my guest is Lance Pederson. Lance is the Founder and Managing Partner of Verivest, and the host of the Real Estate Risk Report Podcast.

And in just a minute, we’re gonna speak with Lance about Verivest, verification and monitoring. And but first, if you would like we would love your your help, there’s couple things you can do to help us out. You can like, share and subscribe. And as always, we encourage you to leave a comment, we’d love to hear from our listeners. Also, if you’d like to see how handsome our guests are, you can check out our YouTube channel. And you can find us on youtube at Commercial Real Estate Pro Network. And while you’re there, please subscribe. With that, I want to welcome my guest, Lance, welcome to CRE PN Radio.

Lance Pederson 2:17

Yeah, thanks for having me, Darrin. Appreciate it.

J Darrin Gross 2:20

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

Lance Pederson 2:29

Yeah, I think you know, for me, my background is I’m an entrepreneur at heart. So you know, went to college for a brief time realized that wasn’t for me, had not to, you know, too much fine. I think I you know, realize that more of the entrepreneurial pursuits are my thing. And so I started my first company I was 20 years old, it was an IT services company. So built that from nothing to about 5 million in revenue and 35 employees and sold that and then I ended up getting into the real estate game via commercial hard money lending through a mutual acquaintance of ours, Darrin, Matt Burk. He was in my EO Entrepreneurs Organization forum group who became good buddies and I joined forces with him in 2008. And then we pivoted the business in 2011, to really moving more from private lending strategy exclusively to more of a capital allocation strategy. You know, private equity, real estate investing. And and that led to sort of the accidental business that we now refer to as veribest. We learned quickly with our capital allocation strategy of investing in deal sponsors around the country that the back end back office reporting is a was a big problem and was creating issues for us to report to our investors. And so we started offering it as a service. And given my sort of outsourcing type of background and I headed that up. And it really took off and and now if we’re, what do we have nine years later, it’s a, it’s a, it’s a great business. And we’ve got about two almost pushing 2.3 billion in assets under administration and serving a big need. And along the way, we’ve sort of, you know, uncovered as entrepreneurs do other other issues or friction in this little corner of the world, that is sort of sub sub institutional, real estate investing and, and have tried to eliminate or remove as much of it as we can to, to help all the participants, you know, limited partners, or investors and general partners and deal sponsors.

J Darrin Gross 4:41

I love the path. You know, even from college, recognizing that wasn’t the thing to, you know, following your entrepreneurial spirit and then sounds like you’ve, you have kind of an awareness of a problem and when there’s a problem, kind of find a solution. If there’s not one, I’m assuming And it sounds like it’s worked out pretty well for you. So let’s talk a little bit about Verivest Can you describe just what is Verivest?

Lance Pederson 5:14

Yeah, I mean I think at the core of what Verivest is, is we’re really a middle and back office administration platform, you know, for the like what I call the sub institutional real estate space you know, and it’s really with the proliferation of syndication since the passage of the jobs act right you’ve got a lot more high net worth investors and you know, smaller family offices that are investing into you know, funds or one offs or syndicated deals you know, 50 100 150 200 grand at a time and so you know, there’s there’s a lot of moving parts that come along with that and so it veribest really what we’re trying to do I think now you know, as the years go by the clarity becomes greater is that it’s really trying to help match interested investors you know, match and you know, educate and match limited partners or passive investors with you know, general partners or, you know, deal sponsors in the space. Because, you know, I think the commonality between the deal sponsors is that these aren’t household names we’re not talking Blackstone or KKR. So you don’t have no you have no brand recognition. If you’re really good, it means you probably have a really solid acquisition strategy whether you’re originating loans or you’re buying houses or multifamily buildings, you know, if the better you become at it, then then your pipeline becomes You know, it versions and, and it really capital becomes a constraint, and then managing that capital, right, those investor relationships and all those things is very different than you know, acquiring property and even the asset management right, which is what many of the participants in this space that’s their passion, you know, their deal guys, they like negotiating, they like underwriting, they like you know, real estate for, you know, for the real estate, but yet you know, what comes along with it is that you really need to use other people’s capital to grow and scale a real estate investment firm. And I think from the investor side right, it’s now that they are aware that you know, you can allocate capital into these alternative investments and specifically real estate ventures into agree that you’re credited especially that’s what most of the opportunities are available to them. It’s just you can really generate outsized returns, right, and I think, above average risk adjusted returns. And but the issue of course, once again, is figuring out who’s offering those investments and then figuring out whether or not you should trust them with your money, I think is that problem now that needs to be solved? You know, back in the day, you know, if you were gonna invest in a deal like this, it was probably in the town you’re you lived in, right? And you probably heard about it from buddies on the golf course. And that’s fine and dandy, but you know, that’s not super scalable. So even even from any deal sponsors I mean, even as human beings I mean, how many relationships can we really build I mean, it’s some of us more guys like me fewer, I’m introverted. Anyway, many real estate guys are probably similar. So they’re not it’s hard to go out there and sort of build the net new relationships with people that are in your locale, there’s sort of a finite number, but now that we can advertise these things broadly, you know, you can develop relationships with the power of the internet, but you run into this problem of you know, there’s there’s limited oversight and regulation by design which is which is which is a good thing, we want to keep it that way. But at the same time, we want to make sure that the good guys are winning and that you know who they are. That’s sort of when I wake when I woke up this morning that’s really what I’m all about Darrin is I woke up this morning a leader of a movement you know, I really believe that that this is what the industry needs Is this fair play you know to ensure that it can proliferate and I believe that limited partners deserve to have greater transparency into these investments and you know, I’m a lead the movement and try to help create and foster the solutions and implement them so that so that that continues.

J Darrin Gross 9:24

Got it. So Verivest, you guys kind of set between the deal sponsors and the investors as far as a kind of a lens to look through that, that looks at the the deal sponsors and kind of, do you rate them or do you just kind of composite, the, you know, profile the information or how, how does an investor What do they see when they when they look at a Verivest, is it a report or is it a subscription or how is it that the information is made available,

Lance Pederson 9:58

So the way we structured that component of it is we’ve created a directory. So each sponsor has a profile. And so investors can go there and they can filter that directory by, you know, property types geography, you know, you know, try to narrow down, like who’s doing deals that look like what I’m looking for. And then what we don’t rate them. But what we do is we say, Okay, well, if you want to be a verified, you know, you want to be verified, verified sponsor, then you and the principals of the firm those who control this firm that you’ve representing your company need to pass a background check. So will that look back seven years and you can’t have any felony criminal convictions? No, you know, personal or business bankruptcies, no unresolved accusations of fraud from investors, no regulatory sanctions, you know, the bad boy stuff. And then the results of that background check are publicly accessible to the world. So even if, you know, if you’ve been in some lawsuits, those are going to show up. I mean, it may not be a disqualifying event from being veribest verified. But you know, nonetheless, those are the things that show up because, as we know, that’s sort of where you can find some red flags. People are highly litigious, although it’s not my place to sort of pass judgment on what’s too litigious or not. And I’d rather not do that. And veribest would rather not do that. I if we make that information transparent to the investors before they invest, they can say, well, this person, although, you know, has no, no one’s accusing them currently of fraud that hasn’t been resolved, you seem they seem to keep running into issues, right. So giving that in that information, and you know, what happens when they know that’s going to be accessible, the guys who have questionable backgrounds, guess what, they don’t participate. And then for those who do participate, it’s sort of that reminder every day that they wake up, to sort of keep their nose clean. So to me, you know, that’s, that’s that component of it. And then the other big piece that we do, once again, we’re not rating it, we’re just we’re just the twist is all what’s objective and empirical. And what can we measure? So someone’s telling me on the phone, that that they’ve acquired $500 million worth of multifamily properties? It’s pretty easy to say that, you know, eyes the investor having just met them minutes before, how in the world can I? How can I corroborate whether or not that’s an accurate and true statement or not, I can’t. So what’s happened in this business, which is one of the reasons why I sort of, you know, ny veribest started to go down this road is that I saw that misrepresentation was becoming rampant. And that’s a problem. And I think that, unfortunately, many of the participants in this face, you know, deal sponsors or real estate guys, I don’t think they fully appreciate sort of the how important it is to not misrepresent yourself, right? So it’s fine to exaggerate your fishing expeditions and your high school football career. I mean, I mean, it’s not fine, but I don’t care, right? Like it’s not, it doesn’t affect me. But you exaggerating your, the the length, and the your track record is a problem. those are those are securities violations. And it’s serious stuff. And you’ve been in the insurance business notice, you got to take licensing and tests, and I’ve been a registered representative and an investment advisor. Rep, I’ve had to pass the tests. I know how I know how important those things are. But it’s happening, and it’s happening too much. And we have to clean it up. Right? Like, it can’t be that way, you can’t fudge numbers like that, because people make decisions based upon that information. And it’s been great, because we’ve been on a historic Bull Run. So everyone looks like a genius. But at some point, some point that stops, right, it’s these these markets, real estate is cyclical, and it will cycle and they’ll you know, I just don’t want to see a situation where a bunch of people raised a bunch of money did a bunch of deals based on you know, fabricating sort of their claim. So we allow sponsors to pay us to verify their track record, right. So my whole thing is, listen, pay us once we’re an independent third party and just keep paying us to verify the things you do, you now have a living track record. So when you make the claim that you’ve acquired half a billion dollars worth of real estate, you can literally say, well, don’t trust me, just go look on my profile on veribest. And you can see that, you know, that, that they’ve already checked it. Right. And so and I think that removes a lot of friction from that. what amounts to a sales process fundraising and getting someone invested in a deal that’s friction because I as the LP or the passive investor, it if I can’t corroborate that, it’s going to cause me to do things differently, right, I may I may write a smaller check, right, I only invest 50 grand instead of even though I could write the $200,000 check. Or I may decide to pass on this deal and wait for deals later to get more comfortable and see more before I invest. Or I may not invest at all because I just can’t bring myself to doing it without being able to corroborate those claims.

And then you know, and then for us, the last piece we do is just after someone makes the investment into it. Deal. Most of these things don’t have audit requirements, right? So no one’s really you know, a tax returns being done by a tax preparer but he’s not it he or she’s not digging into the details, right. So what we do is we monitor, we have a service where we’ll monitor that deal on a quarterly basis and basically review the financials. It’s like audit light, where we’re making sure that the fees that are being charged, you know, are being calculated correctly per the operating agreement, making sure that all the money’s going where it’s supposed to go make sure that the assets and on the balance sheet actually exist. And make sure that there aren’t any, you know, related party transactions or money going out the backdoor, which is most Ponzi scheme and fraudsters that’s what they do they have control of the money and the money has its way of sort of disappearing and sitting in some you know, company account or you know,

J Darrin Gross 15:51

Right now making it back to the investors. Yeah, right. So you mentioned kind of the you know, the fishing tails or just the kind of the not the truth per se I’m curious in in your discovery mode Have you found that those are typically like intentional or are a lot on just like they don’t know the rules and the boundaries as far as what they can and cannot say?

Lance Pederson 16:21

I think I think what happens Darrin is that when because they aren’t necessarily paying super close attention it’s so what happens in conversation and then ends up translating an email communication oftentimes is that we always throw out sort of these round numbers and the numbers just I think, depending upon the person tend to be you know, anywhere from 10 to 40% more than they really are so what we’ve seen already early on in this process is just in my you know, in our conversations with the prospect this prospective member of front like hey well How much do you think it is or whatever right and then when push comes to shove and we they actually give us the information then we start to see that there’s there’s a gap right and then you start to hear the we have but why included the stuff that I did when I worked for this other guy that did whatever and you know and it’s just it’s it’s once again it’s not like they’re trying to lie it’s I mean it’s just that they don’t think they realize that okay, but you have to be able to prove it right like and and so in you know letters you know, you’ve been in the business and you’ve seen a lot of LP activity a lot of investors are kind of getting into syndication games so you’re sweating also seeing is people that have invested as LPs in deals sort of trying to count that in you know, this these claims about how many doors they have or you know, and it’s just it’s just stuff like that it’s like I don’t have a problem with it right like obviously you know you making a $50,000 investment in a in another person’s deal to me is part of your track record right because you made the investment so versus you not having made the investment it makes you more experience than the person who hadn’t you know and and then of course if you make the investment the deal goes full cycle and it’s a win then you know, you should get credit for identifying an operator and ideal that you invested in and you know, when you get as much credit in the mind of a prospective investor as you would for someone who actually found the deal and bought it managed and operated it No but it’s it’s so that’s sort of the way I look at it

J Darrin Gross 18:19

Yeah and I think that is kind of one of these you know, when you get down to it and you and you really study the numbers and stuff I found that to be a consistent thing or some you’ll say I’m in you know, hundreds of doors or whatever and you find out that they’re fractional you know and like so they are invested so I don’t want to like take that away from them but it just it’s more a matter of I guess clarity and kind understanding level of participation kind of thing and and I think the to the to the to the good again being involved in in deal and stuff and and you know watching others operate and stuff definitely helps one see how to or how not to or what, you know, how to overcome certain situation or what if there is value in that, but definitely it is it is kind of a an interesting, you know, tale of sorts, you’ve got to try and parse to try and fully understand where somebody’s sitting. Yeah. So so you guys then if somebody is very vest verified then you will do like a quarterly is that basically taking their their quarterly report and then just measuring that against you know, what you find or how, how, how deep does that go? He said, it’s kind of a light, but I’m just kind of curious.

Lance Pederson 19:40

Well, yeah, I mean, I think it’s it’s like compared to a full blown financial audit, I mean, so I’ll tell you what it is and you can tell me if you think it’s like so yeah, and for the record to the other step, the other state of member we have the very best verified gold members and a gold member is someone who’s engaged us to monitor the totality of the amount of capital they have under management, so they so what they’re doing is on a quarterly basis, they are sending us their income statements, balance sheets, bank statements, bank reconciliations, and a general ledger detail, and any backup documentation on acquisitions of assets, or dispositions of assets. So basically, they’re sending us the financial package, one, one, what that does is it requires you to actually have a process in place where you’re closing your books, at least on a quarterly basis, which actually disqualifies lots of people. So another pet peeve of mine, I don’t understand why that’s such a problem. But then how you can actually operate a business without doing that. But nonetheless, we requested information, which is information that should already exist, right? If you’ve done a closed process, everything I just said is readily available. We take it in, and we make sure that everything ties out income statement ties, the balance sheet, the bank statements tied to the bank, rec, the bank rec ties to the balance sheet. Because he that’s how people sort of fabricate things, right is that it’s really hard to like fabricate financials, but if I get that total thing, I can basically tie everything out with all the reports, I just said, if you know what you’re doing, and we do have a bunch of accounts that work for us. So So that’s sort of what we do. And then we spend much of our time focused on money out, right, so the cash out the door, is where we hone in on like, okay, I mean, money came in, that’s, that’s great. But where did the money go out, and we look at the operating agreement, it says the manager is going to earn an asset management fee, and the property manager who’s a third party property manager earning a fee based on this, we’re going to make sure that the fees that those people are earning is actually the amount that they should be earning. Because that’s the other thing that happens is that well, no one’s paying attention, I’ll pay myself double, you know, the asset management fee, who’s gonna really notice, right, and the reality is probably nobody. But we do, and it’s sort of, that’s that proof that it’s like, hey, everything you’re seeing here is legitimate, and you can sleep well at night, knowing that someone who knows what they’re looking at is looking at it regularly on behalf of all the investors,

J Darrin Gross 22:07

I would think that’s, that’s definitely a higher level of certainty and, and would give any investor, you know, comfort to know that, that everything is because like you said, the, and I think, you know, real estate lends itself to a lot of lesser sophisticated operators, from a standpoint of just, you know, getting the once you qualify for the loan, kind of thing, you know, you talked about as far as management operations, reporting requirements aren’t that great. If you’re operating your own deal, you might have to provide financial the bank annually or something like that, but, but when you’re when you have other people’s money, and have to be able to provide them the level of detail, or some sort of report that assures them that their money is what is where it’s supposed to be. And that, you know, they’re going to get paid, and they’re going to get their money back. You know, it’s definitely a degree of, of reporting that they may not have been used to, on their own deal, you know, kind of thing is, whereas when they, when they start working with others, that is absolutely a requirement.

Lance Pederson 23:16

Yeah, I mean, it shouldn’t, it shouldn’t be right. And that’s why I was telling guys all the time, like, let’s just seems like this is a lot of stuff I’m like, but you don’t understand, like, if we don’t, as an industry start doing these things ourselves, then what’s going to happen is, and we’re already seeing some of this is that it’s the regulators are going to come in and start requiring it of more people within all that’s gonna do is the way that they’ll implement their regulatory regime will be far worse. And we’ll make it so that most people that are trying to participate, now, the barrier to entry will be even higher, which is what, you know, I think we’re starting to see Wall Street, sort of realize that the public markets are shrinking, you know, their ability to generate, you know, alpha that markets not there. And, you know, they’re they’ve got lobbyists looking for ways to sort of, you know, get access to more of that retail type money, you know, the accredited investor money, and it’d be a hell of a lot easier to do that if, if it wasn’t all flowing to a bunch of, you know, random, highly fragmented individuals and all sorts of corners, you know, like, it’s just, it’s, anyway, the point is, it’s the right thing to do no matter what, I think that it definitely demonstrates that you have competence, right? That you’re able to do that you’re willing to be transparent, which is the whole point, right? Is like how do we narrow down the universe for perspective, LP, who may not be as sophisticated yet or whatever, we need to narrow it down this sort of it certainly narrows it down and then it gives you greater certainty. And it’s a way for those who are really good at what they do to demonstrate that to the world, when they may not be the world’s greatest marketers or have the best branding or whatever but it’s that’s you know, that’s sort of what I’m after. I’m we know of having been we’re very active investors. ourselves you know the guys who are some of our best operators that we invest with, I mean, on the surface they don’t necessarily look like they are. right but but but these they’re the type of people that do everything that we’ve been talking about during this episode. Right?

J Darrin Gross 25:15

So do you does Verivest offer a verification for individuals that are doing one deal at a time or more fund oriented?

Lance Pederson 25:31

So the I mean the one deal at a time, if it’s syndicated equity then that fits in right I mean, those who are like acquiring single family homes with their own money and some baina

J Darrin Gross 25:45

Yeah, I wasn’t planning but I meant more like somebody that’s that’s doing a syndication as opposed to a fund.

Lance Pederson 25:51

Yeah, yeah, definitely. I mean, I think the syndications are Yeah, it’s it’s, it’s really targeted at syndications. And, and those who’ve graduated to using funds is really the, the any I mean, I think the key here, right, is that it’s anytime that investors putting money in where they’re in that limited, you know, and, you know, their limited partner there, they have, they don’t have any, they have no rights, they’re completely abdicating the decision making authority to some other party. That’s, I mean, that’s really the the rub.

J Darrin Gross 26:22

Right? Are you seeing more of the experience syndicators leveling up to creating funds? I yeah.

Lance Pederson 26:33

Yeah, I mean, I think I think we are, it’s a bit of a, you know, a love hate thing for people. But I mean, I think what we what I’ve been telling guys, you know, is that if, hey, if you’re in a position where, you know, you’re going to syndicate six or more deals in a given year or something, you really should think about sort of launching at least what may amount to like a co GP fund or just a co investment fund. So even though the fund may not end up, you know, wholly owning all of the assets, I mean, that’s a pretty steep climb to sort of go straight from syndicating one deal at a time to that, but it’s a good interim step, right to demonstrate to your investor base, like hey, there’s a more there’s more efficient ways to sort of capitalize our deals and we’re getting to the point where we need to start using those you know, those ways which would be a fun and I think it’s a good so rather because a lot of people look at it very binary like I’m going to syndicate each deal or I have to have a fund that’s going to raise all the equity and in control the equity in the deal. And I’m going yeah, that’s a really steep and wide you know, deep and wide Canyon. That’s a really hard leave to sort of make, but I think that offering that and starting to put that in place early where it’s like hey, and what we did that you know, at fairway America, that was sort of what we did is say, Hey, we’re gonna start syndicating some deals one off but it the first look is gonna go to those who are foreign investors. So for the investors listening, I think you got to understand that the more successful people come they become and the more velocity they have, it sort of may make sense for them to make that leap and don’t be surprised that that’s sort of what happens is they’ll say, Hey, I’ll give you a look at these these one off deals that you’ve grown accustomed to, but only if you’ve you make an allocation of the fund as well.

J Darrin Gross 28:24

Well it makes sense you know, from a standpoint of you have the investors capital you’ve you’ve you know implied you’re going to put it to work and they’ve they’ve gone with you and now you have an opportunity to get a reward and investor money and make the you know the returns or your investors are looking for I find it fascinating just fell in again kind of going back to the the impetus of all this kind of the JOBS Act really kind of freed up all this or created all this opportunity whereas before it was kind of like you know, like suddenly you know, somebody the golf course and just how it’s kind of proliferated and and really, you know, kind of what you you identified as well it’s just the you can do this but how good are you at marketing or, or attracting capital? And is that space kind of becomes more known and crowded you know, how can you you know, stand out and make certain that people know that you you can do are able to and provide the returns that they’re looking for and have something like veribest that can actually you know, provide some transparency to it and and you know, third party I think it’s I think it’s an awesome idea that you guys created this and I’m you know, the few syndicators I’ve talked to that are that are clients of yours. You know, are gone Wow, this is exactly what the space needed. Because of of just the the lack of ability to discern, you know, a, you know, an operator that that is doing well versus one that tells him a good story one that’s more marketing oriented kind of thing. So I think that’s, that’s a great thing. So you mentioned you know it, fairway, you guys were doing the the funds and also sponsoring some deals. Do you find that that all of that experiences and also helps you be that much more able to discern? You know, because obviously, everything we’ve talked about so far has been more about numbers to the numbers match. But I’m just curious, your your own experience and having been in the market, as long as you guys have, are there things that you for that maybe that the, the numbers don’t tell that, that help you? And again, I know you’re not grading and you’re not providing any subjective reporting, but I’m just kind of curious, does it does it? Does it show up anywhere? That experience you guys have?

Lance Pederson 31:07

Oh, most definitely. Yeah, I mean, most definitely, I think that My take is on everything we’ve spent all our time just talking about is the sort of thing that that removes a bunch of the bias we have just because we’re human beings, and we’re attracted to certain people, and like, you know what I mean, like, you’ve got that whole thing, we just, there’s so much bias built in. So as investors, and it doesn’t matter, if you’re real estate investor investing in equities, like, it doesn’t matter. I mean, to be a good investor, you need to learn how to keep yourself out of that as much as you can, you know, you can’t be emotional, right? You just can’t, right, like, you have to have a process. And so, for us, what we found is that, you know, we were no different, we’re professional investors. But, you know, we were assessed as susceptible as anyone else to just those marketing things, and the charisma of a given operator and, and, of course, we’re human beings, we’re going to be so much the things I think that are important. That’s why I say, take this stuff off the table, right? Like, this is stuff that’s empirical and objective taken off the table. Okay, so you know, what you’re dealing with. When it comes to the people, I think one of the most important things that you have to look at as a passive investor and the things I’ve we’ve learned through going through this process of like, you know, how do you do it and get become better at figuring out who you should invest with? And what deals you should invest in is that it really is about the people. So it’s, it’s looking at who’s on their team, right? Who are these people? What roles do they play specifically? And what is their background? Right? Which ones again, might not necessarily show up on the track record stuff that they have as a principle and its principles, whatever. I mean, it’s still these other things are important. And and then the other big thing is just what’s their strategy? Right? Like, do they have conviction about their strategy and their mandate? And is there a method to their madness, right? Because it’s it they, once again, there’s no right answer, per se, but if they haven’t, they don’t have clarity about how they do what they do, why they do it, you know, all those things, you need to dig into that stuff. And you need to be able to get to buy into whatever it is they’re telling you. Right? Because that’s the risk mitigation part, like that’s the extra it’s like, how do you do what you do? And why do you do it? And then you have to ask yourself an investor does them doing that mitigate risk, right? Like, if you like a multifamily guy who goes in and makes a big deal about having social services for their tenants? And, and you know, and then whatever it is, they’re doing these different types of amenities? Like, those are the people who thought through that, and they’ve got a bunch of different things they do that’s like their playbook that they run, you need to be looking for stuff that a little more depth to it than just like we buy ugly apartment buildings, or you know, I don’t know, right? Like, you want to push on all those things, to see if there’s any depth to it, or any conviction behind it, or they just this is looking for the passing fad, right? And that’s why I mean, I don’t like to be the guy who says, like, oh, people who invest in markets, they’re not in, that’s impossible. And I would always pass on that maybe that’s your own mandate or philosophy, that’s fine. But that’s not necessarily true that someone couldn’t live in California, and invest in a bunch of multifamily deals in Arkansas, but I want to know how in the world, they’re going to do that, you know, and do it successfully and ensure that you know, that they’re not, you know, that there’s not risks that they can’t mitigate because of the distance as an as one example. Right, like so. Those are the things we’ve learned like, it’s just not easy. It’s not simple. And you really have to like do your homework on everything.

J Darrin Gross 34:40

Yeah, no, I think the the, the question I think is outstanding, and I think it’s just across the board. On it kind of goes back to the start of this when the the JOBS Act passed, and how the market has been running up ever since. And you know, how many guys got in when the market was upside down from the, you know, the great recession and have been able to produce these amazing returns? How does their experience translate when there is the, the, you know, future dip correction, whatever you want to call it, I think ever since I’ve been doing this podcast, there’s been a, a, you know, in anticipation that we’re in the late innings of a baseball game, if you will, for an analogy, and that, you know, it’s it’s coming, but there’s continually these different you know, factors that have changed the lay of the land or they continue to promote this run. And so I think it’s, it’s crystal ball business is not what I’m, I don’t think anybody has one. But it’s, I think, just again, everything that you’ve, you’ve talked about this, it’ll be interesting to see how, how these, you know, players do when, when they, you know, the market is corrects itself or, or whatever the next challenge is, and it’s not necessarily a correction, but just a change in the in the course of the winds or, you know, the wind blows a different way.

Lance Pederson 36:16

So you got, I mean, we, you know, a book that I think many people quote is one of the greatest business books ever right was good to great by, by Jim Collins, in the whole book is based on studying comparable firms that we’ve all heard of, you know, head to head, right? And which ones are the ones that went from good to great. And so at the heart of that, and if you listen, if you follow Warren Buffett at all, right, like, what’s his whole thing? It’s all about the teams. It’s all about the leadership of these companies, or whatever. So it’s the, it’s this intangible stuff. It’s like, what are they made of, you know, what’s in them. Because what happens is, that’s why you have to figure that out. And that’s why we don’t Advair Avast, I don’t tell you what deal to invest in. I don’t want to do that. I don’t want to be in the business of saying, you know, shilling this deal, like, you know, put money in this deal. It’s the greatest deal in the world. Right? Right, right. I’m like, I just don’t believe in that. What I believe in is like, that’s your job, you’re an investor. If you want to be in the game, then you need to get learn enough, educate yourself enough to do that, I’m going to help you, we’re going to do as much of that stuff that’s really hard to do for any given individual, but you can do the stuff I’m talking about. In fact, that’s what we tell our sponsor members is that we’re providing you because we have the level of insight into your operation as we do. Our willingness then to provide you with a platform to share what you’re made of with the world goes way up. Because if I didn’t have that level of insight, I’d be super nervous that I’m letting some you know, charlatan up on stage, you know, tell you how great he is. Right? So it’s To me, it’s that’s not my job. So my job, the pitch the deals is not my job to sell, why I’m why I’m, you know, this guy’s great at what he does, it’s their job. And if they don’t figure it out, they won’t get capital. And if they do figure it out, you know, they might, right. And then investors need to also do the same. They need to dig in and see what makes these guys tick. And what are they all about? And do you believe in it or not? Yeah, I don’t know. I don’t I don’t know the answer.

J Darrin Gross 38:12

Right. Right. Right now, and I think, you know, there’s always a, you know, a degree of risk in that. But I think just to try and eliminate the noise as much as possible to where you can, you know, see the numbers and make it more empirical, certainly is a good starting place. I’m curious, is there any asset class that you guys don’t work with as far as any any of the investors is or do you work across all the asset classes for real estate investors?

Lance Pederson 38:42

Yeah, we were Yeah, across all the asset classes for real estate. I mean, we’ve we’ve got, you know, guys doing tax liens, and, you know, single family multifamily. I mean, I can’t think of anything that I mean, obviously, some of the special purpose stuff, we probably haven’t, you know, haven’t done anything with the ski resort there. But it’s not to say, I mean, I mean, we wouldn’t stay away from it. So I mean, I think for us, that’s the other thing is just, it’s, hey, if it has if it’s real estate, and you there’s a strategy you can put around it to acquire it and add value to it and do whatever, then, you know, then it makes sense. They need some of this ATM stuff, which isn’t really real estate, it’s like personal property seems to be popping up. I’ve got a client who’s, you know, thinking about doing a fun with one of those. So that’s kind of different, but the mechanics are kind of the same. Now on the monitoring front. You know, that’s not something we could monitor as a good example, because I have no idea how to keep track of 3000 ATMs around the country, right, like, right, but I certainly know how to figure out with real estate it should be titled, and, you know, with the technology that exists today, we can, we can we have much higher levels of certainty that that things are properly titled.

J Darrin Gross 39:54

Well, income and expenses, right.

Lance Pederson 39:56

income and expenses bank and cash and tax returns and You know, so there’s when you know the financial side I mean, it really is I know it’s complicated lots of people but you know, when you do know it, it’s like, it’s either right or it’s wrong.

J Darrin Gross 40:09

Right? Math. Yeah, like it. Got it. Lance, if we could, I’d like shift gears here for a second. By day, I’m an insurance broker and work with my clients to assess risk and determine what to do with the risk. And there’s three strategies that we typically consider, we first look to see if we can avoid the risk, that’s not an option, then we look to see if we can minimize the risk. And when we can’t avoid or minimize and let’s see if we can transfer the risk. And that’s what an insurance policy is. And I like to ask my guests if they can look at their own situation could be their clients investors the market, in tenants interest rates, however you want to define that. But if you can take a look at the at the situation, and identify what you consider to be the biggest risk and again for for clarification, while I am an insurance broker, I’m not necessarily looking for an insurance related answer. So if you’re willing, I’d like to ask you Lance Pederson what is the BIGGEST RISK?

Lance Pederson 41:21

Yeah, I mean, this is a bias answer but I wouldn’t be doing what I do if I didn’t believe it. I believe that the lack of oversight and I mean is as it pertains to a limited partner investing into a deal that’s controlled by somebody else is just if no one’s watching what’s going on that’s the biggest risk that you’re more than likely not being compensated for you know, in whatever return you’ve been quoted so to me to your to your three step thing I don’t know how to transfer it because there’s no you know, no one’s writing I mean, I’ve seen a few where you can insurance on stuff like this but that’s ridiculous but you can minimize it right? And I think that’s what veribest does, is we just we just minimize it. Is it foolproof? No, it’s not but it’s a big deterrent, right and you take that off the you take that off the table so once again much like concerns the cost of the monitoring and even the light touch in the way we do it to keep that cost down it’s certainly minimises what I believe is your biggest risk is just some go sideways they stick their head in their sand and they start moving money out of the deal and you don’t become whole because of it. How many times have you heard that?

J Darrin Gross 42:32

Yeah, no, absolutely the the you know, the ponds here just you know, again, like you said, People aren’t watching the numbers and nobody’s paying attention and go. Lansa can’t say thanks enough for taking the time to talk today. Before we wrap up, where can listeners go if they’d like to learn more connect with you?

Lance Pederson 42:57

Sure. I mean, so you can go to Verivest dot com check out the directory. there there’s a little chat bubble there. I currently man that I like to be on the front lines. As we you know, the service gets off the ground so you can chat with me there. I’m on Twitter at L at L Pederson. Pederson. pretty active on LinkedIn as well. So yeah, it’s it’s pretty easy to get ahold of me or find me.

J Darrin Gross 43:25

All right. Well, Lance again, I can’t say thanks for taking the time. I’ve enjoyed it. learned a lot. And I hope we can do it again soon.

Lance Pederson 43:33

Yeah. Thanks, Darrin. Appreciate it.

J Darrin Gross 43:35

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.

Unknown Speaker 43:53

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

How to Consistently Make Money in Real Estate with Ken Gee – CRE PN #325

Ken Gee 0:00

I was getting everybody that applied for the apartment, didn’t have good credit. And I thought, oh boy, here we go, this isn’t going to be good because I need someone to pay the rent. And then I met this wonderful woman from the city of Shaker Heights. Her name’s Karen, I won’t say her last name. But she taught me that can if you will make your property nicer. If you will invest in your unit and make it really nice. You’ll be able to collect more rent and guess what the good people will come. And I asked her I remember vividly this conversation. I said, Well, Karen, how much do I need to spend on this unit? She said only about $5,000. Well, the lump came back in my throat. I said, Are you kidding me? five grand, where am I going to get five grand, I just spent all my money to buy the property. So I took the leap of faith, I did spend the five grand and sure enough that rent that I was at 479. I went to 599 because now I had a much nicer unit. And all of a sudden the applications came from really good people. And I thought oh my goodness, this is unbelievable. You know, that was a huge deal for me. And the introduction of the value add concept to me iO iO. Really a good chunk of my career to that that wonderful woman who, who told me to build it, and they will come because she was right.

Announcer 1:16

J Darrin Gross 1:35

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

Today, my guest is Ken Gee. Ken is a CPA and real estate broker. He’s also the founder and president of the KRI group of companies, which he started in 1997 with a purchase of a 28 unit apartment building in Cleveland, Ohio. Since the beginning KRI has evolved into a full service real estate company that specializes in multifamily apartment investment, syndication and property management services. KRI has owned more than 55 million worth of multifamily properties and managed over 15,000 apartment units, collectively worth more than $1 billion.

And in just a minute, we’re going to speak with Ken about how to consistently make money in real estate. But first a quick reminder, if you like our show, CRE PN Radio, there are a couple things you can do to help us out. You can like, share and subscribe. And as always, we encourage you to leave a comment, we’d love to hear from our listeners. Also, if you’d like to see how handsome our guests arm, be sure to check out our YouTube channel. And you can find us on youtube at Commercial Real Estate Pro Network. And while you’re there, please subscribe.

With that I want to welcome my guest, Ken, welcome to CRE PN Radio.

Ken Gee 3:17

Thanks so much for having me.

J Darrin Gross 3:19

I’m really 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.

Ken Gee 3:28

Sure I grew up in Toledo, Ohio, came to Cleveland in the early 90s. where I started, I came to claiming to be a commercial lender spent five years there, transition my life then to be a CPA, went to work for Deloitte for seven years. And then decided that was working way, way way too hard for everybody else and decided that I needed to I needed to get into real estate. When I was at the bank, all I heard was my customers making tons of money in real estate. Then when I went to Deloitte, all I saw was a massive real estate tax practice in our local office. And I said you know what, I’ve got to get into this. So that really was what started this whole process. And I like you said I bought my first property 28 unit building and shaker square, which is in Cleveland, Ohio, and then been going ever since. Well, it’s awesome.

J Darrin Gross 4:26

But and I’m guessing you’ve seen just a few things since that first property that you you. You bought. I’m kind of curious. What do you remember most about that first deal?

Ken Gee 4:39

Yeah, what I remember the most about that first deal was the golf ball that was stuck in my throat when I was doing the deal because it was a huge mortgage. At the time it was $460,000 that was massive. At the time I couldn’t have paid that mortgage off of fighting to save my life. So what I was doing was risking really everything to get started in this business. And it was stressful, even though I’d worked really hard to try to understand the business tried to make sure I knew what I was doing at the time I was a CPA and I had some lending background. So, you know, I felt fairly well informed, but it doesn’t change the fact that you’re not ready for that stress that you get when you sign on that loan. So, you know, I’m happy to say that, you know, it went away very quickly, right after that deal closed, and every new deal that you do, you know, there’s stresses associated with every deal. But you know, it’s been far easier since then. And that’s why I always tell everybody get over that first deal, because that first deal is a big one. And then you’re going to deal with emotions that you’re you didn’t expect and once that’s over, it becomes a lot easier.

J Darrin Gross 5:47

Now that’s, that’s well put the first deal Did you do it solo? Or did you syndicate or have investors in the

Ken Gee 5:54

piano? Great question. So I actually borrowed half the downpayment on my home equity line of credit, and I invited family member in to do the other half. So we kept it in the family, because at the time, you know, I couldn’t with a conscience ask someone that I didn’t know to invest money with me, because I really hadn’t proven myself yet. So my family was, uh, you know, willing to take a risk on me. And I’m thankful that they did, because that’s how we got started.

J Darrin Gross 6:23

And how long did you keep the property?

Ken Gee 6:27

Actually? Three years? Three years? Three years? Yep.

J Darrin Gross 6:30

And in three years, how did the property returns on that first deal?

Ken Gee 6:37

Yeah, interesting. little story, about a couple months in to that deal. I was getting everybody that applied for the apartment, didn’t have good credit. And I thought, Oh, boy, here we go, this isn’t going to be good because I need someone to pay the rent. And then I met this wonderful woman from the city of Shaker Heights. Her name’s Karen, I won’t say her last name. But she taught me that can if you will make your property nicer. If you will invest in your unit and make it really nice. You’ll be able to collect more rent, and guess what the good people will come? And I asked her I remember vividly this conversation. I said, Well, Karen, how much do I need to spend on this unit? She said only about $5,000? Well, the lump came back in my throat, I said, Are you kidding me five grand, where am I gonna get five grand, I just spent all my money to buy the property. So I took the leap of faith, I did spend the five grand, and sure enough that rent that I was at 479, I went to 599. Because now I had a much nicer unit. And all of a sudden the applications came from really good people. And I thought, Oh, my goodness, this is unbelievable. You know, that was a huge deal for me. And the introduction of the value add concept to me, I Oh, I Oh, really a good chunk of my career to that, that wonderful woman who, who told me to build it and they will come because she was right.

J Darrin Gross 8:02

Now I love that, you know, the kind of the experience of you just spent all your money and and I mean, did you have any kind of a plan as far as renovation or it’s more about just Lisa keep the place leased up. So

Ken Gee 8:15

I was pretty, I was pretty naive back then I thought I was just going to buy it, hold it for a while rent would slowly go up. But I would make money. And I actually paid an attorney to sort of advise me and he thought, you know, what, can in three or five years, you’re probably gonna make 100 grand on this. And I thought, Oh, my goodness, that’s, that’s unbelievable. Did I have the same level of business plan that I would have now? No, absolutely not. I didn’t because I didn’t even understand. You know, there was a lot I didn’t understand. So she actually helped me create the business plan on the fly. And we’ve been really implementing that value at concept ever since. And so three years later, you know, I’m happy to say that we sold it. We each put in 35,000 we each got back 100. So you know, in, in, in my life at that time, making that kind of money was just obscene. This was just unbelievable that you could do that in three years. So that’s why that’s why I’m here. That’s why I continued on with with with the process.

J Darrin Gross 9:15

Not I mean, those returns are impressive. anytime they can if you can triple your money and you know, three years that’s that’s just about right. 30 3030 was Yeah, so I think those are respectable I think they today they’d be rolled glass. That’s That’s great. So So your first deal goes, Well, did you do any additional deals during that first three years? Or was that kind of your primary focus, get that one? up and running? You sell what When did you do your next deal?

Ken Gee 9:48

Yeah, that’s that’s a good question. The second deal, it took me a little bit of time. So I did. I did three deals a total of three deals during that three year period. The second one came shortly after I Got my education from Karen. And I did have a plan the second time, and I had the I had my value add plan, I was gonna go in and prove the units, the lender would advance some funds to help me do that. As long as I showed them that I did the work, got the lease rents that I promised that I promised them that I would get, they would then pay for the renovations. So that was deal number two. And then deal number three was just a great, wonderful building in that same area, all these properties were in the same area that I bought, and we all ended up selling them all at the same time. So yeah, I just I kept trudging forward then and just doing deal after deal after deal, because once in this business, once you feel that success, you want it again, I mean, who wouldn’t want to make that kind of money, right? So so you’re going to try to do it again and again and again. So

J Darrin Gross 10:51

got it. So your your first deal you did with family? The second? And third, were those also family? Or did you reach out beyond your,

Ken Gee 10:59

The second and third deal actually was able to do it myself by myself. Okay, I found creative ways to finance it. If you look back at our track record, our track record is actually out on veribest.com. They verified our track record. But it’s so it’s there for everybody to see, those early deals that we did were very highly leveraged. So the returns were just crazy. We don’t use that level of leverage now because we use other people’s money. And you know, there’s lots of reasons why we would do that. But you know, when you’re getting started, you do whatever you have to do to get started. That’s what’s important.

J Darrin Gross 11:33

Right, right. So well, that’s impressive. So the first deal, you did have a partner, the second and third, you were able to do on your own. At what point did you become more of a syndicator? You know, start raising capital?

Ken Gee 11:49

Yeah, good. Good question. So probably in I think we bought our which indicated our first deal in the mid 2000s, early to mid 2000s. And, and, you know, grew slowly during that time. And most of our syndication work has been done, really in central and northern Florida. So the company originally grew up in Ohio, we did a bunch of deals in Ohio, and then about 10 or 15 years ago, I wanted to go to a growth market. So we started investing, or investigating Florida, central and northern Florida. And that was where I think we’ve syndicated out three or four deals there. I can’t recall now. And we currently have a fund that we just finished raising for about $13 million. And we’re out now trying to deploy that that capital. So we did for a period of time between 2000 and mid actually, it must have been Yeah, 2004 we did some deals on our own with with one other partner. And then we really went full boat into the syndication world. Because what we learned was, once we felt like we know what we were doing, we felt comfortable inviting other people into our deal. And then that allowed us to grow even quicker, and allowed us to give them you know, pretty good returns as well. So that’s why we made that transition. And it just made sense. And it’s been going well ever since

J Darrin Gross 13:15

contra. So you mentioned you know, having confidence, or I guess, a proven track record, something that you felt that, you know, you could then I guess provide a story or proof of concept to potential investors and stuff. What were some of the, the keys in that story? I mean, you know, the first one sounds like you’re flying blind, but you you’ve learned the value add concept in some other, you know, keys to create a financing for the next couple of deals. What were some of the key takeaways that you learned that were, you know, purposeful or or helped with relaying your story to to investors?

Ken Gee 14:03

Sure. So what happens as you gain more and more experience in this business, you start to understand exactly what makes real estate investors successful over the long term. Right? So a lot of people can do this, maybe once, maybe twice. But if you’re going to do this over and over and over again, you really need to understand why each deal is successful. So you know, I generally there’s four things that you really got to understand. One is just supply and demand, right? We’re in the apartment world. So the supply of inventory is important, right? If they’re building like crazy in the area that you’re trying to invest in, you need to be careful. You have to make sure there’s enough demand to absorb that. So what we’re looking for is a pat is a is a favorable demand and supply equation. We want demand to exceed supply. That’s what drove us to Florida because that that setup has been in Florida for years and years. decades now. And it’s only been exaggerated by the pandemic, then the second thing we understood is how do we create value in every deal, because every deal is going to be a little different. Sometimes most of the value you create is going to be management related, sometimes it’s going to be physical improvement related. But or most of the time, it’s a combination of the two. But what we learned over the years, so she got to understand exactly how you’re going to create value, and then just get better at executing on that strategy. So that was the second thing that that is the second thing that I think sets long term, successful investors apart from shorter term ones. Now the third thing, and this was really learned the most through Oh, 7080 910. Think back to that financial recession. I mean, that was horrible. And the number one thing you learned through that process is to manage your debt manager maturities make sure that you have planned for the as much as possible, right? apartments generally did well, during that time period. The only reason apartments didn’t do well, is when the loan matured at the wrong time. And then it didn’t matter if the property was a wonderful property, it didn’t matter if it was cash flowing like crazy, the bank had to get it off their books. And at the time, no one was doing no new loans. So people lost their buildings, because their debt just happen to have matured at the wrong time is terrible, there was no reason for that to happen. But again, what that does is that teaches us to manage your maturities make sure you have an out make sure you have a way to continue that debt should you need to just because of a bad timing issue, you don’t want to have have a problem. And then the last thing we learned, we have learned over the years is just watch cap rates, you got to understand cap rates. And, you know, cap rates are fairly predictable, they’re dependent on two things. One is the interest rates on the debt that you’re gonna get. So we always watch that and have a pretty good feel for where we think they’re gonna go. And then the other piece of that cap rate is what investors require for their return. And so that right now, cap rates are compressed, because there’s so much money chasing deals right now that investors are willing to accept smaller and smaller returns. So when we have low interest rates, low investor return requirements, we have relatively low cap rates. So when we do our modeling, this is the long term successful investor concept, you need to make sure that you’re planning your exit at a higher cap rate, because that means the value might go down, if interest rates go up, or not, as many investors are chasing the same deals, they may not be willing to pay as much for that cash flow that that property creates. So you’re gonna want to make sure that you model it in your in your formula, so that you’re prepared for that. And you know, what’s going to happen if cap rates were to move against you? That makes sense?

J Darrin Gross 17:55

Yeah, no, all of that makes sense. It is, you know, especially looking back here and just last 10 years, you can kind of tell, you know, the, or the story, if you look back, you can see how it all, you know, connects I mean from, like you said, Oh, 708 when, when the market was melting down, and and nobody was willing to lend and if you if you did get caught and had to refinance, and there was nobody willing to, to lend. That’s kind of what a great a lot of the opportunity for, you know, newer investors are, I mean, clearly it was it was a it was a problem if you had a property you needed to refinance was an opportunity if you had cash and and had an opportunity to pick up a property cheap from a lender that are you know, not necessarily a lender if you weren’t foreclose, but just somebody that had to let go the property. Yeah, exactly. But But even even having said that, though, I you know, what’s interesting to me is, I’ve been doing this podcast here for, I guess, almost six years now. And in all the time that I’ve been doing this, that the theme has been that, hey, you know, it’s been a good run, we’re probably in the late ending late innings. You know, we expect this thing to have a correction kind of thing. But I, you know, I’d say that, you know, by all accounts were were well into a doubleheader, or, you know, with extra innings, I mean, just based on the run in, in its, I think the other thing is that all of these economic factors that maybe were the cause or had something to do with the last cycle. Everything we’re looking at right now, pandemic, plots of government cash being pumped into the system. You know, investors looking for a return, low interest rates, all kinds of change, anything that people thought might be the case and now it’s it’s kind of Like really it really requires you to be sharp and kind of assess you know like like you were talking about you know supply and demand you know how to manage your debt you know make sure you have some terms that can that can last a while and kind of keep an eye on those those cap rates I mean that’s pretty well that right there I mean I think sums up you know, a good advice for any investor looking at an opportunity and certainly in the last six or seven years

Ken Gee 20:32

Yeah, no, I agree. 100% Absolutely. And when we look you know, I have this conversation with a lot of people all the time and that is are you afraid we’re at the top or are you afraid you’re at the top and I have it with a lot of very smart people because I’m looking for some disagreement. And you know, we’re in we’re in central and northern Florida, the demand supply setup in central and northern Florida has been favorable for a very very, very long time. And I I’m looking one of those two things has to break in order for me to be any really concerned about Florida, we have to have builders somehow figure out how to buy bc class asset because that’s what we buy, right we don’t buy the brand new a stuff because then I’m fighting with supply from New builders right so they’re not building bc stuff they’re just not so I don’t see that changing I don’t see what can happen that can make that affordable for builders to come in and add tons of supply the PC market so now when I look at the demand side what can happen that can erode that demand and you know when I think about why people are moving to Florida, I mean they move there because it’s beautiful whether they move there because it’s a low tax state they move there now because they can live there and still do their jobs because so many more people can work remotely so there’s I’m looking for something to break that demand in order for me to be terribly concerned about investing in central and northern Florida there’s still a plenty of places that are very affordable in central northern Florida and that they’re going to people are going to continue to move to those areas the the coasts will continue to get better up I think and the growth has been between Tampa and Orlando and Daytona it’s been going across that I four corridor for years and it will just continue to do that. And when it gets to unaffordable in one area, say Orlando for example, you just get farther away from Orlando and you can find more affordable housing, more people come in, you see a cycle and I don’t see it breaking so that there are probably some markets that demand supplies setup is different. And if there is an economic slowdown or something changes that might affect them more, but I’m looking for those two things to change in Florida and I just I just don’t see it happening but I have my eyes definitely open looking for any cracks in the dam here to see if see if that is gonna happen and I just don’t see it yet. And everybody I talked to they’re looking for the same thing and they don’t see it either. So that’s why we’re comfortable buying at this point as long as we have the upside and rents which we do because of the demand supply situation.

J Darrin Gross 23:09

Right right now and even you know the kind of lesson you learn from Karen about value add I mean if you can find that opportunity that either the seller hasn’t exercised or hasn’t you know, doesn’t see that you can see there’s always the opportunity to increase the value you know, and I think one of the things I’ve learned is it’s all you can do through the you know, a remodel or renovation or something like that it’s the if it’s only just a management issue where you can raise rents or something like that I mean that’s that’s a pretty sweet little value add opportunity there do you in that marketplace I mean it’s clearly no secret you know, Florida is kind of a boom market I mean, I saw the meme out there that Andrew Cuomo was realtor of the Year for a Florida that was kind of a joke there from all the you know people moving exiting New York moving to Florida right and but but a lot of truth to that just based on like what you were saying just demand and so is you as you look in that market clearly there’s lots of demand for housing. There’s lots of investors seeking the same opportunities you know, one of the things you didn’t say but but you know, I always feel it kind of is part of that cap rate is is you know, if there’s if there’s a lot of investors seeking the same thing that’s gonna you know, push the rate cap rate down as well. do you how do you go about are you just plugged in with the market do You go direct to the sellers? Do you have broker relationships? How are you situated where you find your properties?

Ken Gee 25:07

Yeah, that’s a really good question. So we play in generally the plus or minus 100 unit range. And most people that play in that in that market in that space are syndicators. So that means they’re going to go out and try to get the deal locked up. And then they’re going to spend the next 45 or 60 days trying to raise the money to close the deal. So the seller kind of takes a leap of faith with that buyer. So there’s tons and tons of indicators in that space. Now, we are a fund where a private equity fund so now in the syndication world, the deal comes and then the equity comes in the fund world, the money comes first, then the then we have the money to go get the deal. So now when I compete against a syndicator, in that 100, say, 100 unit property, there’s when we compete this probably 95 90% of the bidders are syndicators. And here we come, we’re a fund we already have the equity raised, the seller knows that we that that equity raise risk is off the table. They know. So they also know that we’re very experienced, they also know that we have a very quick and easy due diligence process that it because we’ve been doing it for 25 years, right, we’re not going to drive him nuts, or her nuts with a retrade or, you know, little silly ass on due diligence questions and things like that, because sellers do like easy deals. So we’re a much more experienced much stronger buyer. in that market. Most fund managers, they don’t attack the 100 unit space, they’re up into three 400 units basis, because they’re trying to deploy more capital. So we become that big fish in the smaller pan, so to speak, which gives us the ability to win these deals. And then Remember, we talked about the fact that we’re a third party manager, so we’re third party managers in that same market. So that gives us another opportunity to integrate with these brokers, because they refer their clients to us. So we have a very unique relationship with the broker community in that not only do we buy and sell through them, but we also help them get deals done because we take their clients run their properties, make them more successful, and then what happens, they’re able to sell that client another property. So we have this really intertwined network that we’ve been able to develop in the central northern Florida market. So that’s how we get our deals. Because the reality of it is in a competitive market like this, the broker really controls who gets the deal. Because when a seller sells that property, he looks to the broker and ask them who is this guy? Who is this guy? Who is this guy? What do you know with him, Have you close with him before, he is using that broker to try to figure out who has the highest certainty a close and who’s going to really get the deal done, so that that seller has an easy sale and that’s critical and that’s why we spend so much time working on those relationships. Really, really super important in a competitive market like this.

J Darrin Gross 27:58

No, I was gonna say I think having the property management company for yourself and others makes a ton of sense. I mean, just in that because the operations of a complex really you know, having the efficiencies in the operations can really you know, make yourself quite a bit more more money I would think as opposed to on you know, unaccounted for or you know, expenses that that aren’t always easy to keep up with or whatever just but just having that that I guess inside track on the management I think it makes a lot of sense. Have you had any opportunities come from the properties you’ve managed were selling her the you know, the owner said hey, you know, Ken, we’re ready to get out of this one you know, is that ever come up?

Ken Gee 28:54

Yeah, you know, we’ve we have those discussions our clients come to us occasionally with those discussions and you know, if you’re a seller what I tell our clients because remember when when you become our client, we have this fiduciary relationship with you, right? I’m I’m your I’m your guy, right. So if you come to me for advice, I’m going to tell you what you really should do. And the reality of selling in a competitive market is you should market the property. If you do a side deal with me, that’s great for me, but I get very very concerned that my client is going to have in the back of his or her mind, you know, he kind of worked me for a sweet deal here and I you know, they kind of get at some point they run the risk that they’re going to be uncomfortable with the advice that I gave them and that was to sell your tell to sell to your friend Ken. Right. I get concerned with that. So our reputation and in all the markets are so important to us that I don’t I don’t even want to take that risk that something could later develop even though you know we’re getting deal done for them, but we get a deal done for us. But I don’t want them to think that I you know, I get it better. deal because because I was able to get to them early.

J Darrin Gross 30:03

Gotcha, gotcha. Well, I think especially if you want to maintain that relationship with the brokers, I would think that would be biased to, you know, not by the end of each week kind of thing.

Ken Gee 30:14

That’s true, too. Yeah, I didn’t, I didn’t talk about that. But you’re, you’re correct. But the real driving force here, when my clients and I have these discussions is I always want to tell them what’s right for them. Right, irrespective of my allegiance to brokers, or to anyone else, my first allegiance is to them. And I want to make sure that no matter what I mean, we go to our clients and say, you know, what, you have worked this thing, we have done a great job, you need to sell this thing, we’ll we’ll go to our clients and tell them that because you know, we know the market, we understand, right? We know what’s, what’s going on. So you know that that’s the real driving force. It’s not protecting the broker relationship, although that’s important. It’s more important that we treat our clients properly.

J Darrin Gross 30:57

Well, makes sense. So how many deals Have you syndicated over the course of your investing career?

Ken Gee 31:06

Yeah, that’s a good question I have to do. Let me do the math in my mind, price service, 678, something like that. We have a deal in process right now. With our fund that we just raised, we accept them get three deals out of that fund. That’s That’s the goal.

J Darrin Gross 31:21

katraj? And of the those funds have all of those gone fullcycle, or not the funds but the syndications have

Ken Gee 31:28

All but one, about one. Yeah, so we have not historically been a unit, some people get in this business to buy unit count, right to get as many units as you can, because that I guess it’s your bragging rights, then right? So we don’t do that we, because of our investors, we want to add our value, we want to leave some for the next guy, and then we want to go ahead and sell that asset. Because then it’s gone full cycle, there’s no way to argue with any valuation. I mean, investor went in, investor got paid investors done the whole deals done, and you know exactly how much you made on it. So we’re down to one soon to have two and, you know, two more after that. I’m sure we’re working on a number of deals right now.

J Darrin Gross 32:10

Gotcha. Well, it’s impressive, the number of of, you know, deals you’ve done and lessons you’ve learned and and the fact that you’ve now got a fund. That’s it. And for the reasons that you did, as far as you know, the opportunities that are going to, or just how you’ll be viewed, you know, in the market, as opposed to syndicators got to go out and raise raise a capital there, I think that’s, that’s a pretty unique and good way to, to put yourself in a competitive market is the capital’s over, already been raised. Right. So that’s good. Hey, Ken, if we could, I’d like to shift gears here for a second. As I mentioned, before we started recording. By day, I’m an insurance broker. And I work with my clients to assess risk and determine what to do with the risk. And there’s three strategies we typically look at, we first look to see if we can avoid the risk. If that’s not possible, we look to see what we can do to minimize the risk. And when neither of those are an option, then we look to see if we could transfer the risk. And that’s what an insurance policy is, it’s a risk transfer vehicle. And as such, I like to ask my guests, if they can look at their own situation, could be their clients, the market, capital raising, you know, however, you would like to frame the question and the answer, but looking to see if you can identify what the biggest risk is. And for clarification, while I am an insurance broker, I’m not necessarily looking for an insurance related answer. So if you’re willing, I’d like to ask you Ken Gee, what is the BIGGEST RISK?

Ken Gee 33:57

Sure, the biggest risk right now as I see it in the market, is it’s very difficult to find deals, that will work. And the reason I call that a risk, is, if we’re not able to make the deal work, and someone else does the deal, it probably won’t work for them either. So the risk here is that people will do deals that they really shouldn’t do, just to get the deal, right. If you’ve ever heard of FOMO fear of missing out, there is a lot of that going on. And if we you know, if we do lose a deal, it’s probably because someone else was concerned about missing out, they’re willing to pay more to make deals that didn’t make sense. A because maybe they’re inexperienced, or B, they just want to get in the game because they’re dying to get in the game. So that’s the biggest risk. I don’t that’s a risk to me, but I think that’s a risk to the entire industry. Because when people do things that they shouldn’t do, you you need to hope you’re in a growth market. That’s going to go fast enough to allow you to grow out of your mistakes. And if you’re not, then you’re going to get stuck with them, and it’s going to impact the market. So that’s the biggest risk. Now having said that, the number one reason we do multifamily is because I can’t find a better risk adjusted return profile. Everybody needs a place to live, they just, they just do, I can’t figure out a way to make that go away, I can figure out how to not need an office, I can figure out how to not need storage, I can figure out how to maybe not need medical, right, think about all the different assets, real estate asset classes, retail strip centers, I can figure out a way for that demand to really significantly decline. But what I can’t figure out is a way for you to not need a place to live. So as long as I have that, I view that as a relatively low risk asset. And then if we’re able to take that asset improves 1525 35% plus annual returns for our investors, I see that I look at risk very similar to the way the way you do, I shouldn’t be able to get those returns with this level of risk. But because we’re good at what we do, and because it’s real estate, and it’s leveraged appropriately, it we really are able to get a significant return. So the number one risk back to your question, is people doing deals that they shouldn’t do, because it’s it’s going to hurt the entire industry as a whole eventually.

J Darrin Gross 36:28

No, I think that’s something we’ve there’s been certainly waited breath, wait, you know, waiting to see, you know, where the correction is coming. So I, I think it’s inevitable. You know, but as long as there’s, you know, lots of cheap money, and, you know, willing willing investors are willing buyers, I guess, sellers are gonna take advantage of that. So we’ll see what happens. But, Ken, where can listeners go if they would like to learn more or connect with you?

Ken Gee 37:00

Sure. So one of the things I wrote I wrote a list a little while ago. Now it’s a it’s a small ebook. It’s called multifamily Real Estate’s a total game changer. If you go to our website, k Ri partners.com. Slash ebook, you can download this ebook. I’ll tell you why I wrote it. I wrote it for two reasons. It basically has two parts. The first part addresses the number one question that everybody has to ask themselves before they get into real estate. And that is, how did they know people are making a ton of money in real estate? They’re just trying to figure out how they get their piece. Right? Should they buy a single family a double? Should they buy an apartment building? Should? Should they go into Self Storage? Should they even do it at all? Should they invest passively with somebody like us? Right? So I helped them through that process? Because it is the question that absolutely everyone gets into this business faces. And I’ve seen it for 25 years, I’ve seen people wrestle with this. They just don’t know how it fits into their life. And so hopefully, the first part of the book helps the reader through that process. The second part, addresses what now now so when I go through that analysis, most people really should be passive investors because they have wonderful full time jobs. They you know, they make a lot of money, they do their thing, and they should truly just invest passively in real estate. Well, now the question becomes, how do you vet the real estate people out there that you can invest with? How can you how do you vet a fund sponsor? How do you give that a syndicator? How do you know that their fund or there’s the investment objectives match up with yours, and the risk tolerance that you’re comfortable with? So I take you through that process, I give you some insight into how our business really works? You know, what makes a syndicator tick, wait, why do they do what they do? And all of that stuff, help you understand the way the business works? Because then, and I also give you some questions to ask, right? So just how do you vet those sponsors, because I feel very compelled to help you, the investor, make a good decision about who you invest with. Because if you do, you’re going to be successful, and you’re going to keep coming back. And that’s what we really want for this whole process is for everybody to be successful because there’s no reason for anybody to fail in this business that we have so that the book is kr I partners.com. Slash ebook and download. It’s free. And you know, hopefully it is beneficial to whoever reads it. So that’s how you can reach us.

J Darrin Gross 39:21

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

Ken Gee 39:31

Well, thank you for having me. You bet. For our listeners.

J Darrin Gross 39:35

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 39:52

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Multifamily Investors Create Generational Wealth with Stephanie Walter – CRE PN #321

Stephanie Walter 0:00

You know, if you’ve ever been a landlord, you know, sometimes you’ll just like let the rents keep coming in at you know, you don’t raise the rents like you should. So we go in we we find places that need the market rents to be adjusted where they should be. But then there’s a whole host of other things we can do to streamline the process. A lot of places do not charge for utilities or if they, they’re, they’re just very consistent with the way that they do that. That’s another way of gathering money. There’s, you know, silly things like pet fees. A lot of landlords don’t charge for that. I even this sounds like weird one, but it’s something we find is is trash, trash, valet services, so any little thing where you can add, you know, a charge for it is going to increase the value of the property.

Announcer 1:04

J Darrin Gross 1:24

Welcome to Commercial Real Estate Pro Networks, CRE PN Radio. Thanks for joining us. My name is J. Darrin Gross. This is 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 guests is Stephanie Walter. Stephanie is a capital raiser syndicator and the CEO of Erbe Wealth. She recently retired and sold her insurance agency of 16 years by following the key principles she’s learned from her wealthy investors. And in just a minute, we’re gonna speak with Stephanie, about how to unlearn what we’ve been wired to think about money.

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

Stephanie Walter 3:02

Yeah, I well, started out of college, I got a job in the insurance industry as a claims adjuster actually. And worked in that world for about eight years and realized that I was got pretty burnt out on getting 2% raises every year and was ready to do something different. So in 2006, I decided to start an insurance agency and did that I really loved it loves being an entrepreneur and building my own business that around that same time I started investing in single family homes here in Denver didn’t really have a lot of education with it at all, just you know, felt like I had some good ideas of where to buy where there would probably be some growth in the future. And so made made those choices along with investing and running the insurance agency and then in 2016, I became I was invited to kind of like a boot camp about showing people how to invest in apartment complexes and I learned about what a syndication was and once I I understood how that worked kind of the the heavens opened up and the light shone showed through to me and I just I love the concept. I loved the concept of having a group of people buy a piece of real estate that you know, no one could do on their own. So just love that concept. So I dove real deep into learning the business got joined a program that gives you basically a master’s in learning Real Estate syndication the ins and outs, I did my first syndication in 2018, by myself realized, I did not like doing that by myself, and I would never do it by myself again. So through my network of people, I met my partner. And we realized we had, you know, we we aligned on on what we wanted it as well as he liked doing things I didn’t like doing. So from there began capital raising, and I loved it. We’re on our seventh deal right now. But what I loved the most was getting to know these wealthy investors and kind of realizing that they handled their money a lot differently than I did. So it took until about 2018, where I started following some of these strategies. And I was able to sell my insurance agency, July of this year, because my passive income has replaced my working income. And so instead of retiring, I do love what I do. And so I that’s why I’m here today to talk about it.

J Darrin Gross 6:18

Got it? Well, I’m probably as much more interested than maybe some of our listeners, just based on your background being an insurance and stuff and, and, like you mentioned, seeing the light and, and the past of income, that, you know, growing out enough to, to where you were able to step out of the insurance and do this full time or actually, and if you even need to work based on you know, you said your passive income and that. But I was kind of curious, you mentioned you’d gone to a boot camp, I’ve I’ve talked with numerous coaching mentors, I was just kind of curious if you care to share the name of that.

Stephanie Walter 6:58

Yeah, absolutely. It’s our a mentor. And they have a fantastic, you know, fantastic program. Really, it is, there’s a lot to learn, and you spend several years just, you know, learning a lot and practicing a lot. Because it’s a little bit different than single family because one, you’re responsible for a bunch of investors money. But two, I think you can kind of more wing it with with single family than you can with, you know, commercial real estate for sure.

J Darrin Gross 7:37

Absolutely. So you you did sound like you were investing on your own. You said you’re like kind of no real rhyme or reason just knew some neighborhoods and kind of picked in we’re investing. I understood what you said. And how many properties Did you get up to? On your own just doing the single family stuff?

Stephanie Walter 8:00

I got about? I think it is about let’s see here. Four properties. One was a commercial, one was a duplex. And then there are two single families in there.

J Darrin Gross 8:15

Gotcha. It’s been a while since I’ve been to Denver, but your timing seems like it was probably spot on as far as just what I’ve come to understand about the appreciation in the marketplace there and, and the growth and any affordability issues that come with that. So I’m assuming that that that treated you well, are you still in any of those.

Stephanie Walter 8:41

Just again, when I was started working with the wealthy, I sort of noticed, you know, that my theory was I was just gonna hold on to these rentals until they were paid off, you know, and then have my retirement in 20 years. What I, one of the things I learned from the wealthy people was that they just don’t let their money sit and not give them cash flow or not give them you know, a good return. And so, when I realized that in 2018, I started selling all my properties, and I just sold my last one just a few months ago.

J Darrin Gross 9:20

Gotcha. Gotcha. So you’re in the is it primarily multifamily? Is that what you’re investing in now? And I thought I heard you say that you you did try syndication solo. Here. You’re doing one solo before you you ended up getting, you know, working with your partner, is that right?

Stephanie Walter 9:42

Correct. Yep, I did one solo project in 2018. Gotcha.

J Darrin Gross 9:49

And what was that project that you did?

Stephanie Walter 9:51

That’s it was up in Fort Collins I still have it was just talking actually to the banker today. It’s a It’s multifamily in the sense that it’s a group of people that live in it. So it’s a fraternity house of all things up in Fort Collins, Colorado. And it’s actually been a really great investment.

J Darrin Gross 10:16

Gotcha. And do you? Do you collect rent from the individual students? Or do you just collect rent from the, like from the fraternity? And then they they weren’t collecting from that?

Stephanie Walter 10:28

They pull it all together, and then they send me a check every month.

J Darrin Gross 10:33

Gotcha, gotcha. Well, that’s, that’s definitely an interesting thing. But I can imagine, depending on, you know, what you where you bought it out, and what the the market rents are, and stuff that that can be a profitable venture there for you. That’s good. So let’s talk a little bit about some of the concepts that you’ve learned. And maybe the way to frame this is kind of back up a step. And just kind of identify what the concepts are, or the beliefs you had about money. Before you you interacted with these wealthy investors. That you, you mentioned?

Stephanie Walter 11:15

Well, I think the biggest, you know, some of this took a while for me to really understand I couldn’t really put my finger on it. But, um, so but I think two, one is a mindset. And the mindset is pretty significant. Most people in our society look at their money and saving for retirement. They think of accumulating their money, that’s, that’s really the model that they have, put it away in their 401k, don’t touch it don’t really, there’s, you know, maybe you could you have a little bit of power of what it’s invested in. But largely, if you ask people, they have no idea what kind of fees that are associated with it. But the most significant thing is that at the end of that investment, we don’t know how much money is there, because we don’t know what the taxes are going to be. And that would be completely, simply not something that a wealthy person would get involved with. And that was, the first thing that I noticed is that most of the wealthy people I worked with did not have 401, K’s. They use a model of using their money, and I’m calling it utilisation. Which just means that they don’t let their money sit, their money is working for them at all times, and working for them in the sense that they are getting cash flow, cash flow is king to them. So and when you start to examine that, and sort of see how that would work in your own life, is just having more cash flow is going to give you a lot more options as to do I want to be working at this job, you know, 40 hours a week, or, you know, the more cash flow you have, the more options you have as far as what you want to do in your life.

J Darrin Gross 13:19

No, definitely. Cash Flow is king. And that’s one of my friends is fond of saying it’s the ace. I mean, it’s the definitely the one you want. Let me ask you. So you kind of mentioned even just earlier about kind of your mindset with the rentals you had was just to basically pay down the balance, you know, and then have this is your retirement then. And I’m kind of curious, so for you to shift from that mindset, and you know, having a job or you know, a business, to getting your money to work for you to where you’re you basically have passive income that, that it allowed you to, you know, sell your business and and, you know, have just enough passive income to live on. Well, can you describe some of the the shifts there? I mean, was it was it? I mean, what, what made you introduce some of these ideas that, you know, don’t let your money to sit? But can you kind of walk us through what what you did, as far as you know, some of the steps you took that made it made it work for you?

Stephanie Walter 14:35

Yeah. Well, I think one of the other concepts that I should probably tie into that is that if you asked a wealthy person, what they felt was most important to them cash flow or net worth. They would tell you cash flow all day long. And so that’s really that was really my shift in my mind because on paper, I had a great net worth as a fan. Casting networks, but I didn’t have cash flow even close to being able to replace my income. So once I that dawned on me, then I sort of kind of examined each property and that I had and how much equity did I have in in the property. And what I saw my future life looking like did I want to be a landlord forever. I’d already been one for 16 years, and I was growing pretty tired of it. But largely, there was an enormous amount of equity sitting in those properties. Now you can either take the money out, you know, refinance it, if that’s possible, and take the money out and invest it. But my decision honestly was, I felt the best place for this money where was in my own syndications that I was doing with my partner because what better place to invest your money. One as syndications are amazing in the sense that you’re getting paid. You know, almost from day one, you’re getting paid seven to 8% interest every month. But our syndications like I said, we’re on our seventh one, have been returning over 20% returns over the whole period of of the property, which is, you know, three to five years, that’s 20% a year. And like, I spoke to one of my wealthy investors, and was just talking to him about what I was thinking of doing. And he was like, well, Stephanie, all I can tell you is that if you’re getting 20% returns, that’s something that, you know, you will get wealthy doing. And and so that is what I decided to do. The second part of the other part of the coin on on that was people think about how they move their money, you know, do they do it in a 1031 exchange, because, you know, tax mitigation is hugely important. What I think is kind of like a little secret in this industry is there are so many ways to mitigate your taxes, a lot of people think the only way they can roll their money over is is is in a 1031, which we can do for some properties. But many times just, you know, what we do is we do a cost segregation study, most people haven’t heard of that. Or if they do, they don’t really understand it to the point of how we use it, we do a cost segregation study on every property we purchase. In order to pass what what that is, is instead of depreciating the property over like 27 years or 39 years, it speeds up the depreciation to where we’re writing all the depreciation off in 157 years. So it’s a it’s amazing strategy for people who have tax liability, or don’t have tax liability. But it’s it’s a tremendous tool to help you save on your taxes, and might have gone on a tangent there. But I think those are two things that wealthy people definitely address. They A lot of people think that they just address what is the investment making for them? That’s definitely, you know, probably half of their concern their other half is what kind of tax benefits are they going to get out of the investment? And I think that’s what most people miss. In our day to day world. We don’t A lot of people don’t think about the tax ramifications.

J Darrin Gross 18:55

No, I think those are all valid, worthy points to make there. I’m kind of curious. So the, the, the path that you were on, you mentioned you had a lot of equity. your net worth was, you know, significant. But the cash flow wasn’t there. When you started doing the, you know, kind of the syndication and stuff, or the syndications. How long did it take you to generate more income than what you were making through your insurance business to whatever rental income you had.

Stephanie Walter 19:35

Once I changed that philosophy, I guess and had had my what I wanted to do, which was to sell my different properties and roll them into different syndications that I had. It was 2018 and is when I started doing that and I retired in 2021 July 2000 You’re 21. So as opposed to maybe 20 years that it would have taken being a landlord and doing all the things I didn’t particularly love doing to get to the point to where you know that cash flow was coming to me.

J Darrin Gross 20:18

I love it. So tell me about some of the syndications you’ve done. You said you, you your Have you? You’ve done seven, you’ve started seven, where are you at in the cycle? How many of you run full cycle?

Stephanie Walter 20:32

At this point, we haven’t we, we only have one that’s run all the way through the cycle. Because we started doing this, let’s see, in 2018. And actually, one, there’s going to be several actually, in the next probably six to 10 months that will will actually finish ahead of schedule. But I can just tell you, what we do is we look to our largely we look in Florida, we do multifamily, we look for properties that you know, how are undervalued? So we look, a lot of people are like Why can’t I you know, just do this on my own? Well, I can tell you that we, you know, have many connections in Florida. That’s where my partner is actually he has 35 years of being a commercial broker there. So he’s established a lot of businesses and our last two syndications were actually off market deals. So deals that never came to market. And the reason that we obviously love those is we really feel strongly that we want to make our money on the buy. We don’t want to buy a property and just say, well, we can do this, this and this to increase the value. We’re extremely conservative with with what we do, but yes, we’re looking for multifamily properties a way that we can build up value. And in Florida right now, that’s not that hard. We’ve we’ve cornered a few markets, we were on our fourth deal in Tallahassee, Florida. We’re on our second deal in Cape Coral, Florida. We have some properties in Broward County. But you know, the Florida if you look at it and you get do any type of research on it, is the there’s just a tremendous amount of growth. I mean, if you listen to any any news, I suppose you pick that up pretty quickly. But there’s a lot of there’s just a tremendous amount of growth in the housing. There’s definitely housing shortages, which are causing the rents to just kind of go through the roof. And we’re taking advantage of that. So the one property that we’re going to be finishing up the cycle on, we’ve only had it for two years, and we’ve already doubled the money of all of our investors. So we’re just gonna go ahead and sell that one and move on to the next.

J Darrin Gross 23:19

Outstanding. In Is there any kind of a sweet spot? Are you guys going after 100 unit properties are you going after tends to, you know, 20s, or tell me a little bit about what your what you’re going after on these different property?

Stephanie Walter 23:36

Well, I we both kind of, again, it’s we’re very aligned on our philosophy, it just kind of happened that way, I’d love to say that I had a master plan to find someone that we aligned so much, but we both really like the idea of being in control of our deals. And you know, you a lot of people come into this space and they go in they buy two and 300 unit complexes in order to close something like that you need to be bringing in money from what are called family offices. They’re just you know, offices where they’re meant managing very wealthy families money. But kind of the deal you make when you work with that these people is they want to really have their hand and what’s going on in the deal. And for my partner and I we just we really wanted to grow our investor base, just very organically. We both are you know, extremely concerned with having our clients love working with us and continue on to love working with us. So we started smaller. We started with like, you know, 23 units, 35 units, then we’re now we’re more in the 50 to 70 units. And so we just have kind of grown organically, which is what we wanted to do, we wanted to be sure that we have a good track record of performance plus, we can see our, you know, our investors are happy, you know, that, which is what we want, they refer more investors to so we’re really concerned with building a base of investors that follow us. And so that we just put under contract 160 unit, and that’ll be our largest 1160160. And so, you know, I feel like what we’re doing is working, because, you know, we have investors that invest again and again, and then they start telling their friends and, you know, on and on, and, and that’s what we wanted. We wanted to, you know, be in charge of our deals at the end of the day. Because having the control is is super important. to both of us.

J Darrin Gross 26:03

Yeah, no, I love that I love the approach the growth, I was gonna ask you were organic. Tell me a little bit about tracking investors, especially at the beginning.

Stephanie Walter 26:17

It’s, you know, I could talk for hours about that, it’s, you know, it’s, you want there to be one magic bullet, unfortunately, there just really isn’t, you know, I just happened to kind of put it out there to a lot of different people that this is what I’m doing, you get in front of people, and some people, most people have never heard of syndication. So it’s really trying to educate people to get their mind around the syndication. I was just thinking of it this morning, our first deal we did happen to be a retail center in Tallahassee, it was the first deal My partner and I worked on together, so we had zero track record. So you had to, you know, really get out and, and sell us as a team and what we wanted to do, and I’m just so you know, very grateful that it works that way. But I’ve tried, you know, different marketing things that it really just honestly comes down to marketing. But for me, it’s the relationships I have, I just really foster those, you know, I’m meeting an investor this afternoon. And, you know, you get to know their families and you know, they they become someone who wants to see you succeed. And the best referral best thing, we ever get our referrals. But definitely, I’m, I’m trying to be more active on LinkedIn, and different things like that. I’ve never bought any accredited investor leads. But I’ve, I’ve done a little bit of everything. I even did a a direct mail campaign and ended up getting an investor that way, which was was pretty cool. But yeah, you just kind of have to use the approach of, you know, just disperse wildly, and hopefully you’ll you’ll catch a few. But yeah,

J Darrin Gross 28:19

So let me ask you what, in that process of tracking investors, how much of it the Do you find your time as educating your prospective investor? As opposed to, you know, gaining their trust and that you’re going to be able to execute?

Stephanie Walter 28:39

Yeah, I think, largely, for me, it’s educating it that that part actually really surprised me. When I went into this business, because I think myself, like so many people that get into syndications people, the people that teach you say, if you find the deal, the money will come. There’s really nothing further from the truth than that. So yeah, it definitely, it’s a little bit of both, but education and creating content, I’ve really made an effort to create a ton of content on my website. And because, you know, it is an education process, but I love it, because I’m, I am really passionate about it, because I just feel like, you know, this is a secret that, you know, the big banks and insurance companies and the wealthy have been taken taken advantage of for years. And I just want people to know that there’s a better way to do things. And so it makes it easier and more. It makes it fun for me to talk about this as opposed to insurance, which I love to but not as much as this.

J Darrin Gross 29:54

I understand. Yeah. So, so let me ask you, so We talked a little bit about the investors, it sounds kind of like, you know, kind of a foreign wide approach. I’m assuming you started with the people closest to you, friends and family, where did you get any? participation?

Stephanie Walter 30:16

My, my, my first deal was my friend was my family, both family and friend of my family member, it was a little funny because my brother in law was really interested in real estate, but he’s, you know, really busy sales guy and brought him this this deal with the fraternity house and he said, you know what stuff that’s the fraternity I was in when I was in college, I definitely want to invest in that. And then he told his friend who liked the ideas. Well, and so the I only needed to bring three investors in on that one. But yeah, so that that, you know, it’s a it’s definitely a mind shift to have to talk to your family and friends about money. But yeah, the My family has been really supportive. But you know, you do have to branch out, you know, and you find that out pretty quickly. So, and I think it probably does get, well it definitely gets easier for us, the more you know, syndications, we have now more of a track record to show it to people.

J Darrin Gross 31:32

Sure. Now, if you’ve if you’ve done it, some of those trust issues would would, I would think be pretty easy to get past. Knowing that you have some sort of performance or or record. I want to ask you a little bit about the value you’ve been creating 20% per annum per year returns are impressive period. What are some of the the strategies or the things that you guys look for? Or what what are some of the ways you’ve been able to create value? Let’s Let’s ask it, though.

Stephanie Walter 32:06

I yeah, I love commercial real estate for that very reason is, is increasing the value of the property by forced appreciation. It’s, it’s super cool. The, you know, most of us have only heard of, you know, natural appreciation, but in these really any type of commercial real estate, but we focus largely on the multifamily. So we found, you know, you find some properties who a lot of people get into this, like, just think of it like going and buying, like a single family home from someone who’s been running it on their own. You can find a lot more ways to be efficient when you go in when you have the experience and the systems and everything like that. So for us, we knew the market market is key, like, above anything else after watching COVID is market is everything. And we have definitely put a lot of time and effort into finding markets, understanding them, the dynamics that’s happening there. So it’s not like we just pick a property and say, Oh, this would be a nice area. No, we do, you know, probably hundreds of hours of research on that economy and what’s happening there. So we want to be sure there’s population growth, there’s going to be, you know, economic growth coming in, that it’s a landlord friendly place to be, you know, just just all of those things, but Tallahassee, I’ll just that one comes straight to mind is what they did years ago is they kind of overbuilt the student housing there. And what ended up happening as a result is there’s a real lack of affordable housing for just regular people wanting to live in apartments. And so we took advantage of that. So when I say take advantage of that we purchased, we purchased properties where we knew the current landlords did not have those rents where they needed to be, you know, if you’ve ever been a landlord Do you know sometimes you’ll just like, let the rents keep coming in at you know, you don’t raise the rents like you should. So we go in we we find places that need the market rents to be adjusted where they should be. But then there’s a whole host of other things we can do to streamline the process. A lot of places do not charge for utilities or if they there, they’re just very consistent with the way that they do that. That’s another way of gathering money. There’s, you know, silly things like pet fee. A lot of landlords don’t charge for that I even the sounds like weird one, but it’s something we find is is trash, trash, valet services. So any little thing where you can add, you know, a charge for it is going to increase the value of the property. And so the more the way that commercial real estate is valued is the income minus the expenses, is that net income, and that determines the value of the property. So if you, you know, are able to streamline the expenses and lower those 10% and increase the, the income, you’ve just increased the value of that property 20%. So that’s, you know, working with a team that’s really has a strategy on how to maximize those things, you know, is, is that’s how we give our clients those 20% plus returns.

J Darrin Gross 36:07

I love that I didn’t hear you say anything about you know, remodeling or renovation, it was more sounds like it’s more operational that typically the the type of property you’ve been able to find is something that’s just not managed as efficiently or

Stephanie Walter 36:22

Management is the number one thing you’d be so surprised that how many people do not run, these are businesses, you know, at the end of the day, and they don’t run them like a business. And that’s probably the number one way that you can add value into a property. But we do on a few of our properties, we do like small micro rent renovations we’re not, we tend to more invest in what are called B properties properties are, you know, broken out into a, b and c properties a properties are, you know, the luxury with the pools and the concierge and all this stuff, B properties are more kind of, you know, the average type of type of not two worlds. And, and those are the ones we really like to get into sees are they need a lot more work. They’re older, they attract a different type of clientele. And what we’ve noticed, because we keep track during recessions is during a recession, bees tend to do very well, because the aid people are moving down into the bees. And that’s, that’s what we’ve seen our rent collection through COVID stayed at 96%. So that, you know, I think is, is pretty remarkable.

J Darrin Gross 37:53

Yeah, from what I understand, I mean, I’ve got clients, insurance clients that I know, that are way behind on some collections, just based on family, the eviction moratorium and the you know, you don’t need to pay rent kind of a mentality.

Stephanie Walter 38:09

And also probably be more like tenants found and see, honestly see type of the bees, they have jobs, you know, probably mostly professional people. So yeah, so there’s lots of different, you know, elements to really think about when investing in properties.

J Darrin Gross 38:33

Currently here so the bottom line on this think different about money is that you view you know, you learn from some of your investors, you basically kind of put your money to work for you more rather than waiting, waiting to use it, kind of thing. And now your your sounds like your cash flow is increased markedly. Is that fair?

Stephanie Walter 38:56

Yeah. Yeah. And I think that, you know, another myth that people think is they think, well, you you became wealthy because you invested in really high risk things, things I would have never wanted to get involved with. And actually nothing could be further from the truth. The wealthy people that invest syndications are what historically one of the best places to have your money in the sense that you get above average market returns with probably one of the lowest amounts of risk that you can have. Another thing that I noticed about the wealthy people, especially this is a little timely is that we’re expecting inflation. And wealthy people tend to want to invest in tangible assets in things that have a value like building a property. They want to invest in businesses. Want to invest in something that has a value to it? And especially when we think of inflation, I had to talk in an event A few weeks ago. And just out of curiosity, I came across this fact, which was from 1980 to 2021, on average, the rents have gone up 8.86%. You know, and that’s probably a number that they, you know, that involves the whole United States. But that’s a heck of a number. And that does show why these, you know, to put your money in a place like multifamily rents is going to be pretty, pretty, not only recession resistant, but definitely a great hedge against inflation.

J Darrin Gross 40:53

Definitely want to ask you is you’re raising capital from investors? What kind of criteria do you have for your investors? Is there a minimum? Or? Or can you speak to that a little bit?

Stephanie Walter 41:06

Yeah, well, we do. You know, solely right now, we’re doing 506 C’s, which means that we work with accredited investors and an accredited investor, it’s pretty simple, you don’t need, you know, to get a license or anything like that. But all it means is that you qualify to invest based either on your income or your net worth. And for us the, or for the accreditation, you need to if you’re single, make over $200,000 a year, if you’re married, you need to make over $300,000 a year, if you don’t qualify, that way, you can also qualify based on your net worth. And that just means that minus your primary residence, you need to have a net worth of a million dollars. And actually, since you said you were in an insurance, there’s actually another way of qualifying. And that’s if you have your series 63. Six, I want to say one more, because I just kind of found out about this. So that’s another way that you can qualify to to be an accredited investor, and we usually for require $100,000 minimum for that investment.

J Darrin Gross 42:29

Now, it’s it’s a, I love the whole syndication model, it makes a lot of sense. And I think the, when you realize that, you know, these larger properties, the effort it takes to take one down, it’s, it’s pretty, you know, pretty big challenge, if you’re going to try and do that by yourself so big, that it’s likely you wouldn’t be able to, but again, like by pooling resources, you can get to a big enough number. And the real key to this whole thing that this is the piece that it’s taking me forever to kind of really cement and understand this is, the bigger the investment you’re in, that appreciation applies to the whole investment. And then when you take that the equity gain you get from where you bought, where you sell, and then you apply that against what your your down payment, or the equity you invested in the property. It’s, it’s like, wow, you know, eye popping, as opposed to, again, my mindset when I first got in, was when I bought, I put my money in, and I’m just gonna watch the balance owed to the bank go down. And that’s going to be my, my equity, and it really is kind of a mind shift, because that’s, that’s just not really investing that’s just kind of waiting. You know, it’s kind of my mindset when I first started investing, but it is a really, you know, a powerful thing, when you realize, the, you know, the the, the idea is to get in as to as big as you can, you know, that you’re comfortable with, but that’s really where the power is, is that because you’re leveraged into that and, and how how much that return on the total is going to improve your investment return on your, you know, the portion you invest itself makes a lot of sense to me. Hey,

Stephanie, if we could, I’d like to shift gears here for a second. As we’ve mentioned, by day, I’m an insurance broker myself. And I work with clients to assess risk and determine what to do with the risk. And there’s three strategies we typically consider. We look to see if first we can avoid the risk. When that’s not an option, we’ll see if we can minimize the risk. And when that’s not an option, then we look to see if we can transfer the risk and that’s an insurance policy. And I like to ask my guests if if they can look at their own situation. Could be clients, investors, tenants, a market government however you want to you know, I guess The question, but but if you can take a look at your situation and consider what you think is the biggest risk. And, again, for clarification, while I’m an insurance broker, I’m not necessarily looking for an insurance related answer. So if you’re willing, I’d like to ask you, Stephanie Walter, what is the biggest risk?

Stephanie Walter 45:29

I think you know what? That’s a good question. I think that the biggest risk, if it comes down to people investing in syndications is I guess, really understanding the team of people that you invest with? Seeing that they have a track record. I actually have, on my website of, I think about 30 questions that I get from almost every investor, and they involve risk and how to mitigate it. And so that’s definitely a good, a good, you know, spot to start. I think the largest risk that I’ve seen personally of you know, people who have invested in syndications and kind of maybe not done so well, the last few years, I think, and knowing your market, or at least, being with people that really understand the market, that they’re working in. That that I think, is huge. Because, you know, we’ve seen dramatic differences, like I said, between say, a B property, how it’s performed through COVID versus a C property. As far as rent collections, we’ve seen differences in the way that you know, that these properties have done in Florida as opposed to say, Indiana You know, there’s just there are definite you know, things about these these different markets that either you need to trust the you know, team that’s bringing you these deals, but these are there are risks, you know, and you’re doing your due diligence is is definitely important.

J Darrin Gross 47:30

No, could not agree more. Hey, Stephanie, where can listeners go if they’d like to learn more connect with you.

Stephanie Walter 47:39

But my best place is my website, which is www dot e r b, e wealth.com. And, yeah, I’ve got some, like I said, I have a lot of content there. Usually, you know, newer investors will download. We have a new report there. That is the five reasons that passive investing might be for you. But then I mentioned that video series that where I talk about, you know, important questions that you as an investor need to ask when you’re betting a deal.

J Darrin Gross 48:17

Awesome. Well, Stephanie, I can’t say thanks enough for taking the time to talk today. I’ve enjoyed it. I’ve learned a lot and I look forward to doing it again soon. That sounds great. Thank you. 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 got this week. Until next time, thanks for listening to commercial real estate pro networks. CRE PN Radio.

Announcer 48:53

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

Matthew Ricciardella 0:00

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

Announcer 0:32

J Darrin Gross 0:51

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

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

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

Matthew Ricciardella 2:42

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

J Darrin Gross 2:45

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

Matthew Ricciardella 2:54

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

J Darrin Gross 5:01

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

Matthew Ricciardella 5:30

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

J Darrin Gross 6:27

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

Matthew Ricciardella 6:40

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

J Darrin Gross 7:03

And were those primarily local acquisitions? Or did you know

Matthew Ricciardella 7:07

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

J Darrin Gross 7:54

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

Matthew Ricciardella 8:12

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

J Darrin Gross 9:22

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

Matthew Ricciardella 9:57

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

J Darrin Gross 11:37

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

Matthew Ricciardella 11:53

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

J Darrin Gross 12:33

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

Matthew Ricciardella 13:06

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

J Darrin Gross 14:41

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

Matthew Ricciardella 15:09

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

J Darrin Gross 16:42

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

Matthew Ricciardella 17:06

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

J Darrin Gross 18:05

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

Matthew Ricciardella 18:19

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

J Darrin Gross 18:43

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

Matthew Ricciardella 19:02

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

J Darrin Gross 20:12

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

Matthew Ricciardella 20:25

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

J Darrin Gross 20:35

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

Matthew Ricciardella 20:44

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

J Darrin Gross 21:17

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

Matthew Ricciardella 21:33

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

J Darrin Gross 21:41

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

Matthew Ricciardella 22:31

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

J Darrin Gross 24:33

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

Matthew Ricciardella 25:00

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

J Darrin Gross 25:22

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

Matthew Ricciardella 25:43

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

J Darrin Gross 25:58

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

Matthew Ricciardella 26:09

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

J Darrin Gross 26:18

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

Matthew Ricciardella 26:30

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

J Darrin Gross 27:15

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

Matthew Ricciardella 27:38

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

J Darrin Gross 27:57

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

Matthew Ricciardella 28:39

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

J Darrin Gross 29:39

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

Matthew Ricciardella 29:47

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

J Darrin Gross 30:01

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

Matthew Ricciardella 31:15

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

J Darrin Gross 33:14

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

Matthew Ricciardella 33:21

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

J Darrin Gross 33:46

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

Matthew Ricciardella 33:56

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

J Darrin Gross 34:00

Announcer 34:19

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

Erik Hayden 0:00

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

Announcer 1:12

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

J Darrin Gross 1:12

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

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

But first, a quick reminder, if you like our show, CRE PN Radio, there are a couple things you can do to help. You can like, share and subscribe. And as always, we’d love to hear from you. Please leave a comment. Also, if you’d like to see our answer, I guess are Be sure to check out our YouTube channel. You can find us on youtube at Commercial Real Estate Pro Network. And while you’re there, please subscribe. With that, I want to welcome my guest, Erik, welcome to CRE PN Radio.

Erik Hayden 1:12

Thank you, Darrin happy to be here.

J Darrin Gross 2:37

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

Erik Hayden 2:47

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

J Darrin Gross 3:08

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

Erik Hayden 3:09

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

J Darrin Gross 3:30

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

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

Erik Hayden 3:42

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

J Darrin Gross 3:53

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

Erik Hayden 3:55

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

J Darrin Gross 4:22

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

Erik Hayden 4:41

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

J Darrin Gross 6:55

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

Erik Hayden 7:58

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

J Darrin Gross 9:21

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

Erik Hayden 10:19

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

J Darrin Gross 14:14

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

Erik Hayden 14:29

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

J Darrin Gross 15:02

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

Erik Hayden 15:08

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

J Darrin Gross 15:23

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

Erik Hayden 15:29

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

J Darrin Gross 15:53

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

Erik Hayden 16:07

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

J Darrin Gross 16:18

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

Erik Hayden 16:57

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

J Darrin Gross 17:23

Gotcha. Gotcha.

Erik Hayden 17:24

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

J Darrin Gross 17:38

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

Erik Hayden 18:18

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

J Darrin Gross 18:39

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

Erik Hayden 19:27

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

J Darrin Gross 19:57

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

Erik Hayden 20:06

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

J Darrin Gross 21:01

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

Erik Hayden 21:15

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

J Darrin Gross 21:52

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

Erik Hayden 22:08

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

J Darrin Gross 22:22

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

Erik Hayden 22:41

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

J Darrin Gross 25:47

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

Erik Hayden 26:38

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

J Darrin Gross 28:51

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

Erik Hayden 29:43

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

J Darrin Gross 30:37

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

Erik Hayden 31:05

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

J Darrin Gross 31:49

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

Erik Hayden 32:11

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

J Darrin Gross 32:14

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

Erik Hayden 33:24

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

J Darrin Gross 37:39

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

Erik Hayden 38:10

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

J Darrin Gross 39:23

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

Erik Hayden 39:52

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

J Darrin Gross 39:57

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

Erik Hayden 40:07

Absolutely, Darrin, thank you again for having me.

J Darrin Gross 40:10

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

Announcer 40:28

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

Raising Capital for Real Estate with Dave Dubeau – CRE PN Radio #292

Dave Dubeau 0:00

The whole networking and schmoozing and turning every conversation into a, into a real estate conversation then following up following up following up, again dealing with massive rejection, most what I call mom and pop real estate entrepreneurs are geared up that way. I mean, they’re doing real estate, they’ve got some, some properties in their portfolio, there’s still, you know, a lot of them are still working at their jobs. A lot of them are doing this part time they got families, you got stuff going on. They don’t have the time or the energy or the inclination to develop this whole skill set of becoming a, you know, a high pressure closer kind of a person. So we offer kind of a different way about going around. raising capital is that say chasing after investors, let’s figure out a way to attract them to us.

Announcer 0:47

Welcome to see our EP n radio for influential commercial real estate professionals who work with investors, buyers and sellers of commercial real estate coast to coast whether you’re an investor, broker, lender, property manager, attorney or accountant We are here to learn from the experts.

J Darrin Gross 1:06

Welcome to commercial real estate pro networks, CR e 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 Dave Beau Dave is a real estate entrepreneur, best selling author, speaker and investor attraction expert based in beautiful British Columbia, Canada. And in just a minute, we’re going to speak with Dave about how to find investors and raise capital without rejection. But first a quick reminder, if you like our show, CR e pn radio, there are a couple things you can do to help. You can like, share and subscribe. And as always, we would love to hear from you if you leave a comment. Also, if you’d like to see how handsome our guests are, be sure to check out our YouTube channel. You can find us on youtube had commercial real estate pro network. And while you’re there, please subscribe.

With that I want to welcome my guest, Dave, welcome to CR e pn radio. Well, thanks very much for having me.

Dave Dubeau 2:27

Darrin, this is great. Now I’m jealous because you’ve got like the perfect radio voice my friend, my goodness. Well, as I’m going Geez, I wish I sounded like this guy. You’ve got like the perfect announcer voice.

J Darrin Gross 2:44

While I appreciate that, but the reason we’re doing this is to learn about real estate, and all the good stuff that from the good guests we have like yourself. And before we get going here, if you could take just a second and show listeners a little bit about your background.

Dave Dubeau 3:05

Perfect. Yeah, Darrin. So as you heard, I’m from beautiful British Columbia, Canada. So just a little bit north of where you are there in Oregon and then doing the whole real estate thing for quite some time. kind of grew up in a real estate family. My father, my grandfather built a six Plex up as a family home. As I was growing up. My mother was a very active real estate entrepreneur. As I was a young young man and into my teens, she built up a portfolio of over 50 doors have always seemed like we had real estate going on in the family, but I didn’t pay that much attention to it. And then after graduating from university, way back in 1991, traveled the world ended up living in San Jose, Costa Rica started a business down there, lived overseas for almost 14 years, got married, had kids, when they got to school age decided to bring them back to North America. So they’d have a better education and had to start all over again from scratch. So I was in a brand new city had been gone too long. I didn’t have bad credit. I had zero credit. I had been self employed so long as pretty much unemployable. And there i’d figured out okay, what am I going to do to make a living so, Darrin, I don’t know if you remember those late night infomercials that used to come rolled out across the TV, but one o’clock in the morning? Remember those?

J Darrin Gross 4:25

Oh, yeah, Carlton Sheets.

Dave Dubeau 4:27

Yeah, yeah. So I saw one from a gentleman named Ron Legrand, one of Carlson’s cohorts. He said hey, you can get into real estate with little or no money down and I said hey, that’s perfect because that’s what I got. So I sent away for the course got it, dusted it off, got it dialed dove and Dolly I think was VHS cassettes and and you know, binders and all this kind of stuff. You gotta remember I was up here in in British Columbia. All of this stuff was American focus to kind of Canadian eyes it make it work in my market. I did that did 18 deals in 18 months. And then after doing that, because of my background in marketing and, and that sort of thing, I caught the eye of an up and coming real estate guru up here, when I’m bored is the director of marketing for him and his company’s helped him grow from two employees to 128 employees, seven branch offices owe $200 million a year in revenues between, you know, training products and investment stuff that they’re offering as well. And took some time off from real active real estate investing got back into it doing rental home, eventually got out of that. And more recently, since 2013, I focused on partnering up with smart folks who are good at multifamily investing, and getting part of that by helping to raise capital for their deals.

J Darrin Gross 5:44

Got it. So you’ve been on all ends of the spectrum of real estate from I guess hearing it in the family where you’re growing up to the no money down to working for larger entered entity and and now you’re, you’re raising capital.

Dave Dubeau 6:01

Exactly, exactly.

J Darrin Gross 6:04

Well, sounds like you, you’re qualified to talk about raising capital, that’s, that’s good.

Dave Dubeau 6:08

Well, I’ve done some myself, that’s for sure. But more importantly, I’ve helped a lot of other people raise cumulatively hundreds and hundreds of millions of dollars for their deals. So yeah, the process I’ve come up with has been quite effective. And it’s really effective. For people who are just getting started with raising capital, they haven’t done it before, or they haven’t done it very effectively. And they don’t like the idea of doing the old school dialing for dollars, you know, which involves massive rejection, or the whole networking and schmoozing and turning every conversation into a into a real estate conversation, then following up following up following up, again, dealing with massive rejection. Most what I call mom and pop real estate entrepreneurs are geared up that way. I mean, they’re doing real estate, they’ve got some, some properties in their portfolio, they’re still, you know, a lot of them are still working at their jobs, a lot of them are doing this part time they got families, you got stuff going on, they don’t have the time, the energy or the inclination to develop this whole skill set of becoming a, you know, a high pressure closer kind of a person. So we offer kind of a different way about going around raising capital and instead say chasing after investors, let’s figure out a way to attract them to us. So that’s what the whole idea is.

J Darrin Gross 7:28

Let me ask you, because, you know, the the your starting point there with the no money down kind of a property, obviously, you know, that’s the no capital. But the reality is in the larger properties, if you want to really grow your portfolio and get into larger properties, there’s a need for capital. So I’m kind of curious, uh, you know, I was just thinking as you’re, as you’re talking that the strategy from, from a No money down a strategy, a starting point, I’m wondering if there’s not some similarities and that you are still, there is still something you’re looking for, you know, in that potential for that deal to work, somebody’s got to have some money to make that work. Whereas now when you’re raising capital, if there’s a is there, is there a thread that a common thread through there, or am I yeah, I

Dave Dubeau 8:24

mean, at least for myself, during when I was doing the creative, no money down deals. It was all about marketing, to attract motivated sellers, people that were in some sort of a walkie situation with their property, and they needed to get out of that situation, they weren’t looking for top dollar for their property, they’re looking for a solution. So that it all revolved around marketing, because those 18 deals that I did in 18 months, and there’s a pretty small market I’m in it was all by doing marketing and attracting these people. To me, I never used a realtor, I never searched the MLS, I never cold called a single fizbo. seller, it was all by applying marketing and getting these people to come to me. So fast forward, whatever was 10 years or more, yeah, probably more. When I started raising capital, you know, after floundering around and failing miserably and getting you putting up with a ton of rejection. I said, Hey, why don’t I apply what I already know about marketing, to raising capital, and let’s, let’s attract investors instead of chasing after them. So not quite, very different process. Same idea, though,

J Darrin Gross 9:31

when I also guess another distinguishable difference that I’m heard something I’m hearing you say is that notion of when somebody is reaching out to you, as opposed to you you approaching them. I’m wondering if there’s if you can speak to that as far as the

Dave Dubeau 9:49

the Well, I’m sure Dan, in your background as an insurance professional, you know, the difference firsthand between chase After a prospective client and having a client be referred to you, by a current client, you know, it’s it’s night and day like, you don’t have to convince that second person, how great you are you, somebody else has already done that or something else has already done that. So same idea here. I mean, a lot of us when we first get into raising capital or think about raising capital, what comes to mind is The Wolf of Wall Street, right, that movie or back in the day Glengarry Glen Ross right? Always be closing, right? Alec Baldwin great movies. But that scares the crap out of most people, the idea of having to pick this sucker up and call everybody you know, and try to pitch them on a deal over the phone. You know, especially when you’re trying to rate you know, your, your listeners are trying to raise hundreds of 1000s of dollars, if not millions of dollars, for multifamily properties, right. So that’s a daunting task, especially if you’ve never done it before. And even if you’re good at it, you’re gonna face a ton of rejection. So most people, myself included, and this is how I learned this the hard way, there is another big concept you guys, you want to write stuff down. When it comes to the chicken or the egg, which comes first the money or the deal, a lot of people think you know, find a good deal, and the money will find you. We’ve all heard that. And Excuse me, but I say that’s complete Bs, that that is Bs, what you want to do is you want to have the capital and your investors lined up first, and then go finding the deals. Because then you can go in, you can negotiate, you know, you’ve got the capital bond to back you up. And you can go in and you can make offers with confidence, knowing that you’re going to be able to close versus if you go and tie up a deal and then you scramble around to raise capital if you haven’t, if you haven’t laid the foundation down. That’s a very, very difficult task. So I remember vividly during my, my whole experience, they got me to focus on this was when I was doing ranch home deals. We’re doing a strategy called tenant first. So we’d actually go find a really good rental client, we go buy them a house, and then we rent owner to them for two to three years while we help them get qualified for financing. So that’s great. And the first I did the first couple of deals under my own steam, I had enough capital I had enough Home Equity I could come up with down payments but then I ran out and of course that’s when the perfect tenant buyer couple landed on my lap. They were absolutely ideal ran out got a property tied up because I’d heard Hey, find a good deal that the money will find you crunched all the numbers figured everything out. saw them I was gonna get my investors really good return. And then I said okay, well I still have to do something right the money’s not gonna magically find me I need to do something around this. So I I heard pick up the phone and start dialing for dollars. So I tried that. Rejection rejection rejection, rejection rejection. Now I admit, I don’t think I was very good at it. But even so it’s it’s a tough, tough road. I my fragile little ego could only handle so much of that before I said, Okay, enough’s enough. I quit. And then I thought, Okay, well, I also heard turn every conversation into a real estate conversation, go out there network schmooze. You know, talk a storm, collect cards, give cards follow up all that stuff. So I tried that local Chamber of Commerce, BMI groups, Toastmasters, wherever, whoever had a group of people together and would let me in the door. That’s what I went. And I talked up a storm use my little elevator pitch about real estate and all this stuff, collected a bunch of cars and cards and stuff and raised zero capital. And I was under a crunch, right? Like I, I had to raise this money. Within two weeks, I got an extension. And then I came up with what I thought was a brilliant idea. And you’re going to scoff at this term. But here’s, you know, desperation. He’s desperate action. So I thought, Hey, this is such a good deal. It’s going to sell itself. It just enough people see it. So I put together little little years ago, put together a little PDF, and email that to a couple 100 people that I knew, that’s how Okay, this is this is gonna work like gangbusters. And this was the first thing I saw any action on there. And I started getting some replies back I thought, Oh, good. I was counting the money already, right? until I started reading these replies. And basically you’re saying date, buddy, I haven’t heard from you in five years or some cases 10 years in one case. 18 years the person hadn’t heard from me. And here you are hitting me up for cash free deal. Take a hike.

Dave Dubeau 14:23

So the story ended badly Darrin, I had to collapse that deal. I’m in a I’m in a relatively small city. There’s about 80,000 people in town. So I got I ticked off my tenant buyer big time ticked off the seller ticked off the realtor, the mortgage broker, everybody that was involved in this deal, got major egg on my face, in a fairly small market. And that’s why I said there’s got to be a better way than this. And that’s why I get my head shaken as a dummy. If there’s something that you’re pretty good at it’s marketing so why don’t you figure out a way to uh, you know, attract investors get people get Get investors lined up ready to go in the wings. And then you can go make offers on deals. So took a bit of time and effort and trial and error, but I came up with this process.

J Darrin Gross 15:10

So let’s talk about what was the? I mean, obviously, the AHA is you need people you need money. You need capital lined up here. Yeah. So let’s talk a little bit about that. What are, what is it that you do now? Or that you teach your prospective clients or your clients to do so that they are prepared with the capital when the opportunity presents itself that they can pull the trigger and make the deal?

Dave Dubeau 15:40

Well, what I do Darrin is I, I encourage people to go after the low hanging fruit, encourage people to go after the low hanging fruit. So what does that mean? That means we need to kind of step back and look at things realistically, in order for somebody invest 5075 100, grand or more with us, they need to know us, they need to like us, and they need to trust us with their money. Would you agree that those those are good starting point? Yeah,

J Darrin Gross 16:07

yeah,

Dave Dubeau 16:08

you need if you’re missing any of those, it’s going to be very, very difficult. But most of us when we’re trying this, we think anybody with a pulse and a checkbook, that doesn’t bounce would make a good investor, that that’s very, very dangerous. First of all, from a practical standpoint, you know, if you’re trying to raise capital from complete strangers, that’s pushing a very big rock up a very steep hill, they don’t know you, they don’t like you. And they sure as hell don’t trust you with their undergrad. So you have to create that, that relationship from scratch. And that takes a long time. The other big thing to take into account is that, typically, it’s illegal, right? Unless you and I are licensed to do so. So typically, we’re thinking about a mortgage broker, a stock broker, could be a financial planner, these people can receive capital from the general public, because they’re licensed to do so. You and I, as mom and pop real estate entrepreneurs, we can’t, unless we got things structured properly, unless we’ve got the right exemptions. And caveat here, you guys, you know, I’m Canadian, from north of the border. So I’m just talking about what I’m aware of in the States, the rules are a little bit different. In Canada, we have we do have securities regulators same kind of idea, you guys for what I understand. You have state regulators, and then you got the securities exchange commission on top of that. So before you do anything, go talk to an appropriate real estate lawyer in your area that can get you set up properly, so that you’re, you’re compliant. That’s my, that’s my cover my butt thing there’s lamer. Yeah, but hopefully that worked. All right. So you guys, but basically, the big picture is, let’s focus on people that we have a pre existing relationship with right people who we know, and they know us, because here’s the beautiful thing there. We got two out of the three things taken care of they already know us. They already like us, now we just have to work on will they trust us with their money. So that’s what we suggest we, when you’re getting started with this, let’s come up with a target group of prospective investors. Now I say prospective investors, you don’t know who’s got the capital, who doesn’t have the capital, who’s going to be ready, willing and able and who isn’t. But for most of us is mom and pop real estate entrepreneurs. If you came up with a list of 150 to 200 people that you know, and they know you within that group, this is where I like to save my my training workshops. Everybody I firmly believe has at least a million dollars of capital sitting here, just waiting waiting to get access. The challenge is we don’t know exactly who has the capital and who doesn’t. So we need to come up with that target group of about 200 people. And then we need to let them know what we’re doing. We need to shake the tree and collect that low hanging fruit. So the first step is, let’s come up with that target group of people. And don’t don’t filter too much. Because one thing I’ve learned over the years during I’m sure you’ve seen this is don’t assume that somebody does or does not have money. because quite often the people that are all flash ain’t got no cash. And the people that are very humble and you know, don’t look like they have much money, actually do have a lot of money. So don’t prejudge people. Does that make sense?

J Darrin Gross 19:28

Yep, no, absolutely.

Dave Dubeau 19:30

Yeah, that’s a target group is the first thing. The second big part of this whole thing here is don’t make the stupid mistake I did, which is charging in like a bull in a china shop saying, hey, it’s Dave, I got a deal. If you got any cash. We’ve we’ve shown that that doesn’t work very well. So there’s a better way to do it. What I like to do is encourage people to do what we call a warm up campaign. So this is a way for you to break the ice with folks before you Start talking business. So we have a very simple three step email sequence that we send out to people we have our our clients send out to their prospective investors, just reconnecting with people on a personal level first, having a little bit of interaction back and forth. And then giving them the heads up there, we’re going to start marketing to them about what we’re up to with real estate investing. And just kind of set the stage before we actually start the marketing. Does that make sense?

J Darrin Gross 20:30

No, so far, I’m on. I’m on on board here.

Dave Dubeau 20:33

All right. Do you have any questions about this part of the process? This is step one of our five step process.

J Darrin Gross 20:40

Now, I just think it makes a lot of sense on where you’re starting you you have, you know, eliminated those you don’t know and starting with those you do. And I’m guilty. You know, so often, it’s so easy to look past those we know, because we already know them. And we’ve already qualified them wrongly or rightly, without ever asking or even lead letting them know we’re doing this. And, you know, same same true. I know, in my insurance practice, it would be probably more more beneficial to start with those current clients, you know, and look for, for referrals, rather than keep charging and after new ones. But

Dave Dubeau 21:19

yeah, well, we all will make that mistake, that’s for sure. But again, when it when it comes to just first getting started with with raising capital, I think this is a way to go. And a lot of people are freaked out. They say Wait, you know what, I’ve heard, don’t mix friendship or don’t mix family and business. That’s a recipe for disaster. And, and you’re right, it couldn’t be a recipe for disaster. If you do it the way most people mistakenly do it, they do it on a spit and a handshake. So here’s the recipe, here’s here’s a way to make it work. Bringing even if it’s your brother, your sister, your parent, whatever on board as investor partner, is what I always suggest, treat it as if you’re working with a complete stranger. What does that mean? That means if you were working with a stranger, which I don’t recommend, but if you were chances are, you’d be using the appropriate legal documentation, right. So do the same thing, even if it’s your brother, have the appropriate joint venture agreement, the appropriate contract, or the appropriate legal structure set up again, this is where it’s important to talk with your lawyer. So you know how to set everything up properly, make sure they get appropriate, independent legal advice, set everything up, set everything up. So when you are working on a deal, that you’ve got the appropriate reporting and the timeframes for all of that. So pretend as if your family member, your best friend from high school, or whatever, whoever it is that your investor, pretend they’re a complete stranger and treat it very, very professionally. And that will eliminate all, you know, set the parameters that will eliminate all of that back and forth that awkwardness, potential awkwardness of working with somebody that you really know. Now, here’s the other thing. People think, Well, you know, I don’t want to talk with my friends and family about what I’m up to with real estate investing. I think that’s the wrong idea. I think, you know, if you’re actively investing in real estate, chances are your thought process is or it should be that real estate is the absolute best investment choice for everyday people like you like myself, like our investors. I mean, what other investment class out there is such a solid, tangible investment, what other investment class out there, especially if your listeners are mostly focused on multifamily? You know, there are at least eight different profit centers that I’m aware of with a multifamily deal. What other investment choice out there offers that kind of potential for average people, so you are doing people a disservice by not letting them know what you’re up to with real estate investing. And then the other big mind shift is understanding the value that you bring to the table because a lot of us, when we first get started with raising capital, it’s, it’s all about me, me, me, me, me what I need this money to grow my portfolio I need this money to, to, you know, create more passive income for myself and my family. Well, that’s cool. But also think about what do you bring to the table for your investor partners, especially if you’re doing you know, a an equitable kind of profit split with your investors, you are bringing them an opportunity that they cannot or will not do on their own. So instead of kind of coming to the table, like a beggar with your, your hat in your hand looking for a handout, you can, you know, go to the table with some coneys with with a little bit of Mojo there, knowing that you are bringing massive value to the equation. So, you know, that’s a big challenge. I see a lot of new capital raisers making is they they kind of sniffle and grovel, they come across as needy. They’re kind of desperate. How do I know this? Because that’s how I was okay, needy and desperate and that just repels people. My mentor. once said, needy is creepy. Be very, very true. So needy is creepy goon just smell that. So you need to step into your position as a real estate professional, you need to understand what you bring to the table. And that is actually a much better thing than what your investors bring in, everything’s necessary, but you’re bringing more value to the table than the male, there’s trillions of dollars out there looking for a better home, you’re providing that better home for them. Again, that’s

J Darrin Gross 25:25

a, that’s a, that’s a great, great point to remember. Because I think, you know, there are so many people that are resigned to what the stock market, how that works, or the little money that they’re getting on whatever they may be doing, as opposed to the opportunity. And I think a lot of this just comes down to a lack of knowledge, they just don’t know the opportunities exist? And who would they rather do? You know, an opportunity with somebody they don’t know, or you they do know, and already like and trust? So I think that’s, that’s a great, great point. And just keep in mind, I mean, I think really that that first, or that last point you made about just the value you are bringing, like you said they have money, and they’re looking for some sort of a return and a safe return it gets those are, those are great points. Great point.

Dave Dubeau 26:17

Well, I think it’s our patriotic duty to educate people in our sphere of influence people who have that relationship with about what we’re up to with real estate investing, educate them, not manipulate them, not pressure them not, you know, arm wrestle them into investing with you, educate them about what you’re doing, and allow them to make their own educated decision as to whether investing with you Makes sense. So my whole process, my whole way of doing things is very, very, you know, no pressure, right. And it works very, very well is kind of counterintuitive to everything that we’ve seen on TV and in the media about, you know what, what it takes to raise capital, I don’t think you have to beat people over the head. To get them to invest with it, I think you need to provide that edgy education, allow them make up their own mind compare and contrast, when investing with you in a real estate deal looks like compared to keeping the money in the stock market and mutual funds when the bank. All right.

J Darrin Gross 27:18

So, so let me ask you, can you describe a a typical student client of yours in their experience? They’re in real estate or wanting to raise capital? Can you describe some of the experience some of your, your clients have had

Dave Dubeau 27:38

before they started this process, or once they start the process?

J Darrin Gross 27:41

Yeah, just the I guess more of like, once they start and how long it’s taken and, and the amount of money they’ve been able to raise and, and

Dave Dubeau 27:50

it’s all over the place there. And so it really depends on what kind of strategy they’re doing. So a lot of my clients come on board, and they’ve done maybe one or two deals under their own steam, maybe it’s a single family home, maybe it’s a single family home with a basement suite, and they want to do more of those, or they want to start stepping up into multifamily properties. That’s kind of that it seems to kind of work that way. So they start with single family homes, and then they start raising capital, they do a few more of them. And then they realize, Oh, you know, one, z, two Z’s are great. But if you can get eight doors in one property, or 16 doors, or 24, doors, or 54, or whatever it is, that’s a lot better. So it’s, it’s usually that kind of a progression. They’ve hit the wall, they sell finance, the first couple of deals, or maybe they they bumbled around and actually raised a little bit of money, but it was the old way it was painful for them. So they’re looking for, for better ways, and what are the results? You know what it’s all across the board. And we’ve had people get started just with this first step I was telling you about, which is coming out with that target group of prospective investors and breaking the ice and getting some people putting up their hand and saying, Hey, you know, Derek, I didn’t know you’re doing real estate, I’m interested. Tell me more. And then they have a meeting with them. And they show them what they’re doing. And they get investors right on board right from the right from the get go. I had one client not that long ago, Bruno was new to the country. He’d had. He’s from Mexico originally came to the country had some experience in Mexico, but none here and not even a big social network here. But went through the process. And his very first presentation, he got an investor on board for $200,000. Now, Is that normal? No, that’s not normal. That’s exceptional. But it does happen. I had another nother you know, typically it’s more like 80 to $100,000. I did have because the next step of the whole process is make sure that you’ve got your investor presentation put together I call this your your million dollar presentation, I usually recommend a slide deck. I had one, one client, I call it the million dollar investor presentation because typically over a period of months, you can probably quite easily raise a million dollars using this presentation. But one client of mine, Curtis, he did this process and he had his his very first presentation was with his dentist, and the dentist at the end of the whole thing he loved it loved what Curtis was doing love the presentation is Amen. So curious like, okay, so are you interested? He said, Yeah, I’d like I’d like to invest. And Gary said, Well, how much would you like to invest? When you said, you know, what, I’ve got a line of credit that I’m not using right now is for $1.3 million. Do you think we could do something with that? And Curtis scratched his head? And he said, Let me think about it for a sec. Yes, I do think we could do something with that. Bank. So that was, that was a biggest example of the fastest that I’ve seen. And that’s definitely not typical. But that’s, it’s definitely possible. So it’s all across the board, you know, from from $50,000, to $1.3 million, quite quickly, typically takes a bit longer than that to raise the big bucks. But you can start very, very quickly.

J Darrin Gross 30:58

Knowing Hey, I think it’s all good. I know, you know, the, the notion, you go by yourself, eventually you will run out of capital. Well, and, you know, if you want to continue, you’ve either got a partner or I mean, you know, you’re gonna need more capital, and you have to sell something and try and, you know, move that around or partner up with somebody else. And I mean, I think that, you know, if you look at the largest deals, so the syndications and that, that they’re, they’re groups of people, they’re not just one guy. And even some of the largest investors I know. They get they get others to partner with them. And, and, you know, join capital in that. So

Dave Dubeau 31:47

even the the biggest guys, pool capital, right? It’s, it’s the way it goes, I kind of use this analogy, I say real estate is our vehicle that we’ve chosen to get to where we want to be financially. So we’ve chosen real estate as the vehicle. And when it comes to every vehicle needs a driver, you’re the driver of your real estate vehicle, every vehicle needs fuel. And when it comes to our real estate vehicle, we can use our own finances, our own resources, that’s kind of like having a little jerrycan of gas, you put that in, and it gets you started. But sooner or later, you’re going to run a gas, you’re going to stall out, you’re going to get stuck, right? Now, when you’ve got access to other people’s money. When you’ve got a group of investors lined up ready to go in the wings, like I’m recommending here, that’s like having your very own gas station, you can pull up anytime you want 24 seven, and you’ve got the fuel that you need to keep your real estate vehicle going. So that’s the analogy I like to use. And again, it’s all about, you know, we talked about, find a good deal and the money will find you. That hasn’t been my case, unless you’ve done this. Now, here’s the ideal situation. You’ve got your investors lined up ready to go in the wings, then you go find a good deal. And then you say, Hey, guys, here’s what I’ve got. First come first serve. Right? You get first dibs on this, the people who put up their hands the first, get it first. And that’s the ideal situation to be in, instead of desperately creepily chasing after people in their mind.

J Darrin Gross 33:19

No, no, it makes a lot of sense. And I think the other thing that I’ve seen in talking with other guests and just other investors is that once you raise that capital, when you return capital, the investors are typically looking if they’ve had a good experience for your next deal. Yeah. And I’ve seen the people be able to, you know, get into multiple properties based on those initial raises. Over time, there’s that’s, that’s all law, good

Dave Dubeau 33:49

business, and referrals and all that kind of stuff. That’s actually step number five of my process. But yeah, it plays a huge, huge role, that’s for sure. So, so we’ve got our target group of prospective investors, we’ve broken the ice with them. We want to make sure we’ve got our investor presentation ready to go. And what I mean for that for most people what I found, the best thing is to have a, a slideshow, like a PowerPoint, or Keynote presentation, something you can show people, especially these days with old COVID thing going on, so that you can, you know, jump on zoom like we are and share your screen and walk people through a well structured, well organized, logical presentation that shows them what you’re up to. Right. And then the goal of the presentation isn’t again, somebody cut you a check for 100 grand necessarily. The goal of the presentation is to get them to say yes, when you’ve got a deal. I want first dibs, I want to be taken into consideration. That’s how we get our investors lined up ready to go and waste. And then this way, capital raising doesn’t need to be a sporadic thing. You don’t have to be waiting until you’ve got a deal to start raising capital. In fact, that’s the worst time you start raising capital now and then you go find the deals. Knowing that you’ve got the investors ready to go into wicks. So step number three of the process is called marketing, what I call constant, consistent communication, you want to be coming out on a regular basis, you know, rock bottom minimum, absolute minimum, once a month, you need to be communicating with your list of prospective investors. That’s the absolute minimum, you know, get up to the point where you can be communicating once a week, that would be pretty good. You can even do more often than that, but you know, shoot for at least once a week eventually. But start with once a month, find something that you at least don’t mind doing. Most people do not know I’m a real estate weirdo, and I’m a marketing weirdo. I like both. But most real estate entrepreneurs are not marketers by by choice. So pick something that you enjoy doing, whether that’s writing, if you want to do electronic newsletters, could be blog posts, could be video logs, blogs, short, three to five minute little videos, whatever it is, pick something and do it consistently. So that’s that and have it come out on a regular basis basis. And then the other thing about consistency is talk about focus on one thing. So most of your listeners, most of your viewers are into multifamily investing. So if you’re going to be talking about real estate, talk about the big benefits of multifamily or commercial real estate invest and talk about the big benefits of the market, or the markets that you focus on, talk about the profit centers that are available. But always keep in mind, this is important to always keep in mind that your prospective investors are probably not real estate enthusiasts like we are. Right, they are regular people. And the stats I’ve seen is 95% of the general population has never purchased a revenue property. So you always have to keep that in mind, the majority of your investors, or prospective investors are not real estate weirdos like us. And I say that with love and affection, you know what I mean? So keep the keep your marketing, pretty high level make it edutainment a little bit educational, and hopefully a little bit entertaining as well. What they want to know is that you know your stuff. So don’t overwhelm them with data, don’t overwhelm them with charts, don’t overwhelm them with graphs, all this kind of stuff, keep it big picture, make sure they understand the you know the details. But keep it very, very Reader’s Digest level for them. So they’re and I don’t know if you remember the old magazine, Reader’s Digest for back in the day, right? It was it was a magazine written for adults, right. But it was written at a level where any 13 year old kid could easily comprehend everything in that magazine, same idea with our marketing, keep it at a level where any average 13 year old kid can get it. And you know, you’re right on target doesn’t mean that your prospective investors are dumb, not at all. It just means we want to keep it, you know, pretty light, and pretty easy to understand and consume. Does that make sense?

J Darrin Gross 38:01

Yeah, no, that’s, that’s definitely something to keep in mind. And it’s really easy when you when you’re constantly talking with other real estate investors to, you know, get into the weeds and that but three, I thought was interesting, that stat he said, it was a 95% of, of people have never purchased correlation

Dave Dubeau 38:20

of the general population has never purchased an investment property, their own

J Darrin Gross 38:25

revenue generating property. I mean, that’s, that’s that right there to me is one of the key. I mean, that’s so critical to the whole understanding of the value of the real estate opportunity. Because I think most people, when they look at when they, when they do walk into a house, they think about living there and they think about, you know, having the the party or you know, whatever the Christmas or whatever, there’s that image as opposed to the the economic opportunity there. So that’s, that’s good.

Dave Dubeau 38:55

Exactly.

Dave Dubeau 38:56

So that’s that is step number three, that’s all about that constant, consistent communication, the marketing. Step number four, is really important. This is all about the trust factor, right? Because we talked about this earlier for somebody invest 100 grand with you, you need to know you like you and trust you with their money. So the good thing is if you follow this process, two out of the three are taken care of they already know you they already like yet. Now we got to work on that trust factor and the marketing out with a lot of that. But there’s also other ways, and again, here’s the cool thing. We need to be able to step into our position as a real estate professional. And a lot of people are freaked out about this and they say I’m not worthy. I’m not ready. I don’t have enough deals under my belt. Or remember that 95% of the non real estate people you know, have never ever purchased a revenue property have even got one deal under your belt. You’re ahead of 95% of the general population. So the other thing you need to remember is we’re not trying to make you a real estate expert in the eyes of the entire world. That’s not necessary. You’re not you’re not going to go head to head against Robert Kiyosaki. In Rich Dad, Poor Dad or anything like that, what we want to do is you want to make you seen as a real estate professional and expert in the eyes of your list of prospective investors, those 200 people, alright, so there’s all sorts of different ways you can do that. You know, getting interviewed on a podcast is an amazing way to do it. interviewing people on a podcast another great way to do it. Even just some simple stuff, dress the part if you’re meeting with somebody about and talking about their money, dress up a little bit, you know, guys put on a blazer, you know, show them some respect, it’ll get you respect back as well be able to speak knowledgeably and simply about your real estate investing strategy, whatever your main focus is, and your market be able to explain it again, Reader’s Digest level, and have good looking sharp materials. One of my pet peeves, Darrin is so called professional real estate investors with crappy business cards, crappy little things they printed out at home, or, you know, an inkjet or whatever, invest a few bucks in some really sharp looking business cards, invest a few bucks and getting some professional headshots taken. And use those in your presentation, use those on your website, have a good looking website, all of these things help a lot to creating that trust factor and being seen as a credible authority in the eyes of your prospective investors.

J Darrin Gross 41:24

Got it. So we’ve got through for that. I mean, we’re building the trust. Yeah. And today hear you say number five was the

Dave Dubeau 41:33

five is is starting to snowball effect and you’ve been in business for yourself, you understand as most mom and pop real estate entrepreneurs don’t. But once you get an investor on board, you know, do the absolute best job you possibly can for them, make them soup, it’s you know, under promise over deliver, we always hear that, but do it right, under promise over deliver, make them ecstatic, they’re going to reinvest with you. And if you do it right, you can get very effective testimonials. And you can get warm referrals to their friends and their family because they hang out with other people with money to so do a good job for them. And that can help you just expand your sphere exponentially.

Dave Dubeau 42:15

And that’s a five step process.

J Darrin Gross 42:18

That sounds so simple, but it’s the execution there. You know, and I think it’s I think we we fundamentally, I think at a base level understand all of that. But but actually the the doing it and and also, I think that, you know, what’s key that I just heard there was about the the communication and the level of the communication, I think so often that it’s, it’s a kind of a challenge to try and demonstrate how much you know, so you start laying down a bunch of lingo and stuff. And it just kind of goes whoosh, you know, right past them. And

Dave Dubeau 42:51

it That’s exactly right. My big plus is all my big brother, Dan is a very analytical guy weighs, you know, numbers, way smarter than I am. But the challenge is, when he talks to a normal person, and he throws all this data at them, their eyes glaze over, they roll in the back of their head, they get confused. And a confused mind always says no. Right? So he struggled, he struggled with with trying to raise money because he overwhelmed people with too much information. So it’s, it’s always keep that in mind. Right? They, they want to know that you know, your stuff, they don’t want to know everything, you know. And at the end of the day, Darrin, this resonate with me, at the end of the day, your investors are really investing in you. And the actual deal is just the security for their money. They’re really investing in you. The property itself is just the collateral. All right. That’s something took a while for that

Dave Dubeau 43:48

to sink in for

J Darrin Gross 43:50

months. That’s good. That’s really good. Hey, Dave, if we could, I’d like to shift gears here for a second. By day, I’m an insurance broker. And I work with my clients to assess risk and determine what to do about the risk. And there’s three strategies we typically consider. We look to see if we can avoid the risk as a first option. If that doesn’t work, we look to see if we can minimize the risk. And if we we find out that we can’t avoid nor minimize risk, and we look to see if we can transfer the risk. And that’s what an insurance policy is. It’s a risk transfer. Risk strategy.

Dave Dubeau 44:31

What Yeah,

J Darrin Gross 44:32

yeah, risk management strategy. And I like to ask my guests if they can take a look at their their own situation, whether it be their clients, investors, tenants, the market, however, you know, they can identify the situation and identify what they consider to be the biggest risk. And just for clarification, I’m not necessarily looking for an insurance related issue. Sure. But if you’re willing, I’d like to ask you, Dave Dubeau, what is the biggest risk?

Dave Dubeau 45:10

Well, do you mind if I give you two answers? No, we will. So the biggest risk is staying stuck. That’s the biggest risk, right? Just trying to sell finance your deals and not growing your portfolio because you’re not going to achieve what you wanted to real estate in the first place. Okay? So beyond beyond the hoody, Flutie whoo, whoo, kind of big risks. The tangible risks, the biggest tangible risk I see with people when it comes to raising capital is crossing the line with the Securities and Exchange Commission or your your local authority. I see people making this mistake a lot. And sometimes they get away with it for a while, but eventually it catches up with them. And it can cause a whole world of hurt and expense that you don’t want to go through. So the process I’ve walked through through here today is a very good one. And it also I also highly, highly recommend, talk to a real estate lawyer in your area, explain what you want to do, and see what do you need to have set up to do it properly, maybe you don’t need anything, if you’re bringing somebody on board, as not only a money partner, but actually a joint venture partner in a deal, you might not need to do anything, because they’re your equity partner. And they’re actively involved, not just with money, but they’re actually doing something. So you might be exempt that way. But make sure that however it is that you’re bringing your investor partners on board, you are compliant, and you’re not crossing the line with the Securities Commission.

J Darrin Gross 46:51

Now, those are our words of wisdom that I think any investor looking to raise capital should pay heed. He certainly wouldn’t want to be that guy that, you know, crossed that line and ended up having all sorts of additional problems. Dave, Where can the listeners go if they would like to learn more or connect with you? Well, thanks, Dan. So

Dave Dubeau 47:15

basically, my main business is I have a boutique marketing agency. And everything I just talked to you guys about today, we help our clients actually implement everything that we’ve been talking about. So the best first step would be for you to get a complimentary copy of my book called The money partner formula. I’ll trade it to you, I’ll trade you a PDF of my book, in exchange for your name and your email address. And that’s how we can get connected. And the way you can get the book is that investor attraction book.com. Darrin, I have spared no, it’s no time or expense of putting this sign together for your for you and your listeners. There you go. Investorattractionbook.com. That’s where you can get a copy of the book. And that goes much more in depth into everything we talked about here today. And then you’ll be in the loop. And if you’d like to attend one of our full day workshops, where we really roll up our sleeves and dive into this, that would be great. And if eventually you decide that you’d like to work with us as a client, we’d love that as well.

J Darrin Gross 48:20

Awesome.

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

Dave Dubeau 48:30

My pleasure. Thank you very much there and keep doing what you’re doing.

J Darrin Gross 48:34

Announcer 48:54

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Boise Ground Up Construction Multifamily Investor Returns with Shannon Robnett – CRE PN #291

Shannon Robnett 0:00

They realize that they don’t want to hold that for five to seven years, because it marginally improves from there. But the main value like you said before we started the show, the original value add was the ground up development, putting the sticks and stones together, creating the value by putting the tenant in and creating that cash flow. And liquidating at that point as soon as you can, because the sooner you can get your your 25% return, the better that looks because if it takes you eight months to do it, versus 12 months to do it versus 16 months to do it, you’re still getting a 25% return but your IRR or your return for the year is substantially affected by the duration of time.

Announcer 0:40

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 0:52

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

Today my guest is Shannon Robnett. And for the last 40 years, he lived in Boise, Idaho. He’s been building and developing there for over 25 years. And two years ago, he moved to Puerto Rico for tax purposes, but still has three companies in Boise. And in just a minute, we’re going to speak with Shannon about the benefits of new multifamily ground up construction.

But first, a quick reminder, if you like our show, CRE PN Radio, there are a couple of things you can do. You can like, share and subscribe. And as always, we would encourage you to leave a comment. We’d love to hear from our listeners. Also, if you’d like to see how handsome our guests are, be sure to check out our YouTube channel. You can find us on youtube at Commercial Real Estate Pro Network. And while you’re there, please subscribe. With that I want to welcome my guest, Shannon, welcome to CRE PN Radio.

Shannon Robnett 2:29

Thanks, Darrin Glad to be here.

J Darrin Gross 2:32

Well, I’m so glad you could join us today. And I’m looking forward to our conversation. Before we get started, if you could share with the listeners a little bit about your background.

Sure. So there and I grew up in a construction and development family my my dad was a general contractor, my mom was a third generation realtor, I had my license for a period of time and I’ve got a 24 year old son who was in real estate as well. And that’s just kind of how I grew up. I just always, you know, I looked at it growing up when I was always working with my dad and working on stuff and and cleaning up job sites as I didn’t really see it as an internship then, but it really turned out to be the backbone of what my experience has been from there. And I just saw, you know, I was I was working on a job site for my dad and I got to know the crane operator. And he was complaining about he didn’t have anywhere to put his stuff and I got to know the little lady next door and she was looking to sell her place and go to a nursing home and all of a sudden the light went on. And I didn’t take my last 500 bucks. Darrin It was my only 500 bucks. I mean, I was you know, I was nuvo broke man, I just decided I was moving out of my parents house. I had no money. I got that property under contract contingent on getting it rezone with the city. I did just that. And I sold it to the crane operator. And I made about double what I was making for my dad working that whole year on a $500 investment. And from then I had no choice I had to be hooked, right? I mean, I was in.

Yeah. No, that’s awesome. And like said kind of a unique kind of a lifetime internship. You know, you get the both ends from your parents and and being around. That’s awesome. So let’s talk a little bit about what you’re doing. Now. You You are now in Puerto Rico. You were in Boise, and you’ve still got some companies in Boise. What are you doing in Boise?

Yeah, so Puerto Rico is they’ve got a great program here is called act 2022. That, that if you’re spending 183 days outside of the continental United States and or in Puerto Rico, you create a residency here that changes your tax status. But I didn’t want to give up my companies in Idaho because after 25 years of building and developing there, I was just getting going things were just starting to get going very well. But as we’ve all figured out with COVID, you don’t actually have to be there every day all day long to get the same things going if you’ve got great people in place. So I was doing zoom calls two years ago, and everybody thought I was just this really cutting edge contractor, right? I mean, that’s almost like the biggest oxymoron out there, cutting edge contractor, right, because we were doing zoom calls. And we were this and we were that, and I could only meet on certain times of the week when I was back in Idaho. But the reality was, I just kept everything going. And I have people that have been with me that are great people that can handle things day to day. And I’m in the development phase of things. So as a development company, we’re building our own product, ground up, whether that’s multifamily or industrial. And then we kick it over to our own property management company that doesn’t really act like a property management company, it acts more like an asset management company who’s more concerned about your noi, because they know what the noi does, when you do it for development proper for investment property, commercial real estate, functions, everything off of a cap rate. And without that without being really cognizant of your noi, you’re likely to get yourself in trouble a little bit by just having a property management company, that’s just managing the tenants.

No, I couldn’t agree more if the property manager and I think some of the best property managers I’ve I’ve gotten to know, or, you know, understand that their philosophy is, they try and keep the property ready for you to sell at any time. And it’s, you know, both physical, but also on all the financial stuff, and that, you know, collecting rent and all that, but they recognize that the value is in that noi. And so that’s, that’s, that’s well said,

Shannon Robnett 6:50

Yeah, you know, something as simple as just turnover, you know, managing your turnover better. You know, trying, I mean, when you’re looking at a property management company, a lot of times they’re concerned with the fees, because they get a higher fee for a new tenant. So they’re going to take the 15 day vacancy, you’re going to clean it, you’re not going to you know, your security deposit is not going to cover, maybe you’ve got to replace carpet in between tenants, and those kind of things cost money, and they affect the noi in a huge way.

J Darrin Gross 7:16

Yeah, no, exactly. So So let’s talk a little bit about your approach. You know, I think a lot of the people I’ve talked to, or had the opportunity to talk to on this podcast have been multifamily investors or in some way shape, whether they’re investing directly themselves as a passive investor, or they’re syndicating. And I think, you know, by and large, a lot of the, the energy is to get in and get out to find something that’s, you know, has room in it, whether it’s, it’s old and tired, maybe it’s poorly managed, but do some sort of a value add. And then upon the, the increase in the value, liquidate and pay everybody and then move on to the next one. The fact that you’re starting from new construction, is your long term objective. Is it more of a, a build and hold? Are you are you building and selling the finished product?

Well, you know, Darrin, I, I built my first building to own for myself at 28 years old. And I didn’t know anything about cap rates at the time. And so once I’d filled the building, I had somebody come and offer me 25%, more than it cost me to build it. For the building with the tenants in there. I look back on that building that I sold back in 2001. And three of the six tenants are still there, right? I mean, you got a guy that rebuilds fuel injectors, you got to gelato ice cream guy, I mean, you know, just salt of the earth, people that have businesses to run. And so I’ve looked at that. And I’ve said, Well, what what kind of investor Are you really encountering, right? And I think that you’re finding two basic kinds of investors, there’s those that want to hold on to the asset because they want the cash flow. And there’s those that want the growth on their money, and they’re looking for the fastest way to get there. And I think what happens a lot of times is we try to put those two together in the same syndication or the same partnership, and you’re trying to accomplish two different objectives. So we have a couple of different strategies that we use with our ground up that fit more the investor. So if you’re looking for, for growth and strictly growth, we have that if you’re looking for some value add, where you want to get in on a deal. We’re going to build a building, we’re going to build some multifamily, we’re going to stabilize it, we’re going to do a refinance, we’re going to hold on to it. We can do that, too. We have that strategy. But what we find that is a lot of times when people really come down to it and they realize that they can make between 25 and 35% with our growth strategy where we build it and we liquidate it. They Realize that they don’t want to hold that for five to seven years, because it marginally improves from there. But the the main value, like you said, before we started the show, the original value add was the ground up development, putting the sticks and stones together, creating the value by putting the tenant in and creating that cash flow. And liquidating at that point as soon as you can, because the sooner you can get your your 25% return, the better that looks. Because if it takes you eight months to do it, versus 12 months to do it versus 16 months to do it, you’re still getting a 25% return, but your IRR or your return for the year is substantially affected by the duration of time.

No, that is it’s so true. I know. There’s a property I’ve got. And I was looking at it and thinking like, wow, we’ve done so well, you know, if you divide by the hold time, that’s pretty impressive return, you know, and then if you start thinking like, well, what if we hold it another year? Or, you know, do this and the returns are marginal? I mean, they they really, you know, it’s kind of a fast hit. And, you know, turn and turn is, I guess the optimal, I guess, get that money back working into another opportunity kind of thing. Yeah. And, but, but I think the, like you said there’s essentially two classes of investors, those that are looking for a steady return versus those who are looking for an equity boost. And let me ask you, because you’ve been in Puerto Rico, I mean, most of the the the people I know that are doing the you know, like the syndication with the the kind of the quick value add or return once you distribute that money in because you’re you’re in a syndication, my understanding is the most are unable to, to take advantage of a 1031. It’s basically it’s, it’s similar to like a stock return from a standpoint of you by yourself, you know, you pay your tax, you move on kind of a thing.

Are you being set up in Puerto Rico? Are you subject to those taxes? Or is that?

Well, the reality is that that the IRS says that the where the money is made is where it’s subject to be taxed. So, but but let’s go back to your question, though. I mean, we’ve all heard the adage that the money is made on the buy, you don’t make money when you sell you make money when you buy. And that couldn’t be truer in what we do. Because it’s not necessarily when you buy, but how you buy. So if you know that you’re going to be in and out of this deal. And it’s going to come to you as ordinary income. What’s the safest way to do that without paying taxes, we’ll use a self directed IRA, right? Whether it’s whether it’s a traditional or non, you know, non conforming IRA, use a self directed IRA, so that your returns go straight back into your IRA, and you’re not subject to the tax penalties that you would face. If you made that 35% and then turn around had to pay Uncle Sam. Right. The other reality is, I mean, if all you’re doing is holding on to something, for a period of time to avoid the tax today, the tax bill is going to come due at some point. Right? So I mean, we all get caught up in the fact that no, I got to do it, I got to do a 1031. But Darrin, you know, you know how to do basic math, if you’re getting a 35% return this year. And next year, you’re getting a six cap. That’s a 6% return, right? You average those two together, you just torpedoed your return? Was it really worth that to not pay Uncle Sam a little bit of money or not think about some advanced tax strategies before you purchase.

Right? No, I think what I what I’ve kind of resigned myself to as far as a the conversation in the line, I think it’s a hold time. If you’re if you’re planning on holding, if you’ve held something for a long time, and you’ve depreciated it down to almost nothing, your motivation to do an exchange is probably greater than if you’ve got something that you’ve got a you know, pile of cash you want to put to work and it’s not it’s not going to encumbered by any kind of real estate or subject any kind of a game you I mean you’re looking to put it to work to me it makes more sense to kind of keep that work and faster. But it’s I think where I I’ve gotten in this a lot of self analysis kind of thing is recognizing that that you know a lot of the properties I’ve got I’ve had them for a long time and it’s either you know, I would need something just you know, I guess I need to sit down really go through it. But I guess I’ve just felt like I’ve gone past that the line of demarcation of easy and easy out based on the whole time the depreciation schedules.

Well then there’s also the the opportunity zone stuff, right. I mean, there’s some great opportunity zone opportunity toonies that we’re dealing with in an Idaho that are brand new product in in a great area, whether that’s multifamily whether that’s industrial, but you know, opportunity’s own provides for that you do pay the tax, but you pay the tax in six years from today.

Right. And if you’re going after you get the in the game, you get the game free.

Yeah, right. Yeah, hold it for 10 years. And so we’re doing a couple of those projects yet this year, where you’re coming into the opportunity zone, you’re getting about a 14 to 16% cash on cash, you get that for about six years that pays about 65 or 70% of the taxes you would owe. We’re also doing a cash out refi at the end of year one was stabilization. So you’re getting returned of most of your money anyway. But just like anything, the IRS believes that when you bought $100,000 of a syndication, and you refinanced it, it doesn’t matter to the IRS, right. It’s just like refinancing something that you’ve depreciated out, they don’t care how far you’ve depreciated it, they’re still looking at it, that you have $100,000 investment in there. So you’re now deferring that, into that, that program into the opportunity zone. And then when you’re extracting your funds at the end of that 10 year period, you’ve essentially washed them you paid you paid for your sins of depreciation. Right, you’ve you’ve done that, and you’re seven, and now you’re you’re off to capture your gains, again, without taxes.

No, it makes a lot of sense. And again, utilizing one of those unique strategy structures available right now. The What is it the opportunity zone opportunity zones? qualified opportunity zones? Yeah.

So, well, let me ask you, so your your primary territory building? Is it Boise? Is that where you?

Yeah, 40 years there. I know the valley? Well, if you look at the last five years in Idaho, last seven years in Idaho, we’ve hit about every top 10 list there is. So I’ve got a really target rich environment, I’ve got a portfolio of about 1000 doors and about 150,000 square feet of industrial to build in the next three years, I really don’t have to look outside of my immediate area. Plus, I gotta admit there, and I’m not that smart. I can’t learn the demographics of Tallahassee, meanwhile, trying to figure out what’s going on in Kansas City, look at another deal over in Santa Monica, California, it’s just beyond my capacity to understand those markets. So I can do what I do, right where I’m at, I can get fantastic returns for myself and my investors. And we get to stay in an environment that I work in and live in. I know I’ve got subcontractor relationships that are two decades old. I mean, I’ve got everything I need. And it puts me in a position where I’m not trying to learn a new market and moving in other areas.

But I think you touched on there just having the I mean, the relationships. I mean, knowing knowing the area and having the people you can count on to get the job done. Right. That’s, that’s huge. That’s great. So and you said you, you have 1000 doors plus industrial space?

Shannon Robnett 18:08

Yeah.

J Darrin Gross 18:09

Okay. And are those a long term kind of portfolio? Or is that more?

Like I said, we’ve got some that’s opportunities on that we’re holding for a minimum of 10 years, we’ve got some other stuff that we’re going to hold for about five, we’ve got some other stuff that we’re building and selling immediately creating a liquidity about on that. So we’ve got just about something for everybody. It just really depends on you know, but then again, back to your statement, the original value add was new construction. So if we’ve made the majority of the money in the first 12 months, why would we continue to hang on to it? Right, right. I mean, it’s not like we’re in New Jersey, where there’s not much ground left to build new. You know, we’re not we’re not like a lot of value, add syndicators that are stuck, looking for the next deal that fits their parameters because I can create a brand new deal tomorrow, with the property next door or the property down the street or the property three blocks over five miles away. We can just create another one.

And what are the current growth? estimates for Boise? Is it I mean, everything I’ve heard, it’s like you said it’s red hot, but it’s a lot of industry coming in there.

Yeah, we’ve got I mean, we’re seeing a lot of jobs move in there. We’re seeing a lot of people move in for quality of life. We’re seeing a huge retirement community move in. So we’re really seeing across the gamut. People looking for an affordable, safe environment to live and work in. And so you know, I just saw some stats from from a realtor friend of mine that came across today that showed that we are anywhere from 15 to 25%. appreciation in home prices so far this year across the valley, we’ve seen an 11% appreciation In a number of units closed, and we’ve seen a 73% reduction in inventory. So we have I mean, I don’t know how else to qualify it red hot. But that’s pretty red high, you know, in one of the one of the biggest worldwide crisis, health crisis, we’re having people flood to our area, because we check a lot of those boxes. I mean, you know, listen, San Francisco is a great place to live. But being in lockdown with 9 million of your closest friends, isn’t everybody’s dream boat.

Right, right. Now, I think, you know, the lot of the I don’t say rural, but more, where there’s room to operate, I think it’d be definitely, definitely a lot more appealing. I know of people that I I, and I’m familiar with that have like even in New York, New York City have sought out upstate, you know, more resort slash rural kind of areas to have a kind of vacation home or, or even, you know, just even with all of the the cost of living, and a lot of the employers have basically realized the cost savings by having their workers work remote. They’ve kind of given the employees the green light to relocate to wherever they want. And a lot of us are looking for a lower cost of living. And I would think that Boise would certainly be a little bit more cost effective than a cost efficient than a coastal. Yeah, well,

you know, even Darrin, look at the conversation we’re having, right, we’re you you would be really hard pressed to be farther apart in the United States, other than you being in Alaska, to have this conversation yet. We’re talking like we’re right next door to each other. And that wasn’t an wasn’t available five years ago, right. So the whole concept of having to show up for work, I think, is, is a thing of the past, and you’re going to see that in multifamily, you’re going to see, you know, we’re already looking at changing some of our floor plans to accommodate work from home situations. You know, in our complexes, we’ve already done that, to a large degree in our clubhouse settings. But we’re really seeing where as a as a nation, we’re able to unplug. I mean, if you work in at a tire shop, or you’re working at a lumber mill, you’re working in a restaurant, you’re you’re not going to be able to call it in, right but but by and large, I mean, you’re an insurance, you can do most of what you’re doing right here in your living room. And, and we can do that. So as we see that happen, I think you’re gonna see a lot of the benefit of being in Silicon Valley fate, a lot of benefit of being in New York in the financial industry, that’s going to fade, you’re going to be able to do the same thing. from Kansas, from Dallas, Texas, from Boise, Idaho.

Yeah, no, I think that a lot of those metro areas, as far as the commercial real estate, there’s going to be a pretty big reset on valuations in that and, and, you know, that’s, that’s kind of the cycle of things. So, right, hope you got in on the right side and got out before, you know, or you’re, you’re prepared to ride it through, I mean, the cycle lap again, I mean, these these have their way. So let’s talk a little bit about just the the strategies that you you know, you look for when when, you know, when you’re working with prospective investors, and you mentioned the IRA accounts, is that primarily the the source of the capital that you you found to be most available and willing to go forward invest with you or,

you know, in our growth scenarios, for sure. In our opportunity zones, we got people that are looking at it going, you know, what, who knows what’s going to happen when this election is finally over? I mean, he, we don’t even know, we don’t, it’s not even over at this point. But But you know, if the 1031 does a go away, is now the time to maybe cash in on some of that. I mean, capital gains is capital gains, right. But there’s a lot of people that did very well in the stock market that are selling that out, they’re moving into a capital gains situation, and they’re looking at it going, Hey, if I cash out now, I can put that capital gains into an opportunity zone. And I can have that benefit of being able to defer that out and not pay the taxes on that for seven years. So for us, we’re using our biggest thing there is to sit down with people that want to be an investor, okay? And to make sure that what they want to do, we’re using the most tax advantaged situation and and scenario to do that so that we don’t wind up in a situation where, hey, we made you 30% returned. But Uncle Sam swinging him for his 37% of that, we want to make sure that we would, we’re doing things right, we’re doing things in a in a fantastic version of the slimmest tax consequences we can do for you to make sure that you’re getting your needs met. And you’re, and you’re making your return the best that can be in an after tax calculation. So if you’ve got an IRA sitting around doing nothing, it’s a Roth from your job from five years ago, and it’s just sitting there, you don’t even know what to do, it’s in a mutual fund, let’s convert that to a self directed. If you’re in a situation where you can put funds away in a non qualified IRA, let’s do that. And let’s use those funds because at least they went in tax paid. And now we’re going to invest them in real estate, it’s going to grow, you’re going to be tax deferred to when you come out of real estate, but you’re growing it without having to cut off a big chunk of it for Uncle Sam every time. And so I think there it’s more about sitting down with people and finding out what they want to do and what avenues and funds they have available. We got people that we use their whole life policies, borrow, borrow against those to put into real estate deals, right. So we’re able to use just about any source of funds that benefit our client, the best that we can figure out how to do to create the scenario that’s optimal for them.

Yeah. So let me ask you this for your development. Schedule. You’ve mentioned a couple different timeframes. 912 18 months? Are you are you doing traditional financing and just raising the capital for the the down payment? Are you doing? are you raising for the entire project? or How are you? How are you structuring your capital?

Shannon Robnett 26:44

Yeah, well, you know, as you know, the bank is a great partner, but they don’t like to cover all of it, right? I mean, if you can pay, if you can pay a 1% loan origination fee, and six and a half percent interest on a construction loan, that’s going to be much cheaper than involving 100% equity. So what we do in a typical situation, let’s talk about this 36 units that were midway through in Nampa, Idaho, the total cost of that was $5.3 million, the appraisal from December of 19 came in at $6.3 million, I went to the bank, the bank said we’ll loan you $3.7 million, so you got to come up with $1.8 million to do this deal. So I went out to LPs, I raised a million and a half bucks. And for that I gave them 35% of the profits. So I was bringing 250,000 of my own money to the table, we are building the project, we’ve already received several unsolicited offers on the project at closer to 7 million than six. And we will be able to liquidate that thing. And out of that the investors will will reap the return. But we use leverage, right we use 60% from the bank, we used the rest of it from the LPS in myself, just depends on what the situation was. But typically on a construction deal, you’re getting between 60 and 65% loan to cost on your original construction. So you have to bring in a little bit more liquidity from your LPs on the upside. But I don’t think it’s really any more than if you bought the apartment complex with an 85% loan to value and then put in another 20%. And in your value add you know, in your cap x this gets it gets dispersed, changing it from the Oasis to the three palms or you know, something like that.

J Darrin Gross 27:52

Right? No new tile and grout? Yeah, um, no so but but I think the the, you know, one of the things that that is always recognized if you’re at the front end of just looking at an investment opportunity in your in your thinking about the value add because the value add strategy makes complete sentence, you know, you can get something that undervalued, you can put a little bit in and based on you know, the metrics of the cap rate, you can increase the value exponentially and, you know, read through words on sale. But what would that doesn’t account for I mean, just on the philosophy is a lot of times a lot of the value and strategies for more about the high polished finishes that you can, you know, you can charge more for they don’t always account for the behind the walls and and, you know, the things that are supposed to work the systems that haven’t been touched and nobody accounted for. And oh, by the way, you’ve got some electrical issues because the you know, the boxes are outdated or the waistline is, you know, crumbling or backing up or just all those systems things were new construction. There’s none of that. I mean, it’s new. It’s exactly what what the the buyer that’s coming after you want.

Yeah, and I think that reflects in our projections, right. So when you’re doing a value add anything that’s over 15 years old, you’re probably estimating somewhere between 45 and 50% expense, right? In New construction, we’re somewhere between 31 and 36%. Right? We’re working, we’re putting away $250 per door a year. Because we know that 10 years from now, we may have Heating and Air issues. But we don’t have to worry about a tree growing through the sewer line, we don’t have to worry about, you know, that pecks pipe that they use a lot of in the 90s, that likes to blow apart in the middle of the night, we don’t need to worry about the mold is growing behind the sheetrock that we never knew about. Those are the things that we don’t have to deal with. And so the reality is, when you’re looking at that, that second group that just want the cash on cash, and they’re willing to take a little bit lower return, if they know that there are no moving parts. Again, that’s where brand new becomes their, their their drug of choice, because they’re able to look at and go, Oh, great, I got all the high polished finishes, I’ve got the brand new floor plans, I’ve got the granite countertops, I’ve got everything I wanted, plus, I know what’s new, so we’re not going to have major expenses that are going to interfere with my cash flow in the next five years.

Yeah, no, and even even with that, I mean, you know, worst case scenario, for whatever reason the market got saturated, or there was a, it wasn’t as appealing of a sale opportunity in your hand to hold it. It’s not your repairs aren’t going to be unexpected, or, you know, eat you up kind of thing, which is, I think the flip side of the whole ground by an old you’re very right there. So well, you know, you’ve certainly made the case for new construction. And, you know, the the self directed IRA, if you’re if you’re going into that kind of investment as an LP and you’ve got debt on it, is, is there any kind of penalty for for using the unrelated debt, finance income, or,

let’s see, since you’re not, you’re never part of the debt solution as an LP, you’re not signing for any of the debt, it’s never your concern, you’re strictly putting in your hundred thousand a year 50,000 or, you know, whatever it is you’re putting in, that’s your only contribution to it. And for that you’re exchanging that for shares that are of the full value of that, that initial deposit, so that none of that plays in really. And so it’s just a straight exchange.

Gotcha. Gotcha. All right. And as far as your your projects going, in Boise, you’ve got a bunch lined up, or what’s your 2020 got?

Like, yeah, we’ve got 191 units that will start before the end of the year, we’ve got about 40,000 square feet of industrial, they’ll start before the end of the year. And then next year, 2021 looks just as cool as this year, we’ve got about 400 doors to build on about 100,000 square feet of industrial to take care of in 2021. So we’ve got a pretty full calendar already. And we haven’t even got there yet.

That’s awesome. And with that, what kind of a lead time do you anticipate for a project like that, just to know that you’ve got, you know, your 2021 calendar lined up? How long have you been working on those? Well, the

reality is Darrin because I am not seller dependent, right. I mean, I I am to some degree, but I’m buying the land. So some of my projects, take some entitlement work. So there’s six to nine months in entitlement work. So I have a longer lead time than most syndicators have because this deal hit the market on Wednesday, we’ve got to get our offer in you know, then there’s a highest and best we go to the second round two weeks, we know if we got the deal done. We got to close in 60 days. You know, all that craziness that happens with normal syndication, none of that happens with us. Right. So we had a we had a building that went under contract last week that left us with a little bit more capital than we thought so we went out we bought on the lot. We’re going to do another syndication other 25,000 square feet of industrial warehouse that will come online before the end of the year. And it’s that simple. You know, so we’re we’re more of a we’re not at the mercy of what’s going on out there in what’s available for sale that’s already built. So we’re, we’re not as Herky jerky as what a lot of people have to deal with where they’re making you know, $100,000 commitments from their from their LPs in a very short period of time. I hope you like it if you don’t, you know, we haven’t seen anything in six months. We don’t know when we’ll see another deal. You know, buy something of mine. I’ll put another deal together and another two weeks. You know, it’s pretty simple where I’m at. Love it.

Curious, you mentioned two projects. You said the you got one currently 36 stores and you’ve got another one 191 and then sounds like 400 doors in 2021. Is there a like a sweet spot As far as the size of project that you, you found that you really like? yeah, we’ll probably we’ll probably do the 3640 unit, you know, infill projects, and just build them out, stabilize them and sell those off.

Gotcha. Hey, Shannon, if we could, I’d like to shift gears here for a second. As I mentioned, before, we started 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 work on and and try out. And the first is we ask, can we avoid the risk? If that’s not an option, we look to see if we can minimize the risk. And when we cannot avoid or minimize the risk, we like to transfer the risk. That’s what an insurance policy is, it’s a insurance or excuse me, a risk transfer vehicle. And as such, I like to ask my guests if they can look at their own situation, whether it be their their investments, their clients, investors, tenants, the market, etc. and identify what you consider to be the biggest risk. And for clarity, I just want to make sure we understand that I’m not necessarily looking for an insurance related answer. But if you’re willing, I’d like to ask you, Shannon, Robnett, what is the biggest risk?

I think in my business, the biggest risk is having the wrong people in the right places. You know, you talk about risk transfer. You know, I’ve always found that when I, when I’m looking for a property management solution, I need something that’s customized to me that that is looking after my property like it’s an asset. And so I could do that. And I could make that happen. And I could, I could become a pseudo property manager. But why not go find the best property manager in the valley that I’ve always admired and wanted to hire? And why don’t I hire him and make him an offer, he can’t refuse to make my mind machine run smoothly, and take that risk out of it. Now, I know that I have somebody that’s tied to the bottom line that’s financially responsible to me, for the well management of our assets, that’s doing it in a phenomenal way. And I’ve done that in in several key places in my business. And I think that when you when you aren’t taking care of your people, when you’re not looking at the personnel you have, I think you’re taking some pretty big risks. And so having great people that are in it, to win it that are part of your team, I think is the biggest way to mitigate that risk. And the biggest way to ensure that you’re going to be successful is because you’re partnered with the right people, you’re working with the right people and you’ve hired the right people.

No, that’s well said. The human capital, it’s it’s part of the equation that if you’re not paying attention to, you’re going to spend, I mean, you can spend a lot of time training and retraining and you know, blaming others and all that. But if you have the right people that actually everything seems to work pretty well.

That’s good. And you know what’s funny, most people that lose people lose good people, they don’t lose them over money. There’s this there’s another line underlying issue that’s in there, that if you’re paying attention to your people in your in your and you’re rewarding them in the way that they’re looking to be rewarded. You’re always going to find that you’re able to keep good health because not everybody’s looking for the bottom line being the money. Yeah,

so true. Shannon, Where can the listeners go if they’d like to learn more or connect with you?

Sure, Darrin so the easiest place to find us is at Shannon Robnett Industries.com we’ve got a great website there that’ll hook you up with all of our different subsidiaries. You can find me all over Facebook at Shannon Robnett Instagram. Shannon Robnett. just about anywhere. It’s it’s just my first name. So if you’re going to Shannon Robnett.com. You’re going to find it Shannon Robnett Industries will also take you directly there.

Awesome. Well, Shannon, I

can’t say thanks enough for taking the time to talk today. I’ve been

Shannon Robnett 39:37

Darrin, I appreciate the opportunity. I hope your listeners and you got something out of it.

J Darrin Gross 39:41

Totally. I’ve enjoyed it. And I’ve learned a lot and hope we can do it again soon.

Shannon Robnett 39:47

Look forward to it Darrin.

J Darrin Gross 39:49

Announcer 40:09

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