Kyle Tushaus 0:00
The current vehicle that my business partner and I are just now launching where the approach is taking the sort of institutional approach the, you know, commercial, commercial type deal or thesis that we might use for any of those product types, but putting it through a syndication model, which is more akin to what’s being offered for your individual accredited investor and so we’re keeping it below an $8 million or there abouts deal size and using a syndication structure to actually put the deals together. With the with the idea being we’re gonna offer the institutional type returns and see structure which is better than what the syndication landscape is offering investors in offered in that portion of the market.
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J Darrin Gross 1:06
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 Kyle Tushaus. Kyle is a partner with Pine Ridge capital. He has a background working for family offices under a sponsorship model focused on acquisition. And in a minute, we’re going to speak with Kyle about syndication and the current macro environment, and how that influences your micro investment decisions. 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. Kyle, welcome to CRE PN Radio.
Kyle Tushaus 1:26
Yeah, thanks for having me to be here. This is actually the first first podcast ever I’ve ever done. So this is a interesting experience.
J Darrin Gross 1:26
Well, we’ll go easy with you then. But no, Kyle, I’m glad you’re here. And looking forward to our conversation. Before we get started, if you could take just a minute and share with listeners a little bit about your background.
Kyle Tushaus 2:02
Yeah, my my background, prior to commercial real estate actually got started as an engineer in the oil and gas industry, which is was interesting and highly technical and exciting. But it’s definitely something that’s more enjoyable when you’re in your early 20s. I’ll say I moved around a lot and eventually got to a point where that was either going to send me overseas, or I was going to need a change of change of scenery, so to speak. And I just gotten married. So I took option B and I had some opportunities sitting on my plate at the time. When I was given that option to try out some commercial real estate deals. They were kind of centered around the energy industry, kind of without going into too many details. A friend of a colleague had bought some properties that they wanted to redevelop and there’s some hidden oil wells on him that he didn’t know about. And so I got started by helping him mediate that issue. And that was kind of the impetus for getting into commercial real estate. And within the commercial real estate industry prior to this, I’ve worked for two family offices across all product types, heavily focused on hospitality, office and mixed use across both of those that was probably the bulk of the dollar amount that we were focusing on were those three. But like I said they both were opportunistic.
So just about every single product type we got into I think the only thing I can say I’ve never really touched is self storage or mobile home parks. Those are the two asset classes where we kind of steered clear, but following those two sponsored a few deals on my own. That was in 2020 which was a great time to go out as a GP. And, you know, got a few deals done. Despite everything that was going on in 2020 I was really excited because I thought I would get some some screaming deals, but you can even keep it pretty good poker face going when you don’t have to pay the mortgage and whatever and had their death pause. I think that was probably the toughest negotiation landscape. I Experience, just because nobody actually had to do anything. So you kept getting 2019 pricing on, you know, zero cash flow in some cases. And in that approach, most of the LP focus was on institutional firms. And so I was kind of mimicking what I was doing at the family offices where we build out the LP tranche with one, maybe three, at most capital groups. So I was rinsing and repeating that model, because that’s what I knew. But it came with a couple of issues, because when you only have say, one LP, they know they have a lot of leverage against you. And so I got retreated 100% of the time on all those deals. And that led me to the current vehicle that my business partner and I are just now launching where the approach is taking the sort of institutional approach the, you know, commercial, commercial type of deal or thesis that we might use for any of those product types of putting it through a syndication model, which is more akin to what’s being offered to your individual accredited investor. And so we’re keeping it below an $8 million or there abouts deal size. And using a syndication structure to actually put the deals together with the with the idea being we’re going to offer the institutional type returns and see structure which is better than what the syndication landscape is offering investors in offered in that that portion of the market.
J Darrin Gross 2:56
Got it? So one of the go back here to so you mentioned your experience in the institution, institutional investment world, and kind of a limited number of LPs that you dealt with and and how they treated you differently when you went out and tried to do some of the smaller deals. And then the retreat. I wonder if you can just expand on that a little bit. Because I you know, it’s funny, I hear I’ve talked to a number of syndicators. And I don’t know that anybody’s ever, you know, kind of shared the backside or, you know, what goes on behind the curtain kind of thing in those situations. But it was kind of fascinating when I heard you say that. Wow, that’s, that’s a that’s a surprise when those lessons you only learned by going through it, I suppose.
Kyle Tushaus 3:02
Yeah, I think we touched about it. We touched on this a little bit when we were face to face several weeks back anyway, when I was kind of talking about the hardware and I went through Yeah, so on those. Yeah, the, and again, I’ll caveat this by saying this is during 2020. So it was an interesting time where I feel like people were more keen to burn a bridge, maybe than they would have been in normal times, because they thought to hell with it, like, who knows what’s gonna happen. And maybe I’m just being too nice. I don’t know. But you know, the, I won’t, I won’t throw out any names, because that can come back to bite me. It’s a very small industry, despite the, you know, the dollar size of the industry that we, we operate in. But a good example is, you know, one we had a really clear thesis on, you know, what the returns are gonna look like, we were going to convert a hotel into apartments, which is now a thesis, I think, just about everybody has seen. But one of the last things I did in the family office direction was help launch a fund for that thesis and said, Okay, well, I learn how to implement this, I’m gonna go do one on my own, and had found one where there was several characteristics about it that led to, you know, you had to mess it up a lot to not make a good amount of money because it was by right zoning, the city already had tried to get this to happen in the past. So they rolled out the red carpet. For me, when I said, this is what I want to do with the property, they said, We’re going to fast track the approval on this, the property was 18 separate buildings. So I could actually renovate and convert them piecemeal, and not disrupt the operation. So it wasn’t even a hey, let’s take our cash flow down to zero and renovate this as fast as we can, I could still operate the hotel and turn over one building at a time on my way to the conversion. So there were all these things that were stacking up where it’s like, you know, despite it being 2020 Look at all these ways that we can protect our downside. And that’s not even just you know, speaking of the difference between the price we were paying for the hotel and what the rents were in that market and they were all extended stay too so it’s not even like I had to convince people to live in a shoebox they were already 520 square feet or above. So it almost looks like the stars were aligned and during 2020 My thought was oh, this is a this is a no brainer. This is going to be great and LPs are gonna love it. And so we got through DD is last week. And you know, this happened several times, but this one was particularly, you know, stung particularly bad because I had lined up all these contingencies. Closing on not closing but going hard on Friday. They call me on Monday and say, You think you can get a couple extra 100 Off $100,000 Off the park. Just price, we would feel better if this was at least $500,000 off, we’re already like at a good price. And so you guys are just kind of, you know, being mean, like, we should just do the deal the returns with great, why risk it. And they, they said, well see if you can make it happen. So pulled some strings, you know, kind of probably pissed off the seller a little bit, got the 500 within 24 hours went back said, Alright, let’s do this deal. Well, you think you can get another 750 off. And so what was actually happening is they just kept coming back with requests that we’re going to get harder and harder, and we’re not going to get fulfilled by Friday. So on the second request, I called them out on it, I said, you guys realize that any another dollar off on this deal doesn’t get it over the like, that’s not the crux of why this should or should not be done, we are far beyond the level of, you know, suitable risk adjusted returns. And they pretty much just blatantly said, Well, here’s the thing, you’re going to be 10% of this deal is the GP which is standard, we have your 10%. And we kind of just want to do the deal without having to pay you either any management fees, or promote or anything like that. So what we’re going to do is, either you take our terms, or we’re let’s get in unless you fall out of contract, because you only have three or four days before your money goes hard. And we know that’s not long enough to get another LP on board. So it’s either going to be this or we’ll let you fall out of contract. And we have the sellers number now we’ll just circle back with them. And we’ll buy it. So that was that was kind of the standard operating procedure, just about every single time towards the end of the deal. And when you’re in that position, you kind of just, you know, I used to have a kind of a mentor that said, look, at the end of the day, you should drop your ego and who gets paid wins in this game. And I agree with that. But then also, if something keeps occurring like that over and over and over again, you have to go reevaluate if you reevaluate your business model, and that’s, that was one of the experiences that kind of kind of highlights the the games that were being played maybe in 2020. Or maybe that’s just luck of the draw, maybe for me, but I’ll say that it, it was still a kind of a standard procedure or standard move. Even when I was at the family offices. The Retrade, when the clock was almost run out was was kind of the kind of everybody did it. Just because they knew they could it’s almost like, hey, once I tie up the property, I’m gonna ask for money off, because the worst thing the seller is going to do is say no, and then I’ll just say, Okay, well, I’ll still do it anyway. But you might as well ask. So that’s, that’s what pushed me in this direction.
J Darrin Gross 3:26
It’s fascinating to hear kind of the inside baseball talk there a little bit about, you know, some of the more the details and the nuances of the negotiation there. Do you find that to be or was it a case particular to one or two LPs? Or was it more just the time? Or do you think it was just kind of the way the big boys were? Were prepared to play?
Kyle Tushaus 5:20
Yeah, I want to say a lot of it had to do with the time in the market environment. I mean, everybody thought the world was gonna end, right. And I was kind of approaching this with I had just gone out in January of that year saying, Alright, I’m gonna do my own deals. I had no, you know, I, I was not in any capital stacks, I was pretty much all cash. So when COVID hit, you know, from an outside perspective, looking in, you can either think that was lucky or brilliant, because I had the liquidity and I thought, This is gonna be great, I’ve got flexibility, and I can go out and, you know, pick up, you know, bargains. And that’s not what panned out, because, like I said, No, you know, nobody had to pay their debt during that time. So they could kind of dig their heels in and say, Nope, you’re gonna pay me on 2019 numbers, no matter what’s happening. And I think some of that trickled over to the actual cash stack negotiations, where the LP said, you know, look, we don’t know, you know, what’s going to happen here. And even if you’re talking to us about something like multifamily, that should be safe. We’re, you know, the, the downside of doing nothing, in that time was zero. And so I think they probably thought, like, why not? Like, let’s see if this guy will say yes to just an egregious deal, because we can, you know, it’s certainly a benefit. And potentially, if you’re sitting in that position, trying to get a deal done, maybe a downfall of our industry, but there’s no called strikes here, right? So I can, I can look at deals all day, doesn’t really matter. I might have opportunity costs, but you know, the human brain being what it is we don’t really gauge opportunity cost correctly, and so the do nothing. The motivation was pretty high at that time. So I think that was probably the bulk of why that panned out that way, but I will say that, you know, was negotiating with LPS from Midwest or west coast, a couple on the East Coast. The These deals were all, you know, Detroit or westward. So this is not, you know, I didn’t look at anything on the east coast. But I would say that I had a similar experience with LP groups regardless of geography.
J Darrin Gross 5:21
Gotcha. And did you end up doing the deal?
Kyle Tushaus 5:56
Yeah, once you’re in that position, you kind of have to just take it on the chin. And so yeah, I ended up doing I mean, basically, for every situation where that occurred, I kind of had to just say, Well, you know, another thing you have to consider, it’s kind of sunk cost mentality, which, you know, I kind of just alluded to the human brain that gauging opportunity costs correctly, and then I fall victim to sunk cost mentality, or the sunk cost fallacy. And when you’re the sponsor, or you’re trying to occupy the GP tranche in a deal, you know, you’re paying for the due diligence. So in all these situations, I’m looking at, you know, 10s of 1000s of dollars of due diligence efforts that could either just evaporate, or you could just say yes, and do the deal. So, you know, 100% of time you say yes, and you do the deal. And like I said, you don’t necessarily get bent out of shape, when that happens, because the who gets paid wins, or who gets the deal done wins. You just change your business model, right? You say, Okay, well, you know, Stefan, the bear trap over there, I’m still alive. I just won’t stop there anymore. Right. So you got to find a different path. So yeah, did did every single deal and kind of dip my lap and just move forward. But, you know, going for future deals, looking to avoid similar situations. And saying, you know, it’s, it’s a lot safer. If you say, have the, say you got 20 people or entities making up your LP investment tranche, and you get one person that pulls that kind of move. And you can just look at the other 19 and say, Hey, does everybody want to increase their capital allocation by X percent, and just replace the person that’s saying that, and you have that flexibility? You don’t have that flexibility when you’ve gone to a single shop? To fill out your cap stack? So
J Darrin Gross 6:04
Yeah, no, he has the money makes the rules kind of thing, right?
Kyle Tushaus 6:04
Yeah. Yeah. So Elon Musk, just skirting every SEC Rule that you were I would be? Yeah.
J Darrin Gross 6:04
So you mentioned the the Pine Ridge Capital model, you guys are working with you? Were you were trying to get returns for your investors, similar to what they might expect on the institutional side? Can you kind of give us a comparison as to what you see in the the syndication model that that you see on the marketplace, as opposed to what you are experiencing? On the institutional? Side?
Kyle Tushaus 6:54
Yeah, and they so prior to this, I could not get anything past the underwriting phase, if I didn’t feel like we had a shot at getting above a 20% internal rate of return for a reasonable amount of risk. So that was kind of our benchmark, where we had to say, look, we can’t hit 20, at a deal level, there’s not going to be enough flexibility for what actually trickles down to the investors after you know, fees, and, and all of that, for it to be worthwhile. And obviously, you don’t go reaching for yield just to try to get over 20. Right, the 20 has to be, you know, with a stabilization plan that makes sense. It is, you know, somewhat expected, given the environment. Now, I would say the main difference. And again, I’ll say that I don’t have a massive amount of experience. In the syndication world, it’s more of having friends and family and colleagues, show me and tell me what kind of things they’re getting pitched. On the institutional side, there’s always some kind of give and take the deal might have. So if I have a really high IRR, first thing I’m gonna ask, is this predicated on the exit, right? Or am I getting a good cash on cash return and a kind of a light pop on the refinance or the exit price? Like, where am I on that spectrum? And where, what aspect of the cash flows in my giving up on to get the thing that you’re advertising to me, and it was very sort of cut and dry on that when we said, like, you know, we have to do XY and Z, like, let’s say it was a hotel renovation, and we knew that this property was trailing market rates, and here was the growth year over year, and it was in a market that was desirable, and you know, not subject to high seasonality, whatever the case might be, we’d say, Okay, we’re gonna spend x amount of dollars to renovate it, you know, I’m going to place it at this point in the market. And then if we can run it at this margin, right, because that’s going to flow through is very, you know, cut and dry. And you would say in that situation, well, what’s my biggest risk factor? How are you going to control the renovation? And so we had a particular firm, that I’m actually You know, speaking to we might have said, well, we bought a GC firm. So now we control construction costs. So there, okay, you’ve, you’ve solved for the biggest risk factor. So great, now I see what’s going on. But you couldn’t really, you know, I said, look, it’s going to be 6% cash on cash return until we can actually start popping the rates. And then after we pop the rates, right, it’s going to take some time to work through the market. And then we got to actually have things trickle down to the net operating income line. So this is what the timeline is going to look like. And then I compare that to the experience and say, This syndication world where I’m seeing deals that say, like in the hospitality example, come with an operating business. But then it’s an operating business that none of the sponsors have experience with. And it’s very new, what not very way very much might be people just reaching for yield, which is a very natural human behavior, especially when we’re at this point in the business cycle. But as the sponsors say, we’re going to take on a business model that we’ve never done before. And that’s how we’re going to get you to X percent cash on cash returns. And I question these models where it’s like, you know, I think I would take a lower cash on cash return, or maybe not such high octane returns in an investment where I’m not banking on you figuring out this business model for the first time. And then beyond that, you might be buying five properties that require this business model. You know, I’m speaking to some things that I’ve seen in the market.
And a lot of these returns are kind of predicated on you trusting that they’re going to just figure it out. And, of course, I’m the man with the hammer. So I’m looking at this through the lens of the you know, if I was on the other side of the table, pitching a 500 plus million dollar, Aum, institutional firm, they would laugh me out of the room. And so, you know, now when I talk to friends and family, if somebody says, Hey, I invested in Kryptos, a big one recently, right? They say invest in some kind of crypto fund, I would I always ask now, how often have they been distributing cash on that thing? Because I hear people talking about, you know, double digit cash on cash returns, and then oh, when we sell this thing, it’s going to be even more. And then I just say, when was the last check. And you know, of course, this is not a scientific approach, but it kind of seems like the marketing, my marketing beforehand, I had to sort of downplay the returns and over deliver, it almost seems like the tables are flipped in the syndication realm, at least what I’ve been exposed to where it’s like, you got to promise a lot and get people’s eyeballs on it. And then afterwards, like, if you don’t distribute, tell them why you didn’t supply issues or something like that, which, you know, from my standpoint, I’d be like, Alright, I’m not investing in you, again, if you if you tell me that kind of stuff. So but that’s, I might be too jaded from where I’m coming from. But that’s, that kind of seems like the difference where, yeah, pitching institutional money, I would have to like, I would just have to handicap the deal so much, and then say, we’re still at 16% IRR. Right. And I have just thrown everything I can at this thing. Like, you know, short of, you know, meteor hitting this building, right? Well, we’re not going to lose money. Where that doesn’t seem to kind of be the like the bar that I have to get over if I were to put together a syndication thing. And I’m sure there’s some syndicators out there that are listening to this saying, screw you, like we’re very diligent, but you know, there’s always outliers. And I’m saying that’s kind of what was pitched to me initially. And why I said, Well, why don’t we just take institutional model, pull it down market where I’m not competing with institutional capital, you have the same structure, right? Well, syndicate it, but Right, these crazy promotes where you got sponsors taken 50% of the cash flow. Like, I wasn’t, I would never be able to get that to pan out at the institutional level. So I’m not going to pitch that to any investor. So you know, we’ll, we’ll stick to reasonable rates of fees, and promote and then look for deals where I said earlier, heads, I win tails, we don’t lose.
J Darrin Gross 7:58
No, that’s, that’s, you know, enlightening to hear kind of the, you know, how you you were required to act on the institutional side versus kind of maybe what, you know, the less sophisticated or experienced syndicator may be promoting. So, talk a little bit about the Pine Ridge capital, what is your, your, your model, your thesis? What are you guys looking to do and go after?
Kyle Tushaus 8:03
So, outside of just saying lower deal size, trying to eliminate competition in that regard. And, you know, we consider they there’s enough tech tools nowadays to where you can manage a pretty disparate portfolio of smaller assets without getting bogged down. Now if I threw something like a hotel in there, obviously something like that if you’re if you’re in the portfolio building world, you hand that management off to somebody else. But for the most part, right, try an asset manage that much you don’t need, you know, if he told me buy one $50 million asset versus 10 $5 million assets, yeah, those are much more moving pieces. But I can systematize a lot of things, and I can solve for a lot of the friction. In the terms of the management, keeping up with the paperwork, that doesn’t necessarily mean I need to charge a crazy management fee to do that. But then outside of saying, we’re going to bring it down to a lower price point in the market to try to get rid of some of that larger competition, we don’t really have a product type that we’re focusing on, right, if we’re agnostic, and we’re really just looking for the right opportunities in the right sub markets, at the right price. With with the right stabilization thesis, I will say we’re only looking at the Pacific Northwest, because that’s where my business partner I live. And so I don’t need any more southwest rewards, points at this, at this juncture, the previous deals that I was doing, despite living in the Pacific Northwest, where none of them are in the Pacific Northwest. And so I was flying around a lot. These are all you know, our focus will be hyperlocal, you know, we gotta be able to drive to them same day if need be. But then, the way we enter any of these is looking for opportunities where we’ll have a thesis, usually we try to find one or two, maybe three avenues, just beyond the base thesis that we could go after. So things like, I think most people are probably familiar with a covered land play. So you know, one, we’re kicking the tires on right now, it’s got a building on site, where I could quickly lease it out to somebody for say, three years, get my ducks in a row, get my ducks in a row and go vertical plan for multifamily, while we’re getting cash flow, but the idea being, let’s ink that lease for three years with a clause that says, hey, we’re going to develop this thing, and we’ll go find you another property. So you get the tenant working hand in hand with you. And for the effort, right, they get a slightly below market rental rate. But that rate still covers your debt service and everything you need to do with the property, maybe distributed a little bit a little bit at the same time. But during those three years, right, we’re actively putting together, you know, a, a vertical multifamily development. And then when you’re ready, right, you go place that tenant and another property, so you actually turn the first deal into two deals, because you might actually go acquire the property that they’re gonna go be placed into. And then you can scrape the original building and go vertical there. So that’s a good example of one where we say, okay, day one, let’s say we just get in day one, we don’t do anything, right? Well, that lease was still cash flowing positively for us, right, and that development potential isn’t going away. And this particular case, I’m talking about sub market that has land use restrictions, where it’s making it a very, very tight market. So it’s very hard to find any dirt that you can build on. And it’s also in a market where we have contacts and colleagues existing that can do the construction. But even if we don’t decide to go that route, right, let’s say we just lock it up, we could turn around, maybe contribute that as 1015 20%, whatever the numbers come out to be as contribution into a go vertical plan. And we let a developer or some other group actually do that part, and move on to the next one. Or you could do it yourself. So it’s, it’s, it’s an approach where you say, look, day one, we’re covered. And then we’ve got, say, three different avenues we could go. And the macro environment, or particularly the market level details, given that sub market are screaming at us that, you know, it might make sense to go vertical, in this case today. But it’s certainly going to make sense three years from now, five years from now. And if you’re locked in with something that’s going to cash flow, right now, you can kind of pick which date you want, obviously, tomorrow would be the best day, you’re going to look at it from an IRR perspective and the time value of money. But if you got to year two, or three, and prices are still soaring, you might say we’re gonna wait for four or five, and it really doesn’t change your returns all that much to have to wait for that, but you haven’t yet pulled on construction financing, right? You’re not now making payments you have that optionality of when you want to move forward. So that’s kind of, I’d say, that’s a good, good example of how we’re looking at the deals we’re going into.
J Darrin Gross 8:49
Gotcha. And I think you might have said about I’m Are you will you be doing syndication, like one building at a time or will you be doing more of a fun approach?
Kyle Tushaus 10:08
So for the time being, we’re going property by property, and that is, I mean, primarily in phase one, we’re kind of testing out this thesis. You know, I might be able to pull up a notepad and say, you know, Why doing, you know, a light industrial play at 4 million makes just as much sense as 40 million. But we want to actually go through the machinations of doing that first. And then Phase two would be, let’s say, you put your head down and you get this, you start chipping away at these and you’ve got a portfolio of 10 or 12 would first go back and probably do a blanket debt refinance over the whole thing. Because obviously, you get better that in and of itself is kind of a strategy for return of capital is get a blanket term across, say, a dozen different portfolios. And at each property level, right, you get better, better debt terms for that reduce risks as far as a lender is concerned. And I think at that juncture, we would probably look at more of a fund approach, how we would incorporate that into still the syndication market, we’re not quite sure. Like I said, right now, we’re, we’re just testing out the property by property thesis. But the Holy Grail of this would almost be to say, kind of be like a crowd street or a Fundrise. Where, you know, I guess in fundraises case, you don’t really get to pick the properties, crowd streets, you do, maybe somewhere in between that, except we don’t want to necessarily be an online platform, I think it would be preferable to operate more like, like an old school Buffett partnership, where it’s kind of like, look, you can chuck your money into this bucket. And we’re doing X, Y, and Z with it. But, you know, scaling up to, you know, a billion assets under management is not necessarily the play here. It’s like taking this laser focused, like picking off the things that make sense and have this optionality. But in a manner that, you know, obviously, you’d want to scale it up to a point where you can move faster than say that one broke one property at a time, but not scale it up so much that you dilute the core approach and the core thesis. So yeah, I guess sort of, like, somewhere between a crowd Street and Fundrise. But obviously, on a much smaller scale, and, and not marketing on sort of like a yeah, just submit your information here. And then wire is 25. You know, okay, not not exactly that model, either.
J Darrin Gross 10:10
Gotcha. Do you have a minimum investment requirement?
Kyle Tushaus 10:10
Yeah, so right now we’re at $25,000. And we arrived at that one, because 25, kind of a typical minimum, anything below that, and you’re kind of just doing a lot, you know, too much movement for not enough contribution into a deal. But primarily, because the size of the deals we’re looking at, it’s pretty easy, just take a if I want to do a $5 million deal, and I have this minimum, divide the deal, but that minimum, and if it gets to be too high of a number of investors to juggle, then you might want to increase your minimum. And so 25 is a comfortable number, where we feel at that at that number will, will not have to be juggling the 99 Investor limit that, you know, we’ll have for that type of deal structure.
J Darrin Gross 10:10
Well, it sounds sounds exciting. I mean, the opportunities and the fact you’ve got a, you know, a model for you know, the funding and then the distribution and raising capital and, and kind of your thesis you’d like said you’re agnostic, but, you know, experience with the hotel conversion and, and kind of multiple exit points. I guess that’s kind of what I what I heard you I mean, it sounds to me, like more of a, you know, safety kind of a thing as opposed to the the one that you gotta hit. And yeah, if not, everything happens, like it’s supposed to, then, you know, what do you do? Yeah.
Kyle Tushaus 11:24
I mean, yeah, another thing that I feel like it’s kind of, it’s probably not completely lacking. But I haven’t heard in, you know, too many people pitch me on it so far in a syndication world, is this idea of sending it up the ladder in terms of investor risk appetites. And I think the closest thing that I’ve seen get in touch on this is, hey, let’s buy called 100 units of multifamily for easy numbers, and we’re going to renovate ATM and leave 20. So the next guy sees that there’s meat on the bone, there’s meat on the bone concept. I mean, I get that and that was something that entered the conversations in my experience previously, but I always thought of it more as like where certain capital resides in the lifecycle or the type of cash flow an investment might throw off and you could say the same thing not just about commercial real estate but just about any private investment. But you know, we did a couple of rows and columns and a couple were certain investors like the more risky like go renovated, get a bridge loan right to yours and pop the rates kind of thing, especially in the hotel world, right? You go do a PIP or what’s called a Property improvement plan. And you can now say, you know, they’re doing $99 A night, now we’re gonna do $160 A night. And once you get to that point, the investors that came along with you for that renovation period of that 99, to your, whatever your market rates were, they don’t necessarily want to keep that capital in something that’s now shelved, and you’re just sending out your distributions, they want to take that out and go find the next hotel, or the next, you know, property, whatever the thesis is, that’s gonna get renovated and mark to market. And so rather than worry about who’s going to pay me 100 bits less than my cap rate to sell this thing outright, we were thinking more in terms of how do we recap this project. So in that scenario, right, we renovate the property rates are going up, you know, property value was, you know, for easy numbers, let’s call it a $10 million property, it’s now $15 million, we’ve created $5 million worth of value, but it’s still cash flowing at X percent, that is still attractive to a passive investor, to say, Great, our investors that only want that renovation phase, you’re out, we’re gonna bring in new dollars at this new valuation, the new dollars don’t feel like they’re getting the short end of the stick, because we’ve already renovated and we already took the risk. And we can tell them, Look, you’re gonna get X percent distribution on a stabilized asset. And they would say, Great, that’s what we’re looking for. We don’t want to trust that you can swing hammers, and not screw it up. And so it was never really, I mean, obviously, if you can get somebody, you can buy something at like seven, do a little bit of work and sell it at a five. Everyone wants to do that all day. But we always talked about more in terms of recapping and it was less about, you know, what’s the new valuation, but what does the capital that’s in the deal actually want out of the deal. And so there’s always this preferred route and saying, like, well, it’s Nick, open market and pay 6%, to the broker to go list it and all this, let’s call the group so we already know that wants stabilized cash flow on this particular asset type, and just pull that tranche out, that was the opportunistic tranche and replace it with, right, the new stable cash flow investors. So that’s, that’s something where, obviously, we’re talking, you know, pretty early on out of the gate for this platform that we’re doing. But that’s another another avenue where, you know, if we can get sort of the more like cookie cutter bread and butter type investors that say, Don’t give me massive valuation increases, if you can tell me, I’m gonna make six to 10% a year on my money, and it’s going to be stable. But I’m okay with that. I don’t need a massive exit and a 20 plus percent IRR pop. So that’s another angle where I feel like it probably definitely exists. But from my understanding, it’s probably probably less focused on than, say, the institutional world where there’s always an option of just recapping your project with a different investment type.
J Darrin Gross 12:31
Got it. Hey, Kyle, 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 try and assess risk and determine what to do with the risk. And there’s a couple different strategies we typically employ, 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 if we cannot avoid or minimize the risk, then we look to see if there’s a way we could transfer the risk. And that’s what an insurance policy is that a risk transfer vehicle. And as such, I like to ask my guests, if they can look at their own situation. Could be clients, it could be investors could be the market could be politics, interest rates, however you however you would like to frame the question as to what you consider to be the biggest risk. And again, for clarification, while I am an insurance broker, I’m not necessarily looking for an insurance related answer. And so if you’re willing, I’d like to ask you, Kyle Tushaus, what is the biggest risk?
Kyle Tushaus 12:56
I think, right now everybody’s kind of afraid of inflation, which is an interesting business environment to be in for real estate, because everybody kind of gravitates towards this industry is a safe haven. I think you can kind of take that a step further and think if I’m going to de risk myself from inflation, and I’ll say inflation, I don’t think is actually the risk of getting at its eventually I think there’s a risk that I think a lot of people are not thinking about some are but I haven’t seen any media headlines about it. But within real estate, right, you might say okay, well what’s my what’s my best inflation hedge within an inflation hedge? Right. And that would be a property that I can mark to market more often, right? So the reason why consumer durables doesn’t do well, and inflation is because I can wait 10 years to buy my next car or washing machine. But bread and butter, I’m gonna buy that more often. And so that price can keep going up every time I transact. So how can I mimic that in real estate and well, the properties that get marked to market more often would be better and inflation environment. So hotels get marked to market every single morning. So it should be the best inflation hedge, but you’ve got the dual side of that sword, it says it’s also discretionary spending. So be very careful on that front. But then, so maybe I’m okay with every year, say in multifamily. You know, the, the triple net 25 year lease would probably be the worst, depending on how that lease got written. So there’s obviously a spectrum even within the inflation hedge that is our industry of commercial real estate. But the thing I haven’t heard enough people talking about, and the thing that scares me the most and influences a lot of how we’re going into these, these, this first phase of deals is that the labor risk that is kind of bubbling under the surface where you see a lot of these value add deals, I mean, people have been ever since 2008, value add has been kinda like the everybody, everybody and their cousin is getting into this idea of renovating a property and popping the value of it. But I think there’s going to be a massive moving target into how well you control those costs. And so for like an interesting data points since about the early 70s. Productivity, or I’m sorry, compensation has gone up 115%, since the early 70s, which sounds great hiring 10 or 15% increase in compensation. And that’s for non supervising roles. So the roles, the jobs that are actually doing the thing.
While productivity of the same jobs has gone up almost 250% During that same time, so there’s this massive difference in the throughput that’s being provided by somebody in our job versus what they’re getting out of it. And I look at the landscape of people now for the first time in four years even know what inflation is. Our socio socio economic landscape is not great, there’s a lot of political strife. And I feel like that gap is probably going to get closed to some degree. And so I see a big risk factor in those business models that are going to be very reliant upon labor as an input, because I think we’re about to see a compression of that gap. And I think rightfully so, I mean, you look at some of the numbers, and it’s just, I might be a little jaded, I came out of, I came out of school, after the Oh, eight collapse. And so I don’t, I don’t really have the, I don’t have that much of an experience through that run up. But, you know, you look at what was accomplishable with, say, your bass degree, or even no degree 3040 years ago versus now and how much you know, someone’s having to work to get the same throughput in terms of quality of life. I don’t see it continuing status quo for much, much longer, maybe, you know, we kick the can a little bit longer, but I don’t see people being willing to do it. And the great resignation might be sorted a first little cue of it. But yeah, I think I think what’s about to follow inflation is and we talked about energy prices going up housing prices going up, when labor prices keep going up. And right now it’s the remote workers that are driving, you know, the leverage in those negotiations, it’ll eventually get to all labor. And if your investment thesis is heavily dependent upon labor, I would think of some ways to lock that in ways that we mitigate that, right? If I if I see a value add deal. It’s got to be in a market where I’ve already got a pretty good relationship with the GC. And I can go to them and say, Do you want to be part of the GDP tranche? And so with that, I can say, you’re now going to have equity incentive, not just, you know, hourly rate, or markup incentive. So, you know, let’s put together a budget of do not to exceed and you control that cost, but you’re also in our cap stack. Now, you know, outside of that, I would be very worried about taking that GC risk, because I hear horror stories of colleagues having guys walked off the job for $2 more an hour. And, you know, it kind of sucks when you’ve already pulled the debt on the deal. And you got, you know, this bridge loan kind of clock ticking away at you, but then you look at the data and you’re kind of like, well, I don’t necessarily disagree with it. I mean, someone offered me more you probably do the same thing. And so I think it’s something that needs to be taken into consideration when you’re when you’re underwriting because I do think that’s the next big wave to follow in this. disinflation run up.
J Darrin Gross 14:33
No, that’s enlightening. They’re just the, you know, wage, wage growth and how it’s likely to affect A lot of things so I got it. Kyle, where can the listeners go if they’d like to learn more or connect with you?
Kyle Tushaus 45:12
So they can either submit something through the website, which is Pine Ridge cap.com at P I N E R IDG E CA p. So it’s cap instead of capital for the website. Or you could email me directly, just Kyle Kyl e at Pine Ridge cap.com. That’ll probably the quickest way to direct to the horse’s mouth so to speak. Yes, and we’re not on any. Not on any social, unfortunately. So I can’t tell you to follow our I’m not even on social personally. So I’m kind of behind the times in that regard.
J Darrin Gross 15:08
Gotcha. Kind of, I can’t say thanks enough for taking the time to talk today. I’ve learned a lot and enjoyed it. And I look forward to doing it again soon.
Kyle Tushaus 15:08
Likewise, yeah, well, I’ll definitely keep you in the loop on everything we’re saying.
J Darrin Gross 15:08
All right. For our listeners, if you liked this episode, don’t forget to like, share and subscribe. Remember, the more you know, the more you grow? That’s all we’ve got this week. Until next time, thanks for listening to Commercial Real Estate Pro Networks. CRE PN Radio.
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