Michael Salafia 0:00
But in general, when we’re talking about triple net, we mean that when you’re the landlord and you buy the property, and you go to your tenant, you set up direct deposit. And all you’re doing is collecting a rent check every year or every month. Maybe you send them a property tax bill every year, but that’s about it. And usually these are 15 to 20 year lease terms, so they make really nice assets for passive income streams. They’re great for retirement purposes. These are typically very stable assets with very low risk profiles. So as a result, the cap rates become very compressed compared to the rest of the market.
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J Darrin Gross 0:56
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.
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Today, my guest is Michael Salafia. Michael is the Founder and Managing Partner of Stax Real Estate LLC, a platform for sale leaseback of single tenant Net Lease real retail assets, located in Miami Beach. And in just a minute, we’re going to speak with Michael Salafia about the benefits of triple net sale lease backs for both investors and tenants.
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 I’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 I want to welcome my guest, Michael Salafia, welcome to CRE PN Radio.
Michael Salafia 2:43
Good morning, Darrin. Thanks for having me on the show.
J Darrin Gross 2:47
Well, I’m delighted to have you and I’m looking forward to our conversation. But before we get started if you could take just a minute and share with listeners a little bit about your background.
Michael Salafia 2:59
Absolutely. So again, I’m Michael Salafia, I’m the managing partner of stacks real estate, and it stacks real estate we’re a sale leaseback platform for single tenant net leased assets. That makes us a mixture between being a commercial real estate developer private equity fund and brokerage, and it’s all in one. I’ve been in commercial real estate investment arena for about five years, got my teeth and got started my career Marcus and Millichap at from the brokerage side. And that’s how I started learning more advanced strategies and getting into commercial real estate investing for myself on structuring deals on my own. And you know, my family has always had a background in commercial real estate and retail specifically, going back to my great grandfather, so I’m kind of fourth generation owning and operating commercial retail properties.
J Darrin Gross 4:02
Got it. So that’s a pretty rich history with fourth generation real estate. So your family it’s
Michael Salafia 4:10
A very abbreviated version actually started my career in the technology sector in tech and doing tech startups. But with these commercial real estate deals, the cashflow is so incredible on day one, it just became so much more attractive to me than some of the venture capital projects I was working on, ended up working as a consultant for a number of real estate investment trusts and other kinds of finance companies in the industry. So I started before I went down the path to become a broker. I started as a consultant for large funds and financial institutions investing. So give me a very diverse background.
J Darrin Gross 4:52
So were you consulting from a tech side then, or were you were you consulting,
Michael Salafia 4:58
tech and communication In strategy, communication strategies.
J Darrin Gross 5:04
Yeah, well, that’s, that’s clearly exploded here in the last 15 years with what was the was the Jobs Act? I know that was kind of the big push for all the marketing with the ability to raise capital and stuff did that. Was that part of what you were a part of then? Or? I mean, is that kind of what?
Michael Salafia 5:25
Right? How do you how do you craft a investment presentation to raise $2 billion to build a commercial real estate investment? Trust? Right, kind of answers.
J Darrin Gross 5:38
I’d be coming up with God. So in your family, real estate experience, primarily retail,
Michael Salafia 5:47
retail and multifamily? Yeah. On the east side of Providence by Brown University. Okay, it’s the area that we’re focused on.
J Darrin Gross 5:54
Okay. And then when you were with Marcus Millichap, were you was a multifamily? Or what was your focus there?
Michael Salafia 6:02
No, I was on the national retail Property Group and the National net lease property group. So I focused on on single tenant net leased assets, I’d be happy to explain what that is.
J Darrin Gross 6:18
Yeah, no, that’s exactly where I wanted to get to. So we’ve got your your background here. So let’s talk a little bit about the triple net lease. Right? It’s always, you know, everybody recognizes the N and N. I’ve found that triple net is not always. Or I guess there’s some some interpretations that can vary. What is a triple net lease? And what are what are the three ends.
Michael Salafia 6:44
So when we think about a triple net lease, just from a broad stroke, we think about a lease that has no landlord responsibilities and all tenant responsibilities. That’s what we’re talking about. And I agree, there are interpretations where maybe something says triple net versus absolute triple net. And maybe there’s an exception, where the landlord might have to pay the property tax bill on their own, or maybe maintenance for the landscaping is reimbursed by the tenant, but the landlord pays it up front, there’s various ways to structure it. But in general, when we’re talking about triple net, we mean that when you’re the landlord, and you buy the property, and you go to your tenant, you set up direct deposit, and all you’re doing is collecting a rent check every year, or every month, maybe you send them a property tax bill every year, but that’s about it. And usually these are 15 to 20 year lease terms. So they make really nice assets for passive income streams, they’re great for retirement purposes. These are typically very stable assets with very low risk profiles. So as a result, the cap rates become very compressed compared to the rest of the market.
J Darrin Gross 8:01
Right, right. In the in the, the, the the triple net, I just wanted to go back real quick on the I mean, I liked the way you kind of said blanket, it’s like no expenses to the landlord, tenant covers all that. The ones that have always been kind of like identified, in my experiences, the taxes, insurance, and then maintenance is kind of the one where I’ve gotten kind of a little bit fuzzy, and you kind of explain a little bit like maybe landscaping or I’ve seen where like the roof is responsibility of the landlord or, but so I guess what I wanted to just revisit there, the concept is no expenses, but the details are negotiable. Is that fair to say?
Michael Salafia 8:48
Actually, Darren, it’s, as you explained, you have a correct in your head. So net net net, right. So as we’re, as we’re the landlord, right, and we’re adding our rental income versus our expenses, and we’re saying, here’s our income, net of insurance, net of taxes, net of maintenance, and breaking into those buckets. Got it? So so in this case, your rent becomes as the landlord, right, you’re looking for what’s my net operating income for the property I just invested in? Well, if it’s an absolute triple net lease, your rent payment is equivalent to your noi, your annual rent equals your noi.
J Darrin Gross 9:30
Exactly, and that’s what I was trying to get to is the the calculation and is it may look like a smaller number, but you have no expenses to reduce that number by Exactly,
Michael Salafia 9:42
exactly. And you don’t really need a property management company. Unless maybe you have 100 triple net lease properties and you want someone to administrate the leases and do that kind of work.
J Darrin Gross 9:58
Got it. And as far as is the the cap rates I mean, or does does a triple net change the valuation? I mean, again, we’re talking in a why it’s in a why as an ally,
Michael Salafia 10:14
it will, it will change the valuation because again, you’re having the tenant pay for costs, and you’re having the tenant basically be your property manager. So you end up typically you will end up paying for that in the cap rate, as compared to say, a modified gross lease or a gross lease, which you might see in an office building, right? If we have an office building with many different small offices in it, it might make sense for us to just be office building operators, and that’s our job, and we’re going to pay the electricity bill, make sure everybody’s office is set up. Now we’re going to charge them a higher rent, because we’re doing everything for them. Right, and it goes in the exact opposite way. Whereas I go to say, Chase Bank. And I say, okay, Chase, I’m going to lease you this one building, you’re in charge of everything, just give me a rent payment every month. And I don’t have to go and do the hedges the way they want. They Right.
J Darrin Gross 11:14
Right. Well, then, I guess what I was trying to see. And so if if the market cap rate for a particular asset class, you know, to to similar properties once triple net versus ones. You know, you’re more involved. And it’s it’s the the owner managers are, are doing all of the maintenance, paying taxes and insurance, the NOI on those two, would they would they not be comparable? I mean, because if you have a because I guess what I’m trying to understand here is would one expect a a higher noi in one way versus the other?
Michael Salafia 11:57
Does that make sense? The Yeah. So effectively? No, it should come out pretty similar.
J Darrin Gross 12:04
Okay, that’s that’s I was just trying to see if there was Yeah,
Michael Salafia 12:09
wouldn’t necessarily be a big difference that that gets, that becomes a very business specific decision, it’s going to come down to the asset, there’s, I wouldn’t say there’s necessarily a global rule there. But in general, it should be if you had the exact same properties, with the exact same management, all you’re changing is the lease structure, the match should remain the same.
J Darrin Gross 12:29
Got it? So that then brings me to how do you identify an opportunity to have a triple dead lease? And hey, I would guess from a landlord perspective, what would be a a? What are some of the criteria you would you would identify or recommend a landlord investor be aware of when when considering offering a triple net lease?
Michael Salafia 13:01
So they are owning a property and they’re offering it to a tenant? Or is their goal to buy a triple net leased property?
J Darrin Gross 13:10
Let’s take the first one in the you own it. And then also I want to talk about that if you’re looking to acquire a property and there’s a a tenant in a budget, just if I own a property right now, and I’m, I’m late I’m, you know, trying to lease it. When, you know, give me some other criteria that that you would recommend that an investor landlord have in place or consider whether it be like a caliber of tenant or term of lease or Yes,
Michael Salafia 13:42
and it really comes down to the type of the property right, so I focused on single tenant retail assets. That very simply could be is most often a fast food restaurant, a drugstore like CVS and Walgreens, a gas station convenience store. $1 General a standalone grocery store cost goes for example, or good single tenant assets. So I’m focused very focused on that. However, you can have a net lease on really any kind of property, you know, some of our offices are or triple net lease structure.
J Darrin Gross 14:23
So, but I guess the the if I’m understanding right, the single tenant occupancy is, is key is
Michael Salafia 14:32
the triple net structure works really well for the single tenant business model, because you have one tenant that’s very specialized in operating a specific property. And now you’ve just given them all the control. So let’s talk about why do we love triple net leases in the gas station convenience store space, because that one makes a lot of sense when you think about it. Okay. So let’s say Darren, you own a gas station, right? and you’re in a convenience store, and you’re looking for a new tenant, maybe it’s gotten a little rundown and you’re like, you know, this would make a really nice Shell station, when I get shell in here to put some fresh paint on it and put up that new sign I just saw down the street, I think this will pave the driveway space will look great, okay, but you don’t want to be responsible for all those pumps, right? You’re literally pumping motor oil, every day, stuff could go wrong. And then you have a giant tank under the ground full of motor oil, you might want somebody managing that property, who’s experienced in this, who carries that kind of liability insurance, who handles those kinds of insurance claims in their day to day business, who knows how to read the reports for all of this specialized equipment that you have on the property that’s very environmentally sensitive as a ton of liabilities associated to it. Right, that’s what it comes down to finding that tenant who really understands what they’re doing. And it could be at a fast food restaurant where you’re like, you know, these guys, they always have clean bathrooms, good landscaping, right? So you’re looking at the bigger picture of the tenant. And that could be at a small or national level, at a national level, you can think of brands, I’ll challenge you right now, to think of some brands in your head where, you know, you don’t really want to go into that store, it’s always a little kind of dirty, it’s not your favorite store. And then there’s other brands, where it’s a nice experience, you’re comfortable with that brands like Starbucks, everybody likes Starbucks, for the most part, they have a good experience. Blah, blah, they have a great customer experience. So those kinds of things are, are what we might look for.
J Darrin Gross 16:42
No, I think that that is appealing, at least from a a, you know, landlord standpoint, to know that you’ve got a brand with some, you know, recognizability and and presumably some some, you know, capital to maintain and, and operate and pay the rent, right?
Michael Salafia 17:02
And maybe a large brand with a franchisees. So as a landlord, you should go to the franchisees other locations and see how clean they are, how well are they maintaining the property? What does it look like on the outside? You know, you can tell a lot just from just from looking at the property and maybe walking through the store. Right?
J Darrin Gross 17:22
So you mentioned the kind of the national brands and then kind of the franchisees, do you find that for triple net, the the brands and the franchises are are kind of the kind of the target or most often kind of the, the opportunity there? Or do you find that there’s a lot of the local, lesser known brands that that can be a good fit for this.
Michael Salafia 17:51
You know, I come from the National Space. So the national brands are really all I know. I will say especially living here in Miami Beach, there are some fantastic triple net lease opportunities in the hospitality space. I mean, I’ve seen even some nice trendy restaurants buy their retail condo and say, Hey, we have you know, three years of sales history. So why don’t we do a sale leaseback and execute a 15 year triple net lease for a restaurant, right? And I can tell you I go to that restaurant, it’s great, they run a great business, I would buy that deal. You know, it’s not going to be as good of credit as buying a CVS store. But it’s a good it’s a good bet. If you if you’re interested in that kind of property type. Really, it really all depends.
J Darrin Gross 18:43
But as I say, I think the the the thing I’ve learned a little bit about commercial, especially the the retail, the value of the the property is dictated lot by the tenant. I mean the the caliber of the tenant, am I my corralling them, right?
Michael Salafia 19:06
Correct. And we’d measure that by the credit worthiness of the tenant, which is quite frankly, a measurement of risk. You’re measuring how much risk you have of that tenant failing to make your rent payment.
J Darrin Gross 19:22
Right, right. So let’s, let’s take the other direction. We mentioned earlier, you’re in the market, you’re looking for a property and you have a property like that’s an it’s leased. It’s currently got a triple net lease. What are some things that you would look at when underwriting that property? And the tenant to determine whether or not there’s, you know, what the upside is and or the opportunity is,
Michael Salafia 19:55
right. So for example, we have a restaurant right now, where Air, it’s near Philadelphia, the had to kick out the tenant, they weren’t paying the rent. And it was a national, quick service restaurant operator, like fast food. So now we have this big and fast food restaurant. So we look at for redeveloping the property or a couple of things, we’re gonna look at the other tenants that operate within that area, say they have a location within 100 miles within the same state. So we know this, these tenants are active in this area. And then from there, we’re going to look at market saturation, and see what the competition is where the closest location is, for each one of these tenants. We run through this process called void analysis, where we look for where the gap is in the market, what is the void that we can fill, and who are the potential tenants. And then our team of agents who will go out and engage each one of those tenants one by one through a series of business development, phone calls and meetings, with hopes of finding the right one that would take over that property. We go based on the best and highest use, run through the legalese aspects first.
J Darrin Gross 21:17
And when you’re when you’re looking for the that’s kind of the the read tenant thing, so when you when you find the property, would you the length of the lease that’s left with that factor into it? Or? Or how would you are you talking about just having buying an empty property where you can now you’re looking for a tenant? Yeah, this
Michael Salafia 21:39
in this case, I’m describing an empty property, we’re looking for a tenant. In the other case, you’re talking about just acquiring a net leased property, buying a triple that property, which is, as you said, you’d be very concerned with the amount of term remaining on the lease. Those are really the three big things that you’re going to look at are what’s my cap rate? And besides the price, obviously, what’s my cap rate? What’s the credit of this tenant? And how many years are left on the lease? Those are the three biggest levers that impact the market value of the triple net property.
J Darrin Gross 22:17
And as far as the lease terms, we’ve established the the triple net aspect of it. But as far as the the length, you mentioned anywhere from 10 to 15 years. Are there any kind of standard increases over that time? Or is it present all there’s negotiators what’s
Michael Salafia 22:38
typical, it’s all negotiable. There’s no standard practice. But what you typically see is 10%, every five years, or 2% per year, you really want to structure these leases. So to keep up with inflation, so anything below what’s effectively a 2% annual rent increase could get dangerous for the owner. We’ve seen this before I saw that, yeah, a Burger King where the lease was signed, it was near Miami, and the lease was signed in the 1980s or late 70s, or something, and the rent was so low, and they had such a strong lease that it was artificially decreasing the value of the property. So the most we could underwrite the property for based on the lease was like, maybe $100,000. Meanwhile, this property, the real estates worth, like $5 million, based on the average price per acre, according to the comps, they have a big discrepancy in the two appraisal methods. Ya know, that we ran into that.
J Darrin Gross 23:39
But as you say, the the, you know, if you have a long lease, and it’s written on some historical terms, when maybe real estate wasn’t been doing as well, that could, that can be a bummer. If you’re,
Michael Salafia 23:56
here’s something very interesting about the valuation of these assets that I don’t think most people fundamentally understand. So when I was first getting into this, I said, okay, so you’re telling me on a 15 year lease, and the value of the asset, it’s, its maximum value is when the lease hits its maximum term. So therefore, the value of the asset should decline year over year, however, you also have a rent increase, which could technically be offsetting it. But overall, you know, when you have 15 years versus 10 years term remaining on a lease, it’s going to impact the cap rate, the cap rate is always going to be higher for the 10 year deal versus the 15 year deal, assuming all other conditions are the same. So I thought, well, then there must be a linear decrease in valuation every time you lose a year lease term. That is not the case based on my independent research. So I took all the comps data that I did one year and compared it. And it’s not linear. It’s a waterfall of CLIs. You have value clips that go on. So the biggest one is after your 10, huge value clip. There the difference in your valuation between having 14 years or 15 years left 13 years left, very little, the difference between having 13 years versus nine years, huge 10 years versus nine years huge value cliff. It just works that way. I mean, that’s what I’ve seen based on studying the comps and I believe it’s, you know, primarily consumer psychology at that point. And
J Darrin Gross 25:35
is that just based on the the length of the payout that’s scheduled? I mean, that there’s a potential to lose a tenant or what’s
Michael Salafia 25:44
your thought process is accurate. And typically, we are looking at the net present value. But I’m I’m literally saying the difference between your evaluation at year 10 versus year nine, it’s not linear between love and 10. To nine, it there’s a big cliff that happens between year 10 And year nine. It’s just the market value goes down dramatically. These are all market conditions. So can be changed my market behavior changing, but this is just what I’ve noticed in my studies independently. Sure.
J Darrin Gross 26:16
So I guess here’s something to to ask you. So if we have an investor, and they’re looking to buy a property? Typically, if I understand correctly, they would expect to pay more if the lease had 10 plus years in it in what you just said, versus if it was nine or less, right, perhaps get a get a better price? And I guess my my question is, and so is, as a investor, if you’re looking to sell a property, is it, it sounds like if I if I’m understanding correctly, it’d be best to first get it released. With a longer term lease before you you go to sell that to get a higher price.
Michael Salafia 27:07
If your goal as the investor is to maximize the value of the property when you sell then yes, you can go to a company like Stax that does these value add strategies and we’ll find a new tenant will extend it to a long term triple net lease and dramatically increase the value of the property. For example, you wouldn’t come to stacks because we’re leasing agents who and say, Hey, I have this shopping center, I want you to lease it out. That’s not really what we do. But if you said I have a shopping center, I want to sell we need to bring it get in all the leases and get everything organized and ready to sell. We’d say okay, this is what we do.
J Darrin Gross 27:44
Okay, so that’s the next thing I wanted to ask you about this. Tell me about stacks and what is stacks.
Michael Salafia 27:50
Right, so at stacks, we work directly with tenants, we partner with kind of tenants and developers, and we bridge the gap using our sale leaseback platform to finance the opening of new stores. Basically, what that means is, we’re buying properties that are usually vacant, or maybe it has a tenant that I can move out with 30 days notice. Then I’m bringing in a new tenant, usually making some improvements to the property, you know, some like construction work or re imaging the property, putting up the new signage, oftentimes renovating the interiors, new bathrooms, new driveway, new landscaping, making it nice, we bring in the new tenant, we execute a long term called 20 year triple net lease, and then we’ll take that and we can sell it on the market to private investor, we can sell it to a real estate investment trust or some kind of fund acquiring these assets. And basically, when we sell it, that’s the money that we use to pay off the real estate and the the capital expenditures, the capex that we put into the property.
J Darrin Gross 29:05
Got it so that that
Michael Salafia 29:07
basically finances the cost of setting up the business for the tenant. So it’s a it’s basically a franchisee for example, coming in and getting to open up a new franchise, but they don’t have to put you know, a million dollars down in order to get done. We’re financing everything.
J Darrin Gross 29:25
So, snacks and basically facilitates that kind of the the returning and getting the the property leased. Is that the my understanding there right for the for the investor.
Michael Salafia 29:37
Yes, but more. We’re working with groups of tenants. So for example, we have Shell gas station operators, and we’re working with them we will find them their new site or new property that they want to take over. We’ll arrange a real estate invite estar to basically fund the acquisition of the real estate will arrange for another source of financing to cover any other costs, they have to re imaging the property. Let’s say putting up fresh signs new landscaping, re renovating the interior. That’s, that’s more what we do. Got it. Got it. So as a result, we have a lot of these brand new reimage. Net leased properties for sale. Because every time we’re done setting up a new store, usually we go and sell it for.
J Darrin Gross 30:36
Yeah, okay, I gotcha. So the goal, then is more of the, in for lack of a better word, flip the property, I don’t want to compare these two, you know, like,
Michael Salafia 30:48
we’re not really flipping because we’re the value of getting that tenant to sign that lease for long term. That’s extremely valuable. Right, right. Right, right. No, stabilized property. And now we have a stabilized triple net asset.
J Darrin Gross 31:05
Right? But what if I understand right, what you’re doing is you’re you’re finding the property, you’re finding the tenant, and then you’re, you’re making it so it, it’s a much more valuable property? And then are you selling? And then are you selling it then for the investor? Are you are you acquiring the property,
Michael Salafia 31:24
we have a private equity fund that we’ll use to acquire the property. But our part of our strategy and our fund is to get in and out of the property quickly. So we’re not flipping it, per se, but you know, we can get our money in and out within six months, we’re trying to turn over that money as many times we can per year.
J Darrin Gross 31:42
Sure. So like in a comparison, like a multifamily the value add kind of thing, but that for if you can do that 36 Or not 36, six months, that’s a pretty quick turn. So okay, so that’s, that’s the A P, I get it now, that that makes a lot of sense to me that. So let me ask you, so when, you know, I think one of the things that I recognize that I love about real estate is that it’s the buyers opportunity to recognize the opportunity that the seller doesn’t, or the seller is ready to be done with. And so if I’m understanding kind of your, your ability in your, your, your company’s ability, it’s to recognize that which is not recognized, and to you know, improve and, you know, make make more appealing and, you know, add value to the property, but I’m assuming also add value to the, the area, if you bring in a, you know, if you take something that looks kind of tired and all sudden you make it all pretty, and now there’s traffic and in more, more of a viable, big time, it’s,
Michael Salafia 32:56
you should see what we’re doing in rural communities with hospitals. I have a project right now where the hospital is completely under managed. And this is a proper regional Regional Hospital for a rural area. So the population within three miles is small, but this is servicing people within like an hour to a 90 minute drive. Right? It’s a big place. It needs work, it needs a new management team management team needs a budget to bring in like the proper equipment that they need to offer the new modern services and collect the healthcare billables that are just sitting there, not being collected. And so it’s another strategy where we’re setting up a sale leaseback right for this operator and getting them some tenant improvement allowance in the process in order to get this rural hospital out to the place. But when this one works, my point is we’ll have a bigger impact if we do 10 of these this year. I mean, that’s a lot of communities that were impacted and, and gave medical proper medical care that were lacking it before.
J Darrin Gross 34:03
Yeah, so let me ask you, I mean, what’s interesting to me and just kind of thinking, it almost feels like you guys are really touching on the operation side of thing. Whereas a lot of times I feel like the conversation about real estate is the, you know, more of the the asset and the and the the revenue it can generate as opposed to the actual operations. That makes sense. It does.
Michael Salafia 34:26
It sets us apart at stacks. We’re very focused on the mechanical operations behind the business, and what’s supporting that rent. And we dig in deep and we consult with these operators. We work very closely with them. We go through all their books and records in detail to understand, you know, what their business model is where they’re making money where they’re losing money, and we structure every deal in a sound way. But it works because it’s a single tenant net leased asset works because it’s one tenant with one building at one site. It’s going to have One traffic count and one population count. So we can break it down on a store by store level doing it that way.
J Darrin Gross 35:08
Yeah, no, I think that’s that’s, that’s interesting. I hadn’t really thought of it in that in this month. But I mean, really that how important the operations are in your ability to recognize and to, you know, find either a better operator and or improve the operations of the of the current operator, I’m assuming more often than not, you’re switching operators versus consulting the current operator to improve their operations. Am I correct on that? Are
Michael Salafia 35:38
we’re working with existing operators to expand into new locations? Okay.
J Darrin Gross 35:46
That makes sense. But you’re but you’re qualifying the operator first, and that they’re a high level operator before correcting them?
Michael Salafia 35:55
Got it? Correct. And then maybe we’ll provide some guidance along the way. Or maybe we’ll learn some things.
J Darrin Gross 36:03
So tell me who’s an ideal prospect or a candidate to work with stacks?
Michael Salafia 36:13
Right now, we’re looking for more operators in the medical space or gas station, convenience store or quick service restaurants. So any fast food franchisee would be a great person for us to talk to? Excuse me, gas station convenience store operators would be great operators of urgent care facilities, or any kind of replicatable medical retail? We’re very focused on essential retail properties.
J Darrin Gross 36:44
Got it? And your territory of operation? Are you are you limited to the Miami area? Or how far and why do you go?
Michael Salafia 36:52
Nope. Through our brokerage of record network, we can transact in all 50 states. We have deals going from California to South Florida. I do most of my business in Florida, I have numerous brokers, agents, consultants and partners that work for me. Not all of them are located in Florida, summer in Chicago and Tennessee and other parts of the country. So we’re pretty spread out and very well virtual connected with our home office here in Miami Beach.
J Darrin Gross 37:30
Hey, Michael, if we could, I’d like to shift gears here for a second, as I mentioned to you before, by day, I’m an insurance broker. And as such, I work with my clients to assess risk and determine what to do with the risk. And there’s three strategies we typically consider, we first look to see if 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 nor minimize the risk, we look see if there’s a way we can transfer the risk. And that’s what an insurance policy is. It’s a risk transfer vehicle. And as such, I like to ask my guests, if they can look at their own situation, could be or clients investors, the Fed, you know, local municipality, laws, whatever. And identify what you consider to be the biggest risk. And again, for clarification, while I am an insurance broker, I’m not necessarily looking for an insurance related answer. And so if you’re willing, I’d like to ask you, Michael Salafia, what is the BIGGEST RISK?
Michael Salafia 38:43
As an investment manager, it’s the fluctuations in interest rates are our biggest risks that we are dealing with at the moment. That changes that become very, the changes of interest rates are somewhat predictable to a degree and we’d get communication from the Fed. Our challenge is the market reaction or slow reaction and and kind of gauging how slow the reaction is going to be to the shifts. So getting getting sellers to understand that, you know, interest rates are not at three and a quarter. They’re now at seven and a quarter. So your five cap property that you think is worth a five cap is now worth an eight cap and getting them to swallow that pill. That’s that’s been the biggest challenge.
J Darrin Gross 39:41
Yeah, no, that’s certainly a challenge with you’re gonna have to borrow to to buy.
Michael Salafia 39:48
So and then let’s talk about biggest risks in net lease investing in general. My biggest concern is what happens if the tenant doesn’t pay rent All right, what do you actually do? Okay, so I’m gonna sue them, okay? Ever seen somebody before you know that works, I’m going to do this, I’m going to do that? Well, at the end of the day, you have a tenant, and then typically you have a mortgage, and you’re responsible for paying the mortgage, the tenant is responsible for paying you, you need to get this over here. I don’t know, that’d be great if there was some kind of an insurance for tenants failure to pay that backed up mortgage payments. I’m sure there’s lots of complicated tools for this, but gaining a better understanding and, you know, thinking out loud that I don’t have a deep understanding about this, you’re gonna turn to 50 million in transactions this year. Right?
J Darrin Gross 40:48
Yeah, no, you’re not the first person I know, I’ve had insurance clients think that there was some sort of coverage for that. And on a, on a typical property and casualty policy, there’s not anything for a tenant on pain, unless there has been damage that was caused, and then perhaps might have some sort of a trigger for coverage. But yeah, straight up, but I have heard of some lease protection type stuff, but it’s been more like in the residential. Arena. But, you know, it’s interesting, as you say that I am kind of curious why the concept wouldn’t work on the commercial, unless it’s just a matter of the law of numbers. There’s a, probably a significantly lower risk with a residential tenant than there is on a commercial tenant, and maybe an opportunity to, you know, buffer, or spread your risk with more, versus the fewer kind of thing. So.
Michael Salafia 41:50
Right? And also for commercial investors, just our appetite, why are we in commercial real estate, you know, for me, I don’t want to pay that insurance, I’ll take the risk, right and paying the premium, because if something does happen, that’s why I mean, I’m a professional, commercial real estate investor, I’m prepared for something like this to happen, I really don’t need to go to the insurance company to go through that. What I would like the insurance company to do is cover me if there’s damage from a hurricane, or there’s theft, or vandalism, that kind
J Darrin Gross 42:19
of thing. Right. And I think that, you know, that that is the traditional insurance model is physical damage to your, your investment. And I would say that your, you know, what I what I heard you say is more often than not the investors I would categorize and the newer investors and the more seasoned investors, and the newer investors tend to be a little surprised. Whereas the seasoned investors just kind of go, well, that’s kind of that’s part of the deal. You know, these things happen. And that’s why you gotta have gotta have some reserves, and you got to have, you know, more than one property.
Michael Salafia 42:57
And think about it this way, you buy a $10 million property 75%, LTV, that means you only put down $2.5 million cash, now you have a $10 million property, you got it at a seven and a half cap. Okay, so now you’re on the hook for, that’s the should be $750,000 of rent coming in, you have to make your mortgage payment, mortgage payments gonna be substantial. If that tenant fails to pay, that is a big number to cover. And you’re someone who bought this $10 million asset with $2.5 million down, you’re trying to, you know, make your return on your 2.5 and cover your mortgage payment. That’s where you can get into when you get leveraged like that you could get into a bad situation if you have a tenant that fails to pay rent.
J Darrin Gross 43:47
Yeah, no, I I hear you loud and clear. And it’s it is kind of the I think what separates the the lesser capitalized investor from the the larger institutional level investor has just had ability to take the hit and or whether the vacancy you know, there’s a there is a I don’t know you know, COVID and, and all this kind of commercial reset, especially like with Office and even some retail there’s there’s been a little bit of a reset and in various markets, or a reset that’s about to happen based on the vacancies and when the notes come to and and be interested in see what happens in next couple years. Oh, yeah. Anyway, Hey, Michael, where can listeners go if they’d like to learn more connect with you?
Michael Salafia 44:48
During the best thing to do would be to visit our website. We’re also on all the social media channels. You can find our website at stacks our e.com That’s, that’s t AXRE. dot com. You can also just type in Stax real estate into Google. You’ll find us on LinkedIn, Twitter, Instagram, everywhere. We’re always posting Brian comp podcasts frequently release a lot of articles. And we’re very, very active in the marketplace.
J Darrin Gross 45:17
Awesome. Michael Salafia I cannot say thanks enough for taking the time to talk today. I’ve enjoyed it. Learned a lot, and I look forward to doing it again soon.
Michael Salafia 45:27
Darrin, it’s been an absolute pleasure. Thanks for having me on.
J Darrin Gross 45:31
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