Risky Business

Real estate investors price risk, real estate operators navigate it.

Our success hinges on how well we manage it

Some considerations for the mental Cuisinart as we charge through the property minefields: Physical inspections go a long way, but we’ve got to lay odds the inspectors 1) were thorough and 2) found everything (pro tip: they didn’t)

Using top tier consultants increases our odds but what about the latent defects - the nasty pickpockets like

Getting big rich: a modest path for an aspiring real estateur:

1. work for someone leasing and managing small ($3-20m) commercial properties

2. learn management and become an expert in leasing these properties (pick a small geography and product type)... 3. spend less than the leasing fees you're paid, save as much as possible

4. document how your leasing increased the value of properties

5. sell your clients on the idea of partnering with you if and when you can find a certain type project

Over the years, a few fun things we *didn't* find during due diligence:

- a corrugated metal pipe under a building was rusted and could collapse at any time

- a tenant had negotiated a new lease in a new location with the seller, financed by sales proceeds - the sewer line from a renovated but vacant building did not tie into city sewer

- vacant spaces square footage were meaningfully less than rent roll

- detention pond was controlled by army corps of engineers

- an entire site was on top of a series of underground caves

There's lots of ways to make hay in the real estate investment biz

If I was starting out as an independent hustler and had a lot of runway ahead of me and wanted to maximize upside odds while hedging my downside, here's how I'd do it: 1) Pick a growth market, one where demographic trends point toward increasing population. Who knows what happens down the road but I'd rather bet on consensus growth than the opposite

I'd look for pro-development municipalities with good infrastructure.

tl:dr sunbelt city

3 traits that identify an effective real estateur:

1) A noticer

- Operators notice things -

Years ago, mid-sentence, walking a pedestrian-spiteful stretch of ATL with me, a pal dodges four lanes of traffic mid-block because he sees some surveyors setting up across the road 2) A connector

- Whether people or dots, the effective operator combines the disparate and creates something new -

Same guy learns from the surveyors the state DOT is trying to improve the intersection but has to coordinate with the feds and take some private property.

The ability to increase values in commercial real estate is a handy skill.

Places where alpha hides:

- change of use

Convert the vacant Kmart to storage, build out lofts in the old cotton mill.

Also, - environmental abatement

Understand what it costs to remediate a polluted site when others don’t. (Then do it)

Also,

For those with a bit of ambition to be a real estate entrepreneur, we're entering a terrific launch time.

*To do this you'll need to have saved up personal overhead for 3 years

Here's how to minimize your chances of screwing up: first, starting out, the trick is not having a bad outcome (save those for later) *and* generating positive returns

both are required to build a track record and attract capital.

lots of ways to do this but the below is something anyone can do with hustle and smarts

A tenant rep broker duo I know started sponsoring CRE investments 20 years ago and have had wild success - they’ve paid astonishing prices in some cases but the returns on everything I know of have been tremendous - 3 lessons: 1/ their biz is built on the unique and specific knowledge of knowing where a certain subset of retailers had to be and what they could be pushed into paying.

Where others speculated on market, these folks had conviction

If you're an aspiring real estate GP, now might just be a helluva time to get started:

This playbook works in all property types, but is best suited for sub-institutional properties.

You'll need experience, low overhead, and gumption

Step 1: Find a bookkeeper with deep CRE experience

If you haven't worked with them before, make sure there are stellar recs from well-known operators in your market.

Step 2: find a controller/CPA with deep experience in CRE.

If you haven't worked with them before, see above

Step 3:

Anyone that's started from nothing and made serious dough in real estate used these four tools: 1. Extreme leverage

Either through borrowed $ that allowed them to amplify a small investment or by partnering with others where they received a disproportionate share of the proceeds.

examples

95% loan to cost on a build-to-suit Walgreens

5% of equity for 30% of profits

The best real estate operators have a core “thing” they do, a business process that creates economic value.

Examples: Buying operating businesses that own properties (chain restaurant franchisees for example), rewriting leases, and spinning them out as individual NNN leases and keeping the business for free (or less than free)

Or

In real estate, slow and steady doesn’t win the race

Staying in the game until an outsized event happens is the trick

Exciting things can happen along the way: A property manager making personal hard money loans with rent collections and returning them before closing books at month end

Match the retwitter to their stage doppelgänger
@PaulinaJones @moseskagan @EllliotttB @PinkPoloShorts @abakermont

Some folks here are dialed in to class B industrial, others self-storage, others urban multifamily. Some sickos - office.

Our business is a commercial real estate sub-specialty:

Patios.

1/20 2/
Our patios average maybe 1/15th of an acre but done right they can improve the value of millions of square feet of surrounding property

The 360 degree path of real estate success

Phase 1:

“Acquisition Criteria” broad as a malnourished pound puppy’s grocery list:

Ex. We seek office buildings 10,000-500,000 sf in gateway markets. Will also consider smaller or larger in secondary markets on a case-by-case basis These newbie hustlers will also jump at a retail repositioning or a townhome development or off campus student housing, or, sure, specialty surgical clinics.

Also offer construction mgmt and lease audits.

And, yes, ofc, strategy consulting

All with limited success

In real estate, beware old coots.

Then study their every move

Once an unknown legend OC asked me to his office and out of curiosity (and since I aspire to old-cootness) I agreed

the receptionist rang him on the beige multi-line phone He stepped out smiling, wearing salmon colored khakis and a yellow Merion golf club shirt. Looked like he should be holding a g&t. Even his ankles were tan

instead of taking me to his office or a conference room, we sat side-by-side in the cheap and small lobby chairs

When you start with constraints projects design themselves

Start with constraints then solve for the program

In this project the city limited the max driveway grade, bldg height, and FF elevation

Setback lines, site slope, view corridors, and sun pattern constrained options After setting the constraints, then solve for the program and solutions appear.

Here the program required morning sun in the kitchen but a skylight became the only option because of surrounding hills

A book that changed the way I see the real estate world is John Gall's Systemantics

Had a call with a retwitter today that reminded me of it

You can read it in an afternoon but the synopsis is: Complex systems work either rarely, not at all, or contrary to their intended purpose.

the book is example after example after example of how and why complex systems fail

Real estate investment/development is a complex system, so

Lots of talk about creating "vertically-integrated" real estate companies

We started on that course, using fees to build an infrastructure and buy groceries, with an occasional capital gain to take some pressure off

over time we found the "machine" took on a life of its own, and it's care and feeding became all-consuming, and the machine itself took priority over the machine's intended output

So we moved to a "horizontally-integrated" model where we partnered with others

using their machines like

A real estate operator's life is a string of dilemmas, predicaments, and mishaps

We've come to see these not as something to once-and-for-all get past, but to embrace

Like an auto mechanic, when the problems stop coming in, it means you're out of biz

Here's how we navigate: Nothing formal (it's just become part of our way of doing things) but we'll ask a series of questions, framing and reframing them until we find a vein that feels like it leads to a easy/prudent/creative answer

Usually it doesn't, so we just keep going with new questions, like

Under-discussed around here, but NNN retail development is a way for an enterprising young hustler to make some serious hay

Competitive, hell yes, but if you've got a wildcatter's sensibility, a reliable car, and some charm it's worth looking into

Here's how it works: Step 1 develop a relationship with the real estate manager of an expanding company that needs freestanding locations

Skip the top tier folks - Walgreens, CVS, Chase, Chick Fil A and look for the scrappy up and comers think Dutch Bros before they were Dutch Bros