Ladies and gentlemen, welcome to The Business BREW.
I am your host, Bill Brewster. This episode features Darren
Fisk. Darren is the CEO and Founder of
Forum Investment Group. Forum does everything real
estate related. They do credit, they do equity,
and this conversation happens to be mostly focused on
multifamily. I hope you enjoy it.
I enjoyed it. It's a asset class I have an
interest in, so there's going to be more and more of these, but
this is a good perspective on the private side of the
business. Additional disclosure.
This material is provided for informational purposes only and
is not intended as, and may not be relied on or in any manner as
legal, tax, or investment advice, a recommendation, or as
an offer to sell, a solicitation of an offer to purchase, or a
recommendation of any interest in any fund or security offered
by Forum Capital Advisors, LLC or its affiliates.
Private market investments are complex speculative investment
vehicles not suitable for all investors.
An investment in a private market investment entails a high
degree of risk and no assurance can be given that any private
market investment objectives will be achieved or that
investors will receive a return of their capital.
The information contained herein is subject to change without
prior notice and is also incomplete.
The industry information and its importance is an opinion only
and should not be relied upon as the only important information
available. Information contained herein has
been obtained from sources believed to be reliable but not
guaranteed, and Forum assumes no liability for the information
provided. Past performance is not a
guarantee nor a reliable indicator.
Future results? As always, nothing in the show
is financial advice. Please consult an investment
advisor before making investment decisions.
Everything in the show is for entertainment purposes and
educational purposes. And do your own due diligence.
All right, ladies and gentlemen, thrilled to be joined by Darren
Fisk today. Darren, how are you?
Doing great. Might be a little bit too early
to tell, but off to a good start.
It's like 8 and you get up at what, like 4:30?
So you've had a full day I. Know it's almost time for me to
go to bed. Yeah, well that's a it's an
interesting schedule. That'd be nice if you could only
be up 4 hours a day, although you'd miss a lot, I guess.
Anyway, it's neither here nor there, Darren, do you want to
tell people about yourself and what you do?
Sure. Just a little background, our
company here Forum, we're actually the only multi family
group in the US that has three different strategies all under
one roof. When I say that we do debt, we
do credit in in three different fund vehicles and then we have
ground up development as well. So a lot of folks are investment
managers and they allocate, we actually manufacture our own
stuff meaning we develop our own assets, 7580% of the loans that
we make are direct to our borrower.
So been a unique journey over the last I would say 23 years of
which I started off in the real estate finance business and saw
an opportunity in the GFC in 2008 to start developing and
buying multi family. And so Fast forward today, we
roughly have, as I mentioned, three different strategies.
I mean, obviously you were lending, but what specifically
were you doing pre GFC? I knew I wanted to get into real
estate. My mom and dad were school
teachers and a principal, and so I was our we had about 13 units
in the Bay Area, Northern California.
And I always loved real estate, but I was our framer and our
drywaller and electrician and doing all these things.
And right after college I got a little try out with the Atlanta
Falcons. I said well what am I going to
do? I want to get into, you know,
real estate. And I was tabling bathrooms at
10:00 at night and talking to some friends.
I realized if if I did financially how things went
together, I could go buy things. I could hire a development
person, I could hire property managers.
And so we were a company that was called Johnson Capital.
We had 17 offices and myself and a partner ran the office here in
Denver and all of our loan servicing.
So we represented Fannie Mae, Freddie Mac, HUD and a bunch of
different life insurance companies.
And so I just had this, you know I don't know it was like a pull
towards multi family and I don't know if it was because I grew up
in a small town and small community but really took the
multi family. So there were a bunch of reeks
here in Denver, Aimco, the former Archstone UDR and then
one commercial group called Black Creek and really was just
focused on the multi family side from large REITs to the mom and
pops. And the lending business got me
into buying with one of my own partners in 2003.
And then when the GFC hit, like I mentioned, we started our
development company. We bought about 9000 units from
2009 to 2012. So the lending business is
really what gave me the start to to building forum.
It's a nice time to buy. Wish it was back.
Wish we had more money and more opportunity.
But there was, excuse me, there was plenty of opportunity.
I had real, real young kids at the time and I was gone on the
road flying around everywhere. HUD at the time had this 221D4
program where they provide non recourse construction loans and
they were foreclosing like a lot of lenders were on their multi
family assets. So we were flying around the US
look at these different properties that HUD had in these
big pools. The problem was we didn't have
the money. And so a lot of these larger
groups, real estate groups that are out there, we're buying
these pools and then we'd buy directly from them, you know,
30-45 days after they closed and we'd go syndicate, you know,
kind of from Oasis. We'd pass around an offering
memorandum and bunch of folks. I had No 3 at the gym.
The first deal we ever bought, we raised 3.3 million for a 252
unit apartment building in Albuquerque.
And it was folks like that that I would call on each and every
time. And one of the things that
ironic things about that first deal, we still own it today.
We've refinanced our money out three times since 2003.
So 2021 years ago we bought that property and about a year later
we refinanced it and got 100% of our money back.
And I thought, wow, what a racket this is.
Yeah. Is that good?
That seems good and. It that that seems pretty good
to me, especially when you don't pay tax on that refinance at the
time that you do it. So I think people think that
real estate is a, you know, get rich thing.
But I think with cap rates declining and interest rates
coming down, it seemed that way and now we're back to more of
the norm where it takes time to create value in real estate.
And we did that and we're patient.
And really, you know, Bill, one of the things that that I
learned early on and it was actually saying that my
father-in-law said to me, he said, Darren, if there's one
thing I teach you in life, remember this.
And I thought, oh God, don't touch your daughter or what, you
know, what's it going to be? He said cash is king, but cash
flow's queen. If you wake up next to Queen
your rest of your life, you're going to be a happy man.
And I thought about that forever.
And so I think so many times people think about having cash.
In my mind the secret to life was having cash flow where when
you wake up in the morning you have a check coming and you're
not waiting till you retire to cash in your IRA or your 4O1K.
And so the basis of of Forum in the early years we were just
cash flow, cash flow, cash flow. If we couldn't get 1% a month be
nice. You know on an amortizing basis
we wouldn't do it. And as you know interest rates
started going down, cap rates went down and it's probably five
years ago it was 7% a year maybe interest only.
And so the markets definitely changed over the years and I
think as as we'll probably talk about, we've changed with it.
I mean, obviously cap rates have changed.
I mean, how competitive was the market, let's say from like 2015
to 2020? I mean, you're talking about
buying things in the global financial crisis.
I mentioned it on the pod before, but I I was listening to
Steve Schwarzman talk at some lunch.
It was just a like a lunch that UBS had and he talked about
buying, he was buying real estate at like 6 times cash flow
basically. And you know, he's talking about
if you can do that and you lever it like you're always going to
make money. And I was thinking to myself,
OK, well that's that's like a very nice story, but where the
heck am I going to find that now?
And I'm just kind of curious to hear you talk a little bit about
what it was like getting deals in the financial crisis versus,
you know, sort of like when things normalized leading up to
whatever 2020 and 2021 was and where you see us now and how
over time you've sort of shifted where you're playing.
I I think that should be a question that'll take about an
hour to answer. Yeah, wow.
Well, you know when the GFC hit and I was a lender, 2 of my
clients were parted on a perspective development in
Boulder, Co and I had arranged a HUD 221D4 loan form while one of
them got in trouble and the other one said, hey there, I I
can't move forward without Jim. And I said well to Lou was the
other part. I said Lou if you get this
property entitled in Boulder, I'll get it built.
He said what do you know about building?
So I said well my father's a retail developer and I can find
a development partner what have you.
So his 2009 we own you know 4 1/2 acres in the 29th St.
Mall in Boulder and nothing over 50 units had been built in 25
years. Oh wow.
And not only were there no land comps, but there are also no
rent comps to support it. So we actually had to go out of
state to get comps. But I knew one thing that real
estate in Boulder was like a piece of gold if you could get
entitled. So we had a non recourse loan
with HUD. All I knew is I couldn't afford
not to get that Commission for the loan.
So if I couldn't get the Commission, I might as well, you
know, build this as well. Throw the Hail Mary?
Why not? Right.
And and look, it's easy to look back on life and tell a story.
But back then I was like I just couldn't believe I had the
opportunity to do it, that I actually could get this site.
So we ended up building it. It turned out great.
We ended up buying the property next door.
We built Google's campus up there in Boulder as well, but
going back to multi family, I was the only one in Colorado in
2009 developing so I got a call from another gentleman here in
Denver. We then had another two
projects, 300 and 362 units going by 2010.
Oh well, my day job, a real estate finance, I'm now a real
estate developer at night found a wealthy partner here in
Denver. So we had almost 1000 units
under construction by 2010 while we're also trying to buy things
and you ask the question, you know how it was like for me it
was like Fred Flintstone and Rock Vegas, it was like bet,
bet, bet, bet, bet, bet, right. Like there was just like deal,
deal, deal, deal, deal. And as fast as we could fly
around the US to buy these HUD loans, you know, to get these
development going developments going.
And if I hit the pause button, Bill and I looked, I wish I
could write a book like the lessons Learned or what not to
do, Not what to do, but what not to do.
I learned through the GFC in O Eight that my friends that were
single family home builders went bankrupt.
They were out of business. And I realized something just
kind of connecting the dots that if you're a one trick pony in
the market shuts off and you could Fast forward today.
Real estate development's really tough today if you're just a
developer. You're either laying everybody
off or you're going to, I don't know what you're doing and if
you're just an acquirer of real estate and like in multi family
right now, you're probably not doing much either.
And so looking back, I said OK, well I want to be able to invest
throughout a real estate cycle, not to a cycle.
We today have debt, we have credit and we have our equity
products and if we didn't have our debt products today, I don't
know what I'd be doing. We haven't bought anything in
four years. We had eight developments
planned for 2023 and they didn't pencil, we didn't start one of
them. We have one development we're
working on right now in San Diego did actually pencils and
pencils well just because the land basis.
So going back to O 8 again what do we learn?
We were buying as fast as we could If we you know you're
buying stuff at such a low basis, you know 40,000 a door
and we were in Michigan, Ohio, Indiana, Alabama, all these
secondary and tertiary markets. Fast forward today, we sold out
of a lot of those markets during COVID because again, there was
another demographic shift. People that were in New York or
that lived in Montgomery, AL like, hey, I'm going to go try
Denver out and then their parents are saying, hey Johnny,
when are you coming back to, you know, Montgomery and is Johnny
says never. I'm never like I found Denver,
this place is great or I found, you know, Austin, TX.
And so also understanding these demographic shifts and where
they're going has helped our awareness of where we want to
position our portfolio moving forward.
So we are buying a lot. You asked about 2015, it's
really about the time we started slowing down on the acquisition
side. We really started focusing more
on the development side. We never did value add.
We were either buying for cash flow or we were developing
ground up. And so you know again cap rates
were compressing, we weren't doing value add.
We could get, we're not an IRR shop, right.
Like we we create this promote structure with our investors 21
years ago where we cash flow promote if you will, where it's
not a GPLP structure, it's a member managers and an LLC.
And we had a 51% vote of all of our partners, which were our
investors, always called them partners because they were for
major decisions like a sale or refinance.
Because I didn't want anybody ever to say, hey, you're
conflicted, you're doing this as the GP for your promote.
So we wanted to have something where, you know, we weren't
taking all the fees. And I go back to my real estate
finance days and the lessons learned I I was able to watch
what so many owners and operators and developers were
doing, and I took the best of what people were doing to kind
of create forum. What about the GPLP structure?
You know, for those that don't know, what are some of the sort
of adverse incentives that you've seen go on and what did
you want to avoid when you set your structure up?
I appreciate that. You know I think the biggest
thing was the lack of alignment of interest in the sense that
they were the and again this is generally most GPS have to have
fees to keep the lights on. I was fortunate that I had my
real estate finance business funding by keeping the lights on
while I was building my real estate business.
And they take, let's just say it's a 2 or 3% acquisition fee
and then they have to have a 5 or 10% Co invest and they go get
that from their buddies and it's like well how.
And then they do all this work and it may be a great cash
flowing asset, but all of their equity if you will their built
up equity, their sweat equity is stuck in these projects until
they sell. So their incentive is to sell
but the best thing for the L PS might be to hold in cash flow.
And so there was that lack of alignment that I saw where it
was just like fee fee fee. So we never actually took an
acquisition fee on any day. We still to this day don't
rather we had this contingent profits interest that we would
roll in to these deals and we wouldn't take any fees out at
closing. Rather we'd keep 100% and it was
contingent in the sense that let's just say that there was an
8% preferred return and after all investors got an 8% of their
money back, we'd get a 20% back in.
Well, we did that. And so because we had this
upfront cash flow promote if you will, we got cash flow and
refinance proceeds along the way.
But upon a sale investors had to get all their money back in that
8% preferred return before we got anything and rarely did we
sell right. We wanted to buy these things.
We wanted to cash them. We we would refinance a lot and
if we could pull 50 or 100% of our dough out, you know we would
and we always use 10 year fixed rate debt.
Maybe just another subject that I think people need to be aware
of real estate. In my mind people get in trouble
for two reasons. One their debt comes due or
they're over levered, right and it comes down to debt because
I've never met anybody that had no debt on a property that they
gave back. Now I'm sure it's happened in in
the history of of our our country, but.
Environmental liability or something?
That's right. Yeah, who knows what it was, but
coming from the lending side and I had some buddies when I was
financing for them in California, they said, oh, well,
we use real low leverage. We're 5560% low leverage.
And being the lender, I said, yeah, but what what's your debt
service coverage ratio? And I said, well, we're at a 120
in in California. I said, well look, I said I'm in
Michigan, I've got an 80% loan to value and I'm at a 210 debt
service coverage. They're like, well, that's way
too much leverage. I said no, no, I don't think you
understand. I'm at 2.1 times debt service
coverage, you're at 1.2 times. You don't get in trouble because
of loan to value, get in trouble because of debt service
coverage. So now that cap rates have
really started to squeeze and come down in all markets across
the US you know today loans are debt service coverage
constrained, not loan to value. So typically in the lending
world it's the lesser of A12O or 125 or an 80% loan to value.
Well today just given how you know where we are on the cap
rate environment, you know you're gonna be most loans are
price sizing in the multi family world to 60% anyways because
they're at that 125 debt service cover.
Yes, said slightly differently, in a market like California the
the rent to asset value is lower, right.
So, so your debt service coverage is tighter even though
your LTV is lower, right. So but but banks care about cash
flow, right. Banks care about cash flow when
you're when when the loan is getting serviced, they don't.
I mean you know you're the asset coverage helps your LGD but if
you never default it's better than worrying about loss given
default. That's right, yeah.
Do you remember the GFC? Most people had two black eyes
and a broken nose, right? They didn't know what happened.
We we're in tertiary markets like you know Fort Collins Co
and Pueblo Co and Albuquerque, NM which may not be so tertiary
anymore, but we didn't have any problems.
And I would say if if you're playing defense it's really hard
to go on offense. And so like right now in today's
environment we've just been patient, patient, patient not
buying and shelving our developments.
But I think that that I would say you know today's opportunity
is dead and tomorrow's opportunities could be on the
equity side. But I might also say that I
think there's been capitulation. I think the equity opportunities
right are front door right now as well.
The interesting thing, you know I follow like the the
multifamily Reit's, I had this guy Bill Chen on Bill if you're
listening what up Anyway, the and the multifamily Reit's have
not moved and the stock market has seemed to be on a quite a
Ripper lately and it'll be interesting to see what what
goes on in the future. Have you seen the what are the
debt markets doing for development right now?
I mean I noticed the the mortgage market hasn't really
come in all that much. I don't know if it's correlated
or not. Well, well, two things there.
On the construction side, we have 71% less lenders from 1980
till today, so seven, 1%. It's astronomical.
There's a great chart I'm happy to share, McKenzie put out.
And so I think the buzzword of the day is real estate credit,
right? Like how do you know?
Well I I think there's a secular and structural change in our
banking system that has created this you know and the GFC you
know Wamu Wachovia which they're not here they were doing 90% non
recourse loans and it was like jokingly say you know what could
go wrong. So you Fast forward today these
big bulge bracket banks like Wells Fargo, I mean they're
they're not even making construction loans, it's really
the local or regional banks that are making the loans today.
And again I I have a bias and a tilt towards multi family.
So I kind of look at it you know, in a box from that, but
you know trying to get a construction loan for an office
building today is is extremely, yeah.
Forget about it. Very right.
But on the multi family side, if you can get a loan, lenders are
only going to their best borrowers and they might give
you 5055% loan to cost. So our credit vehicle, we being
a developer ourselves, we get a lot of lenders that call us and
say we've got a borrower they can't get 4550% equity together.
Would you provide them a preferred equity slash mezzanine
loan and take them from 5055 up to 7075?
So for us, we've got a huge pipeline.
We do like Unitron stuff instead.
We do, right. We would like to do more of
that. A year, year and a half ago we
could do note on note financing and just structure a whole loan
and we'd bifurcate the A note, the B note or sell off the A
note to a pack West or you know Bank of the Ozarks really,
really tough today. It's just gotten even tighter
just given all the commercial real estate loans that are out
there, the ones that aren't paying off if you will, but huge
opportunity going away. The debt markets are a great
place to be. We're, you know, in that.
I could just stop you. I don't, I don't mean to stop
you, but what is going on in multi family debt service
coverage? It seems to me from the outside
that the debt service coverage pieces is pretty OK, but am I
reading that incorrectly? No, I think you're right.
It depends on the existing construction.
I think some of the issues if is that where you're going, what
are we seeing, kind of what are the issues we're dealing?
With well, sort of what I'm really thinking of is it's
interesting just hearing you talk about the lack of appetite
potentially from banks. It's somewhat interesting to me
how the, I think some of their commercial exposure might be
tainting some of their willingness to touch
multifamily, but I think multifamily is fairly healthy at
the moment. But maybe maybe I'm wrong?
It is across the nation. I think we're 94 and a half, 95%
occupied. There are markets where we have
oversupply, you know, the Phoenix Metro, Austin, TX, the
Southeast, but given the lack of new construction starts, so.
We're. Predicting in 2024 we're going
to see 10 to 15% of normal construction starts.
So as we the the demand side of multi family is unassailable
right, They're just more more needed.
It's 50 more expensive for monthly mortgage payment today
than it is the monthly rental payment.
So you look at that, we're not building enough single.
We're not building enough housing as it is.
You know I was reading the economic report yesterday from
you know the president's office and you know there's just I
think the statistic was that between 2020 twenties housing
prices have tripled while household income has doubled.
So in other words the price of housing rose by 50% more than
household income has in the last 20 years.
So it's the renter nation right in the in some people it's OK
that it's just they actually prefer renting.
But from a from multi family fundamentals, if you Fast
forward two years and we absorb through this product because the
lack of new that's coming, I think we're going to see another
run and inflationary pressure in multifamily.
It's it's like if there are two seats left on a Southwest
flight, what happens to the price of those seats, They go up
where we're starting to see or where we see the stresses in
multifamily. On the value add kind of you
know depth we're going to go do the value add in our interest
rate takeouts going to be 4% now it's five and a half 5 3/4
people are just I think the hope of rates coming down has in the
last probably four to six weeks gone away because if somebody's
it sofer plus say 303 twenty you're at an 8 1/2 percent rate.
Today that if the Fed funds rate goes from down 50 or 75 basis
points and that's what my index I was borrowing against.
It's just like my line of credit if I have a home equity line of
credit and goes from 8 1/2 to 8 it really doesn't make a bit of
difference or or the seven three course it really needs to go
down to like 5 1/2. But the other thing I think that
the construction and value add world is based off of short term
floating rate. So the Fed funds or SOFR long
term real estate debt permanent financing is based off the 10
year treasury. So we could have a scenario
where and I don't know necessarily believe this where
the Fed funds and SOFA comes way down but the 10 year treasury,
the take out the permanent debt market stays high.
So for a 10 year Fannie Mae Freddie Mac loan today, you're
probably in the five six to five 8 range.
For a construction loan, you're probably sofa Plus.
Yeah, you're at 8 1/2. Cool.
So I'm borrowing at 8 1/2 and then I'm exiting into a market
that's got higher than than his at least recent history
borrowing costs, right? So my my exit value is lower
than it used to be, and my cost to construct from a financing
perspective is higher. Not to mention whatever
inflation's done to my building costs.
That's right. But I think the way that
developers think about it versus you know existing value add is
hey the interest reserve is built in my total cost.
I've got an interest reserve to cover this now a lot of folks
behind schedule you know blew through their interest reserve
have to rebalance their loan that's some of the stress and I
would like to delineate. I don't think multi family, it's
not distressed, it's stressed because the financing on it.
But when you're 94 and a half, 95% occupied, you're fully
occupied. I would argue that your rents
are, you know, if you're not, your rents are too low, right?
Like we always think about. Your rent a little bit, yeah.
Right. Push your rent.
But the stress is there where, you know, people are saying,
hey, I've been feeding this thing.
I thought we were going to have a takeout loan.
And I think the capitulation has actually hit where it's like,
hey, interest rates are not going to save us this year.
We're actually going to have to sell.
And I've got examples of it like real life.
And I think that I think when Chairman Pal came out a few
weeks ago and he was on 60 minutes, maybe it was a month
ago, it. I think what's happened is we've
now that we know rates are probably not going up and I'm
talking about Fed funds, there's a floor on values and then
people can say, OK now we know where the floor is, but how much
are rates going to come down? That's the $1,000,000.
And when and again inflation is stubborn, the Fed's knocking all
of a sudden just like hey we're dropping 100 basis points to you
know that could be over a two or three-year period.
Now when your debt comes due and you can't refinance out, your
debt comes due and you can't refinance out.
So I guess the question becomes, why would you build the day if
you can go buy? Yeah.
The interesting thing to me is if you Fast forward this
discussion, like I I think if it is true, like you said,
inflation sticky, I think true inflation would disagree.
But I think that some of the recent numbers are sort of
appear to be getting hotter. Maybe I'm misreading that, maybe
not. If if the Fed short term rates
stay higher, I I I don't know what conversation we're having
in 2027 'cause it feels like a big shortage is on the com.
Right Big Shortage of Housing, 100%.
A single family homes, the home builders, they seem to be as
well positioned as anybody because they can buy down
mortgage rates and have sort of a financing arbitrage there.
But man, I I don't know. It's going to be very
interesting to watch. When I I I'm not leaving my 3%
mortgage for a 7% mortgage as a home owner.
Yeah. Interestingly though, I've just,
I mean, I've just transactioned on 2 houses and I'd argue both
the values that I got were very fair.
I don't know that, you know, I mean, obviously if I sold them
two years ago, 2021 or whatever 2022, they'd probably be a lot
better. But like, it was not terrible by
any stretch. So values don't seem to be
coming down. And that to me is sort of
anecdotal evidence of what appears to be a shortage in the
data. Yeah, they're just not a lot of
trades. And to your point about single
family home builders, some investors with us are partners
here in Denver. They enlarge you know publicly
traded single family, you know they're buying, they're like
it's it's as good as it gets right now.
You know they're buying that 7% mortgage down to five, you know
existing home you you can't do that and even in multi family
you know we can buy our rate down to 100 basis points and in
fee meaning it might save us 2530 basis points and overall
rate. So it's meaningful, but it's not
like we can buy it down 2% and we can't go from 5 1/2 to 3 1/2
or everybody would be doing it. That would change things
overnight. But I agree the lack of housing
that we're producing, most of the developers that were
financing today are vertically integrated.
They're AGC, they're a developer and they're squeezing things on
all sides. Like for us at Forum outside
this one project in San Diego that took through a rezone, our
basis is so low, we can build to just over a six on cost, which
is unheard of in California. It's if we can't get to 6 and a
quarter 6 1/2 on costs. So the unlevered return on
development, we're not doing it now.
There's a project in Glendale, AZ we've been watching.
We actually had under contract for 105 million three years ago
was the first deal we were going to buy kind of at at Co and we
dropped it. Offers are due next week and I
think it's going to trade around 72 to 75,000,000, so a $30
million drop over the last three years.
Now that market's a little over built today, ton of job growth,
they'll work through it, but it's hard to want to go build
when you can buy. And we're finally starting to
see a decrease in construction costs here and subcontractors as
they're getting done with work are finally calling saying, hey,
do you have any work for us. So we estimate costs or down
come on wood construction here in Colorado around 1011%, but
we're also pricing. So insurance, we should talk
about insurance. I mean, you want to talk about
wild? Card dude, I'm in Florida.
You want to have an insurance conversation?
I'm happy to have it. I think that's actually the
opportunity to buy in all these developers in Florida like as
they under wrote 600 a unit and it's coming out at 1200 a unit,
you know stabilize. I don't know how they make any
money or that maybe they get their money back on a
development that if they're selling it.
But you know what's kind of interesting about that 'cause
you, you're talking about the opportunity of it.
I just got on the House. I just sold.
We had to to. Well, we didn't have to, but I
provided alternative quotes to the buyer.
And I think it was 2 new insurers entered and DeSantis
finally got off his ass and somewhat addressed the insurance
problem down here. I I don't think it's a full
address, but it's the beginning of one.
And it appears as though we might be having insurers enter
the market again. I talked to my insurance
brokerage. You know, just like retail
people, it could be getting better.
And it would be interesting to see, to your point, if people
are capitulating at Max Payne and this actually is kind of a
good opportunity to buy into the fear cause 'cause.
Until then, there has been no indication that insurance is
going anywhere but up. In the state of Louisiana you
cannot get insurance right now for multi family.
We own 1 legacy deal there that got hit by two named hurricanes
within like 18 months, you know had and we actually got forced
placed insurance from Fannie Mae because we just could not get
it. So I think from a legislative
standpoint when California is no better, we have a house up in
Lake Tahoe and you know the fear of wildfires, I think nationwide
pulled out Allstate and and you want to talk about upside down
the government there or the government, you know they
basically said you can only raise rates 3%.
So these people are taking huge losses meaning the people, the
insurers, they're just backing out.
So I think now but we actually in Louisiana this year, you know
we're actually starting to see some insurers and it look it's a
cycle just like everything, couple of seasons without
catastrophic wind claims or fire claims, things like that,
they'll pop, you'll see people starting to pop back in.
But our insurance in Louisiana went from $50,000 per year when
we bought it seven years ago to $850,000 per year.
So if you if you did a six cap on that or a set, I forget what
it was like a $13 million in value, we lost just an
insurance. Yeah, that's wild.
So. We, we've got a legacy.
We've got to push the rent. There's.
I mean, it's like it's the way the math works, right?
Well, and look, I'm not going to get into politics and rental
control, but you you go to markets where, like I've always
said, I will take market risk, but I won't take political risk.
As soon as, like St. Paul MN said, OK, you can only
raise rents, you know, 3% whether it's a new tenant or
existing. Well, my insurance just went up
50%, My real estate tax, it just went up 40%.
I'm underwater. And the gap between income and
expenses is going like this, where all of a sudden the
government's forcing and creating foreclosures and
negative debt service coverage covenants and things like that
while they're trying to solve an affordable housing crisis or
issue. This is, this is when I start
thinking like how can I get bearish multifamily.
This is the scenario. I've I've had them because I I
worry that if if there's not construction soon, in three to
five years, we're going to have such a shortage that it's going
to be like on the top of every rent specifically is going to be
on the top of a lot of political minds.
And then if you start to get into rent control, then I don't
know, all bets are off for a little while, although that's
when I I would actually consider making like a real bet.
If you start to see values, adjust on that.
Yeah, I know governments are trying.
And look, we we really focus on the renter by necessity.
Like not the renter by choice. The runner by choice is somebody
who's like living in the penthouse over here across the
street from where we're standing for 13,000 a month.
I'm talking about the blue the kind of Gray collar it's nice
product in San Diego that that renter by necessity makes
150,000 a year but it's those folks that don't they they make
a little bit too much to get truly affordable housing.
You know the with a capital A we're trying to provide that
that small A and if you had told me going back you know bill to
in three years if we don't know saying we won't.
I think the only reason why folks like ourselves are
hesitant is that you can't, we see the data, but it's really
hard to prove out and say, hey, in 36 months or 24 months rents
are going to start going up five or 10% a year, just trust us,
right. Otherwise we'd all be firing up
the, you know, tractors again and building like crazy.
But when you look at, hey, we can build in Denver to a 5 1/2
on cost, you know, finance it with 8 1/2 percent construction
debt in the takeout loan, you know, let's just say it's 5 1/2.
We're pro forma. You know, it's kind of neutral
leverage. It's like why don't we just go
buy something where we have more upside and rents.
Why are we going to take the risk to go put a shovel in the
ground and what have you? So I don't have the answer.
By the time it's really evident everybody will be doing it.
Again, we do own some A+ plus sites that we're just not moving
forward on and they'll never be bad locations.
But I'm never going to go do a bad or make a bad investment
just for the sake of doing. I think we've proved that over
the. Years.
Well, I'm going to take something that you said earlier,
if cash is king and cash flow is queen, having nice sights is a
hell of a Rook, right? I mean it's it's a feather in in
whatever. However I want to say it it's
it's a nice way to play offense once the opportunity becomes
clear, and it's a nice thing to be able to wait with.
Right. And it's in my career.
There have been times where I said you can give me the lamp
for free and it doesn't change this deal, penciling or not.
And there's times where the land does make a big difference, like
I mentioned in our San Diego project.
But today you can give me the land for free and it doesn't
move the needle. It doesn't make a 5 1/2 go to a
6 1/2 or 6 1/4 where you know you really, really are trying to
create value in development. When so just my brain is not
picking up exactly what you're saying.
So do you? Do you mind explaining why the
land doesn't make a huge difference right now?
Sure. I'll just give round numbers.
Let's just say that we could build a garden style three story
walk up lump stick frame, you know lumber framed asset for
$350,000 a unit and let's just say that the land underneath
that was $30,000 a unit. So basically it cost us 200 and
it's it's 10% of the whole project.
It's not going to move the needle 50 or 75 basis points as
far as being a creative to the overall development.
Yeah, that makes sense. Meaning $270,000 or $300,000 per
unit isn't going to change. Now I mentioned like in Phoenix
that asset that we were looking at, you know we were going to
buy that for north of 300 when we were under contract and now
it'll trade for less than 250 and you can't build it for 250.
So you have all this product coming online, but a lot of
folks are betting on you know, neutral or negative leverage
where they're buying a cap rate less than their debt and that
there are very little or low rent growth.
But it's all basis play for the future, which is I guess one way
of looking at it. Yeah, it's a way.
How do you look at it? So for us, you know in our
credit, well we're making mezzanine preferred equity loans
from a risk adjusted return. If we have somebody that's
putting 30% equity ahead of our loan, let's just say it's
300,000 per unit all in. So our last dollars at 210,000,
their last dollars 300,000. And look, I've never been in my
life, I never had to take a property back, never been a loan
to own. But if there ever was an issue,
I our theory is we'd love to own that project at 210,000 a unit.
Now we're getting paid so far and I'm glad you're sitting down
South for plus 10 to 12%, right. So we're getting 1718% with a
net of let's just say 16. So we're getting equity returns
and debt. So why are we going to go do
equity, same returns with less risk and debt.
Now again, I think that's going to change here.
I think this is a year where people are going to capitulate.
We're starting to already see it.
And remember, within any market, the first deals you start seeing
when the market changed, probably the ones you don't want
to do, but we're not far away of seeing the ones you know that we
do want to do. Huh.
That's interesting. Why?
They're the first ones.
I think I know what you're saying, but I'm I'm just
curious, why are the first ones the ones you probably don't want
to do? You know, like there's an office
conversion to multi family in the Arizona market.
You know that's just a 30 million over budget on a night.
You know, just things like that, just maybe a different like
those those were just bad, those are distressed, they aren't
stressed, they're distressed. So those are the ones there.
There's an opportunity here in in Denver it's been all over the
news and but you know you're going to have to take all the
siding off all the windows off. There's mold like out of state
developer. It's just I'm not getting
anywhere near that there that you couldn't pay me to to do
that. And by the way, this reminds me
of something that I learned in the GFCI actually think
properties can have negative value.
Meaning you could give me AI wouldn't take it and we were
looking at a property in Houston and and we could have bought
this thing for. I'm going off a memory, let's
say it was 20, five, $30,000 a unit.
It actually had negative value because it had mold.
It had everything that was wrong like if you gave it to me or
'cause like it was worth less than replacement cost.
So you so I didn't even want it and I don't know that we're
going to see that again. It just jogged my memory of I
never thought that somebody giving me you know 10 acres with
multi family on it. I wouldn't take like there's a
value for everything. In that case it was actually
negative value. Yeah.
Well, that's the issue with replacement costs.
The natural question is, is it worth replacing, right?
Right well not I agree because talking to a friend of mine from
a multi family re yesterday here in Denver and he said you know
replacement cost story. I don't know what's what like if
it's a high rise the exterior is always going to look good and
you can redo the you know, interiors, he said.
Older product at stick frame, you know the exteriors can get
worn like and and and I haven't really fully digested or agreed
with. I I do agree that you know high
rising is not really something we do but the replacement cost
is a fair is a fair argument. But for folks like us that need
current cash flow or want current cash flow and if it's
very, very little, you know when I say very little below say 5%,
probably not worth us waiting for two or three years or at
least we haven't seen those opportunities yet.
Yeah, that's interesting. If I heard you correctly and
remember correctly, you said that right now is sort of the
opportunities are in debt. You think that the opportunities
for equity are are maybe on the near horizon if I if I asked you
to put your fortune teller hat on, how do you think this all
plays out? I think you've been talking
about it, but I I'd like to hear you like sort of.
Specify, I think we'll be active buyers the second-half of this
year. I think we'll probably tie
something up in the second quarter, but I think we'll be
active buyers and there's just such a, you've seen the charts
I'm sure 2024 and all the debt that's coming due.
And so because we've got different vehicles which we can
provide different whether it's for ourselves or to third
parties, there are a lot of loans that are just out of
balance. There are a lot of interest rate
caps where people were hoping that the cap costs would come
down to re up. There are folks that lenders are
saying hey, time's up, we give you enough extensions or pay us
down or so whether it's a bridge loan that we can provide,
whether it's equity and we're going out you know and buying.
I think the opportunities, again, the capitulation is there
where folks know crossing their fingers or hoping.
I always say hope's not a strategy, their rates are going
to come down. I think the capitulation is
there. So the question now is how much
more time do I have before my dad comes doing?
What can I do to solve that problem?
Yeah, interesting. You know one of the things I was
chatting with my dad about and maybe maybe it came up when you
and I talked the first time. But one of the interesting sort
of dynamics that I've I've been thinking about with multifamily
is as people live longer older people that are choosing to move
back into multi family. Now some are obviously nursing
homes but some aren't ready for that.
They don't want to take care of a house anymore.
And this is kind of a segment of the population that I have not
historically associated with renting that that may be looking
to rent more. Is that are you seeing any of
that in what you own? We are actually our, our CIO
moved here from San Francisco, lived there for 30 years.
He was portfolio manager with a $25 billion fund and he's an
empty nest for now. And he rents, he said.
One of the things and moving to Denver, I wanted to be able to
walk to work and he loves locking and leaving, right?
They eat out a decent amount, they cook at home, he said.
The only downside is like when we have, you know, a bigger
group of people come over, it's hard to kind of host like we
would at our house, but they just love the flexibility.
They're one of their kids in Southern California, the other
in New York, so they're gone a lot as well.
So I think that's actually just been a shift in our culture that
it's OK to rent. Yeah, and you don't have to
manage a house. Managing a House of pain can be.
You aren't. Yeah, you aren't.
Couldn't. Especially when you don't live
there, right? And he's, you know, letting
friends stay there. Do we rent it out?
Do we put some of our stuff in storage?
Again another thing from my father-in-law, he said you know
nothing in life stays the same, your friends, your family, your
health, your business. And I think that's one of the
things that formed that we've done a good job and we have
signs around like connecting let's say it's connecting the
dots like where's the market going.
You know 8-9 years ago we built, I mentioned Google's campus, we
did a million square feet of retail.
We would do non multi family here only in Colorado, but it
was really hard for a guy like myself who's you know more of an
entrepreneur and a deal junkie to say OK no more we're only
doing multi family. We're doing the entire capital
stack in multi family and turning our entire business
around like for for real estate people like myself that like I
said are deal junkies. It was like a tree with a lot of
limbs but no roots. It's always about the next deal.
It's like a I I probably shouldn't use this analogy, so I
won't. But you know somebody who's
addicted to something, it's like, hey, I'm just going to to
ease my pain. I'm going to go do this.
Well for real estate folks. It's like, hey, I'm just going
to go to the next deal. We're going to make more money
on the next deal. So one of the hardest things in
my careers was turning the whole shit and say I'm going to build
a foundation and we're going to stop and and the market timing
was OK because as I mentioned cap rates are going down and you
know we stopped buying a lot and but now I've built a foundation
where in roots in the ground where we could add as many limbs
on that tree as we want and it won't fall over.
But I was at the point where if I just kept adding limbs the
tree was going to fall over at some point.
We just couldn't keep growing without the foundation.
I like that. I I I like that a lot.
I wrote it down I so. Yeah.
I may, I may. My dad often says like look
down, where are you? And he he's sort of saying
something similar but different. He's like just pay attention to
where your feet are and and execute what's in front of you
and maybe slow down a little bit rather than like spreading out
the focus. And seeing where life is going,
like COVID was a huge shift, right?
That again had the chance to move from someone to go to Vail,
Co and they never left. Or they, you know, we look at EU
Haul, you know, trucks or just just open your eyes and see
where like all people are moving to and and not going back to.
And it was pretty easy to see that this wasn't really a
transitory change, it was a structural change.
The interesting thing and I I may be mistaken but I haven't
the Midwestern and Northeastern markets actually been like
relatively stronger. Now they probably took a right
down. So it's strong off a lower base,
but is that is that accurate it? It it depends on where.
So we were in Saginaw, MI. He probably never heard of
Saginaw and a lot of people from Michigan go back to Michigan
junior college like, but people were leaving there like there's
just not a lot of growth but like Kalamazoo with Pfizer with
Merck, you know Ann Arbor, like Detroit, you know area.
There were just certain areas or Columbus OH right, where you all
of a sudden start getting tech you get biotech in these markets
that yeah they're strong and and rents haven't skyrocketed and
costs. A friend of mine from Iowa City.
He's a single family home builder and he told me about
this house that he built on. He I I said what like you live
on 63 acres and I I couldn't believe, you know he said I
couldn't build a house for 2 1/2 or $3,000,000 like it's I could
build like 100,000 square foot home or you know something huge
but just a cost differential. But market like Iowa City,
right, the university, the medical.
There's a lot of wealth in Iowa City and Des Moines, you know
South in Indiana, you've got you know in Indianapolis and Carmen
like there's some great Midwest markets.
It's some of these smaller markets that you know, we owned
in Jackson, Ms. and and glad we did and glad we sold out of
there. But they're just not.
I jokingly say to people, I'm like, do you know what's going
on in Jackson? I say no.
What I said nothing. Absolutely nothing.
Like there's no economic driver to help really grow that market.
Now, I'm not saying it's not a nice place to live or or not,
but for an apartment owner there's just, it's like
apartment stocks getting older and the only thing new that's
getting built is capital. Affordable, like light tech type
stuff if anything. So they're just not a lot of
growth in that market. Not the best place to own an
equity asset in, right? I used to have a guy.
I was a trainer at a gym. He was sort of a abusive to me,
but I liked it for some reason. I should probably sit on the
couch and figure that out. He used to call me Muffin Top
and and he'd be like, Top Top. You got to buy in Kalamazoo
because Pfizer's going there. Turns out he was right.
Right. We own there.
Yeah, there you have it. Oh well, sometimes the abusive
are right. He was something, anyway.
It's my old joke. If I ever get the urge to
exercise, I just set back down the couch and it goes away.
I don't know man. I've I've had good.
I've had good luck with trainers, but not not on my own.
I'm not. I'm not good at self motivating
in the gym. You said you had a tryout for
the Falcons. Yeah, a long time ago I played
at Colorado, played linebacker. I was our fullback for short
yardage and goal line. And so yeah, I was built like a
linebacker, not like a fullback. So that was back in 98, our
Super Bowl year. Unfortunately, I blew out my
neck and know why? Most fullbacks have retired from
the NFL because of a neck problem.
So that sucks. There we go.
Is it still? Playing great experience.
We met some great people, met some stuff, great friends,
investors. Yeah, it's been great.
I've been teaching my kids to respect the full back position.
It's hard to find these. Days when I see him, though, I'm
like watch this guy block because my my youngest, all he
wants to do is talk about quarterbacks and you know he,
but he learns. You know what's helped him a lot
is Madden. Oh yeah.
Like, they actually understand football.
We were watching the playoffs. I was asking them about calling
defenses and stuff and like, they get it.
It's kind of cool. So.
Yeah, we've got a dozen or so a more at, you know, athletes and
not that I'm looking for them, but it's typically the wealthier
ones that have the capacity to make the investments.
And I I found that athletes like real estate because they can see
it and touch it and really understand it versus being in a
private equity fund or something that they don't.
No, But it was always a joke. You know what?
What's the next deal in the locker room that's coming, you
know, being passed around so? Well, better that than than
spending it, right? Yeah, well, many, many of
stories about people spending it and you know, you're you're one
play away from the end of your career.
Yeah. And.
And especially NFL. And that's not guaranteed money
either, right? That's right.
So it's different, interesting. So when you were in college like
how did you start, I know you said you got into financing real
estate like how, how do you go about building 1,000,000 square
foot facility and protecting your own risk, like how do you
structure that deal and where do you learn to structure those
kind of deals? I assume it was on the debt side
mitigating risk, but. When I was in college I was
doing landscaping and decks and fences and stuff like that in
the summer. So I was hiring all my football
buddies to help me out on the on the labor crew.
But there's nothing like real life experience.
You know, my wife was at the University of Denver and a
master's in real estate and when I was in finance and the
professor asked me to come in and talk and my wife's got her,
you know, book and trying to write down like do all and I
said hey, this is an HP12C. This is all you need.
You don't need to memorize just like the Pythagorean theorem or
whatever. You don't need to memorize any
of this stuff, but maybe to answer your question to me,
experience in the number of transactions you do.
So like for me on the real estate finance, the number of
transactions was more powerful than the years in the business.
It's not about how many years you've been doing something.
It's about the number of transactions or investments or
loans that you've made and underwrite.
Because if it quacks like a duck, it walks like a duck.
It's probably no No2 deals are ever the same, but there's a lot
of similarities. And so I've always looked at
things more in the sense of like, how do we get in trouble?
Not how much money are we going to make?
Because I think as soon as folks starts looking at, like, licking
their chops and saying, hey, here's how much money we're
going to make, the game's over. It's how do we get in trouble.
The last thing you ever want to do in one of the most, one of
the things I'm most proud, we've never done a capital call
outside of like a fund where you have drawdowns yet.
But like where a deal was over budget, like we've never had a
development over budget or we had to do a capital call or
anything like that. Because again we use lower
leverage. And I would rather take the risk
say on a development once we build it and stabilize it on the
permanent loan and leverage using more leverage there if we
were going to do it then leveraging up on the
construction side. So again you get in trouble for
two reasons, You you're over leveraging your debt comes due.
So it always comes back down to debt.
But just observing a lot of folks, developers, you know my
father-in-law was a huge he doesn't know it but a mentor to
me in a way and it was his name is Dick Landon I call him the
Dickisms. He he has these sayings.
Darren, when the ducks quack feed them, It's like when the
market's hot sell right, you never get go broke taking a
profit, you know, things like that.
And so he'd been through it all. He moved down from Canada in
1980 with Pat Bolton, the former owner of the Denver Broncos.
And they were 30 years old, didn't go to high school, he
didn't had a $5,000,000 in the bank, a $30 million line of
credit from one of the Canadian banks.
And they said, hey, pick Denver, Santa Barbara and go work out
all of our problems in real estate.
And so he helped me because they were Wheeling and dealing in
real estate, and then they got in the banking business and the
SNL crisis hit and then they took their lumps.
And so he learned a lot and just talking to me at the dinner
table. And he lives in Denver with his
wife here as well where where my wife Blake grew up for most of
her life. And just, you know, just those
lessons learned from him just talking like the the Dick ISM.
See, he doesn't realize how many of those sayings like stuck with
me. I got that cash flows queen from
him, right. And to this day, I'm always
focused on how much you you got to have cash as well.
And like, I wish there were some developments that we didn't
sell, but it also helped me grow my business more.
But the cash flow, if there are goals for me, I've always had
goals around cash flow, not about cash.
Interesting. So on the Google campus or the
how like how did you mitigate your risk?
Do you subcontract all that out? So we have never been a
contractor ourselves. We thought we were.
We were going to entitle more residential land and maybe a
hotel, maybe retail, and we got a call from Google.
It was like this top secret, you know, it's almost like the US
government, right? They don't want you to know.
We ended up signing a a long term lease with them.
So we did a build a suit for them.
So with our contractor we had a what's called a GMPA guaranteed
maximum price. They guarantee a price, they buy
out the Subs. And one of the things we do a
little different, a lot of folks, developers don't buy out
all their subcontracts, they do it over the project.
Well, if there's a cost inflation you get stuck.
So we always want to buy out 75 to 80% of our subcontract before
we break ground. And we actually do the same when
we make loans to our developers because we don't want them to be
over budget or get low cost. We also rather than just having
a lender contingency, we have a lender contingency, we have an
owners contingency and then we have a contractor as a
contingent, then we have a joint contingency with our contractor
that we can agree upon. So if there's cost savings on
time, so one of the reasons again we always want a cash
cushion just in case, just just be safe and some people say well
there's a drag you you raised you know or have more equity
that's just sitting there. Yeah, but never done it.
I'm sure if that same person I said hey, I'm you know doing a
capital call because we're over budget would say gosh, I wish
you had more contingency or something.
So we've always again rather play it safe and but that Google
development, I'd do it again. We sold it to Google.
There's a whole nother story for another time, but that was an
interesting process selling to them.
As well the cat makes sense, right?
I mean that's I'd I'd built this house and I'd I'd made I was
really worried about inflation and I signed fixed price
contracts because I was like look I I'm not I got to know
what I'm going to spend like I can't just it's an insurance
policy and and then the roofer came back and he didn't procure
his stuff and I said, look man I'm not trying to be a Dick but
we signed a fixed price contract.
That's your business problem, not mine.
Well, and you know how many people my sisters, you know,
hired a contractor and you know they over.
But I people just aren't. They just don't know.
But even on a remodel, because it's like, well, until we open
the walls up, we don't know what we're going to find.
OK, well, give me a budget and before you go and do the work, I
need to sign off on it. Right.
A change order. Like if you give folks, you know
an open budget, they'll spend it because there is none.
There's no budget. Yeah, well, I heard a story.
It's either it's somebody that lives around here, somebody that
knows lives around, you know, whatever the boat's name is.
Change order. So I like that, yeah.
All right, cool, man. Well, is there anything that I
haven't asked you that you'd like to to talk about?
And regardless of the answer to that question, if if this is
close to the end, let people know where they can find you and
how they can contact you and I'll put it in the show notes.
Too. Oh, I appreciate.
Yeah, we're forumre.com happy to help any way I can with folks as
they're going through their journey in real estate.
But you know, one of the things that that I was thinking about,
what would be one wish I had in commercial real estate or
commercial real estate finance today.
And Debbie Jenkins who's at Freddie Mac, I have a decent
relationship with her. And every time I see her in DCI,
say, Debbie, if there's one thing you guys ever do, please
come out with a construction to perm financing program for
Freddie Mac. And I would say the same thing
to family. If I had a wish construction
Ware that's one way where I think you'd really get more
housing built and housing started where where we knew
where our our insurance policy just like you said about AGMP
you know locking in those prices if I knew you know and life
insurance companies do some of that where they can do like a 10
or 12 year construction perm. But if you had the agency
backing because it's, you know, let's just face it, we have
twice as many lenders and multifamily than we do in
commercial real estate just because we have Fannie Mae,
Freddie Mac and HUD supported by the US government.
So HUD is an arduous process to get through on the construction
side. But if I had one wish for
multifamily today, it'd be that Fannie Mae and Freddie Mac could
provide 7 plus year construction perm financing because it really
it'd provide more lending options to our space and it
would provide you know lower cost financing to our space as
well. So that that that's what I would
probably leave with is my. Wish you may have said this, and
I apologize if my mind drifted while you're talking, but I was
thinking like if you had what you're asking for, you could
almost have like a yield the worst on your project, right?
That's right. You nailed.
It yeah, that would be nice then.
Then you can sort of pencil things out and know where you
stand. One and look the regulators are
hammering the banks for you know reserves and what have you and
so they're just out of the market like the big bulge
bracket banks are just out. So you have a way for the
government to get involved and not make it a negative
involvement, a positive involvement to create more
housing whether it's the capital A affordable or the little a
affordable. We're providing more multi
family housing through these construction programs and
hopefully somebody from back east is listening and we can get
something going because it really would make a huge dent in
providing more housing. Yeah.
Well, if they don't, then it's up to the private markets and
the pricing is going to be higher.
That's right. That's what's happening.
Yeah, the golden age of private credit, as they say.
All right, cool. Thank you so much for stopping
by. It was a great conversation.
It's been nice getting to know you.
It was a nice, nice pre call conversation too.
So when I'm out in Denver, I'm a hit.
You up? I know you're investing with
some some local friends here, so congratulations, great group and
if you ever have time when you're in Denver, I'd love to
get together with you. So thanks for including.
Me. Yes.
Thank you. Have a good one.
Take care. You too.
Bye.