The following Q&A was completed as part of our conversational Commercial Real Estate FAQ Interview Series, we hope you find it helpful.
Drawing from 30 years of experience in real estate investing, Ben Marks shares his experiences and strategies in the commercial real estate investing world. Making the right partnerships, studying disruptions in the market carefully, and learning how to hyper focus on your specialize niche are all emphasized in his proven successful strategy. Learning from this experience teaches new commercial real estate investors the mistakes they may make, and how to learn from those mistakes to improve successes going forward.
Richard Wilson: Hello everyone, this is Richard C. Wilson founder of CommercialRealEstate.com and the Family Office Club. And today I have with me my friend Ben Marks here, welcome Ben!
Ben Marks: Hello, thank you for having me.
Richard: Sure, and Ben is the head of Leverage Equity Holdings a single family office that does investing, and he’s been involved in the Family Office Club for the past several years and has spoken at some of our largest investor summits during that time. He’s got a broad array of experience that we’ll get into through this interview. We’re going to go through about 20 questions in relatively quick style here, touching on a bunch of points. We’re going to touch on his 30 years of experience and kind of share his insights, kind of like if you had a intense cup of coffee with Ben, then you could pick his brain on all these different questions. So we appreciate you being here, anything you want to add, Ben, to your background that would help people listening to this today?
Ben: Thanks very much, Richard. Yeah, just single family office we started in Florida based. We almost exclusively invest in commercial real estate and sort of peripheral related businesses, but we’re primarily a commercial real estate outfit. My background is pretty heavy in economics and capital markets with some Wall Street and finance experience. But that’s – you basically did a good job with it in the broad strokes, thank you.
Richard: Alright, great. And I know you’ve got a pretty good strength in the commercial real estate due diligence side of things and seems like that’s been a strength when speaking on stage at our events in the past, so appreciate the help here today with the interview. Alright, how are interest rates tied to property prices and why do investors watch the fed so closely on changes and rates?
Ben: I think first, I think it’s a great question and it’s a good place to start. I think the first thing that’s important for most folks, particularly who are looking to get into commercial real estate especially if they are coming from another industry, real estate is very unique in that it is almost entirely financed and structured based on debt. And so a typical multi-family deal for example where say there’s 100% of the capital stack, 80% is financed typically by a lender, by a first mortgage, and sometimes more, we’ve had a couple of deals where that’s higher but typically 80% is fairly common. And the other 20% is either a combination of equity, preferred equity, or some other type of structure.
So, getting back to your question, when you have 80% of anything being financed based on interest rates it’s highly leveraged interest rates. And that’s why if you take a longer term view back when I started in the late 90’s, in our first yield we’re getting financed at about 8-8.5%. Today we just, literally today, locked in a new structured refinance we were in the process of doing it – 2.5%. So if you go from 8.5% to 2.5%, that’s 600 basis points, what that really means is that it’s cheaper to finance and that the same existing cash flows that you get in a piece of real estate are worth more because it’s cheaper to finance. And so that’s why the relationships between interest rates and prices are directly and almost exclusively inversely related. As rates go up, values tend to go down.
Richard: Right. That makes a lot of sense, so in layman’s terms if rates start to go up, then NOI is going to drop, the free cash flow will drop, because you’re going to be paying more to the bank to borrow that money. There will be less profits for the investors so those things just move in inverse directions essentially is what you’re saying, right?
Ben: Correct. I’d say it’s inversely related because so much of it is so often financed by debt. Literally it’s one of the most, I think one of the most, levered industries to interest rates that’s out there.
Richard: Right. Okay. What insights can you share for those looking to start to invest in commercial real estate properties?
Ben: Wow, where to begin? I think I’ll start with this – I think especially for younger companies and younger folks going into the industry, and you’ll see this is a running theme for what we’re doing operations now, the industry you know is always changing. But I would say especially post-Covid, the rate of acceleration and the rate of disruption in every asset class is really completely bifurcated. When I say bifurcated I mean you can have similar asset classes in different parts of the country behaving differently, you can have different assets within a given city, in the same city like Miami, Florida, but we are – multi-family has never been better, office and retail not so much. So I think getting a handle and really deciding on where you want to specialize is probably more important now than it’s ever been, because up until a couple of years ago if rates were down, every asset class went up. And inversely if rates were up every asset class went down. That is beginning to change, but even though per the prior question, interest rates are incredibly important, but almost as important now is the nature of the asset and whether it’s disruptable. And I think that’s becoming a key issue in the world out there.
Richard: Right, great. Having worked with commercial real estate brokers dozens or hundreds of times what is your advice for getting started as a commercial real estate agent?
Ben: Yeah, so I think obviously having understanding your asset class, or understanding your property type if you’re in residential. I’m a big fan of hyperspecialization. If you’re exclusively going to do single families, on the water, in Broward County, or any given county, the realtors I’ve worked with that have had the most success are hyper laser focused on one asset class in sometimes even in a neighborhood. And I’m not suggesting everyone should do that, what I am suggesting is that everyone should understand your asset class better than anyone else number one, and then a very close second to that is learn to think like an owner. All the brokerage relationships that I have that are successful and long-term I know for a fact that when I get a phone call from an agent or a broker, they’re going to think like I am and they’re not going to think like a broker. And more than anything I think that is the pattern of the narrative I see with a successful broker.
Richard: That’s a really great answer right in line with what makes a powerful single family office. You know we have a single family office flying here on Saturday and we’re helping them specialize in the neighborhood in only one asset type, but more than that for proactive reach out for off-market deal flow on two city blocks that we just want to assemble a package on over time. And I think it’s that exact type of mindset that and approach. So I’m glad that just kind of randomly came up without us planning that because it’s just so close to what’s made us successful, that laser niche approach, and I want to emphasize that for anyone listening who kind of glossed over and wasn’t paying attention to rewind that and listen really carefully to what you just said. Great, so what is common among all of the top commercial real estate brokers that you’ve worked with besides that niche approach being hyper specialized in one area, what else is common among all the top real estate agents?
Ben: In addition to thinking like an owner, I guess just really having depth of knowledge of their market. I can give you an anecdotal example: we are in the process of selling a multi-family building in Philadelphia, which we hadn’t really started, we hadn’t really sold a lot in that, bought a lot and developed a lot but we hadn’t sold yet. We were working with an agent, I hadn’t worked with him before, that came recommended and said everything we wanted to hear. And when we actually went through it and went through the listing it just sat. And at the end of the day, it was mispriced, the agent was more concerned about getting our business than actually executing on the deal. And that relationship didn’t last very long and when we found the right broker for that property in that market, instead of it having sat for 6 months, it traded in less than 30 days. And so I think those are the kinds of examples that really, again getting back to laser focus, know your market better than everyone else because like it or not sales and brokerage is a commoditized business. If you don’t know what your value add is, it’s almost reminds you of the old anecdote – if you’re at a poker game and if you don’t know who the mark is at the poker game, you’re the mark. Same thing I’d say in real estate. If you don’t know what your value add is, and you can’t explain it to a 12-year-old, you need to go back out there and improve on that value add. Because everyone is going to tell you what you want to hear to check the box.
Richard: Right, right. For sure. What are some unique methods or strategies that you have for valuing commercial real estate assets?
Ben: We take a very, I don’t want to say it’s pessimistic, but we take a very very conservative perspective. I’ll tell you, a lot of the consulting work we do because we do look, I probably look at a hundred deals a week now, we really strip back all of the layers of the onion. We really dig into the assumptions. Again, I’m going to pepper you with some other quotes. Another of my favorite quotes, I think it’s from Mark Twain I’m not sure, it goes something like “It’s not what you don’t know that gets you in trouble. It’s what you think you know, it ain’t so.” And so assumption is the mother of all screw-ups, and so we really take a hard look at our assumptions and then peel back a lot of the noise. And there’s always noise on any given deal. Again, another anecdotal example, I’ve looked at projects and offer memorandums where the IRR on a stabilized tier 1, 100 unit multi family was 22%. And I can tell you these things don’t quintuple, or they don’t double every 5 years as a matter of general course, right? So, again, unless there’s something spectacular, development in play, or something in terms of risk of value add, those numbers are inflated and they can be inflated in a myriad number of ways which I won’t bore you with. But understanding your asset, understanding your risk and parameters.
Thirdly I’d add to that is we don’t have positive exit assumption. For example, if we underwrite it and we buy it at a 6 cap, we don’t assume we’re going to be able to sell it at a higher capitalization rate than what we bought it at. And what that does is it forces us when we go look at the rest of the numbers, whether there’s ROI or IRR, when you have an exit cap that’s equal to or less than your insurance cap it really forces you to look at the cash flows of the property exclusively. Which is why, to answer your question, the last portion of what we do in diligence that may differ is we don’t ever assume appreciation. We tend to get it a lot, thankfully, but we need to make sure the investments can sort of stand on their own purely based on a cash flow return, a cash or cash on cash basis, with no appreciation or impression of interest rates and what we find is we usually under promise and overdeliver. We’re very comfortable with that methodology.
Richard: What is the number one lesson or insight you could provide related to commercial real estate valuation perhaps for somebody who is just new to being a passive or active investor in this space?
Ben: You know there’s so many. I’ll try to come up with one or two that have served me in the last 20 plus years, and that is I would say really focusing on the assumptions in the sense that everyone hopes assets go up, and what’s hard is I think in the last 15 years they’ve almost predictably gone up every year so again more function of interest rates than the function of real estate investors are. Although some investors might tell you differently. We don’t drink the Kool-Aid on that, we understand the difference between value add and simply luck in the markets, and they are mutually exclusive. So when it comes to understanding and proforma, which has become a dirty word, I think this market is incredibly tough to try to transact in so the more you understand and the more you get about risk, the more that may or may not happen, the more you can handicap your risk.
Richard: Right, great. And how heavy is financial modeling or how heavy of financial modeling is typical when you’re evaluating commercial real estate assets with your team?
Ben: I would say it’s fairly moderate. I don’t get too impressed by a lot of fancy schmancy excel programs or, you know. At the end of the day, and I don’t think I’m particularly exceptional, when I look at a deal I can tell you within five minutes with the back of a napkin and a calculator whether this thing is going to make sense. Not all deals are like that and not all deals are that simple. But at the end of the day, the more brain damage and financial engineering I have to get through to understand a transaction, usually what it means is there’s something wrong, right? Or there’s fraud. Neither one of those are good, and I’m not saying that’s the case with everyone, and there are some complex deals we’ve been involved with of course that was worth the brain damage. But in terms of the model, I don’t think what kind of modeling you do is as important as your assumptions. And again assumptions are the mother of all screw-ups, and I’ve made assumptions, you know, that you’re buying in at a 5 cap and you’re exiting at a 3 cap. Those just aren’t reasonable assumptions.
Richard: Right, right. And that ties back to your comment on being laser focused on one area, if you are then you can make that judgement in five minutes. Where as if you don’t know the price per door in the area, and you don’t know how much rents, you know, that can take you a while to figure out which way is up, obviously.
Ben: Absolutely. And to your earlier point also, the more you specialize the smaller world in which you’re specializing in, I have a colleague of mine that is very similar to what you were mentioning, focusing on one or two blocks the added value of that if you’re actually making a market you’re becoming the market, right? And having that kind of leverage on an asset you understand, what you’ll find is over time, two three deals into it, you won’t worry as much because you’ll know. And that’s why buying stuff that’s contiguous, we’re doing a deal right now where we own a property five years, we understand it, and the one literally next door came on the market on the water in Ft. Lauderdale and it’s a no brainer for us. We don’t have to – we know what we’re getting. And that’s what you find…
Richard: Right. Makes sense. What is unique about your commercial property due diligence process?
Ben: I think what is unique about us is, again, this gets back to my comment earlier about brokers making like principals, I think there’s so many brokers that don’t understand their role, and that specifically what I mean is that their role is asymmetric. They’re taking asymmetric risk. And when I say asymmetric risk what I mean is they get a commission regardless of whether this deal is good, bad, or indifferent. Where as principals, we have got to live with this for the duration. And so, what I’ve found, and this is true for every broker not just in commercial real estate where there’s stock broker or any sales person, they’re selling you upside and that’s all well and good, but the way we underwrite things, because again we’re risk averse and we don’t necessarily need home runs, we underwrite 80-90% of our time is underwriting the risks first and all the things that can go wrong. And then the return is almost secondary. And so I think focusing on risk almost more than anything else is perhaps what differentiates us from most of our competitors.
Richard: And what is a commercial real estate broker model that would actually align them with you more? Is there a way that if things go well they get paid out a double fee and if the deal is not good or doesn’t work out they get paid almost nothing, just enough to cover their paperwork? That really they get paid very very little if it turned out to be a bad deal. Have you found a way to do that or have you custom structured something with brokers to align them with you in some way?
Ben: You know, that’s an interesting question. We’ve tried doing that and interestingly most of the push back we’ve gotten is actually from the brokers. And I think the other sort of filter that we like to use, we don’t use it all the time but on occasion where deals are marginal or we’re bridging a gap, we’ll look to them and say “Why don’t you guys put in some of your equity on the deal? Would you be willing to do that?” And it’s one thing, I don’t expect everyone to put equity on every deal, but if they’ve never done that, and they don’t own any commercial real estate, and again it’s not an automatic disqualifier, but it certainly gives me confidence to know that A) they’re able to think like an owner and B) they are going to think like an owner. And again I have a group of brokers that I’ve worked with exclusively and I know that when they call me, they’re not going to waste my time, they’re not going to, I’m not going to shoot a bunch of holes in it in thirty seconds, because they’ve learned to think like an owner. And I have to say, it’s a lot easier to think like an owner once you’re an owner and you have the benefit of experience, and the mistakes, and the baptism by fire. Learning from others’ mistakes is a very very difficult skill, and only very few brokers I’ve seen have been able to master it. I don’t think I could do it to be quite honest, without the benefit of that experience so that’s why I’d recommend it.
Richard: Right, good point. Okay, great. Where do you see most investors messing up or missing the mark on real estate investment due diligence?
Ben: Well, how much time do you have? I think I’ll tell you, I won’t go into individual areas, but I’ll tell you is I think the pattern of mistakes, again, usually falls into the category of either not understanding the asset, not understanding why they want to own it, buy it, invest in it, not understanding or misunderstanding the assumptions. As one anecdotal example there’s so many games being played with debt I saw one deal where it was, again, an above market return and it was based on an interest only debt service payment. And that’s all well and good but those things only last 1, 2, 3 years at the most, and then you’re stuck usually with a 10 year term that’s fully amortizing. And so what may have looked good in year 1, 2, 3, by the time you get to year 4 you on some deals are actually negative cash flowing. So I’d be real careful to not just look at the next year, but the next 2 years, or the next 3 years. Commercial real estate especially is a very, very, very long term endeavor, as you know, and really taking our minimum perspective is 10 years.
Ben: And so that’s how we tend to look at that aspect.
Richard: What legal structures do you use while putting together a real estate investment?
Ben: So obviously LLCs have been our have been kind of our go-to entity, not SNC corps they’re unnecessary expensive, and again most of our stuff is single member LLCs or pass-throughs. That’s not only an advantage for liability, it’s an advantage for tax reasons. We, you know, have to deal with taxation, or distributions. So LLCs, SPEs, we do do partnerships – one of the key things that I have to thank our fantastic legal counsel that sits in DC who does this – they set up all of our partnerships as tenants in common. Lots of reasons for that but the simplest ones are if you ever have an issue, or a deal goes south, or one needs to buy out the other, or you’re both selling but one wants to do a 1031 but the other partner doesn’t, without having that kind of tick structure in place it can really cause a lot of complications. So I would say LLCs, ticks, and certainly making sure we operate efficiently and that everything fits into our stake plan for the family.
Richard: Right, great. What areas of the tax code are you navigating most often when it comes to structuring real estate investments? Are there 5-7 things, or 10 things, or just 1 or 2 you’re really focused on?
Ben: It’s really I’d say 2 or 3. Obviously we always have a very keen eye on capital gains taxes. Under the Biden plan looks to be, appears to be he’s going to be president we’ll find out soon enough for sure, but it certainly look like there’s going to be some potential tax changes and again depending on how the senate race comes out in Georgia, we may or may not see significant increases that are proposed under the Biden plan on capital gains. We try to run things, and we’re very fortunate to be able to run our companies so even though they’re all positively cash flow we buy them right and we structure it so that most of them depreciate out. So I like to joke that any time we get close to having to pay income taxes on cash flow we buy another building and add depreciation and reset the clock. So we tend to keep a very close eye on number one capital gains, number two on income. And I’d say a very important not too distant third is 1031 and how that fits into estate planning. So for the other family offices and brokers listening when you add in all of these layers on top of each other, I don’t want to say it’s rocket science, but you certainly need a lot of folks smarter than me to properly sort of navigate the difference between, you know, year to year taxes, capital gains taxes, 1031, what you’re going to be doing with legacy proceeds and all that, and it’s almost as time consuming and as difficult as the actual investing into real estate. So that’s what we’re spending quite a bit of time on.
Richard: Right, right. What are the top 3 insights you could share on being an effective commercial real estate investor?
Ben: Great questions. The top three. I’d say the first is to have a very very long term perspective and a very long term time horizon. And I think a lot of people say that, in my experience even in the commercial real estate industry not a lot of people actually have that. If they have it they think long-term is 3 to 5. What I’ve found in my time in through a lot of clients we’ve worked with and advised is, and learned through their mistakes, is usually the shorter the time horizon people have the more mistakes they make because if you buy it right, and you’re buying good market that’s stabilized and an asset you understand, and you hold it long enough, right, and you can hold it through bad markets and you can hold it through downturns like ’08-’09, like we’ve had recently with Covid, usually time fixes most of those small mistakes. It won’t fix, you know, structural mistakes and if you’re buying obviously an office building in New York you have different considerations. But aside from those outliers, having a long-term horizon, being just obsessed with risk and downside, and then just making sure you A) have the right partner, and if you don’t what the right partner looks like, I could spend a whole hour on partners but in short I’d say as far as the partnership goes figuring out what you’re good at and what you’re not good at, and bringing in a partner that is basically the opposite of yours is able to fill the gaps that you have. In our example, we don’t do a ton of marketing we haven’t needed to, so when we looked at partnerships, partnering with a marketing expert is appealing to us because that’s not, sort of, that’s not what we specialize in, we’re number crunchers at heart.
Richard: Right. What are some long-term trends that you think most people are ignoring or denying even exist right now but you think are going to come to be true?
Ben: Wow, again, how much time do you have? There’s a lot of them, I’ll try to go with some of the bigger ones. I’ll kind of go by asset class, at least the ones we’re invested in. I think the scary thing about multi-family, which is probably the strongest out of all the asset classes right now is really we’re just seeing a tremendous amount of capital really flowing out of every other asset class and sort of being siphoned off into multi-family there’s good reasons for that in the sense that the disruptions technologically coming down, which you heard me talk about ad nauseam at this point, they’re actually starting to materialize. We were talking earlier about Tesla, which is a wonderful company, I love my Tesla, and I remember good friends of mine laughing at me saying years ago when I bought it “Oh it’s just a, you know, an electric car. I’ve driven them, they’re terrible, they have a 15 mile range and yaddah yaddah.” And here we go 7 years later, and they’re bigger than every other car company in the world put together. That wouldn’t and couldn’t happen 20, or 30, or 40 years ago. It certainly wasn’t happening when I started out in the late 90’s. And so I think the rate of disruption and the rate of change is just getting faster and faster. The effect of that, I’m going to bring you back to real estate, is commercial – multi-family is probably getting overvalued, just because there’s a lot of fear in every other asset class, industrial is probably becoming overvalued same reason, the rush to internet marketing and sales and Covid I think accelerated that as well. And then the other asset classes which are office, hotel, and retail are going through massive disruption. The office disruption probably in my opinion is the greatest, even though people talk about retail, retail is a very close second and then hotels which hopefully is temporary, I don’t know. But the trends that we’re seeing are not going to stop, they’re going to accelerate in my humble opinion, and the rate of disruption across all industries which will indirectly affect real estate is going to be significant. So getting ahead of those trends is what we’ve tried to do and continue to try to do.
Richard: Right. Makes sense. How do you deal with that inside of your family office? I know part of your answer might be “Well, if you have the goods to add value to something, then it has to be based on that legitimate process of adding value.” But how much does that disrupt or make you hesitate when you see an opportunity and you’re like well, it’s everybody else in every investor club or business club I go to is obsessed with industrial all of the sudden; should I put on the brakes here a little bit or just check myself to make sure I’m not just being swayed by, you know, Wall Street Journal articles, you know?
Ben: Completely. I know, and I think it’s a great question, and I – the answer I believe is that it’s sort of easy to follow the crowd, it feels good and it feels safe. I learned the hard way that over time things that feel really good, and safe, and popular don’t always end very well. And again, the difference between feeling and crunching the numbers and looking at the data can sometimes lead to different conclusions. And so having said that I think, I think the toughest part on going into another asset class, and the only way we’ve done it is we’re really not going in and doing stuff on spec. So, for example, the industrial asset class which we expanded into in the last couple years the only types of deals we’re even considering is a sale lease back where we have an operating partner already who is best in class or has a track record that they’re really great at what they do, and we’re solving some kind of operational problem either liquidity, which is a common problem post-covid, they own the building and they want to do $2 million of improvements and we’ll lease it to them at a 7 or an 8 cap, but the can reinvest that capital into their operating business at a 20-30% return. So things like that that really are a win-win where we’re really not taking development or speculative risk those are the only kinds of deals we’ll execute on new asset classes for the reasons that you alluded to. We’re not arrogant enough to think that 20 years in multi-family makes us experts in industrial. We know it doesn’t, and pretending like it does usually leads to some real bad results.
Richard: Right, okay. What is a commercial real estate offering memorandum?
Ben: So, I’ll tell you what it should be. When I started out it was a compendium of information and data that was accurate and specific about a specific commercial real estate. And so things everything you could possibly want to know to make a decision about buying the asset from the financials, to the locations, ariels, traffic counts, demographics, if it’s a retail property, store sales. Data points that are I would call them essential to helping not only a purchaser but also a lender, because you know my background is in banking. So what amazes me is there’s so many times I’ve talked to brokers and they’ll put out an offering memorandum and they won’t put in a debt quote. And my first question is – guys, 80% of this, as I mentioned earlier, is financed by debt. Have you guys gotten a debt quote? And sometimes they’ll have one and not put it on, but more times than not they wouldn’t even bother to going out and getting one. So that’s sort of an indication to me that you’re dealing with a broker that doesn’t know what they’re doing because the only way those deals are getting done are financed. And in many cases what the broker will find out after I’ve gone to the trouble to get my debt financing together is that the asset isn’t financeable. And so guess what happens when 80% of the structure is supposed to be financed at cheap debt at 2 or 3% and the banks for whatever reason in this scenario won’t finance it? Well that means that asset isn’t getting sold. And so those are the kinds of things and why I say that’s what it should be. I’ve seen some real great wins and I’ve seen some wins that are just terrible. So that’s what in my opinion I think a good offering memorandum should do.
Richard: Sure. After working in real estate for over 20 years now, where exactly are you spending your time now and why?
Ben: So believe it or not we’re spending quite a bit of time in understanding the rate and the areas in which technological disruptions are coming. You’ve heard me talk about this and in my postings, there’s a great article in The Economist which I circulated with some colleagues I’ll be happy to send it to you, I think it would be instructive for a lot of the folks who are watching because I think the big move in The Economist hit the nail on the head it’s really from tangible asset evaluations to intangible assets.
Ben: Tangible real estate is obviously tangible, intangible things are like software…
Richard: Right. Like AirBnB would be worth more than Mariott is kind of mind blowing, right?
Ben: Exactly. And if you look at, you know, in the S&P 500 with Tesla being added was instructive, and I didn’t know this until I started look at it the other day after the news came out 60% of the top 15 companies on the S&P 500 A) weren’t around 25 years ago, and B) are mostly leveraged technology. I think by the year 2030 when we’re sitting here in 10 years looking at this, I think it’s going to be close to half if not all of them. And I think the biggest risk we’re seeing is on industries where we have tenants that are going to be disrupted significantly by these technological companies. So it’s not just Amazon and retail anymore. I have a good colleague of mine that he specializes in automotive properties, and I’ve been telling him for years, that’s not an asset class I’d want to be investing in because that model is not only changing, it’s being completely disrupted. It’s being gutted. So if you’re in the industry and you own automotive properties or you own bank real estate, it’s going to be challenging. And so disruption and technological trends are very very important right now.
Richard: Right, right. That’s exactly why we just spent half a million dollars buying CommercialRealEstate.com, because it’s our belief in that transformation of things to the digital. So I appreciate you being a sounding board for us as we’re growing this platform and doing this interview as part of our effort to try to take advantage of that trend because I know you’re very much on top of what’s going on there compared to most family offices I know. So, I appreciate you bringing that up. What is the bet way to sell a commercial real estate property very quickly?
Ben: It’s funny you ask that because we’ve had on some, especially tertiary markets, some issues with just buyers not performing. And again, to my previous comment, it was a multi-family asset and there’s been such a girth of folks moving into that asset class. Not only just from other types of real estate, but from all different kinds of industries. And it’s a very timely question because we at one point with one asset in the tertiary market just go so frustrated with having our time wasted by buyers who couldn’t perform we ended up going to an auction. And there’s a lot of stigma attached with going to some of the auction sites, Tenex who we used in this case was we got very very good execution, really impressed with a lot of the folks there. I don’t think it’s for everyone, you know, if you’re selling a multi-family property in the middle of Miami you don’t need them, but if you’re dealing with a more difficult asset to value or tertiary market, or a large asset in a tertiary market, or something that doesn’t sort of fit. And a lot of people kind of joke about it, a lot of folks didn’t know that, and I didn’t know, that Tenex is owned by Google. So when we’re talking about disruptive companies, I got a crash course from the Google folks when we did that transaction about how they broke. And let me tell you, it is just like Tesla is changing the way that cars are built, and driven, and manufactured, I really do believe that companies like Google and Tenex are going to completely disrupt the brokerage industry. It’s already happening.
Richard: Yeah, interesting. I’m sure LukeNet CoStar has their eye on all that stuff going on because they’re the old school gorilla that’s been gobbling up things and acquiring people to become more up to the times with Apartments.com and LukeNet and other things. But I’m sure they’re on each others’ radar so that’s interesting.
Ben: Yes. I agree.
Richard: From an investors perspective, how do you compare investing in residential real estate versus commercial real estate properties?
Ben: So completely different animals. Completely different skill sets, completely different metrics. I have one colleague of mine, owns 900 doors, every single one of them is a single family. And I’ll tell you, the appreciation is nice but man that is – and companies are starting to do that on a very large scale, I think there was just a recent merger, I forget the name of the company it was owned by Colling at one point – but very large where they’re owning they’re trading portfolios of 100,000 single family homes between 2 and 300k. So if you do it at scale, and if you’re large enough, you can run a very nice portfolio. If you’re going to be owning less than 10,000 units, which is I think the majority of family offices, in my experience having started out doing residential and having also done multi-family I think it’s much more economically effective and efficient to do large scale multi-family versus single family. The economy to scale are just not there in single family homes. Every time you have to, you know, make ready for a home, you’re spending 3 to 4x what you’d spend on an apartment. Every home is different, every yard is different, the tenants are different, the marketing, it’s completely night and day. Not to say one can’t transfer from one to the other, I have not seen a lot of folks successfully do both. And I don’t think we successfully could do both when we focus on multi-family. But I think the rate of return and a lot of the metrics are different, and quite frankly more attractive if you’re looking to place significant capital I think multi-family.
Richard: What is the most expensive or painful mistake that you have made in the commercial property investment area that by sharing it maybe somebody could relatively easily avoid making that same mistake?
Ben: We’ve made a lot. I would say probably the one that sticks out most in my mind is not having the right partner. And we learned the hard way. Partners are great, until they’re not, and that’s why really tight great operating agreements were – we don’t take, we don’t leave anything to chance, everything is spelled out. In terms of who’s collecting, simple stuff that sounds obvious, we want to understand that upfront and we’ve had cases where we’ve had very tight operating agreements and partners we’ve approached just wouldn’t assign them and that was, we found out later that was probably a good thing. So I’d say having the right partner, having very tight agreements having good fences make good neighbors I think is absolutely true in this business when it comes to partnerships in commercial real estate.
Richard: Right, right. I think that’s a really good good piece of advice to tell people that hasn’t been shared in any other of these interviews. That’s great. Final question here – what is a $100,000 value piece of advice you could leave us with here related to commercial real estate?
Ben: If I had to pick one, and again I would say I think this coincides with longer term trends, outside of I’d say multi-family residential if you’re commercial real estate in any other asset class other than apartments and single family, and if you haven’t thought about it and you don’t fully understand how your sector is going to be disrupted in the next 5, 10, 15, 20 years, figure it out now. Because by the time everyone else figures it out, and it gets priced into the market, you don’t want to be owning a portfolio of Kodak and Blockbuster.
Ben: And I think there’s a lot of folks who own those and just don’t know it yet. And again I hope I’m wrong and I hope the market takes off and things change and things stabilize, but I think walking around pretending like the internet is not going to affect me and I’m in main to main location, because at the end of the day the internet is the online real estate of the future. And it’s a good point what you’re doing with the family office I think anyone who’s not doing that, and we were guilty of it for many years, anyone who isn’t thinking in those terms it’s almost too late. It isn’t quite too late yet, but it’s getting there. And I would encourage them to think again very long term and about disruptions very very carefully.
Richard: Right, great. Thank you. Well I appreciate all of your time here today. If anybody wants to connect with Ben on anything they think they could work with him on or collaborate on, whether you’re a family office or you own a whole bunch of assets that your family has been sitting on for generations and you need some advice or strategic guidance, Ben is a savvy family office professional we’ve gotten to know well and could probably be helpful to you so I’m happy to connect you to Ben, or Ben do you prefer someone reaching out via LinkedIn or going to a website or something if they want to touch base with you or?
Ben: LinkedIn or Email is fine. Again, we do some consulting and we only really consult with family offices in commercial real estate because again we are that hyper focused as I mentioned before. So email is fine, and again anything to do with operations, getting into the industry, getting out of the industry, partnership issues, and estate planning, that’s a good chunk of what we’re doing in our consulting anymore.
Richard: Okay. Great, well thank you for your time here today, Ben.
Ben: Likewise, thank you for having me.
Richard: Thank you.