All Forum Posts by: Jim Groves

My 2$- if reducing complexity and legal costs is your goal, I don't think that would be accomplished by syndicating a first mortgage note.  A syndicated first mortgage can be more complex because the investors want to know who controls the workout scenario if things go wrong, and that's after you go through a length description of how to define "going wrong".  An operating agreement isn't much more complicated than a loan agreement, and you can still leverage the property if you want a bank loan.

I know most people are doing hard money loans on these fix and flips, but to me the returns and risks are the same as equity.  I'd rather invest in the equity, especially if there are other people involved.

The idea of forming a parent LLC is a good one if you want this done on a programmatic basis but you'll have to work out with your investors a typical profile of what you're going to buy because I doubt they want to just write you a check and hope for the best.

Bad.  I'd expect this to impact most gateway cities, particularly SF and NYC.  Vancouver BC is a big magnet for Chinese money.  It's already affecting real estate prices in Sydney (not sure if this link will work): http://www.theaustralian.com.au/business/property/...

 @Evan Manship

As you probably already know, every county has differences in how they approach real estate valuation, but I've found that they are all done based on very broad approaches and errors are sure to result.  I've heard previously that Cook County IL consistently over assesses assuming that you will appeal.  I spoke with someone who was previously in that role and he denied that, but did acknowledge that a well though out appeals process can show results.

I think its prudent to always question the valuations of your property but you should do a comparison against similar assets before calling the assessor.  Most counties have this information online.  There is no way to automate this, consider it part of the hands on aspect of asset management.

Hi Ian, I would classify what you're looking for as "desktop underwriting".  Desktop underwriting can serve a useful purpose when you're looking for a 30,000 ft view of a particular investment, but obviously it cannot be a substitute for actually boots on the ground site visits.  However, I will say that the tools available on the internet make the process so much easier.  I can't tell you how many flights I can avoid just by doing a simple search on Google.  It helps to have traveled the country a great deal as I have to have a basic feel for different submarkets, but Google street view can tell me a lot.

I won't plug my site because I don't think BP will let me, but I will tell you that there are a lot of tools, many that you have already mentioned, that can supplement or speed up the processing time for viewing the massive amount of investment opportunities that are out there.  My site just takes basic bullet points of a deal and classifies them in grades.  It is not a complete substitute by any means, but it highlights the particular areas and deals you may want to take a closer look at.  

Sponsorship underwriting is a whole other ballgame.  There is no objective measure of sponsorship quality, but you would be surprised how many sponsors could be flagged by a simple Google search.  Resumes tend to be embellished, but if I see significant skin in the game and other connections to people or organizations that I know (LinkedIn helps a great deal) I can gain some confidence in their abilities.

Ian, I believe the index you're referring to is part of the NCREIF index which includes values of private real estate held by pension funds. I could argue that the REITs tend to not hold the same quality of property that pension funds do, so that may explain some difference in the variability. However, I'll concede that at some level the volatility of REIT stocks can also be related to some factors that have nothing to do with their underlying assets. For example, fund flows in the retail stock market (people exiting tech stocks for dividend paying stocks) could contribute to this volatility. But the underlying assets remain the same, and the fundamentals of those assets do not change whether they are held by a public or private entity.

In regards to the liquidity premium, I agree.  For example, EQR, PPS, and AIV yield around a 3% dividend whereas the properties they own likely yield 6-7%.  If you plan to hold these assets for 5+ years, direct ownership is the better way to go.

 No, the ultimate cash out is to get a loan for >100% of your original purchase price, then you get the option for free

@Roy N probably said it best, but from my limited time in Canada (Toronto, Ottawa) it seems to be booming much like major metros in the States.  The banking system was much healthier and avoided the downturn that we had.  However, the condo projects in Toronto remind me of Miami circa 2006.  Is job creation really filling those units? Hard to say.

The other wildcard is the looser immigration policies that Canada has.  Toronto is a very international city, with a huge influx of foreign money.  Vancouver is a magnet for Chinese money, and has a very nice climate (one Canadian described it as the California of Canada).  Prices in Vancouver would rival what we're seeing in the Bay Area, but main difference is that it isn't driven by tech job growth.

Hello BP!

I’ve had a 20+ year career in commercial real estate, primarily in lending. I’ve worn a number of hats—commercial mortgage originations, syndication, securitization, etc and was once a CFO for an affordable housing developer using low income housing tax credits.

I've seen the tail end of the early ‘90's downturn and was knee deep in the most recent one. I know there are pockets of excess in some areas and product types, but I don't believe we're in the end of this cycle. It feels a lot more like late 2004 than 2007. In both cycles, the downturn was precipitated by uncontrolled excess in the lending markets (construction lending in the late ‘80/'90's and CDO's/CLO's prior to the credit crisis). The most egregious error in the last credit cycle was the lack of a gatekeeper with meaningful influence, whether it's the rating agencies, bank regulators, or the CMBS B-Piece buyers. They were all compromised to some extent. I don't see that excess yet. In my view the debt markets are now more constrained due to bank regulation.

With that said, I’m now focusing my time on the newest product in the market—real estate crowdfunding. There is a lot of hype around this industry but it has the potential to address some market needs, namely an alternative to hard money lending and access to direct property investments at more modest exposure. Technology speeds up the process and brings efficiencies, but at its core this industry is just a 21st century version of the real estate syndicates of the late 80’s. It’s important to not repeat the mistakes of that era but unfortunately we are not addressing some key problems. Some of my concerns include:

• No third party oversight of the underwriting process—REITs have equity analysts, quarterly audits and SEC regulation. CMBS has rating agency surveillance, B-Piece investors and now Operating Advisors. Who watches over real estate crowdfunders? Right now they are relying on you, the crowd, to perform the due diligence that they miss. I realize there are "100 point checklists" and "proprietary algorithms" but honestly, what do they have that the CMBS lenders don't have? CMBS lenders have more third party vendors working for them, they have the same (or better) technology, and they have the same pre-funding risk. Yet despite that, investors still demand and receive better oversight and skin in the game.
• No liquidity—A few sites are building out secondary trading platforms, but I'm not optimistic that you will see a lot of trading of interests on them. REITs (and to a lesser extent CMBS) have more liquidity because they are more homogenous, do not require significant upfront (and costly) due diligence to trade, and carry more robust third party surveillance.
• Weak Interest Alignment—There are a few deals where there is significant sponsor equity at risk. There are a lot more that do not. And debt crowdfunding deals? Forget about it. If you’re considering an investment, think about who you want in charge when a deal goes bad. I would prefer a local experienced investor with significant (i.e. more) equity at risk than myself who will make the right decisions on behalf of the investor group. Outsourcing this work on a fee basis rarely goes well.

There are a lot of other issues, but these are the big three that I’m concerned about. Looking forward to contributing in the community where I can.

Hello BP!

I’ve had a 20+ year career in commercial real estate, primarily in lending. I’ve worn a number of hats—commercial mortgage originations, syndication, securitization, etc and was once a CFO for an affordable housing developer using low income housing tax credits.

I've seen the tail end of the early ‘90's downturn and was knee deep in the most recent one. I know there are pockets of excess in some areas and product types, but I don't believe we're in the end of this cycle. It feels a lot more like late 2004 than 2007. In both cycles, the downturn was precipitated by uncontrolled excess in the lending markets (construction lending in the late ‘80/'90's and CDO's/CLO's prior to the credit crisis). The most egregious error in the last credit cycle was the lack of a gatekeeper with meaningful influence, whether it's the rating agencies, bank regulators, or the CMBS B-Piece buyers. They were all compromised to some extent. I don't see that excess yet. In my view the debt markets are now more constrained due to bank regulation.

With that said, I’m now focusing my time on the newest product in the market—real estate crowdfunding. There is a lot of hype around this industry but it has the potential to address some market needs, namely an alternative to hard money lending and access to direct property investments at more modest exposure. Technology speeds up the process and brings efficiencies, but at its core this industry is just a 21st century version of the real estate syndicates of the late 80’s. It’s important to not repeat the mistakes of that era but unfortunately we are not addressing some key problems. Some of my concerns include:

No third party oversight of the underwriting process—REITs have equity analysts, quarterly audits and SEC regulation. CMBS has rating agency surveillance, B-Piece investors and now Operating Advisors. Who watches over real estate crowdfunders? Right now they are relying on you, the crowd, to perform the due diligence that they miss. I realize there are "100 point checklists" and "proprietary algorithms" but honestly, what do they have that the CMBS lenders don't have? CMBS lenders have more third party vendors working for them, they have the same (or better) technology, and they have the same pre-funding risk. Yet despite that, investors still demand and receive better oversight and skin in the game.

No liquidity—A few sites are building out secondary trading platforms, but I'm not optimistic that you will see a lot of trading of interests on them. REITs (and to a lesser extent CMBS) have more liquidity because they are more homogenous, do not require significant upfront (and costly) due diligence to trade, and carry more robust third party surveillance.

Weak Interest Alignment—There are a few deals where there is significant sponsor equity at risk. There are a lot more that do not. And debt crowdfunding deals? Forget about it. If you’re considering an investment, think about who you want in charge when a deal goes bad. I would prefer a local experienced investor with significant (i.e. more) equity at risk than myself who will make the right decisions on behalf of the investor group. Outsourcing this work on a fee basis rarely goes well.

There are a lot of other issues, but these are the big three that I’m concerned about. So about a month ago I learned some basic coding and developed Vrytas.com. My vision is to provide a channel for all of us to provide a “boots on the ground” view of the projects that the real estate crowdfunders can’t, or won’t provide. The site utilizes an objective analytical rating tool call the V-Score, which is patterned off of the models that rating agencies use. It’s a model I’ve used in some form for nearly 15 years. I’ve built some features that allow it to rate preferred equity investments, and use those ratings to compare to other available crowdfunding opportunities. At the moment it only works on stabilized, or near stabilized properties.  No fix and flips, SFHs or development deals yet.  The summary is included here: https://www.vrytas.com/realestate-crowdfunding-investments/summary/

I’m continuing to backtest the rating system on other publicly rated deals and so far the results have been good. This intro has been long enough, so rather than explain how it works on here I encourage you to visit the site if you’re interested.

Feedback and questions are always welcome.  

Some REITs also charge substantially higher fees, oftentimes close to 15% of invested capital. Finally, because most REITs are publicly traded, they have traditionally experienced substantial volatility along with the stock market.

I have to reply to these two points.  "Some REITs" that charge fees upward of 15% are typically private, non-traded REITs.  They're sold by broker-dealers who take about 6-7% commissions, and the manager typically charges an acquisition and disposition fee.  Crowdfunding sites are better from a fee standpoint, but you still have to look at what the sponsor is charging to the partnership.  

As for the "substantial volatility" comment, this is very misleading. Whether you buy a REIT stock or a property directly, the underlying asset is real estate. The former is marked-to-market on a daily basis, the latter is not. The REIT stock can be sold with a click of a button, the property investment can not. Watching the daily fluctuations is a small price to pay for the liquidity the REIT stock provides. Just because you don't know the daily price fluctuations of your property investment doesn't make it any less volatile.