The “Formula” for “Success” in the Real Estate World – This is Exactly What to do – Truly!

Why is it that when I ping the top guy/gal at a real estate company at 11 P.M. on a Saturday night – because I had an idea – she/he responds by 11:15 P.M.?
 
Why is it that many of the top people in the real estate world still cold-call people when they don’t have to do that any more?
 
Why do some people succeed in building incredible franchises and others just don’t?
 
What makes it happen – and what makes it fail to happen?
 
Of course no one really “knows” but I think I have some insight that I will share as The Real Estate Philosopher®.
 
Part of this insight is based on my informal empirical observation of successful people – and people who fail – over many years.
 
And another part of this insight comes from a very interesting book I read recently called The Formula: The Universal Laws of Success, written by Albert-László Barabási, in which he tries, as scientifically as possible, to evaluate what makes people “successful.”  As a side note, I heartily recommend this book as one you might want to give to your kids or cousins or people in their late teens and early twenties.  I wish I had read it then…
 
Anyway, here is what I have come up with…
 
People who succeed instinctively know that their “network” is the key to success or failure.  To be clear, I am not talking about what we all know as typical “networking.”   My point here is related but at heart different than that.  It is that successful people sense that the more other people are aware of what they are up to, the more likely it is that good things will happen.
 
To delve a little deeper, when you think about it, you can’t really predict what will happen in any particular situation.  You start out each year and probably write down some goals.  Then at the end of the year you probably forget to even compare the goals to what actually happened, and if you were to make the comparison you will likely find that whatever you planned for didn’t happen; however, other things happened – hopefully better than the ones you planned for.  Life – and the real estate world – is too unpredictable.
 
So when you think about it, success or failure in the real estate world comes down to a game of statistics.  You don’t know what will happen in any particular situation, but you do know that if you do a lot of things – and you do them well – good things are likely to happen.  I make this point in my book, If You Want to Get Rich, Build a Power Niche, which will come out in April 2019.
 
Successful people figure this statistical theorem out – either intellectually or instinctively – and then act on it.
 
They realize that simple things like:

  • Being super responsive
  • Making 1000% sure that their reputations are fantastic
  • Letting people know what they are doing
  • Being ‘different” so others remember them

Will all help them in growing their network and increasing the – statistical – chances that they will ultimately be successful.
 
In the Formula book I referenced above, Barabási has his first law of success:
 
           “Performance drives success, but when performance can’t be measured, networks drive success”
 
For example, consider your business.  You possibly have a team that is fantastic in every category that you could be evaluated in.  But if there is not a formal measuring scale, how could you “prove” this to a third party?  Even your competitor who is dumb as a post and completely incompetent will likely be saying that it is super-good, right?  If so, all that will matter to a prospective third party is who says they are better better (so to speak).
 
Since you can’t really prove you are “better” to a third party, then if you follow Barabási’s first law, you need to figure out how to effectively use your network to drive success.
 
My saying is similar to Barabási’s and it is:
 
                “It’s the network stupid!”
 
To finish up this article, here is a quick list of things I think someone should do to drive successful long-term performance in the real estate world.  This applies to both organizations and individuals, by the way:

  • Make sure your reputation is super – this is something you hopefully already have done, as if not it is kind of tough to change – actually this is very tough to change as we all know.
  • Get your network started – i.e. the people you know should be aggregated into a single list.
  • Let these people know what you are doing – and especially what you do really well.
  • Be a friendly teammate to others – even your competition – people tend to move around networks – today’s broker is tomorrow’s private equity real estate player with $10B AUM.
  • Be super responsive – don’t blow people off.
  • If you say you are going to do something, do it.
  • Be out and about constantly – in person, by email, however you like to do it — although I have a sense so-called “social media” is less effective.
  • Be different from everyone else so you don’t get forgotten.

And things – good things – will happen to you.  You will not be able to predict them, but they will happen.  And as you keep doing this they will happen more and more.
 
Good luck! 
 
Bruce M. Stachenfeld a/k/a The Real Estate Philosopher®
 
PS:  The core mission of D&S is to “help our clients grow their businesses.”  The foregoing article is along those lines.  If your business is struggling – or doing okay – or doing great – the odds are that we can make it even better.  Feel free to give us a shout.  We don’t charge for that sort of thing.

Ten (Not So Obvious) Predictions for 2019 in Real Estate

Only foolish people try to predict things.  Well, actually, that is not true.  Smart people make continuous outrageous predictions.  When they are right – which happens by chance to pretty much everyone at some point – they crow about how prescient they have been.  When they are wrong – which usually happens way more than 50% for most predictors – they rely upon either (i) the fact that everyone will forget what they predicted or (ii) a revisionist claim that their prediction wasn’t really a certainty anyway, or what they meant was…..

Anyway, with that predicate, here is what The Real Estate Philosopher predicts for 2019 in real estate:
 
The Choppy World Markets Will be Great for Real Estate:  With wild swings up and down in the market – political uncertainty – the media loving and swirling controversy as much as possible – and fear and greed vying for control – a nice safe cash-flowing asset class will look very attractive.  I predict that cash-flowing real estate will do great.  However, projects with risk will have increasing difficulty attracting debt and equity capital.
 
For the First Time in Years Opportunity Funds Will See…..Opportunities:   Yes, I predict that the really long wait is finally going to be over.  The years of no deals or few deals or just wishing there would be deals is finally going to end.  There will be opportunities at last.  These will be generated by troubled deals that don’t provide sufficient cash flow to be attractive to those fleeing the uncertain markets.
 
Opportunity Zones Will Continue to be Hot:  I have written about this before so I will devote but little space to it here.  I will just reiterate my prediction that capital will flow here eagerly. Indeed, the more the stock and other markets gyrate, the more capital gains will be created, which are tax fodder for these deals.  The tricky spot however will be the fact that opportunity zone deals are by definition “development” deals, and as I noted above there is going to be increased difficulty attracting capital to deals of that ilk.  All of this will require creative structuring (to provide investors the tax upside with as much protection against development downside as possible) and – dare I say – lawyers who understand development, tax, and opportunity zone deals and who are not afraid of intellectual challenges.
 
Opportunity Funds Will Become Big Players in Opportunity Zones:  A second point vis a vis Opportunity Zones is a prediction that Opportunity Funds will become major players in Opportunity Zone deals.  They just don’t realize it yet.   Indeed, we have a perfect structure for this.  I have been talking about it a fair amount but so far I admit no one has actually done it yet.  Any day now…..
 
Auction Funds Will Hit the Real Estate World:  Yes, of course…..hmmmm…..what is an Auction Fund?  Few know right now but I think by year-end this will become a significant force in the real estate fund world.  In a nutshell, it is a creative way to provide liquidity to investors in real estate private equity funds that is backed by NASDAQ and blessed by the SEC.  This concept is just starting out so I would stay tuned here.
 
The Tokenization of Real Estate Will Become a Real Thing:  Right now it sort of sounds like a mixture between millennials and bitcoin, but I think this is going to be a “big thing” over time as it will eventually provide great liquidity to real estate. 
 
If the Bubble Pops it Will be Bad for a lot of Disruptor Wannabees:  Okay, this is hardly a prediction since I start it by hedging with the word “if”.  So I don’t count it – happily I have “ten” other ones so my headline is still accurate.  But I will say that “greed” can turn to “fear” in the blink of an eye.  Once that happens, all that ridiculously plentiful cash seems to vanish with the speed of an egg-timer.  Real estate tech companies with an expiration date vis a vis their burn rates will go belly-up or be bought for a song by bigger players or shrink dramatically.  Real estate players with projects that need more capital than they have will either be seriously distressed or pay for that money at exorbitant rates (see above about Opportunities for Opportunity Funds).
 
Co-Living Will be Ready for its Close-up:  So far it has mostly been all about co-working and co-living has lagged because it is a lot trickier to pull off.  However, I think you will see some major things happening in this space this year.
 
Creative Players Who Are Willing to “Create Value” Will Outperform Those Who Are Not:  This is an old theme of mine but I think it will become more and more obvious that with the continued instantaneous flow of information it will become harder and harder to take advantage of market opportunities that are based on lack of knowledge of others.  Instead, economic outperformance will have to be based on people thinking of ideas and angles to “create” value.   Peter Drucker points out that the “purpose of a business” is to “create customers,” which requires innovation.  It is the same in real estate and this will be more and more critical in a choppy market.  For investors, I urge you to look to invest with parties that have something more creative than just “looking for good deals” and for those who are doing deals, I urge you not to sit by and wait for brokers to call but instead “create” the deals and thereby capture the value yourself.
 
Retail Will Remake Itself but Not in The Way Many Expect:  Everyone is talking about the “experience” of the customer in the store – or the mall – and my sense is a lot of retailers are spending a lot of money on upgrading the customer’s experience.  Sorry, I don’t think that dog hunts that well.  For coffee, yes I love the Starbucks friendly “experience,” but if I am shopping for blue jeans, I can’t imagine how the “experience” will change my shopping habits, except maybe once I might go into a store if I am curious about the fact that they serve me some mint tea while I try on the jeans.  I think what will “work” for retail is the good-old Power Niche.  My prediction is that retailers with something they own – through a brand or a Power Niche – will do great – Amazon and Walmart and mega-players with pricing power from sizing will do great – and parties spending time and money creating an “experience” will be wasting their money. 
 
Choppy Markets Will Bring Out the Best and Worst in All of Us:  Everyone says “my word is my bond” in an up market.  I mean it is pretty easy to be honorable when it just means you are accepting upside.  It is when things go wrong that we will once again learn – or re-learn – who we should be doing business with.  I hope – but not sure I can predict it – that those who showed their honor and integrity during the Global Financial Crisis (now ten years ago) will be rewarded with deals, investments and upside during this go-round.
 

Ten Capital Sources for Opportunity Zones

As an industry leader in Opportunity Zones, D&S has been working with all types of parties that are looking to make investments in Opportunity Zones.  We believe there are not only opportunities for US based investors but for global (yes, global) investors as well. 

This video gives you ten ideas for how to source investment capital for Opportunity Zone transactions.

Opportunity Zones – Ignoring This Major Shift in the Real Estate World is a Big Mistake

I am writing to you about Opportunity Zones.

Apologies if I am outspoken here, but there is a reasonable chance that this is the “biggest thing” to hit the real estate world in perhaps the past thirty or even more years.  The Tax Reform Act of 2017 has made a mega-gift to the real estate world.

My proposition is that whatever you are doing in real estate you need to either:

  • Get involved directly

  • Consider how it will affect you even if you are not involved

Let me take you through my thinking ….

I will start with the first aspect of the “game change” for real estate that hit us in September of 2016 when real estate became a separate asset class.  Instead of being one of various “alternative assets,” real estate is now an asset class on its own.  This means that your average garden variety investment manager is probably advising her clients to put a share of her assets into “real estate” for “diversification purposes.”

This has gradually been unleashing a wall of money to the real estate world over the past two years.  This is evidenced by major players – such as Blackstone and others – raising so-called “permanent capital” vehicles.  And many of our clients are either raising such vehicles or talking about how to achieve permanent capital as an adjunct to their businesses.  In a broad sense, “permanent capital” is generally thought to be capital that likes a current yield but once it gets that yield it is more accepting of a lower overall investment return.  See my article on this from September 2016.

Now all of the sudden the Opportunity Zone initiative has hit us.  For the uninitiated I think of this “Like a 1031 on Steroids” (my phrase).  There is a “good” benefit, a “great” benefit, and an “off-the-charts-benefit” to the real estate world:

  • The “good” benefit is for the investor if it has gains on a sale the investor can effectively “exchange” the gains into an opportunity zone and defer the tax on the gains for up to 8 years and even legitimately avoid some of the gains.

  • The “great” benefit is for the investor that if it invests in an opportunity zone and holds it for ten years then the gain on the investment is tax free

  • This is great stuff, but the “off-the-charts benefit” is to the real estate world in that gains from non-real estate assets can be exchanged into Opportunity Zones.

Taking a step back for a moment, consider how much the stock market has gone up in the past few years and created I am guessing a trillion or so.  All of these are untapped capital gains.  And just about every other asset class has gone up in value too in the past ten years.  The Economic Innovation Group says there are $6T – that is SIX TRILLION DOLLARS — of untapped gains.

What does this mean for us in the real estate world?  Here are my takeaways:

  • For the first time people who have nothing to do with real estate are looking at it.  Sergei Brin who has $50B of Google Stock might, for the first time, think about real estate?  Note I have no relationship with Mr. Brin and I don’t know him – he is purely a metaphor here.  Normally, tech people think that real estate is kind of stodgy and they can make better returns in tech.  But a lot of people in the tech world – and just about every world – are starting to wonder if markets really only go straight up and maybe it is time to diversify – to put some money into things that are stodgy but stable – so that the money might be around for the “next generation” of the family/family office.  It is hard to beat an opportunity zone for this kind of thing due to the tax advantages.  This is already happening as our phones have been ringing off the hook – and I predict it will turn into a stampede. Also, if the non-real-estate markets start to fall, this stampede could gain significant ground.  I mean if you made a million in tech stocks and they drop 20% you might be thinking it is time to take those chips off the table and if you could avoid the tax, well, then, you get my point.

  • If you are a sponsor of course the upside is obvious. If you are capable of putting together deals in an opportunity zone, you should be able to achieve a less expensive and more readily available source of capital. As a side note, I emphasize that I personally am strongly against people putting together deals “because” they are in an opportunity zone – that just encourages foolish deals.  I am sure us old-timers will recall, and never forget, the “see-through” empty building built in the 1980’s – ultimately, a terrible result of tax advantages run amok in the real estate world.  This time, instead of just doing “opportunity zone deals,” I advocate that people should put together what they believe are “good” deals that are in opportunity zones with the tax benefits just being gravy; however, my guess is people will not listen to this advice and instead that unscrupulous, over-aggressive or over-eager, players will raise opportunity zone money just to get the fees and a lot of foolish deals will get done.

  • If you are a fund raiser type, there should – for the first time – be an ability to raise money from parties not in the real estate world who have never looked at real estate that intently.

  • If you are just a rich gal or guy – or have friends who are such – the odds are you have gains and you might at least consider opportunity zone investments.

  • If you are a rich guy or gal in the real estate world, who is not afraid of real estate development investments, it may make sense to talk to your rich friends who are not in the real estate world about teaming up to invest in opportunity zone deals.  They may be less afraid of real estate development investing if they see you putting your money in side by side, perhaps with a promote or other advantage – or maybe not if they are your buddies.

  • If you are an opportunity or investment fund that in your view has nothing at all to do with this since perhaps most of your investors are tax exempt, I think it is a major mistake to ignore this.  This is because this wall of opportunity zone money will likely (i) divert sponsors away from you, (ii) provide competitive and cheaper sources of capital, and (iii) divert investor interest away from your business.  All of these are competitive risks that should be carefully considered.  Perhaps instead of being shoved around by the competition you might raise your own opportunity zone fund?

  • If you are a non-profit out to do some good things – perhaps in blighted areas – this can be a way to achieve your mission without the necessity of actually raising money for it……  Hold on – what did I just say?  You mean you could achieve your mission without the – intensively miserable and annoying and time consuming and expensive – process of raising money?  Yes that is exactly what I just said.  Just get people interested in building whatever is needed in the opportunity zone (perhaps to create jobs, etc.) and get out of the way.  People can feel doubly good – they are doing good and getting a chance to make some money – and even save their taxes.  Too good to be true?

  • Lenders – you may not realize this, but there are some severe timing issues pertaining to how the money has to go into the opportunity zone investment in order to qualify.  A quick note here is that you “cannot” put in equity for an opportunity zone deal and repatriate it back and keep the tax deduction – it doesn’t work that way.  However, you can put in legitimate debt and pay it off with opportunity zone investment money.  This means that lenders that understand opportunity zones – and can be flexible – will become in great demand.  So far no one is really planting a flag to focus on this kind of lending.  If you are lender in this position give me a call!

  • Lawyers, accountants, and other professionals, well, I guess that is obvious.  You really don’t want to answer the phone when your client calls to ask about opportunity zones to ask if that is the place inside ten yard line in a football game…

  • Finally, even if after really thinking about it you don’t think it will have that much effect on your business, you really should know what is going on so at the next cocktail party with your real estate friends you can be the center of attention.

To wrap this up – I have been doing this a long time now – about 35 years since 1983 – to date myself.  I can’t say this is the “biggest” thing I have ever seen – yet – but it might be.

I don’t like to advertise for my firm in The Real Estate Philosopher – so please forgive me – but we are the industry leader in this space right now – both from the tax and the real estate sides.  If you want the skinny on any of this or guidance give me a call.

Anti-Fragility – Nassim Nicholas Taleb

Some of the greatest “thinkers” are often not afraid to get ideas from other people – and so it is for The Real Estate Philosopher.  My thinking in this article comes from Nassim Nicholas Taleb, in his new book called Antifragile.

I just finished his book and it is quite a read.  He is so arrogant that you start out reading his book and are almost offended by the condescension, but soon (halfway through) you feel like a teammate – kind of like he is a pompous arrogant intellectual, but he is “my” pompous arrogant intellectual.  Anyway, I have become a major fan of his iconoclastic thinking.  And I think it is one of the “best” books to read for one running a business of any kind.

I guess I might say that he is just a “better” Philosopher than me…

In a nutshell, his theme is that organizations are either:

  • Fragile – where an outside adverse event – such a financial crisis – could wipe the organization out

  • Robust – where an outside adverse event – will hurt but the organization will recover

  • Antifragile (his word) – where the organization will actually be enhanced by an adverse outside event

He devotes a fair amount of space on:

  • The folly of trying to predict the future.  Indeed – he points out that possibly the best “prediction” is that those who are “predicting” will eventually be very wrong and blow up, although of course you cannot predict when or how.

  • The equally great folly of centralized management, which often masks trouble until it is too late.

  • The safety of being a small organization and the dangers of being a large organization.

  • And the benefits of optionality.  As a quickie aside, he mentions that over centuries the real estate business has been one of the best for creating wealth due to the implied optionality that the real estate player has and the lack of optionality that the banks and lenders have.  An interesting point to be sure for this readership.

So what can one do with this thinking?

Well, for me, as I always do, I apply it to my law firm.  Is my firm fragile, robust or antifragile?

I know I spend a lot of time “predicting” and using these predictions to “manage” my law firm.  But – being very honest with myself – as I evaluate my predictions — few have gone as predicted.  Certainly, less than half of my predictions have come to pass.  And centralized management of lawyers has almost never worked out.  The more I “manage” my lawyers, the more the friction it creates, and in the end, I have learned that the best thing is to hire and grow talent, set firm values and principles, and then just get out of the way and hope for the best.

Over the years this has really upended my thinking about the optimal way to run a law firm.

So, how would this apply to your real estate business?  Here are some thoughts:

Certainly don’t try to predict the future or what the markets will do.  Set things up so you benefit as much as possible from “good” surprises and aren’t hurt that much by “bad” surprises.  See my prior article on this.

Center your organization around attracting and retaining and inspiring talent.  Give your talent the tools they need and try your best to get out of the way and let them achieve.  This is outlined in another article I wrote, which was largely based on Jim Collins’ book Built to Last.

Set up some values and general principles about what your organization should be about at heart, i.e. the inspiration and “why” you are in business.  See my prior article on this concept based on Simon Sinek’s book Start With Why.

Keep your overhead low – high overhead pressures an organization to make poor business decisions and certainly increases fragility.  Anything that can be outsourced should be.

Be brutally honest with yourself – on a consistent basis – about what has worked and why, and what has not worked and why, and then act accordingly.

Keep as much optionality as possible in all matters.  This is as simple as evaluating all decisions with the goal that they should be low risk and high reward.

Buy some insurance.  I have always wondered why investment funds don’t sacrifice – say 1% of their returns – in order to buy puts/calls and other financial products that will multiply upside in the event of a major adverse event that harms their investment thesis.  Sooner or later something bad will happen and it would be “nice” to be able to say “whew” after that wouldn’t it?

Whatever you do, don’t ever put the company’s franchise at risk, i.e. never take a risk that you cannot recover from if the outcome goes the wrong way.  Although, I guess the exception to that rule would be if your company is going down and the end is in sight, then perhaps a so-called Hail Mary might make sense.

How To Avoid Getting Taken Advantage of In A Real Estate Deal

I have been around for an awfully long time now.  Close to 35 years since I started my real estate career in 1984 – after a year in litigation.  And, just for amusement, this issue is going out on my sixtieth birthday.

I have seen a lot of things happen, including the laws of unintended consequences upend some really smart real estate players.  Here are some things I have seen (very smart) people do that have turned out quite badly for them in the end, always to their surprise:

In a joint venture, the bigger guy has the advantage in a buy/sell right?  Wrong!  Often the big guy has to pay a lot more to buy out the little guy and the big guy might be a fund or other vehicle where in the future there is just zero cash around to fund the buyout.  The predator becomes the prey!  Yikes!

Same thing happens with capital calls as the bigger guy insists – sometimes vehemently – on terrible and horrible punishments to the little guy if the little guy doesn’t fund its capital call.  This despite the fact that the bigger guy is putting in 90% or even 95% of a capital call.  But then years later it turns out that the bigger guy has to put in close to 20 times what the little guy has to fund and the bigger guy doesn’t want to fund or can’t fund.  Oops – again – the predator becomes the prey!

You are conservative on your debt with, say, 50% loan to value, but the term of the debt isn’t that long and the term of the loan runs out at the worst possible moment.  Ironically, the conservatism on the LTV turns out to be a lot less important than the length of the term of the debt.  Surprise!

You are the borrower and you let the lender get a pledge as well as a first mortgage, thinking, they can only kill me once – what’s the difference if I die by pledge or foreclosure.  Boy are you wrong in a state – like New York — where foreclosure takes three years and a pledge ninety days.  You just gave up your swords, plowshares, and other weapons and are now defenseless.  Egad!  [Note – this is not settled law and no one knows whether the short-term pledge would be enforceable, but if you are going to be in this position it would be nice to understand it ahead of time]

You are in a joint venture with a money fund and time creeps up so that you get to the end of the fund’s life and the party running the fund just wants to dump the asset.  This can be an opportunity for the joint venture partner or a real problem.  Hmmmm!

What if a key man/woman leaves a fund or other major organization where the investors are there “because” of the key man/woman?  On a related note what if third parties – such as lenders, financial partners, etc. — have rights triggered by this?  A very awkward situation to say the least and especially so if not planned for ahead of time!

What if you are the seller with a hot asset and just “strutting your stuff.”  The buyers are begging you – and your broker – for just a moment of your time.  You are on top of the world.  You pick a buyer and the buyer flakes out for whatever reason.  All of the sudden you are a wounded fish aren’t you?  This is because the next-in-line buyer knows he has you over a barrel as you can hardly go to your third choice can you?  And it happened so quickly you were the king to the pauper.  Now what!

You and your partner were buddies when you started on the deal – on the business – on the venture.  But now you hate each other.  It is (almost) at the point of litigation, or maybe it is at the point of litigation.  Is your reputation going to be destroyed if a fight brews up – are you effectively out of business until (four years) of protracted litigation is resolved – is the value of your investment going to be trashed before things are over.  Despite good documents are you over a barrel anyway?  Did you think ahead of time about the “practical” implications of a litigation that effectively puts you out of business for an extended period of time, or did you just assume that if the documents protect you then you will be fine?  Not good!

Did you sign a contract to sell a piece of property worth, say, $100M to someone who is known to be a “sleaze-ball.”  Did the “sleaze-ball” put down, say, $5M as a deposit and are you feeling pretty good knowing that if he defaults you get his money?  Well, your good feeling is illusory since you just tied up a $100M asset and the “sleaze-ball” just tied up $5M.  Who would you rather be for the next three years of litigation where you can’t sell or even finance your property.  Yuk!

Are you a mezzanine lender feeling pretty good that you are clipping the coupon at 10% plus and have “points in” and “points out”.  And maybe you even leveraged your position.  Your returns are in the high teens – pretty sweet.  But then the deal gets in trouble and the first lender is calmly moving forward with a foreclosure.  Do you have the money to buy out the first – to cause a refinancing – to take control of the borrower – to put in a substitute guarantor – and all those other rights?  If not, as the highest yield debt, you are not sitting pretty at all.  Instead, you may look more like a fatted calf ready for slaughter.  Many mezz lenders, preferred equity providers and high-yield debt players learned this the very hard way during the financial crisis and some are still learning it today.  You need a source of capital to protect yourself or you find yourself with few – if any – friends during a workout.  Alas!

More intricately, these same issues applied in more depth in so-called “tranche-warfare” among parties to CMBS capital stacks that didn’t really review the domino-like nature of the documentation.  Typically the party with a lot of cash to protect itself came away the winner and the parties that didn’t have cash at their disposal were victimized and even wiped out completely.  Ugh!

Are you the kind of guy who is pugnacious and kind of a [fill in nasty word]?  No one and I mean no one messes with you!  If so, did you wonder why no one is calling you with deals day and night and why others seem to get the plum deals?  It’s like that country song, “if the phone ain’t ringing, it’s me.”  Bottom line is that people who act like [nasty word] find themselves gradually going out of business over time, but they never know why.  Sigh!

Did you agree to act in “good faith?”  Did you agree to be “reasonable?”  That always sounds so, well, good faith and reasonable doesn’t it?  But when the sh_t hits the fan those are the words that the litigators seize on to create all sorts of trouble.  Bummer!

Did you sign a guaranty and your partner didn’t?  Did you and your partner sign a guaranty but you are the wealthy one and your partner has close to nothing?  If you did, you blew it and this could be a very hard lesson to learn.  Ick!

Did you assume that the single purpose provisions in the CMBS financing documents that made all bad acts guarantors personally recourse for the entire loan didn’t mean what they said.  Well the Michigan Supreme Court came out different in the famous “Cherryland” case and said basically that “a contract is a contract.”  If you didn’t get nailed for this it is just because everyone got lucky.  Whew!


Real Estate Philosopher Prediction for Amazon HQ2

Everyone told me I shouldn’t do this.  So far everything I have predicted has thankfully been accurate – and why ruin that track record?  But here goes anyway:  I am predicting that Amazon HQ2 will be in Newark, NJ.

To be clear I have zero inside information.


The Real Estate Philosopher’s Book on Power Niches Will be Published in Just a Few Months

Many of you know The Real Estate Philosopher as, well, a philosopher in the real estate world.  But my day job is marketing – marketing – and more marketing.  That is what I do.  In this vein I have developed a concept and coined the phrase:

Power Niche

To delineate the incredible (bargaining and pricing) power that one has in becoming a powerhouse in a small market niche, as opposed to having little or no bargaining or pricing power in a larger market.

This Power Niche concept works perfectly well in the real estate world or in any party investing in, building developing, servicing, disrupting or otherwise interacting with the real estate world.

I have written a book about this – and all my other marketing secrets and ideas.  It is called:

          If You Want to Get Rich, Build a Power Niche

It is being published by Morgan James Publishing with a target publishing date of October of this year 2018.

If you are selling anything – if you are marketing anything – if you are starting a business – if you are building a business – my book will be helpful to you.

In my book I synthesize all that I have learned in the past ten years of studying marketing.

The book is for people who feel like they are just losing and want to start winning.  And it is also for people who are winning and smart enough to know that no matter how successful you are you can always learn from others to be even more successful.

Indeed, my proposition is that I can help “anyone” who has the desire to become a great salesman and/or a great marketer if she/he just follows the outline in my book.  Truly!

Click Here to see a preview of the book’s content.

To stay apprised of information about the Power Niche book and its release date, go to www.brucestachenfeld.com and sign up for the newsletter there.
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An Insidious Danger To Your Business in the Real Estate Industry

There is something particularly dangerous and awful lurking out there that can potentially destroy just about any business – even a very successful one – and that is letting someone get between you and your “customer.”

To be clear what I mean here by “customer,” it could mean:

  • Your money partner, if you are a sponsor

  • Your investors in your fund, if you are a fund

  • Your tenants, if you are a landlord (office, retail, multifamily, etc.)

  • Your condo buyers, if you are in condo development

  • Your clients, if you are a lawyer, accountant or other service provider

And it is so innocuous at first.

Indeed, it starts out almost all the time with someone trying to “help” you, probably with customer acquisition, and maybe they do “help” you at first, but then – maybe before you even realize it — you are caught like a fish on the line.  Consider……

How did those publishers feel when Amazon got between them and the people who buy the books?  It started out Amazon was just helping them distribute books, didn’t it?

How did the music people feel when Apple – and then Spotify – got between them and the people who buy the songs?

How wonderful – or awful – does a public company feel getting into a nice safe index – or kicked out of one?  As I write this I read that GE was just kicked out of the Dow after I think over 100 years.

Hitting closer to – real estate home – how do the hotel companies feel about Expedia and Priceline?  I am sure it is a love-fest.

And all you financial fund-like players, how do you feel about Townsend between you and the investors?  Loving every minute of it?

And consider the battle – titanic in proportion – between Google, Amazon and Apple – as to who will get that snarky little “device” into your living room so that when you clap your hands and say “honey we need soap,” it will direct you to Google Soap, Amazon Soap or Apple Soap?

The above is an anecdotal list of what I could whip out in about eight minutes.  But there are stories everywhere and everyplace about these kinds of things happening.

So now, as a hypothetical, consider what happens to condominium sellers when someone starts a new company called “NYC CondoBuyersUnite.Com,” and that site starts to aggregate all sorts of data.  At first no one really notices.  Then more and more people hear about it.  Maybe it has all sorts of interesting tips about how to negotiate with the seller, which is just moderately annoying.  But then the site starts to put in pricing data, which is even more annoying.  But then when there are a lot of people using it, at some point the site asks condo sellers if they might want to advertise on the website to drive traffic to their condominiums, and at least one significant condominium seller likes the idea and puts its project on the site.  Then someone else similarly situated realizes that it can hardly not be on the site if its competition is there.  And then, all of a sudden, the game has changed hasn’t it?  The website holds some real cards and it is too late to do anything about it.

And this is not just fanciful.  Indeed, as I write this, my head is spinning in the brokerage world as versions of the foregoing seem to have been happening there, resulting in the destruction of some long-time venerable and respected brokerage institutions that, not so long ago, were doing just fine.

The bottom line is that whatever business you are in, you simply cannot allow anyone to get between you and your customer – or sooner or later your customer will become the (middleman) party that got between you and your customer.  And that (middleman) party will have no incentive to do anything but transfer (almost) all of the economic upside of your business from you to that (middleman) party.  Which is just plain awful!

Interestingly, as an aside, I have a related philosophical thought here – as follows:

One of the things everyone thinks the internet does is cut out the “middleman.”  However, as I think on it, perhaps it can also create a middleman – in the way I outline above?

This leads me to suggest that if you look at the point I am making from the other direction – i.e., getting between a business and a customer as an opportunity – if you can figure out a way to do this successfully, you will end up owning that business, won’t you….?

The “Best” Books to Read for Building A World Class Real Estate Organization

This article contains my thoughts on which are the ‘best’ books to read in order to build a world class real estate organization.

As a philosopher I am supposed to think – of course – that’s what we philosophers do.  However, when you really are honest with yourself, you admit that most thinking is built on the thinking of others.  You learn something and then you apply it to something else or you build on it, or, just maybe, you break away from what you learned completely.  In any case, without belaboring this too much, a good philosopher is not too proud to learn from others.  And I will certainly admit that many of my greatest ideas in the real estate, legal and marketing worlds (my three worlds) were outgrowths of ideas that had been thought up by others, and my contribution was to perceive how to modify these ideas so that they would apply to my business or the businesses of my clients or those I was teaching.

So I read a lot.  And my hobby is reading on the two most critical elements of building any successful business, as outlined by Peter Drucker, who points out pithily that the two key ingredients any business must do effectively are to:

  • Innovate

  • Market

in order to “create” customers.

With this backdrop, I thought it might be useful for me to set forth which books I think are the best for someone trying to build a world class organization in the real estate world, whether one is building things, servicing others, marketing real estate assets or doing pretty much anything else.  So here goes – this is my reading list for success in the real estate world:

General Business and Management:

Peter Drucker’s compilation called simply Management.  This is not easy reading, but every word is – for me at least – like catnip to a cat.  Who else could explain the purpose of a business in a single sentence: “To ‘create’ a customer”. He is truly the father of this science of “management”.

Jim Collins’s two incredible books, Built to Last and Good to Great.  For many years this was required reading at my law firm.  Indeed, I don’t think I would have a law firm without them.  His adage is both prophetic and instructive that it is much more important to figure out “who should be on the bus” than to figure out? where the bus is going”.  How many times has my business model changed along the way? Answer: many.  Accordingly, I could never have succeeded without my incredible partners and teammates who were on the bus with me and who took those changes in stride and indeed saw them as opportunities.

Michael Porter is one of the great thinkers on competitive advantages.  Although he has written many books, I think the easiest way to distill him is through Joan Magruder’s book, Understanding Michael Porter.  Porter is probably most famous for defining the Five Forces that determine competition in an industry; however, the single phrase that has dictated my law firm’s success is the statement that “strategy is deciding what ‘not’ to do.”  Without that phrase from Porter, how would I have concluded that my law firm’s success in competing with bigger and stronger law firms would depend on our becoming The Pure Play in Real Estate Law?

And then just read all of Patrick Lencioni’s books.  He is a genius in assessing human interactions and how to manage them effectively and positive.  And, to boot, he gives you his brilliant thinking through enjoyable and metaphorical stories.  If you are running a team – whether as a CEO or a team leader – you will benefit from his books, and you will benefit a lot.

Marketing and Sales:

Seth Godin’s easy-to-read and powerfully counterintuitive Purple Cow is perhaps the best marketing book of all.  He illustrates so simply that it is more important to Stand Out, like a purple cow, than just about anything else.  In this vein, I ask you, how many real estate philosophers are there?

Tilt, by Niraj Dawar, is also a superb marketing book.  Among other things, Mr. Dawar points out that victory in the business world no longer goes to she who ‘does’ things; instead, victory goes to she who ‘markets’ things.  This lesson is kind of a bummer for all of us over-achievers, but like it or not, this is a fact of life.  Drucker knew that of course, but Mr. Dawar makes this point very effectively in his book.

Blue Ocean Strategy, by Kevin Kaiser and David Young, is notable for its creative thinking that the last thing you want to do is “compete” in a “red ocean” (where it is blood red due to competitors clawing at each other for market share).  Instead, say the authors, you should swim away to a blue ocean where there is no competition and do something completely different.

Brand Warfare, by David D’Alessandro, I read long ago, and then again more recently.  The point I took away was that there is nothing more important for the CEO to focus on than her brand.  Nothing at all.  Warren Buffett points out that a brand permits a company to sell its product at a higher price for an extended period of time (not an exact quote).  If you are a CEO and aren’t thinking about your brand and how to make it stronger, you are missing a major boat.  Notably, your brand doesn’t just apply to customers – it applies also to the talented people that will either join your company or join your competitor instead.

How to Master the Art of Selling, by Tom Hopkins, is a masterpiece.  He doesn’t spend the first 75 pages telling you what he is ‘going to tell you.’  He just tells you how to sell stuff.  Boy did I learn a lot from him.  Before I picked it up, I thought I knew just about everything about marketing.  I mean, for heck’s sake, I just wrote a book on marketing that will be published later this year.  But when I read his book I felt like a schoolboy being schooled.  If you have to sell or market things, you should buy this book.  It is out of print and hard to get though.

The Presentation Secrets of Steve Jobs, by Carmine Gallo, is notable for the theme that one should have a “passion statement” that is short and to the point and evidences the thrill and passion you have in what you are presenting, marketing or selling.

The Challenger Sale, by Matthew Dickson and Brent Adamson, is also very useful.  Their point is that the prospect is usually tired and bored with sycophants kissing her ass as they ply their wares; and, what makes the CEO sit up and take notice is someone who clearly is no pushover – someone who has ideas that might be of use – someone who will (at last) challenge the CEO intellectually.

General Lessons:

Simon Sinek blew me away first with his Ted Talk and then with his book, Start with Why.  His point is that the ‘why’ is inspirational, and he is right.  If you can’t answer the question ‘why are you in business,’ then you have a serious problem.  For us it is our hedgehog, which means that we truly care about our clients and colleagues.  Without a ‘why’, then ‘why’ should anyone of talent join your company and stick around?

Also, if you are kind of a math guy (and if you aren’t I think you should be), consider reading The Drunkard’s Walk by Leonard Mlodinow.  It gives you a come-uppance that you “might” not be nearly as smart as you think you are and a math-based way of evaluating what you and others are doing.  And don’t worry even though there is ‘math’ all over the book, it is easy and fun to read and understand.

And whatever you do, one should read – and re-read – Dale Carnegie’s incredible book, How to Win Friends and Influence People.   I had some trouble coaxing, manipulating, begging, and even bribing my daughters (when they were teenagers) to read this book, but even though it came from their Dad, both of them admitted it was one of the greatest books they had ever read.  And Warren Buffett is said to have read it numerous times, and he hasn’t done half bad.

Along the way, it won’t hurt you to take 45 minutes to read (or probably re-read) Jonathan Livingston Seagull, by Richard Bach.  If you are down and need to be inspired – or maybe just could use a reminder as to what is important – there is nothing like reading this book.  I don’t know if I have read it more or less than 50 times, but it is close either way.

Okay – are these all the great business books I have read?  By no means, but these are the ones that have helped me the most in forging what I hope will be a lasting and successful law firm business in the real estate world.  I hope this is helpful to you as well.

A Super-Easy Marketing Thing You Can Do – But So Many Miss This…

Sometimes people are brilliant at what they are doing but overlook an opportunity that is right under their noses.  So here goes some hopefully useful thinking …

What is the absolutely easiest free marketing and sales pitch any company can make in the real estate world – or really in any world?

Answer – your name – i.e. the name of your company!

Every single time someone says it, asks for it, googles you, emails you, gets your business card, tells someone else about it, your name is used.  You can’t get away from it.

If done right a name can be explosively useful (which I will discuss below), yet oftentimes I come across companies that name themselves with acronyms like:

  • XBT Companies

Possibly the CEO’s kids are named Xaiomi, Beth and Toby, but the problem is that the name is almost impossible to remember; accordingly, the CEO loses out on a marketing opportunity every single day many times a day.

Sometimes – going too far in the other direction, people come up with a name that covers all aspects of what the company does, such as:

  • American and European Realty Debt and Equity Partners and Investors

This name – although on the surface informative – still results in the same result – that no one can remember it, nor does it achieve the upside that I will describe below.

Along these lines sometimes people come up with an acronym.  If they want to be real estate investors that invest in debt strategies throughout the capital stack they use:

  • REDSTRAT

This stands for Real Estate Debt Strategies, but once again, is not memorable and doesn’t achieve the upside that I will describe below.

Finally, sometimes people hire a naming specialist or marketing or advertising agency to come up with a “name”.  This can be useful, but only if the third party consultant is thinking in the manner I outline below.  And it is critical that senior management be deeply involved.

Okay – I apologize if I have inadvertently insulted some people’s company’s names.  I mean no harm and I am trying to be helpful.  Here is what I think you “should” do in naming your real estate company.

Let’s think of what a great name can do for you, which can be dramatic, and I am not exaggerating here.  Let me peel away the onion and show you just how to do it.  There are just three steps:

First – consider “why” you are in business – see the great book by Simon Sinek, Start with Why, for some guidance.  What is the purpose of your business?  What is your message – internally to yourself and your employees – what gets you and your team excited to go to work every morning?  If you don’t have an answer for this, see my prior article on this subject, as you have some work to do.

At the same time, consider your external message, to customers, lenders, investors, borrowers, landlords, tenants, buyers, clients, etc.

It is critical – and excellent – if the two messages are the same and dovetail together.

One way or another, hone your message down so you can say it in just a few words.

Second – once you have your message – your name has to be edgy, provocative and memorable.  Don’t worry about offending people; instead, worry about getting noticed and remembered and telling people the entire story of your company in a couple of words.

Third – and finally – do not delegate this initiative!  The owner, principal, CEO, top girl/guy has to do this project by his/herself.  There is no way out of it.  It is fine – and good – to brainstorm with a ton of people and keep an open mind into the workings of your own mind.  Even hiring a third party expert could be very useful.  But be honest about who you are and what you want to do in your business and “why” you are in business.  If you just want to make a zillion dollars and really don’t care about anything else, well, I guess that’s what you’re about.  Don’t try to fake being something you’re not.  People will figure it out.

So here is an example of exactly what I am talking about….

Pretend your message is that you will look at making loans or investments that no on else would consider.  Your theory is that the borrower or sponsor should come to you when they have exhausted every single possible alternative.  When everyone turns down this borrower/sponsor, then the borrower/sponsor should come to you.  Your theory is that when a borrower/sponsor comes to you, you will hold all the cards since, by definition, everyone else has turned them down.  You will then be able to write your own terms for the loan/investment that could range from (i) just saying “no” because it really is a bad idea, (ii) charging a ton of interest or other upside to compensate for the risk, or (iii) changing the structure and nature of the investment so that it is not so crazy after all, i.e. you box the risk.

Is this smart or dumb?  That is not the question here and I am not advocating this strategy – it is purely a metaphor – but right or wrong that is your strategy.

The first step is a short statement of the message, which is something like “when everyone else says ‘no’ give us a call”.

Now for the second step, which is making the name memorable and edgy and exciting.  Here are some ideas:

  • Whacky Capital (hard to forget the name and implies you will do things others won’t do)

  • Effing Fearless Capital (see above)

  • Crazy Capital (but of course you’re not really crazy are you?)

  • Boxy Capital (implies like a fox and/or boxing risks)

  • The Last Resort Capital Company

Are these great names?  Maybe.  Maybe not.  But they tell a story.

When someone gets hired by Effing Fearless Capital and – with raised eyebrows – asks why is that the name, someone at the company has to tell her that the CEO is the opposite of fearless and instead has the business model described above.  There are even stories about how everyone said making the loan was nuts, but then…
.
And that same story registers with potential sponsors and borrowers, doesn’t it?  Everyone will remember it.  How many times will a borrower go to a “normal” lender for a loan and the lender might say something like….”well I don’t see how we could do something like this.  Why don’t you try Whacky Capital.  They’ll do almost anything.”

Try forgetting the name Whacky Capital, after all.

So that’s it.  Have an amazing name that is the fulcrum of your business – that tells everyone internally and externally the story – keeps the heart of the company beating – and is unforgettable.

Of have a not-that-interesting name that people have to just strain to remember and does nothing at all for you.

The choice is yours.

By the way, naming things is my hobby.  If you want to brainstorm with me about the name of your new company – or maybe a re-name of your existing company – I am here to help.  It will be fun.

PS:       Oh – and my law firm’s name – you might be wondering about.  Ummm, Bruce, if you the great and wonderful Real Estate Philosopher are so smart, how come your law firm is named Duval & Stachenfeld.  Well you have a great point, but there is a great answer and that is that in New York we lawyers have to name ourselves with partners in the firm.  Or – believe me – I would have a different name for our enterprise.  Dang!

Is Talent Analysis The Magic Key To Successful Real Estate Investing?

The front page of The Wall Street Journal’s Review section on March 24th – said the following in very large type:

The U.K. Is Doing Just Fine, Thanks

Hearkening back to July of 2016 – right after Brexit – there were many – and I mean many – that thought the U.K., and London in particular, would get nailed.  The fear was that everyone would move away and Britain would be screwed.

The Real Estate Philosopher’s article, dated July 11, 2016 was entitled Brexit and London and Talent, Oh My, and my main point – now about 20 months old – was exactly the opposite of the fears of the time.  I said in boldface type:

London Will be Just Fine! 

Okay, I was 100% right and (sorry to be a little bit humbuggish here) it is  important to examine why I was right.  My thinking at the time was as follows:

When you get right down to it, I don’t see the talent “wanting” to leave – uprooting their families to go where, exactly? There are other great cities in Europe for sure, but if your life is in London, I don’t see people eager to move somewhere else so easily. If you live in London and have family and business contacts there, your optimal first strategy is to figure out if there is a way to stick around.

And if the talented people that form the backbone of London’s financial expertise don’t actually leave then I am confident that everything will be just fine in the end for London. That talent will create the next upside, just as occurred in New York.

In a nutshell, my thesis was that the talent wouldn’t leave London and if the talent didn’t leave, then London would continue to be successful.  And that has now proved out.

Of course, readers of The Real Estate Philosopher don’t know this, but I made “exactly” the same prediction at my law firm’s annual outing at the end of 2008.  The only difference was that I made it for New York and not London.  At that time, the Global Financial Crisis was in full swing, panic was everywhere, and many thought it was “game over” for New York.  The financial world was in ruins, and everyone was blaming New Yorkers.  Even the real estate market crashed here.

But The Real Estate Philosopher said the same thing, i.e., that the talent won’t leave New York City, and if the talent doesn’t leave, then New York City will be just fine.  And that has been correct too – indeed, it is hard to find anything that hasn’t gone through the roof in NYC in the past ten years.

So I have now made the same prediction twice in a row, and in the face of widespread beliefs to the contrary.  Does that mean I am right in my thesis and you should listen to me now?

Of course not!  The graveyards are full of brilliant forecasters who got lucky a few times in a row and then it turned out to be pure luck.  I am the first to advise that you should take what I am saying with a grain of salt.

However, I do think that I am onto something here with my theory that real estate investors should have a Talent Meter as part of their checklist of underwriting a real estate deal.  The idea would be to gauge not just population growth and other demographic metrics, but also to gauge whether talented people are coming or going.  This would include considering how that location – i.e. the city or the location – can compete for talent with other places trying themselves to attract talent.

One way or another everyone is fighting for talented people.  Countries are doing it.  States in the U.S. are doing it.  So are cities.  So are universities and schools.  And so are companies and organizations of all kinds.

At our firm, our mission statement has been the following for about fifteen years.  It has stood us in good stead, and we have no intention to change it – ever:

Attract, train and retain talent – also known for short as “ATR” 

To conclude, my thinking is that the geographical locations that win the ATR wars will undoubtedly have the value of their real estate rise significantly, and the losers in the ATR wars will have the opposite result.

So consider developing your own Talent Meter to use when making your real estate investment decisions.