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.

For An Edge In Real Estate Investing, Follow The Talent

My law firm has an internal message called “ATR”.  It stands for:

Attract, train and retain talent!

For a law firm it is the whole game.  Clients sometimes leave or even get merged or go out of business; however, if you have a high-quality legal product you can always get more clients.  If, on the other hand, you lose your talent – i.e. your lawyers – it is game over – because you have nothing left to sell.  Also, once the talent starts to leave it is like a run on a bank and almost impossible to stop.

So we focus relentlessly on this message internally.

Also – I can’t resist a very dramatic movie quote from a movie I like called Rock Star.  In the (dramatic) scene the band is shouting at each other and breaking up.  Mark Wahlberg – the lead singer – walks out angrily.  The remaining band leader turns to Jennifer Aniston and offers that even without Wahlberg she can still manage the band.  Aniston replies:

“There is one rule in the music business and that is ‘follow the talent.’  Well all the talent in this band just walked out the door.”

Aniston leaves and the movie unfolds and I won’t spoil what happens with more about it here….

In any case, I have been wondering whether that is what real estate investors should be focusing on when they determine where to invest?

Consider an obvious situation unfolding now – Hartford versus New York City.  Aetna – a long-time stalwart in Hartford – just took the step of going to New York City for its top brass – and it is big news.  Why did they do that?  Obviously New York City is a place where the top talent already is, and wants to go, and stays.  Even after 9/11 the talent didn’t leave.

Hartford is known informally as the insurance capital is of the US.  But – I genuinely mean no offense – for many people Hartford is not as attractive a place to live as New York City.  Does this mean that other insurance companies will follow Aetna’s lead?  Can they compete with Aetna without also being in New York City – or another place that would attract top talent?

Hartford is a lot cheaper than New York City, but where would you want to invest in real estate right now?

I made this point in my “Brexit and London and Talent, Oh My” article, where I took the position that London would be just fine post-Brexit, because London is a cool and exciting place where the talent just wouldn’t want to leave, so one way or another London would be just fine.  So far – a year later – that seems to be the case.

I made this point eight years ago in the depths of the financial crisis – when I was giving a speech to my firm.  They will no doubt recall how afraid we all were.  My speech said effectively that New York had nothing to worry about since the talent wasn’t going anywhere – indeed, where was the talent going to go after all?  I don’t like to be a humbug (that much), but I was certainly right about that as New York has continued its position as the global center of finance, and much more.  This is all because the talent has stuck around.

Indeed, our ATR message is one for cities – and you regularly see them competing for businesses that will attract jobs for talented people.

And you even see the ATR message for countries now, as they try to prevent their talented citizens – especially the wealthy ones – from leaving.  Indeed, sometimes they compete a bit unfairly, by making laws stopping you from leaving.

My point is that ATR is – or should be – the message for just about every organization – every city – and every country.  See also my article, “Why Are You in Business” from November 2016, which was my ‘first’ Real Estate Philosopher article, where I suggested that ATR should be a focal point for just about any organization.

If you follow my thinking, then a real estate investor that is considering where to invest should add to its demographic due diligence a Talent Analysis, which analyzes whether talented people are coming or going.

How would one do this?   I admit I don’t know.  Certainly just reading local news articles for the past three to five years would give insight.  And I bet the predictive analytics types and the tech people could come up with programs and heuristics to figure this out too.

In any case, that is my recommendation – before investing, do a Talent Analysis of the jurisdiction in which you are investing.  And if the jurisdiction (A) isn’t trying hard to do ATR and (B) isn’t succeeding in ATR, then just don’t invest there.

By the way – as an aside – for all those who think NYC is crazily overpriced, I wonder if your pricing determination takes into account a NYC Talent Analysis?

Power Niche Marketing: 6 Things Not To Do

Here are some things that are almost certainly a waste of time. I think, to my embarrassment, I have done most or all of these things myself. Mostly they makes me cringe….. Since it is a lengthy list, I have split them into two parts. Part one is below.

  1. Trying to take someone to lunch without an agenda that makes it clear that the lunch is for the other person’s benefit.

In this situation, the other person will assume you are trying to just get business out of them, and they will cleverly and creatively avoid it for a loooooonnnnngggg time.

I wonder how many of you readers are – right now – chasing some poor prospective client down for lunch? And if so, how many times has it been cancelled? And at the last minute at that, I bet, which is kind of demeaning to you? And afterwards I bet you chased after the person to reschedule. And each time it gets rescheduled, is it weeks, or even months, till the reschedule date? And what is your plan for that lunch – to talk about the poor fellow’s kids and skiing and then (subtly) slip in something about getting his business, which is supposedly the point of it all?

Bottom line, you are thinking of what you want and not what your client wants.

  1. Making up a super-convincing PowerPoint to show people.

Unless it is really funny or funky or crazy or iconic or a dramatic visual presentation, it will just put people to sleep. They will do anything to get out of watching it or if you force them to watch it they will not pay attention, or even if they do politely force themselves to pay attention, they simply will not remember it.

Do you really think your analysis of your market share versus that of your competition is going to “make the sale”? I ask you, when was the last time someone sold something to you, and why did you buy it?

By the way, here is a super-sales story, and it happened only a few weeks ago. The doorbell rang and a traveling saleswoman showed up. Can you imagine how she made the sale to me, and I had no chance against her tactics?

Well, she was about seven years old, cute as a button, and was with her Mom. They lived down the street and she was selling Girl Scout cookies. She just said “….do you want to buy some girl scout cookies?” I hate most Girl Scout cookies, and the rest make me fat, so I bought only ten boxes.

Boy was this a devastating sales technique. I wonder what would have happened if she had brought a PowerPoint…

  1. Misusing the internet and the social networks.

Some people seem to think if they press the right button on the internet or on social media, the business will just roll in. This is not going to be the case if the use of these tools is in place of personal interactions.

At least I certainly haven’t found a way to do this in a professional service business, nor have I seen anyone else do this successfully. The internet can be used for generating leads and letting people know your brand. However, sitting in your office and playing on social networks just won’t get the job done.

By the way, a caution here about what I mean is in order. I don’t mean you can’t email people and build pre-existing relationships by putting forth positive statements about yourself and your Power Niche on the internet. Of course you can and should. What I mean is that you shouldn’t be using the internet instead of personal contact. There is nothing more powerful than meeting someone in person, shaking hands, and sharing a cup of coffee or a meal. That is a predicate to a “relationship.” A supposed relationship built over the internet is not much different from an email relationship with that fake Nigerian Prince.

  1. A party where you invite all your clients/customers so they can network, etc.

This can feed your ego, if the party has “all the cool people there,” but doesn’t get the job done nearly as well as sitting down with people and talking about “their” business and how you can help build it. It is also a lot of time and money that could be spent better elsewhere.

  1. Networking without a plan or a message.

Networking without a plan is a lot better than doing nothing, as I will point out in later columns, but not that much better. It is a variant of working “hard” but not working “smart.” If you couple the hard work you are willing to put into your networking with the smart ideas you will learn from my column, then you will convert this to a winning strategy.

  1. Conventional PR.

After flip-flopping on this a half-dozen times in the past ten years, I have concluded that, for most of us, and for most businesses, this is just about a complete waste of time. Typically PR sops up the personal time of the most senior, and most valuable, persons in your company, as that is who the media wants a quote from.

You might spend hours to get yourself quoted somewhere? So what? Are you really going to get hired as a lawyer because you got quoted in the newspaper? Hardly.

Sorry, but all of this is almost always a complete waste of time, not to mention a waste of the money you spend on a PR Firm.

You are better off taking the time and the money that you would have devoted to PR and using it on the other techniques I outline for you.

Having said this, PR can be good for a global law firm to maintain its global branded position as one of the top players in the legal world. But down in the trenches, for most of us with smaller-sized law firms, it isn’t likely to help your business succeed or help you become a great rainmaker.

. . . .

If you have been doing any or all of the foregoing things, don’t bum out too much. I think I did every one of them, other than the social media stuff. The past is irrelevant – all that matters is what will happen going forward.

By the way, if you have done some of the foregoing and it has actually worked for you, consider why that is the case. Is it pure luck, in which event it is great that you were lucky but you still shouldn’t waste more time on it? Or, do you maybe have a special angle on the foregoing that I personally haven’t seen but is nonetheless successful that could be exploited? I don’t like to admit it – but I don’t (yet) know everything…

Is Real Estate Becoming A Service?

Real estate just became its own separate asset class.  However, ironically, that may have occurred just at the moment it should have been morphing more deeply into other asset classes.

Don’t get me wrong, as a real estate professional I am very happy about real estate being named as its own investment class; however, it is worth taking stock of what is actually happening around us and its implications.

So far we have the disaggregation of real estate persisting in numerous directions, such as:

  • Co-working

  • Co-living

  • Crowdfunding and similar concepts to democratize real estate investing

  • Airbnb

  • The implications of self-driving automobiles

These are the obvious ones.  But roaming beneath the headlines is a slew of real estate players with different business models, with more being imagined and created every day.  Here is a quick list of some I know of:

  • LiquidSpace – Network for office space where startups and growing teams connect directly with real estate owners, operators and companies that have space to share.

  • Opendoor  and Nested – Offer simpler and easier ways to sell your home

  • Breather – On demand access to private spaces across the U.S. to be used as temporary working spaces.

  • Spacious – Uses restaurants during off-hours as co-working spaces for paying subscribers

  • Roam – Network for global co-living spaces and co-working spaces when you travel – providing everything you need to feel at home and be productive at your chosen destination

  • Remote Year – allows you to travel around the world while still being able to work remotely

  • Common – Manages shared living spaces

  • Storefront – Finds temporary retail or event space in the best neighborhoods

  • Fundrise – makes quality real estate investments available to everyone

And this list just scratches the surface as there are more and more things going on every day.  I certainly don’t know everything and even if I did, there are likely a bunch more things about to happen that I have no idea about, .i.e. to paraphrase Mr. Rumsfeld, “unknown unknowns.”

I have been wondering whether there is a way to make sense of all of this.  And the conclusion I have reached is that just as many people have been wondering whether they should really own a car when they can just rent or use one — through services such as Zipcar and, eventually, self-driving vehicles – I wonder whether people will reach the same conclusion about real estate?  I mean why own a house and why rent space under a long-term lease if you don’t have to make that kind of economic commitment and get pretty close to the same benefits without such a commitment?

What this means is that real estate may transform from a thing you buy to a service…..

Consider these thoughts……
Living space that has co-living and robotic movable walls (already in development) whereby a single room can morph from a bedroom to a kitchen to a party room to a study.

Restaurants that have a breakfast brand – a lunch brand – a dinner brand – and a swinging nightspot brand.  There are logistical issues; however, ultimately with the right cosmetic changes you could see that coming.

Retail stores that are one store on one day and another on another day or at another time of day.  Of course, there are devils in these details but you could see it coming.

Offices that are shared.  I guess we already have that.  At first it was companies like WeWork.  Then it was competitors to WeWork.  And now it is landlords themselves putting these spaces into their buildings without leasing to a WeWork or a competitor of WeWork.

Houses and homes that are like hotels and used and rented out.  I guess we already have that too.

Transient living uses that are being invented, largely under the concept of co-living.

Liquid space – Airbnb – and so much more

For some time, I have been idly thinking and wondering about this concept, but without really putting the intellectual pieces together.  Then I read a very insightful article by Mr. Dror Poleg entitled Don’t Think of a Building, Understanding Technology’s Threat to Real Estate Owners, Operators and Asset Valuations, where he synthesized my nascent thoughts better than I was able to do.  He makes the following points about how real estate is morphing:

  • “Space is broken down into smaller value units, allowing end-users to pay only for the specific components they wish to use — as desks, meeting rooms, bathrooms, beds, etc.”

  • Time is broken down, reducing the minimal commitment required from end-users to as little as 30 minutes — shifting profits to those who can secure large spaces “wholesale” and lease them out “retail” in smaller sizes for shorter periods of time.

  • Incremental use (smaller spaces, shorter periods) gives rise to dynamic pricing models.

  • Equity is broken down, enabling smaller owners to share their financial burden with other small and medium investors.

  • Visibility is no longer just about being seen offline. Accessibility is now partly about the ability to book space and other amenities within it on demand. Spaces with “good enough” locations become more valuable through optimized design and innovative marketing.

  • New attributes – community, curation (who else is there?), content (events), value added services, and availability on demand – are eclipsing location and accessibility as the key drivers of differentiation between assets.

So I wonder if real estate is morphing into a service more than an asset.  What does that mean and what should real estate players do about it?  Of course, no one can really predict the future and figure out what is going to happen.  However, I am getting more and more confident that real estate as we once knew it is going to be changing dramatically in years to come

The answer to appropriate strategy would be specific to the different asset classes and investment strategy of each real estate player; however, I will stick my neck out and advocate the following plan of action:

First read Dror’s article – this article – and whatever you can find about new business models in the real estate world.

Second – sit down with a pad of paper and a pen – and no iPhone – and think of what real estate related business you are in.

Then consider whether there is a deeper meaning to what you are “really” doing.  For example, the car companies are now wondering whether they are really in the transportation business?  Is there a deeper meaning about what you are doing that leads you to describe the heart of your business differently?  For example, instead of building houses, maybe you are in the business of giving people a comfortable place to live.

See where this leads you…….

Finally, I do think it behooves all of us (including us lawyers) to be as vigilant as possible regarding these changes because when an industry is disrupted, it is typically much too late to play catch-up once you fall behind.  And I will end with a Bill Gates (famous?) quote:

“People tend to overestimate what will happen in a year and underestimate what will happen in ten years”

I am comfortable in saying that whatever you are doing now, the odds are that you won’t be able to do that in ten years or, if you can, it will not be nearly as profitable.

Power Niche Marketing: Moving On To Michael Porter

Sorry for all the intellectual “stuff” as I try to effectively “teach” professional services marketing through this column, but sometimes you have to buckle down to the books rather than just winging it. I didn’t get to where I am in the marketing/legal world by just wandering out and bumbling around. I took the time to read and think. So I am moving on from Peter Drucker (the topic of my last article) to Michael Porter.

Michael Porter is also very cool and a famous professor at Harvard Business School. He is known for his incredible insights into competitive advantages and his famous “Five Forces” to assess competitiveness of an “industry” are taught in “every” business school.

He has written a ton of stuff and if you are a scholarly type, his books are like catnip to a cat; however, if you want to just learn the basics, they are explained in a great book by Joan Magretta called, aptly, Understanding Michael Porter (affiliate link). In any case, the buildup is over and let me get to the point.

Professor Porter is often asked what is the biggest mistake people make in the business world and he answers “trying to be better” than their competition. If you try to get “better,” all you do is spur your competitors to do the same thing. Then pricing falls or efficiency rises, etc. All that then happens is the upside from your industry (and indeed the upside from your investment in getting “better”) goes straight to the customers, and not to you. Indeed, when you are the absolute “best” you can be and so are your competitors, the result is zero profit!

So what should you do? Mr. Porter answers “be different.”

This is not far off from the concept of “innovating” is it?

Also, by the way, for those of you who read my prior series of articles on Above the Law — Reinventing the Law Business — you may recall I started out that series of articles with Messrs. Drucker and Porter. They are always a good place to start.

Now to sum up and put Mr. Drucker and Mr. Porter — my intellectual heroes — together, your plan in the business world should logically be

Innovate and market to create customers

I know this article is shorter than usual; however, this really is the basis for my marketing plan and the essence of the Power Niche — and it is worth dwelling on it.

Here is the definition of Power Niche again so you have it handy.

In brief, a Power Niche is a small-sized niche within a bigger industry that no one else yet dominates or owns. The niche isn’t obvious so you have to figure it out and “create” it. You step in and learn everything about it and everyone in it. You tell everyone about what you are doing – incessantly – and become the real “owner” of the niche merely by staking out your homestead in virgin territory. This then becomes a virtuous cycle as the more you know, the more you do, and the more you do, the more you know. Before long you are the world’s unquestioned expert in this (smaller) niche. All of this enhances your bargaining power within that niche. Instead of begging for business in the bigger industry, you now have eager clients paying you top dollar within this smaller Power Niche.  

What is a Power Niche?

One of the most important things for any real estate business and, indeed, any business is a successful marketing program.  Of course in our hearts we want to believe that if we just do something great then everyone will figure it out and be impressed.  But alas, that is just not true.  Indeed, Einstein flunked physics and couldn’t land a job.  And everyone has an example of a super-talented person that ends up just toiling in the trenches for someone else.  Like it or not, the world belongs to the marketers.  And I believe that this will increase more and more over time.  Someone – but I cannot find the exact quote – said something like this:

“The world will increasingly belong to those who create the ideas rather than those who execute them.”

In the real estate world it is no different.  If you have a great “brand” (which of course is built by a successful marketing program) you typically succeed — and the converse.  This is the basic reason why Warren Buffet – arguably the world’s most successful investor – focuses on brands; namely, for their long-term premium pricing power.

So how do you create a strong brand in the real estate world?  The simple answer is that you do this by creative and intelligent marketing.

I have become a student of marketing over the past ten years, including both reading everything I can lay my hands on and at the same time analyzing what works and what doesn’t work and delineating the reasons for success and failure.  After thousands of hours of study, I have come to the conclusion that the secret of a successful marketing campaign and, concomitantly, the essence of building a successful brand (almost) always centers around what I call:

  • a “Power Niche”

This is a concept and phrase I have invented and coined; however, for any intellectuals reading my writings, you will quickly realize I am building on the works of Peter Drucker and Michael Porter and other great intellectual giants in the business world.

As an aside, I note that there are certainly other ways to be successful, such a being the low-cost-producer; however, generally the other angles (including being the low cost producer) are typically much more difficult to effectuate and maintain; however, just about anyone can build a Power Niche.

So what do I mean by a Power Niche?  Here is my definition:

In brief, a Power Niche is a small-sized niche within a bigger industry that no one else yet dominates or owns.  The niche isn’t obvious so you have to figure it out and “create” it.  You step in and learn everything about it and everyone in it.  You tell everyone about what you are doing – incessantly — and become the real “owner” of the niche merely by staking out your homestead in virgin territory.  This then becomes a virtuous cycle as the more you know, the more you do, and the more you do, the more you know.  Before long you are the world’s unquestioned expert in this (smaller) niche.  All of this enhances your bargaining power within that niche.  Instead of begging for business in the bigger industry, you now have eager clients paying you top dollar within this smaller Power Niche.  

A Power Niche is often difficult to identify and at the same time counterintuitive, and indeed kind of scary, but once figured out is very easy to accomplish and can be crazy-lucrative.  Indeed, just about anyone can create a Power Niche successfully.

Indeed, for my law firm, I am a lot better off as The Pure Play in Real Estate Law than I am trying to be all things to all people.  It was surely an unsettling decision, to become the Pure Play in Real Estate Law as when we enacted this we were theoretically scaring off the 99% of clients in the world who are not in real estate.

But consider that in the (smaller) real estate world my firm is a major player.  We are able to know everyone and everything.  This makes my partners and me very useful to our clients in ways that are in addition to “just doing great legal work”.  This of course includes effectuating our mission of “helping our clients build their business” due to our connectively, contacts and industry knowledge.  If I tried to make my firm full service, I would be competing with multi-thousand-lawyer global behemoths and I have no idea how I could convince a client we were the optimal, or even a useful, choice.

In the business side of the real estate world, it is the same thing.  Let me give you an easy example, which is deliberately quite simplistic.  Let’s say you are in the multi-family business.  You do what is called “build-to-core.”  This means that you find locations for multifamily buildings, you get a construction loan and you build a high-quality building.  Then you rent it out.  Simple, right?

However, if your building looks like other buildings, how are you going to make a profit that on a long-term basis will be greater than just average?  You could convince yourself that your building is “better”, but what does that really mean?  Does it mean you paid more for a better location?  If so, your costs are higher and hopefully your rent is higher to make up for it.  Or did you do a better job of building it with higher quality contractors?  Same thing – you paid more and hope to get more rent.  I wonder whether that is really much different from making it cheaper and charging less?  It is two sides of the same coin.  In the short term you are making bets that may or may not pay off.  In the long term, what you are doing is making a product better and hoping to charge more for it because of that.  Indeed, Michael Porter says that the biggest mistake people make in the business world is making things “better” when they really should be concentrating on making things “different.”  And of course that is what I mean by the Power Niche.

So instead of the usual plan (outlined above), what if, for example, you modified the marketing and business plan for your residential real estate company to more narrowly concentrate on the LGBTQ community?  I picked this concept at random but please follow my point through.  What would now happen?  A bunch of things:

  • You would learn everything about the LGBTQ community

  • You would learn what they like and dislike

  • You would target your building towards LGBTQ people (and figure out if in fact they wanted to live with other LGBTQ residents)

  • You would develop intellectual capital at your company around this

And you would build your building to make it one where LGBTQ people would want to go.

You would be building a Power Niche.

Your market would be smaller – much smaller – but if you did it right you would do what Dale Carnegie says in his famous book, How to Win Friends and Influence People, namely, to “arouse an eager want” in the customer.

Would LGBTQ people pay more rent to live in a building that was really about the LGBTQ community in New York City?  Honestly, of course I don’t know that and there is always risk in any new idea.

But this is just the beginning of the Power Niche.  Once it became clear to the market that this was your business’s focus, LGBTQ people would want to work for you.  LGBTQ businesses would want to do business with you.  Advertisers would want to advertise with and through you.  You would find all sorts of opportunities you wouldn’t otherwise see because you would be the “only one” focusing on this.  You would learn more and more and become a font of intellectual capital on the LGBTQ community’s interaction with the residential real estate world.  People would want you to speak at conferences.  You would be the expert’s expert in residential real estate for the LGBTQ community.

If the idea worked for a first building, your next building would be a no-brainer to get investors and lenders and other parties.  And after a while, everyone would be chasing you to invest with you and do business with you.

Instead of trying to be “better” and playing the odds on paying more for a better location, you would be a “brand” that had a small but targeted customer base.

You would have established a Power Niche in the real estate world and as Warren Buffet would presumably like, you would be able to sell your product (i.e., brand) at an above market price for a long-term period of time.

Guaranteed success?  Of course not.  Obviously there are social issues at play here as well (for this particular Power Niche), but I still like it a lot better than the other game plan in “build-to-core”, in which you are a lot more at the mercy of the market.  Indeed, when the market falls apart for multifamily, which place do you think will hold its rental value better?  All the buildings that look pretty much like each other, or the “one” building where LGBTQ people really want to be.

Power Niche Marketing: What Is A Power Niche?

Welcome to my new column, “Power Niche Marketing.”

This column has a very simple purpose: to teach marketing to lawyers and other professional service providers.

Astonishingly, all of us lawyers need clients in order to survive, yet when we go to law school and start our careers and our careers move forward, there is simply no one teaching us how to get these clients!

And we are desperate to learn. We see the big rainmakers, with their (figurative) cigars having all the fun and making all the money, while we toil away in the trenches wondering “why?”  It doesn’t make sense. It doesn’t seem fair. But we have no idea what to do about it.

In our desperation, we may ask a successful rainmaker, “How do you do it?  What is the secret?”

The rainmaker is always 1000% confident in her answer, and you hear things like this:

  • You get your clients from across the table.
  • You get them on the golf course.
  • You go to seminars.
  • You work the room.
  • You network relentlessly.
  • You get them from your high school, if it is connected.
  • You get them through just doing great work, and people hear about it.
  • You get them at the synagogue/church, etc…

The list goes on and on and on, with the only theme being that there is no rhyme or reason to it. And yet the rainmaker who gives you this advice is super-confident in it for an empirically misleading reason: whatever she is telling you worked for her!

Some of us in our desperation go to marketing courses, or seminars, but, alas, just about all of them (and maybe all of them) are taught by people who didn’t actually go out and bring in clients. Perhaps they are non-lawyers or, worse yet, people who failed at being lawyers and then turned to teaching marketing, thereby validating the old saying that those who can, do; those who can’t, teach.

There really is nowhere to turn. But meanwhile, our profession is becoming utterly relentless in the simple truth that:

No rain = bad career.

Your troubles are now over!  Just read my column for the next year, and you will be a great rainmaker. Simple!

Okay, it is not that simple; however, I will stick my neck out and say the following:

  1. I am not some guy who couldn’t succeed and so is now teaching. I am out there every single day marketing and trying to provide strong value propositions to prospective clients. I am in the trenches, and I know what clients respond to.
  1. I have gained my expertise by ruthlessly examining internally my own strengths and weaknesses and, with brutal honesty (to myself), I have analyzed what works in practice and what fails. At the same time, I have tried hard to understand what is really and truly important to my clients. After many fits and starts – and more outright failures than I like to think about – a lot has become clear to me. I will be sharing what I have learned in this column.
  1. Finally, of everything that I have learned in the marketing world, by far the most important lesson I have learned is the importance, and indeed the power, in the “Power Niche,” which is a term I have coined. Although there are numerous sub-parts to my marketing plan, at the heart of it is the Power Niche; accordingly, you will hear a lot about it throughout the articles.

Ultimately, virtually anyone can become a successful rainmaker by following a few simple teachings. This is really true. There are some tricks of the trade, but it is not a secret handshake – it is actually quite easy. Just keep an open mind, and I will be of great use to you.

I will get into the heart of the Power Niche in my next article, but so I don’t become one of those “annoying” serial writers who always puts the excitement in the “next” article to bring you back, I will let the cat out of the bag right now and tell you what I mean by a Power Niche:

In brief, a Power Niche is a small-sized niche within a bigger industry that no one else yet dominates or owns. The niche isn’t obvious, so you have to figure it out and “create” it. You step in and learn everything about it and everyone in it. You tell everyone about what you are doing – incessantly – and become the real “owner” of the niche merely by staking out your homestead in virgin territory. This then becomes a virtuous cycle as the more you know, the more you do, and the more you do, the more you know. Before long you are the world’s unquestioned expert in this (smaller) niche. All of this enhances your bargaining power within that niche. Instead of begging for business in the bigger industry, you now have eager clients paying you top dollar within this smaller Power Niche.

The goal of this new column is to teach you exactly how to build a Power Niche and become a rainmaker (or grow your book of business if you already are a rainmaker).

The End Game for Co-Working

I have been watching – and our firm has been participating in – the co-working trend.  It started with Regus when it was founded in 1989 but didn’t really go anywhere until the past few years.  Since then, numerous players have entered the market, each with its own twist to appeal to different parties.

There is an ongoing debate as to what will happen during the next downturn.  Some say that the co-working spaces – filled with millennials – will become ghost towns as these millennials will go home to work out of their parents’ basements for free.  Others say that in a downturn, co-working will boom even more because there will be more people out of work.

I am not wading into this debate except to say that I am certain that no one has a crystal ball and we will just have to see what happens at the time of the next downturn.  If I had to guess – and I shouldn’t guess publicly – I think the latter (i.e. the boom) is much more likely than the bust, but that is just my guess.  However, I do have a perspective here that I think is interesting….

To take you through my thinking, I hearken back to the internet.  When it started, everyone was so excited.  It was a “new business” and everyone was pouring into it.  However, it turned out that it was really not “a new business”; instead, it was “a new way of doing business.”  This meant that WalMart could be in the business just as easily as an internet start-up.  If you fast-forward about twenty years, I don’t think there is a single business that exists today that is truly an “internet business”, with the single exception of Amazon and, at least according to my calculations, it is only just now starting to turn a profit.   So much for the “internet business”.

I think the exact same analysis applies to co-working.  If you look at what is happening now, there are numerous competitors; however, recently, landlords themselves have started to enter the fray.  For example, if you own an office building, you might consider allocating a floor for co-working space.  The margins are dramatically higher than what you would get if you leased the floor – versus the risk that your tenants are sort of like hotel guests and could evaporate if the market changes.

To be clear here, since co-working is so labor and operationally intensive, most landlords will team up with a co-working provider.  I think you will see a lot more of this.

As a landlord you wouldn’t want to risk the entire building on this concept just yet and even if you did your lender wouldn’t let you, but for a single floor it probably makes sense to take a chance and enjoy the upside without that much downside risk.  And ten years from now, once co-working has proven to be a longer-lasting concept, your lender will probably let you co-work out half of your building or even more than that, i.e. co-working will likely morph to be more like a hotel concept.

In any case, over the next ten years I suspect co-working will become more and more ubiquitous.  Then what happens to the co-working companies?

My prediction is that there will be a couple of survivors.  The rest will fold or be absorbed or bought by other real estate players.

Meanwhile, I advocate that real estate players – worldwide – should be looking at how they can optimally apply this “new way of doing business.”

Fail Dammit!

I was reading this morning about a superstar Olympic hopeful. A woman named Simone Biles (check her out). She is the top gymnast in the world right now – and the United States has high hopes for her in Rio. During her rise to greatness, she fell a lot (off the balance beam and in other places), but she kept on winning because she kept on doing things – and taking chances — that no one else could do, or dared to try. Maybe she fell a lot because she was pushing the edge of possibility in gymnastics rather than playing it safe. Maybe that is why she is the top gymnast in the world – because she was not afraid to fall – and to fail?

To move closer to the business world, in recent years I followed Ron Johnson’s attempt to revamp JC Penny. He was running a company that had only one certainty and that was that if they kept on doing what they were doing the company would slow and inexorably die off. It was a dead husk of a company that was slowly succumbing to irrelevance and everyone knew it. So Johnson, who had previously started the incredibly successful Apple store, joined up as CEO to try something completely different. He up-scaled the stores and brought in brands and created a completely different shopping experience. The idea ended up backfiring. Customers were lost and it just didn’t work, or at least it didn’t work quickly enough. In other words, it failed! Johnson was fired in early 2013. After that, everyone jumped on him. The media was relentless. The guy who had created the half trillion dollars of value in the Apple store had now blown it with the JC Penney store. Fortune wrote an aftermath article – writers Marty Jones and Susan Kramer — they ended the article with these words:

“It’s impossible to know if Johnson’s reforms could have succeeded but he does leave one legacy: Nobody will be attempting something similar for a very long time”

Wow. Think about this. The company was dying. Someone had the guts to try something new to save it and it didn’t work out. So let’s not only damn him for eternity but let’s publicly humiliate him and, for good measure, make as sure as possible no one ever tries anything like it again. After reading this would you want to take a chance like Johnson did? The downside of failure is so huge!

Consider this basic emotion we have, which is fear of failure and maybe even worse, fear of being humiliated and laughed at. Every time we try something new we have this fear. It is a natural emotion. And if this is what happens when you fail, there is good reason for this fear.

So how would this work in (most) organizations if someone has a new idea that no one else has done before?

First – she would bring the idea to management – to investors – to lenders – to partners. What would they say? Well, in most of these situations, you know exactly what they would say. They would come up with every possible objection. We are all awesome at that. They would poke holes and say “but what if this happened” [as a result of your idea]? We could be laughed at – we could lose money – this could harm our reputation – we wouldn’t be able to get future lenders, partners, deals – or (gasp) it could hurt the vaunted track record we have that we tout all the time and we can’t risk that – etc. The list of concerns would be endless and the more the idea was outside of the parties’ comfort zones the worse it would be.

Second – if she had major guts, she would fight everyone on this. She would point out that the issue is not whether there was a risk of failure, but whether the rewards outweighed the risks, coupled with the probability of a successful or failed outcome. Maybe after a great deal of back and forth, expenditure of political capital, and alienating the most fearful parties (maybe permanently), she would finally get her way.

Keep in mind that she doesn’t know if the idea will work. It is a new idea and by definition risky.

Third – she tries out the idea and – bummer – it flops completely! Now what? You know what happens next. All of the parties involved have different versions of “toldyaso”. They bring it up forever and ever. They roll their eyes. They say they “knew” it was a bad idea. They were naysayers and triumphantly proved right. The humiliation is complete and never-ending. The various people she confronted along the way are pleased, although they might not publicly admit it. Those who supported the idea are chagrined and think “that’s the last time I do something like that.”

Fourth – it gets worse. The person who brought up the new idea will certainly not bring up another one. Even if she had the guts to take a risk of the foregoing again – and how many of us have that much fortitude – she would never be able to win the political capital to make it happen. So she is out of the new ideas game for good. And maybe even out of a job….

Fifth – and to make it worse yet – everyone else who is watching from the sidelines, how are they going to feel about trying out something new? I think we know the answer to that too, and that is that there is no way they would make such an attempt, because the downside of a failed idea is obviously so high.

Now the organization has created a culture of no one ever doing, or even suggesting, anything new! No one ever innovating or trying things out. Certainly no cutting edge thinking will go on at this organization.

So I ask you, does the foregoing describe the company you work for – or the company you run – in the real estate world. We all know the real estate world is changing, and maybe even dramatically, what with all the technological changes and the increasing sophistication of the various counterparties with whom we all deal. No one can afford to have an organization that crushes the spirit of someone with the “guts” to push for trying something new.

As an aside, I note that my point here applies to new ideas as small as trying a new brand of coconut water in the cafeteria fridge to changing the “usual” place you go to lunch to moving your company into a new line of business. Big and small changes always make people nervous and ruffle their feathers.

I came to this realization many years ago for my law firm. If I tried to make my law firm just like all the other law firms, but better – there was only one thing for sure – and that was that we would fail – we would fail slowly – we would never realize why we were failing – we would just slowly go out of business – but the good news is that we would never be embarrassed along the way.

I didn’t like that outcome and decided we would have to try new things, and try a lot of new things, and when we tried them we would certainly fail. Indeed, the list of failures at my firm with new ideas I have tried out is endless. But there were a lot of successes too – and it is now possibly a surprise to many that little firm that few have heard of outside NYC is now one of the largest real estate law practices in NYC.

People often ask me – at interviews and otherwise – what is the secret to my success? How did I get where I am? I always answer the same thing and it is 100% true – that is that for some reason I just don’t mind making a fool of myself. In other words I am happy to try – again and again – and fail!

I can’t tumble like Simone Biles – although I can do a cartwheel – but one thing I share with her is willingness to try things neither I – nor anyone else – has ever done before. The bottom line is that it is awfully hard to have great success without a whole string of solid failures along the way.

So next time someone throws out a new idea at work – maybe timidly – treat the idea with respect. Thank the proponent heartily. When the new idea is evaluated, consider the risk and the reward of the idea, rather than everyone ganging up to poke holes in it. Then when the idea is ultimately tried out and turns out to be a complete flop, throw a party for the colleague who had the guts to try the new idea and make it clear how thankful the group is that she really took one for the team.

And maybe – just maybe – your organization will become one of the great players in the real estate world. Maybe – just maybe – you will always be on the cutting edge and out ahead of your competition, with new ideas that are rewarding to your employees and to the counterparties you deal with.

I will end by noting that John Wooden (one of the greatest coaches of all-time) is famous for saying that the team that makes the most mistakes is the team that is likely to win.

So go ahead – make some mistakes – and fail! Who knows what will happen.

Brexit and London and Talent, Oh My!

I am sitting here in New York reading goodness knows how many articles on the Brexit. It is getting more coverage than any other news right now.

I recognize it is juicy for the media because there are all sorts of thought-provoking issues that touch on how human beings can live together (or maybe not live together) – but I have another take on this that I haven’t seen in other articles so I will share it. My thoughts also lead into a possible twist on real estate investing as well.

Let’s start with London. People are wondering understandably what will happen to London. It appears that some parties want to pull their money out; hence, various London based investment funds are (temporarily) closed to withdrawals. Other articles indicate a concern that the EU will make it rough on London and/or the informal financial center of Europe will move away from London. There is a concern that London may be in trouble.

I know I shouldn’t make a prediction about the future – indeed, that was the point of my last article – but here goes anyway. I predict that:

London will be just fine! 

There I said it. I sure hope that either (i) I am right or (ii) if I am wrong no one remembers I made this prediction,

Here is my thinking…

About eight years ago – at the end of 2008 – there were many who thought it was lights out for New York. The thinking was that the banks and investment banks and funds were falling apart, there were no bonuses for the people who worked at them, people would give up, the financial center would shrink down and die and possibly the center of the US world would move to DC or another location.

At this time I made a speech to my law firm about this issue. My speech had a central theme that NYC would be just fine. My reason was simple – it was that New York City has a special magic to it that makes the key ingredient – the talented people – stick around. Even though everything financial was crashing, my thesis was that the people that think of and effectuate complex real estate and corporate financial transactions wouldn’t “want” to leave. They would “want” to stay in New York and if they did in fact stick around they would create the next upside.

That is “exactly” what happened. The talent stayed and New York is stronger than ever before.

I see the same thing here with London.

I have only been to London once and I haven’t traveled much – so I admittedly am taking a bit of a leap here – but from what I know, London is a very special place. It is a melting pot of humanity. It is a vibrant and powerful city that has a special magic to it. 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.

Also, London has other significant features compared to the rest of Europe: The language in London is English (or some variation of it) and the language of global business is also English. This is a significant built-in advantage for a global financial center. And, London is a common law system with a well-developed and understood legal tradition and landscape that is far easier to navigate through compared to any other jurisdiction in the remaining EU.

Now I will philosophize a bit and wonder if this is a theme for a modest twist on real estate investing; namely, to follow the talent?

Consider this for the real estate world, i.e. evaluate where to invest based on whether the location is attracting and retaining talent — or not.

Currently, real estate investors look at population growth and jobs growth, which of course makes a ton of sense – however, I haven’t seen people look at “talent growth” or “talent flight” for purposes of real estate investing. Perhaps this is worth considering.

And I do hope I am right about London. . . . . .