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.

The Wall of Money Pouring into U.S. Real Estate – Is It Slowing or Growing?

Almost every day – or at least every month or so – another country’s leadership announces restrictions on money getting out of that country.  There can be various reasons for this.  Sometimes it is just that they don’t want capital flight – and other times it can be that the leadership needs the money of wealthy people in order to fund other initiatives, i.e. Venezuela, Russia, and, most recently, Saudi Arabia.

Certainly, if you are in a country that has announced initiatives to control outflows of capital or is under autocratic rule, it is likely that you would be trying to figure out how to get your money out of the country to a safe location.

What about other countries with autocratic leadership that have not – yet – announced capital controls or wealth confiscation?  Wealthy people are more likely to be attuned to world events and world risks.  So one would think that people in those countries would be starting to think that it might not be the worst idea to move money out, ‘just in case…..’

And what about countries that don’t currently have autocratic leadership but might have such leadership in the future if political events turn out a certain way.  Maybe citizens with wealth in those countries might be wondering too.

And oh yes – let’s not forget wealthy people in countries with leadership that is just fine, but with stagnant economies.  There are fewer places they can send their money as, by definition, they will be excluding all of the autocratic countries I just mentioned.  If they send their money into these places, they might not be able to get it out.  Once again, I see the money flowing right here.

And finally, what about great countries where wealthy people just want to diversify.  The result is the same as the preceding paragraph.  There aren’t a lot of choices.  And, yes, again, more money flowing to the U.S.

In some of these situations, money will flow here quite legally and properly.  However, in other situations – the first few mentioned above — the odds are that those with wealth to protect would be thinking about how to move their wealth legally, but if not legally, then likely illegally if they have no really good alternative.

Money leaving autocratic – and non-autocratic — nations and flowing towards the U.S. is obviously nothing new, i.e. it has been going on for years; however, my belief is that rather than a wave cresting, it is, if anything, gaining in strength.  Yes – my view is that the wave of money coming towards the U.S. is growing and not slowing!

What does this mean for U.S. real estate?

I see two things:

First – it would point to continuously rising prices, especially in gateway U.S. cities.
Second – it would point to a lot of shady transactions and attempted shady transactions.

What should real estate players do?  Two things:

First – don’t let this wall of money pushing up prices push you away from your good underwriting.  The fact that other players are making a rational choice to overpay – based on their political circumstances, should not push U.S. real estate players to overpay when we don’t necessarily have those political circumstances.  Said another way, don’t fall prey to the greater fool theory that because prices are rising for the foregoing reasons it means that the underlying value of the item in question justifies its price.  And said still another way, the wall of money flowing into the U.S. pushing up prices will come to an end at some point, at which time the pricing could fall precipitously.

Second – in view of my prediction of increased efforts of frantic wealthy persons in other nations trying to get their money out, and the obvious benefits to third parties in assisting them in doing so, I suggest increased scrutiny of who you are dealing with.  In this regard, I suggest that U.S. real estate players be “over-careful.”  So called “know-your-client” and other protections should be increased.  It is never worth it to take a risk of breaking U.S. laws to capitalize on this otherwise potentially beneficial situation.  And, to belabor the point, turning a blind eye by pretending not to see something that has a funny smell to it, and hoping it will be ‘okay’ to claim ignorance if the matter is later challenged, doesn’t work either, as when it all comes to light everyone’s reputation is burned and sometimes irreparably.

Third – ‘if you can’t beat ‘em, join ‘em.”  What I mean by this is that in a gold rush the people selling picks and shovels always do well.  This means that U.S. real estate players with the reputation and ability should consider working with the foreign money in an advisory, co-investment or other similar capacity.  To be clear, I am not advocating taking advantage – I am advocating the opposite; namely, being an honest U.S. teammate to help the foreign money be invested safely in U.S. real estate in a win/win manner.

That is my philosophizing for today.

A last thought – if you feel the need/desire to speculate, maybe buy Bitcoin.  Jamie Dimon is no fool and he said the following about Bitcoin:

“If you were in Venezuela or Ecuador or North Korea or a bunch of parts like that, or if you were a drug dealer, a murderer, stuff like that, you are better off doing it in bitcoin than U.S. dollars,” he said. “So there may be a market for that, but it’d be a limited market.”

So if my theory that there is a wall of illegal money exiting autocratic regimes, it may result in pushing up the price of Bitcoin.

To be clear I am NOT advocating buying Bitcoin – and I don’t intend to buy it myself – but it might be a fun ride for the pure thrill of gambling and not having to fly out to Las Vegas.

Platforms – The Flavor of the Month In Real Estate Investing

In the old days a sponsor found a deal to buy a real estate asset and called up a financial party (either a fund or other institution).  They would form a joint venture and purchase the asset and that would be that.  Of course those – relatively simple – deals continue today; however, more and more we see clients entering into a more long-term relationship.

Here are some (philosophical?) perspectives on the various types of relationships that can ensue between sponsors and financial partners.  Since I have been (happily) married for over thirty years — and therefore know nothing about dating — I thought I would relate my thoughts here to the dating process.

The first level is the one I mentioned above, i.e. the sponsor finds deals on a one-off basis and when she finds a deal goes around to money partners until one is interested.  Then they form a joint venture and close.  I would call this casual dating since no one is obligated to do more than the single deal at hand.

The second level is what is often called a “programmatic relationship.”  This is where the sponsor and the financial partner enter into what we called a “Deal Production Agreement”, although there are other names for these types of arrangements.  Basically this means that the sponsor will seek out deals and give the financial partner “first dibs” on the deals.  Often the financial partner asks for exclusivity (or at least the first look) and sometimes the sponsor asks for the financial partner to pay part of its overhead or pursuit costs in return; however, these issues are typically heavily negotiated on both sides.  By the way, sometimes there is no agreement at all and the parties just handshake that the sponsor will show the deals to the financial partner and they will try to work together.  I would say this is like going steady (for old-timers) or being “in a relationship” (for people in the middle) or “making it Facebook official” (for the millennials).

The third level is a formal agreement to form a Newco, which is a joint venture between the Sponsor and the Financial Partner.  Newco will be used to do new deals, with typically Newco forming a special purpose subsidiary for each deal.  The Sponsor will pre-agree to post a certain (smaller) percentage of the capital needed for the new deals done by Newco and the Financial Partner will agree to post the rest.  There are quite a number of important issues to be negotiated in these types of arrangements since the parties are really joined together.  For example, are deals “crossed?  Can the Sponsor do the deal without the Financial Partner if the Financial Partner disapproves the deal?  How much discretion does the Sponsor have?  What if the Financial Partner just doesn’t fund any deals what can the Sponsor do about it?  How does the promote split work – does the Financial Partner get its pro rata share of the promote or some smaller amount; does the Financial Partner pay a promote or not?; does the Financial Partner participate in the payment of fees or receive a portion of any fees?  Going back to the dating analogy, this is like moving in together, but you aren’t really married yet – with the added twist that, when you move in together, you invariably need to think about how much you want to share and how much you want to keep separate.  But, at the end of the day, in a program, typically each party keeps its own business and if there is a divorce they are (moderately) easily able to go their separate ways.

The fourth – and final – level is typically called a “Platform Investment.”  To start off with our analogy, this is truly getting married.  In these types of deals, the Financial Partner invests directly “into” the Sponsor or, alternatively, just purchases the Sponsor whole-hog.  Often the theory is that the Financial Partner will have access to everything the Sponsor does plus the ability to recapitalize existing deals plus a share of promotes and even fees.  In return the Sponsor now is more credible in the market with the real backing of a major financial player.  Often, these transactions are used to set the stage for an eventual IPO and/or to grow the sponsor’s business.  Sometimes the goal is to have the now-recapitalized Sponsor raise a fund, using the Sponsor’s reputation and the Financial Partners financial backing, and sometimes the goal is just to do future deals as a team.  These deals are very intricate and involve significant negotiation.  There are numerous issues but some of the big ones are the valuation of pre-existing deals and whether and to what extent the Financial Partner participates in pre-existing promotes and future promotes, the split of fees between the Sponsor’s principals and the Financial Partner, the allocation between fees and promotes where the Financial Partner has different participation rights depending on the income stream, the nature of incentive compensation arrangements, the ability to reinvest funds into the business, the extent of future funding obligations of the Financial Partner or Sponsor, the ability of the Sponsor to raise additional capital from alternative sources, corporate loan facilities, discretion and decision-making, buy-out rights, the terms of an eventual unwind, and the degree of non-compete that the Sponsor’s principals will have to agree to.

Duval & Stachenfeld is right in the middle of all of this.  And what we are seeing is a gradual gravitation from the simpler deals to the programmatic to the formation of Newco’s and all the way to the platforms.  Indeed, we are seeing more platform deals than we have ever seen before.  My sense – as I survey the real estate industry – is that Financial Partners are fearful of being locked out of the “good deals” if they are not right in on the ground floor with a high-quality sponsor seeking those deals.  Correspondingly, the Sponsors are fearful that if they don’t have credible and real financial backing they will not be able to compete for the “good deals” as the sellers will gravitate towards buyers who have the ready cash to be able to perform.

Now for the sales pitch part of this – sorry……

At Duval & Stachenfeld, we have an entire team of lawyers that have dedicated their careers to corporate real estate transactions.  Our Corporate Real Estate Group consists of over 20 lawyers and is one of the largest of such practice groups anywhere.  But, unlike the corporate groups of most of our peer firms, our Corporate Real Estate Group focuses exclusively on real estate transactions, and this translates into a distinct competitive advantage for our clients in the area of corporate real estate because, put simply, we understand how real estate businesses work from top to bottom!

Notably, over the last five years, our Corporate Real Estate Group has spearheaded some of the most high profile transactions in this space including the formation of several up-and-coming emerging manager and operator platforms, the recapitalizations of several name-brand existing platforms, the launch of new business-lines by marquis managers through the formation of multi-tier joint venture or other arrangements for the establishment of new programs, and a host of other transactions (the list of which is too long to summarize).

Finally, there is one additional piece of information that is crucial to why the Corporate Real Estate Group at Duval & Stachenfeld is different from similar groups at our peer firms.  The practice– and in particular the practice in the specialty area of programmatic and platform arrangements – fits seamlessly with our core business model — which is “to help our clients build their businesses.”  Put simply, if you are considering any of the above transactions it is great to call us for two reasons:

First – of course we know how to do the necessary legal work – as it is our core specialty

But second – we have a wealth of counterparties – Sponsors and Financial Partners – many of whom are looking for high-quality counterparties to team up with through casual dating, going steady, moving in together or even getting married.

So if you are planning to team up with someone in the real estate world, please feel free to reach out to our Corporate Real Estate Group.

The Latest Bubble

Here are further thoughts about Amazon and its effect on the retail world, which I have named “The Amazon Retail Distortion”.  See the article I wrote in my last Real Estate Philosopher.

I note that roughly fifteen years ago – in mid 2001 – Barrons wrote a perceptive piece that, in one article burst the internet bubble.  It pointed out that no matter how many “eyeballs” internet companies were getting, almost all of them only had a few months left of cash to burn and if they didn’t raise more money by then they were broke.  And so it was.  Between three and six months later virtually all of these companies disappeared in a puff of smoke.

Of course, I am not Barrons, and I don’t see Amazon going bankrupt any time soon, but I continue to wonder when the Amazon bubble will burst.  When it does there will certainly be a mass celebration in the retail world.

Consider my last article where I made the point that Amazon has been given a now twenty-year gift from Wall Street and investors that it doesn’t have to make money.  And this still continues, incredibly.

Their last quarter – which came out after my last article – put them at breakeven or worse when taking out stock based compensation and losing significant money if their cloud business – which has nothing to do with their retail business model – is excluded.  Indeed the article I read said they made 40 cents a share (for a stock trading at $1,017 a share), they expect somewhere between a small loss or a small profit next quarter, their income fell 50% from last year, and their operating costs were increasing.  The same article – incidentally – mentioned that Jeff Bezos was temporarily the world’s richest man…

Face it – Amazon makes no money in retail!

Yet retailers that used to make money – or are making money – are getting clobbered by it.

My – continued and reinforced — view is that Whole Foods will reveal the lack of clothing of Emperor Amazon.  Consider a recent Wall Street Journal article entitled “Amazon Rewrites Rule Book for Grocers.”  The second paragraph starts with “while Amazon doesn’t need to make money from its grocery division yet, food sales are crucial for traditional players like Kroger, WalMart and Target….”  Seriously?  Amazon doesn’t have to make money on food but WalMart does?  Seriously?

And then a few days later what appears to be a “shocking” headline that Amazon is lowering some prices at Whole Foods crushes grocery stocks.  Again, I ask, seriously?

Whole Foods is known informally as “whole paycheck” and is struggling, so they lowered some prices.  Gee – wow.   I looked at the article and the price changes on some vegetables wasn’t enough to change my shopping patterns.  Amazon’s (brilliant?) strategy in groceries is to take on experienced behemoth players in a razor-thin-margin business and lower prices against WalMart?  Seriously?

If you are going to bet on WalMart – which makes something like $15B in cash a year — versus Amazon – which makes nothing – and you bet on Amazon, your bet has to be based on one thing; namely, that it will continue to have a free pass on making no money in its core business.

My last article generated a lot of responses – some favorable and some implying I had no clue.  The ones telling me I had no clue mentioned that a huge percentage of Americans use Amazon and they are brilliantly run, etc.  My response is that even if that is true, Amazon is still losing money or at least not making money.  Plus, I don’t know why the fact that you use Amazon to buy a book has much to do with groceries.

Maybe the theory is that someday, once they have put all the retailers out of business they will have a monopoly and raise prices then?

It is a lot like my partner coming in and telling me about a new client that wants our pricing so low that we are losing money.  He then says to me “Bruce, don’t worry, we’ll make it up on volume!”

I reiterate my prediction that Amazon’s ability to destroy the retail world is based on mis-placed hype and an irrational stock market valuation.  I do have to admit though that irrational stock market valuations can persist for a long period of time.

My advice to retailers is the same as in my last article:

  • Don’t freak out – this is a temporary phenomenon – albeit a long one – it will end at some point, and I think pretty soon.  Sooner or later someone more respected than me – like Barrons maybe – will poke at the same hole in Amazon I am poking.

  • Set up your business so that you can survive until the Amazon Retail Distortion ends.

  • Perhaps follow the other suggestions in my previous Real Estate Philosopher articles; namely: (i) don’t try to be “better” than others and instead try to be “different” from others, (ii) sell only exclusive branded goods in your store, (iii) consider yourself as much in the distribution business as the retail business, and (iv) don’t go nuts setting up expensive structures to enhance the consumer’s “experience” in the store, which I bet will get old awfully fast and be intensively expensive and difficult to maintain.

Power Niche Marketing: Competition Is Evil

I start this article with an incredibly powerful quote from Peter Thiel. Mr. Thiel is a very smart fellow who started, and then sold, PayPal and became a billionaire. Now he is a professor who teaches at Stanford.

Thiel coined the phrase “Competition is Evil” in his book Zero to One, which should be on your reading list.

What Thiel means by this short phrase, is that your goal is to avoid being commoditized and similar to everyone else (which destroys your pricing power). Instead, you should create your own little baby monopoly that you really “own.” In other words, Thiel advocates creating a smaller “niche” that is absolutely your own.

Once you follow Mr. Thiel’s advice — once you become a monopoly in your niche — you aren’t “competing” anymore within your niche. And the best thing about being a monopoly is that monopolies have pricing power. Note the use of the word “power” just now.

Keep this thought in your mind. When a client or customer asks you: “How would you compare yourself to [name your number one competitor]?” —  you have probably already blown it because in your client’s/customer’s mind he sees you as “competing.” The essence of competing implies your products are “comparable” and so the client or customer could easily ask you:  “Why are you more expensive?” And then it is likely that you and your competition will end up in a race to the bottom of pricing and you lose all pricing “power.”

You want to be able to say something like. “We’re not actually competitors. The other party you mentioned is really great at [X]; however, when it comes to [Y] we are the top/only game in town, because….”

Thiel’s point, at heart, is a statement that you have to be “different.” It is important that you outperform in your smaller niche — it is the first thing you must do — be different!

And Thiel is not the only one making this point. Indeed, all the smart thinkers are saying the same thing:

Peter Drucker says you have to “innovate” which means do something differently.

Michael Porter says that the biggest mistake companies make is trying to be “better” than their “competition” (which only enriches the customers, employees, and other related parties), when instead they should be striving to be “different” from their competition.

Seth Godin, who wrote some brilliant marketing books, including Purple Cow, which should also go on your reading list, touts the virtues of standing out (i.e. being different), like a purple cow would stand out.

And of course yours truly, that incredibly intelligent, and arrogant-in-a-nice-way, columnist writing this article, is pushing that view hard. There is literally nothing worse than being indistinguishable from the “crowd” — you have to be different and thereby avoid the “evil” of competition.

Power Niche Marketing: The Third (Marketing) Threebie – Knowledge Is Power

In my last two articles, I explained that when I need to remind myself of the most important basic marketing things to do, I am mindful of the three basic items, which I call the “Threebies.” In my last two articles, I wrote about the first two Threebies”:

The importance of “being enthusiastic”when marketing and meeting new people.

The importance of “getting out and about.”

In this article, I will talk about the last Threebie, which is:

Knowledge is Power

Ultimately, you have to have knowledge of something, or you aren’t that useful. Indeed, when you get right down to it, people, whether or not they are really thinking about it analytically, generally want you around if you are useful or potentially useful to them, and generally don’t really care that much if you are around if you aren’t that useful.

Consider when you were a kid. You were someone everyone wanted to be with because:

You always knew where the party was.

You were smart and could help with homework.

 

One way or another, there was something useful about you that made people want to be with you.

Obviously, what we are talking about here is much more sophisticated; however, you are trying to create something of use that makes you worth talking to or having around. For marketing purposes, that “something” is your “knowledge” of a topic that is of interest — or of use — to the people you want to have around you.

How do you get knowledge to have power? I will say now that you should pick an area of the industry in which you work and learn everything there is to know about it, so that you are a complete compendium of useful and cutting-edge information. This of course is what I call a “Power Niche,” as per the various articles I have written and will write.

For example, I am a real estate lawyer. So I read every single thing I can put my hands on pertaining to the real estate industry. Of course, I read the Wall Street Journal, but I also read books, publications, blogs, magazines and everything else I can find that deals with the real estate industry and/or the players in that industry. For example, I have my assistant send me any article on real estate that appears anywhere. That way, I am a wealth of information about real estate. It is astonishing how much I know and keep learning in my real estate niche. I have made myself very useful to be with because I know what everyone is doing and what is going on.

So if you are one of my clients, or someone I hope will be my client someday, it is obvious after speaking to me for a short period of time that I know a ton about the real estate industry and that I am able to provide value to you and I will be an extremely useful source of information, guidance, and advice.

Also, just to be clear, I am not out for “power” in the classic sense, to have the ability to push people around and lord it over my subjects. That simply isn’t my style, and it is not at all what I am talking about here. I am referring to the “power” to be useful. Indeed, it is great to have “power” to help your friends and your clients achieve their goals.

So, the next time you decide to market, remember to “Get Out and About,” to “Be Enthusiastic,” and to relentlessly seek knowledge because “Knowledge is Power.”

There may be a special fourth step or a “Fourbie” as I call it, so stay tuned…

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?