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At GowerCrowd, we take a realistic view of commercial real estate investing, providing pragmatic insights for passive investors who are looking for sponsors they can trust and opportunities they can invest in. You’ll find no quick fixes or easy money ideas here, no sales pitches, big egos or hype. Real estate investing for passive (accredited) investors is turning messy with vast swathes of loan maturities approaching which is going to send many sponsors into default causing their investors to lose capital. While this is nothing to be celebrated, it will also bring in a period of wealth transfer and opportunistic investments. We’re here to guide you by looking at the harsh realities of real estate investing, examining the risks and the rewards in conversations with some of the world’s top experts so you can make informed decisions. You’ll learn how to build your wealth while protecting your capital investing as a limited partner in commercial real estate investments, even and especially during an economic downturn. Each week we add new episodes that provide you with access to the foremost specialists in commercial real estate investing with a focus on discounted distressed real estate and the associated market dynamics. We provide interviews and explainer videos that dive deep into the trends driving today's real estate industry, how the economy impacts returns, how to access and invest in distressed real estate deals, and how to protect your capital by mitigating downside risks. There’s no doubt that it is a very challenging time right now for the average investor. With the impact of COVID still being felt and the era of record low interest rates behind us, commercial real estate is experiencing severe headwinds. This creates financial distress for many CRE owners who did not include contingencies in their original business plans and who now face dramatically increased debt costs, increased construction and maintenance costs due to inflation, and reduced revenues from rents as the economy slows down. Is the commercial real estate world on the cusp of a major correction? Is it 2007 or 1989 all over again? Will passive investors (limited partners) who have invested in syndications (through crowdfunding or otherwise) see losses they had not predicted? How can you access discounted real estate opportunities this time around that were only available to a select few during prior downturns? Let us help you prepare your real estate portfolio no matter what the future holds, whether it be business as usual for real estate investors or a period of wealth transfer where those less prudent during the good times, lose their assets to those who have sat on the sidelines, patiently waiting for a correction. Be among the first to know of discounted investment opportunities as the market cycle plays out by subscribing to the GowerCrowd newsletter at https://gowercrowd.com/subscribe Subscribe to our YouTube channel: ⁠⁠⁠ https://www.youtube.com/gowercrowd?sub_confirmation=1 Follow Adam on Twitter: ⁠⁠⁠ https://twitter.com/GowerCrowd Join the conversation on LinkedIn: https://www.linkedin.com/in/gowercrowd/ Follow us on Facebook: ⁠⁠⁠ https://www.facebook.com/GowerCrowd/ *** IMPORTANT NOTICE: This audio/video content is for informational purposes only and should not be regarded as a recommendation, an offer to sell, or a solicitation of an offer to buy any security. Any investment information contained herein is strictly for educational purposes and GowerCrowd makes no representations or warranties as to the accuracy of such information and accepts no liability therefor. Real estate syndication investment opportunities are speculative and involve substantial risk. You should not invest unless you can sustain the risk of loss of capital, including the risk of total loss of capital. Past performance is not necessarily indicative of future results. GowerCrowd is not a registered broker-dealer, investment adviser or crowdfunding portal. We recommend that you consult with a financial advisor, attorney, accountant, and any other professional that can help you to understand and assess the risks associated with any investment opportunity. Unless otherwise indicated, all images, content, designs, and recordings © 2023 GowerCrowd. All rights reserved.
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Now displaying: June, 2018
Jun 26, 2018

Listen to the podcast and read the shownotes here.

Jason Schwetz, President and Founder of Triple Net Zero Debt.  I am originally from Virginia Beach, Virginia.  I went to college in the mountains of Virginia and headed west, as they say, right out of college and got a job working for a shopping center syndication company out of Los Angeles literally starting at the bottom, collecting delinquent rents. That was interesting in and of itself, and I moved from collecting delinquent rents to property management, from property management on to leasing, from leasing to financing of shopping centers and from that went to acquisitions and dispositions.   

What I have enjoyed the most through the whole cycle has been working with companies and leasing space and understanding their businesses and how they're going to fit into the property, whether it's a shopping center or single tenant property, either way.  I have done anything and everything there is to do with shopping centers with the sole exception that I have never purchased dirt and built from the ground up. I have added on to shopping centers, torn down centers, and renovated anything and everything, but I have not done ground up development.

Then the Internet came along. And over the years of being in the shopping center business I've noticed that there was definitely the beginning of an impact on the bricks and mortar of shopping centers as a result of the Internet.  I got increasingly more frustrated because my industry just wasn't addressing the issue they almost had their head in the sand for years.

For years and years and years they just would not address the challenge of the internet.  There were no conferences on it.   And as a shopping center owner I'm sure I'm speaking on behalf of lots of shopping center owners across the country, there was no way to feel the effect. I remember the days of leasing space.  Let's say it was 12 or 15 hundred square feet and your space goes dark. Your tenant moves out and your list of prospective tenants were 25 to 50 tenants 50 tenants long. Today that list is pretty much nonexistent. I mean it is a short list of what is available to move into shopping center space. Yes, there's the traditional food which I think will be around for a while although I have my concerns for that as well. And having seen that and seen all of the unnecessary friction that went on in purchasing a commercial piece of property going through the process of loans which, as you know, is brain damage and all of the rules regulations and requirements of whether it was a governmental entity or the lenders that they put you through. Combined with the challenge of shopping centers themselves i.e. the effects of the shopping centers by the effect on the shopping centers from the Internet.

So that drove me to thinking that there has to be a better way. I went back and revisited as many of my deals as I could and I went through them and tried to pick out what wasn't necessary or what could I do instead to make the parts of the transaction unnecessary. And after a long time while trying to figure out a model where I could be internet resistant. I don't if there's anything out there that I would call Internet proof but I think it's safe to say there are tenants out there that are Internet resistant. It's a term I've been using for many years and I'm starting to see that that term being used out there.

I came up with the model that I have now which is, in simple terms, is buying single tenant triple net properties across the country for all cash.  And what I have successfully done so far is to make the transaction as simple as possible not only from my perspective but from a potential investors perspective.

I wear a unique hat when it comes to shopping centers in that although I have been a landlord many, I am also a tenant.  I also own and operate businesses in other people's shopping centers.  My longest business which I still have is a restaurant for which we just celebrated our 26 year anniversary. When I look at a shopping center I look at it from two perspectives. One is as the tenant perspective and I can see the impact of what goes on around me and I can also feel it as a landlord. I've seen what's happened to my rent rolls over the years and the types of tenants that I focus on to put back into vacated spaces i.e. tenants that are Internet resistance.  The impact has been you know there's not nearly as many trips to the shopping centers that there used to be prior to the Internet. They're just isn't. The tenants that used to fill shopping centers are not there the way they used to be. One of the biggest impacts on shopping centers going down the long road is traffic.  When you and I were younger, every single kid or ninety nine percent of those kids with an entrepreneurial spirit, that had that dream of starting their own business, ninety nine percent of them needed real estate. They needed a space. A lot of that was a shopping center space, some office, but a lot of it shopping centers. And when that dream came to life and they were able to put their business plan together and actually go out there and be that entrepreneur and start that business it was in a retail space.

That does not exist today. Ninety nine percent of the kids today they're in college or high school that have that entrepreneurial spirit and they have that brainstorm of a new idea. None of that includes a retail space. Those girls and/or guys are not interested in opening up a dress shop or a clothing store of twelve 1500 square feet in a shopping center. It's just not there. What you're left with is trying to find tenants that are resistant to the Internet. That actually understand business and can run a business and start a business and pay the rent. And that's very challenging in today's shopping center shopping centers and in today's market. Very challenging.

Triple Net Lease

A triple net lease is a form of a lease. They exist both in a shopping center as well as in single tenant. I migrated away from multitenant shopping centers to single tenant properties. What I liked about the shopping center business is you were diversified across many different businesses.  If you had a 10 or 15 tenant building shopping center you know your each tenant only occupied a certain percentage of your rental income. When you switch over to a single tenant properties 100 percent of your rental income is dependent upon that one tenant. You really need to be careful when you're out there looking in the single tenant triple net market.  You say to yourself OK what is a single tenant triple net? The best example I can give you is, let's say, a McDonald's. A McDonald's is a freestanding building that has one tenant in it. A credit tenant. And they occupy what we call in the industry a single tenant triple net property. Now the technical definition of triple net is the tenant pays for all of the taxes insurance utilities and maintenance.

There is a term that is loosely used in the industry known as absolute triple net. I will tell you this: I am very frustrated when I deal with commercial real estate people across the country that misuse the term triple net. You cannot have a triple net lease with landlord responsibilities. You will see properties advertised all the time that use the phrase triple net lease, minimal landlord responsibilities. That is an oxymoron. You can't have the two. But it's used. I caution people when they are out there and they're looking for single tenant triple net properties to be careful of the way these leases are written and the way it's being presented. A triple net lease is a lease and a single tenant property where the tenant pays for absolutely everything. And I mean everything.

I'll give you a classic example. You'll see an advertisement that says a single tenant triple net property, minimal landlord responsibility – roofing and structure only. That's a classic. That's not a triple net lease. It's just not. That's a double net lease.  It's misleading and it's frustrating because as someone who buys triple net properties somebody will submit a property to me that's claiming it's triple net. And I request a copy of the lease and I read the lease and sure enough the clause in there that says landlord is responsible for let's say the roof as an example. Well that's not a triple net at least then. It is just not.

A absolute triple net lease means you are buying the building and the land.  However, the tenant is responsible for absolutely everything and I'll give you a real life example.  Let's say – and I've actually had this happen – I get a phone call from the management of one of my tenant companies and they say Hey Jason you know somebody backed into the building and we're sending you a picture and I respond back with, You know I'm sorry to hear that but read clause 7 of your lease and that's the end of the conversation because literally everything is the responsibility of the Tenant. Everything. It doesn't matter if the roof leaks. When the real estate bill comes it's their responsibility to pay the real estate tax bill and then send me confirmation that it's been paid. When the insurance comes up it's their responsibility to pay the insurance bill and to send me confirmation that the insurance had been paid. In an absolute triple net lease literally the only thing that I do on my end is make sure the rent has been deposited into the account. That's it.

It differs, for example, from a ground lease because when you're buying a ground lease you're buying the dirt only you are not buying the building and the real difference that separates an absolute triple net lease and a ground lease is that if you are the lessor you own the ground, so you cannot depreciate it. You have nothing to depreciate on your taxes.

Triple Net Zero Debt

I was following crowdfunding and when it made that jump from business crowdfunding to Real Estate that was very exciting.  It has obviously grown and grown and it's going to continue to grow. It offers an opportunity to be able to have an audience, a potential audience that is nationwide as opposed to an audience that would be made up of either your family and friends or an extension of your family and friends i.e. their referrals. Real estate crowdfunding opened the doors to the rest of the country so to speak no matter where you're at.

Then what I needed to figure out was what to invest in.  The shopping center model as it's been around for you know for decades and maybe even a century is just not a model that I believed was sustainable. Shopping center owners are really needing to rethink the whole concept. I did not want to be in that space. You combine that with the level of difficulty of lenders. And when I say a level of difficulty lenders just their inability to understand assets and it obviously led to disaster in 2007 2008. I tried to figure out a way how can I avoid all of these issues and having gone through my past deals and trying to pick out what is not needed or what can I do to avoid those challenges or friction, I arrived at buying single tenant triple net properties for all cash.

The only way to do that, for me, was number one I wanted to invest. I wanted to diversify my own capital across many different buildings and as many different states as I could. In other words kind of being similar to owning multitenant buildings having the diversification of a multitenant building, but without the risk of a shopping center. I started looking at absolute single tenant triple net properties across the country. I only have a limited amount of capital so I don't want to own 100 percent of one property. I'd rather own 1 percent of 100 properties. That's just my personal investing philosophy. The only way to accomplish that would be to bring in investors, and what's the most efficient way to bring in investors?  In my opinion it's real estate crowdfunding. The traditional family and friends are still there that's still alive and well. But bringing in investors through the crowd because your audience now is this nation nationwide makes it more efficient. And it will continue to become more efficient.  Indeed, I'm very pleased to say that I have a 98 percent reinvestment rate – 98 percent of my investors have reinvested.

Challenges

It's getting your website up and then focusing on SEO –  Search Engine Optimization –  which is a whole other subject and quite difficult; quite challenging.  If you said to me what is the single most challenging part of real estate crowdfunding it would be once you are live on the Internet, how do you get people to see it. That comes down to SEO which is extremely challenging.  That's probably the single most difficult thing that links real estate to technology. It is difficult getting your name known or getting people to see you apart from the hundreds and hundreds and hundreds of crowdfunding sites that were out there and are still out there. So that was the most challenging. Your first step is getting your website live but then you not only got to get your website live but you got to get people to see it and hopefully make the phone ring and it just it starts slow and builds from there.

Investment Strategy

I look for single tenant triple net properties anywhere in the United States. One million dollars or less. The only states I stay out of are California and Illinois. Other than other than those two states I look anywhere in the country. Now I will say that that there's a variance almost all my criteria. I have gone over a million dollars on the last part that property I purchased which was a Hardy's. It was over a million but it was because it was a fantastic purchase – it just had all the right metrics that I look for and more.

I look for known tenants.  I don't buy individual mom and pops or or single tenant operators. I look for local, regional, national or international tenants. One of my tenants is the second largest Papa John's franchisee in the chain. They have just under 150 locations. That type of tenant I love. That's a great opportunity.

I focus very heavily on what's called the rent to sales ratio. It's especially true in businesses like the food business.  Being a food operator myself, I know where my rent needs to be in relation to my overall volume. I understand the food guys intimately, where their rent needs to be when I know that they are they are very profitable and the more profitable they are the more likely they are going to be in that space for a long time. I do look at the rent to sales; I also look at car counts if, for example, I'm looking to purchase, let's say, an oil lube and change place. I look at how many cars a day they're doing, I look at what's their average ticket price, and from those numbers I can determine how profitable they are. And again how likely they are to stay there for a long time.

All of our returns are anywhere from 6 percent and all the distributions are paid monthly.  The returns are anywhere from 6 percent on up to just under 9 percent. Most of them grow annually. And when I quote my returns I do it very differently than everybody else I've seen out there. I quote only the actual return that goes in your pocket each month. I don't do projections. I don't do anticipations. I don't do a term that they call projected ROIs. I don't do any of that. I do it the way that it was done 50 years ago where Sam and Bill and Sally threw their money into a hat. They bought a piece of property when the rent came in they divided it up and they went on their way.

Fees

There's obvious a cost of doing the deal escrow fees, title fees, things like that. In total, of my fees combined including escrow title and everything are usually under 3 percent. And the industry calls it load factor or whatever. I haven't seen anybody out there yet that has been able to have fees less than mine especially and be able to generate the returns that that I generate on all cash purchases. That's the difference. I charge no management fee, and instead there is a sponsor and investor split.  As the sponsor, my company, Triple Net Zero Debt, takes 15 percent and the investors get 85 percent.

And I'm also an investor in my deals thought amount will vary.  Inevitably I'll put a piece of property in escrow and I've got to say a million dollars and I'll get commitments. During the escrow period inevitably on almost every deal you get towards the end in some cases someone comes to me and says, you know Jason I was going to put in 150 but I can only do 100 right now. As we get closer I wind up putting up the difference and as a consequence my investment ranges anywhere from 10,000 on up to 60,000 in a given property.   I do like to stay above $75,000 per investor if possible. If it's an existing investor and they come to me and they they’d like to do 50 in a deal, as long as I know them and I know their financial background I'm okay with that. I don't want investors who are not sophisticated. The more sophisticated the investor the more they understand the better off they are and the better off I am.

Goals

I would like to close three to four more deals this year and that's going to be dependent upon, obviously, the deal flow as well as the investors continuing to get the word out to the marketplace that what I do is very different – Single Tenant, triple net properties, all cash with monthly distributions. That's a unique model.

And for those people who are looking for ultra-conservative commercial real estate investing that's me.

Jun 5, 2018

See the shownotes to this episode here.

I'm a partner in the New York office of Mayer Brown and am a co-head of the firm's capital markets practice. I devote much of my time to counseling issuer's, counseling placement agents, underwriters, and other financial intermediaries when they are thinking about or structuring a financing transaction – that might be a private placement to accredited investors or institutional accredited investors, or it may be a public offering.  In short, securities offerings are an important component of what I do.

The JOBS Act obviously is something that made some significant changes to securities law. I think people focus too much attention on the JOBS Act and its effect on the IPO market and neglect to talk about the JOBS Act and its effect on exempt offerings both on private placements, Rule 506(c), matchmaking platforms, Reg A crowdfunding and probably even more importantly, just the ability for private companies to stay private longer which obviously is now something that we read about almost daily when we commiserate about the declining number of US public companies and the relatively small number of U.S. IPOs.

The Accredited Investor Standard

The worries of, for example, Commissioner Piwowar who I think was one of the first to suggest it that about perhaps doing away with the accredited investor standard. Or the more recent comments that Commissioner Peirce made regarding accredited investors. It all derives from the same sort of public policy concern right. Do we need this standard? The accredited investor standard. Is it helpful? Is it still serving its purpose or, if you were to take the other view, if you were to take the commissioner Piwowar view, if companies are staying private longer and companies are experiencing more of their growth these days while they're private instead of in the years that immediately follow their public offerings, are we essentially doing a harm by not allowing a greater percentage of the investing public to participate in those offerings. I think it's interesting to look at it from both angles.

Unlike Commissioner Piwowar, I think there is merit in having an accredited investor standard There is good reason to have an accredited investor standard. I think that the current standard which includes some institutions – and I don't think that many people have quibbles about the prongs of the accredited investor definition that include that include non-natural persons – I think that's fine. What many have looked at is whether the two prongs that we now have for natural persons, the net worth test and the net income test, are still appropriate and whether those are good proxies for sophistication, for financial sophistication.

Dollar Amounts as Proxies

In the securities laws we have lots of instances where we use dollar amounts, assets as a proxy for identifying the kinds of individuals that can fend for themselves. For example, if you look at the definition of qualified client or if you look at the definition of qualified institutional buyer, qualified purchaser, any number of investor standards that we have sprinkled throughout the securities laws. We've always sort of resorted to having these dollar thresholds be a proxy for getting at whether somebody has the wherewithal to bear some investment risk or could, if an investment goes sour, it could withstand the loss. There's nothing wrong with that. It's important to have bright line net worth and net income standards. That's very helpful because it provides legal certainty because there are crisp answers that you and I can identify – we know what those are, we know what those mean. They're not subject to judgment. They're easy to verify. For broker dealers for investment advisers having that clarity and legal certainty is important.

Obviously, the Dodd Frank Act required that the SEC periodically review the appropriateness of the accredited investor standard. The SEC did deliver a report on the accredited investor standard. There were some recommendations which are sensible ones that certain individuals having securities brokerage licenses or certain designations like a CFA designation be able to be considered an accredited investor regardless of net worth or net income. There's a fairness to that because they are sophisticated. There's an ascertainable standard. The CFA designation is conducted over a period of time by an independent organization. FINRA administers the securities licensing exams. That's sensible. Things get murky and complicated with suggestions that there be some test that gets administered that then becomes the basis for assessing whether somebody is or isn't financially sophisticated. That’s troublesome.

Education vs. Net Worth or Income

Indeed, education and income or networth are not necessarily equivalent. Net income or net worth suggests that a person is probably going to be able to take certain financial risks. There may be a little bit of a paternalistic quality to that regulation i.e. deciding that we should only let those who can withstand risk of loss make an investment. However, it's important to have some proxies even if they're imperfect and net worth and net income are imperfect but there is merit to the notion that you can substitute net income and net worth. These are people who probably could withstand the fact that their investment in a startup amounted to zero; that they lost it all.

Keeping in mind that the accredited investor standard was promulgated in 1982 it may be a reasonable approach to index the standard to inflation, for example. We have inflation indexes written in to a variety of other thresholds and, perhaps, there's a lot of common sense appeal to that.  Of course, applying an inflation index to the standard would, however, reduce the numbers of eligible investors so to contemplate such a change, one might go back to some of those interesting public policy issues that are now coming about. There'd be some reluctance to limit the overall number of investors that are able to or that may participate in in private placements. This is because private placements have a more significant role in capital raising than they did historically. Then again, another way to go about things would be to require more disclosure in connection with certain private placements. You could attack the problem in any number of different ways.

For and Against Retaining the Accredited Investor Standard

The notion of our securities regulatory scheme is premised on there being investment decisions that are made when disclosure is provided. Section 5 of the Securities Act is disclosure based if there is a public offering, with disclosure requirements being relaxed in the case of certain private offerings or certain exempt offerings based on the theory that you're offering to investors that are sophisticated, that can fend for themselves, that have the ability to ask questions regarding the investments that are being offered to them, and that have the ability to have those questions answered. It presumes that we're not going to impose disclosure requirements or we're going to impose lighter disclosure requirements in instances where we're selling to certain types of more sophisticated investors or investors who can, at least, bear a risk of loss. That's a powerful argument for keeping the accredited investor standard for similar such standards and it's kind of built in to how we think about the securities framework.

Disclosure Requirements

Another alternative would be to modify or review some of the disclosure requirements that we currently have in offerings that are made to non-accredited investors. In 506(b) transactions or 504 transactions there are certain disclosure requirements but, one wonders, are those still current? It’s hard to know but that's another way to skin the cat.

Now for those that are in favor of just setting the accredited investor standard aside there is a good story to tell and that is that the capital markets have changed a great deal particularly in the last 10/15 years. We now have private companies with the ability to go out to a broader universe of investors and to conduct successive rounds of financing and to become Unicorn's and essentially to become household names and have some dispersed ownership while still remaining private. A lot of the wealth that's being built and a lot of that explosive growth that's being experienced by these companies is only open to institutional investors and accredited investors because, in order to avoid disclosure requirements, most private placements are limited to accredited or institutional accredited investors or equivalent. Wouldn't it make sense, from a public policy perspective, just as we once encouraged retail participation in IPOs to encourage broader participation in some of these exciting private placements?  That's the argument that would be made.

Gambling Has Only an Age Hurdle

People understand when they take their seat at the craps table that they may walk away with a significant return. Or they may walk away with empty pockets. Meanwhile it's all too easy for investors to hear about a startup with what they think is a promising business venture and to assume or perhaps be led to think that at least some portion that it's an investment that some portion of the money that they're putting up is not subject to complete risk of loss.

Process for Change

In the Treasury report on capital markets, one of several reports that was issued in response to the recent Trump presidential order, a number of suggestions were made, but it is only within the SEC's domain to evaluate whether the definition ought to be changed or not. Obviously the SEC has done its work. The SEC has completed its study. The study's been done for some time. There have been comments solicited from the public and submitted on the standard.

The SEC's investor advisory committee has weighed in on the standard and the takeaway from all of that is that most people would like to keep the net worth and net income measures, maybe with some indexation, maybe with some changes in the numbers, but also want to see added individuals who have certain designations. There is another recommendation to add knowledgeable employees to the standard which makes a lot of sense. The collective wisdom of the commenters, the Investor Advisory Committee, the SEC report, is to keep it intact but make some changes.

For any changes to occur, the SEC would have to propose changes to the definition and on the SEC's published agenda, the Reg-Flex agenda, one of the actions in the long-term category is consideration of proposed changes to the accredited investor definition, perhaps bringing it to the top of the agenda in no less than six months or so.

SEC staff would come to the commission with a proposed rule. The commission would take a vote on releasing the proposed rule for comment. There'd be a comment period and then presumably after a time the rule after giving weight to the comments the rule would be adopted modifying the definition in Rule 501.

Anna believes that the Standard will stay substantially the same, maybe with these added categories.  It is unlikely that there will be any reduction the number of people who qualify, rather, if anything, it's going to be increased.

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