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My father is in commercial real estate, and when I first got my driver's permit, I was driving around with him, taking pictures of commercial real estate assets, specifically apartments. That was my first sort of intro to the world of commercial real estate. Out of college, I started working for a lender that was primarily focused on Fannie Mae, and Freddie Mac debt. I did that for the bulk of the start of my career, and I learned some very important lessons, but, I was obviously exposed to the intricacies of commercial real estate. With Fannie, and Freddie, you're obviously really focused on multifamily.

One of the things that Fannie Mae did that I thought was really smart is they have a risk loss sharing agreement with all of their lenders, their designated underwriter, and servicing lenders, which gives them a certain amount of rights, and responsibilities, when it comes to who they make loans to, and at what terms. In exchange for having that responsibility, there is a risk loss sharing agreement.

Fannie Mae, to its credit, has created a structure, where these lenders out there that are interacting with borrowers, and dictating terms, and doing the hard work of actually getting money out the door, gave an incentive to these lenders to make sure that it was good money out the door. It was an early lesson that I learned. Essentially, we were underwriting loans with an equity perspective. That's how I got started.

I did that in Chicago before I moved to Boston. In Boston, I continued that. I ultimately moved from Boston to New York. One of the key reasons I moved from Boston to New York was I'm a Midwest kid, so being in New York was a really easy sort of transition, where the diversity is really, really broad. I also had a nice crew of both personal, and professional friends here. I went to work for a company called The Carlton Group, and I got to expand from just doing multifamily debt to doing preferred equity, and mezzanine debt, and all asset classes, not only in the United States, but throughout the world. Having an opportunity to learn about other asset classes, and other positions in the capital stack was kind of the focus.

Now, if you're familiar with Carlton, I was there for four years. To Howard Michael’s credit [CEO at Carlton who has, sadly, since passed away], it's not an easy shop to live on a day-to-day basis. It is, however, an exceptional place to learn a lot. It's a tradeoff that I was certainly willing to make, and I think other people have made. Howard took his professional performance very, very seriously, and expected the same from his team. It was an interesting time, and I was there from 2006 to 2010, which was a time of radical transition for virtually any commercial real estate executive, so, it was interesting.

One of the great things about having a boss like Howard at Carlton is he understands the mandatory evolution that's required. We went from raising capital on fairly straightforward deals to attempting, and successfully, in certain instances, trading distressed paper. Carlton set me up with some expertise in the note-trading space, and I got drafted to Cantor Fitzgerald, which is a large fixed-income trading shop. They trade a lot of different things at Cantor Fitzgerald, but I was brought in, and integrated a loan-trading platform into their fixed income.

I sat next to some muni traders. I sat next to some CMBS traders, high-yield traders. A lot of the clients that were buying the types of fixed-income products from other salespeople within Cantor Fitzgerald were, of course, curious about some of the buy opportunities in commercial real estate, and we had our own universe of buyers, as well. We advised the FDIC on some of those transactions, and Colony [where Gower worked at the time] was such a compelling bidder, for a lot of different reasons. The FDIC put together a really interesting structure, and, at the time, and you've already pointed this out, there's a lot of different reasons to sell, we would call it a piece of paper, or a mortgage instrument to a buyer. There's a relationship there that maybe didn't exist prior. There is yield there that is probably above what currently existed. Interest rates were significantly lower, then, than what some of these loans, when they were originated. Even paying par for a loan still meant a premium yield.

It was a great, great opportunity that forced all of us to learn not just what the value of real estate, and collateral was, but how these positions are structured, and how certain terms, and conditions - whether it's a mortgage, or a preferred equity position - might impact the long-term value, and how it relates to the underlying collateral. It was a very interesting, and compelling time to be in the industry.

It was an exciting time. It was those of us that adapted to the transition in the market and were able to provide a service that was relevant to what was currently happening was a really important lesson. I think it was one of the key lessons for me, in my career, and my willingness to sort of take the step into commercial real estate crowdfunding, because I think this, what's going on in the private placement space on these crowdfunding platforms, is still nascent, but it does have similar characteristics to what has happened from 2008,'09, and '10, and then, as the market stabilized in 2015.

That's how we got here. I was at Cantor Fitzgerald; I made the move to GE Capital, because I thought it would be a nice, long-term, stable place to have a 20-year career, and GE Capital sold everything, so, I was in and out at GE. Despite my move towards something that was maybe a little bit more longer-term, and stable, it ultimately turned to be remarkably short-term. It was a reminder to not be afraid to constantly adapt, and stability isn't necessarily strength, in anyone's career, at any point in time. I had to make the decision, after GE Capital, I had to decide: do I go back, and get a more traditional role, like I had, or do I go get a job that I think I'm going to want to have five years from now?

It was very evident to me, especially people in financial services, how important, and how massive the fintech space not only is, already, but is likely going to become over the next five, and 10 years. With a little bit of time to think about it, it ultimately was a no-brainer. I think you've made a mirror step in establishing the National Real Estate Forum and understanding the potential in this space.

It was an aggregate of the long-term potential. It also happened to be a really great fit for my skill set. I had done a lot of underwriting, for a really long time. At Cantor Fitzgerald, I had to make a lot of phone calls, and I had to establish a lot of relationships. Those two skill sets are actually particularly well-suited to crowdfunding. There's a constant demand for underwriting and reviewing an awful lot of deals. The ability to quickly, and efficiently select the ones that make the most sense, and have a reasonable structure is a skill set that not everybody has. It takes time, and it takes generally seasoned executives to pull that off.

Then, you've also got to not only interact with the sponsors, and borrowers, but there's a lot of investors out there - more than a traditional real estate deal - that are very curious. Some of them very, very sophisticated, that have been doing this for a lot longer than I have. Some of them not so sophisticated that need very complex ideas distilled into relatively short, and efficient answers. It's kind of like the traditional teacher, until you really know something, you can't teach somebody. This is an opportunity to help other people learn about what we're trying to do, and it's an opportunity for me to learn from people that have been doing this for even longer than I have.

I decided that I wanted to get into real estate crowdfunding. I went and looked at the top real estate crowdfunding sites, like a lot of people do, and I went, and tried to get a job, and I ultimately did. Now, unfortunately, it ultimately didn't work out. I had a series of clients, and was given an opportunity. I have a co-founder that had a really remarkable vision that coincided with mine, as well. I had the opportunity to start my own platform, and there were a few key things that we needed to resolve.

One of those is how do we differentiate ourselves in this market? It was a somewhat crowded market, but not terribly crowded, with really qualified, and competent players, but we wanted to distinguish ourselves. It's what you mentioned before: we need to make co-investments. I have a single source of capital that not only understands commercial real estate, and is an active investor throughout the world, not only in the United States, but in Australia, as well. They are willing to, in certain instances, prefund these deals. They're willing to provide capital for co-investments, and they understand real estate.

Having a good co-founder, to people out there considering starting their own business, having a good co-founder that not only understands your vision, but can help you execute it is an irreplaceable asset, when it comes to navigating the world of startups.

It's been a little bit over a year since we started the company. I've been active in private placements, now, for almost two and a half-three years. The biggest challenge is relevant to pretty much any startup, I think, and that is establishing the brand. It is, from a macro perspective, something that is done by just the basic blocking, and tackling, every day. We're going to have our first capital-raise payoff next month. The process of getting that deal funded, keeping regular updates going out, and then, ultimately, making the repayment, that's how you establish the brand. As inquiries come in, providing timely, and accurate responses, that establishes the brand. Doing podcasts like this, making sure that articles go out, all that stuff is the day-to-day responsibilities of First Real Fund, and that's how we established the brand.

Fortunately, our biggest problem is a relatively straightforward solution, and that is keep at it, and do the little things right. I think that's our biggest challenge. One of the great questions, I think, about crowdfunding platforms, in general, is are you a tech firm, or are you a real estate firm? The answer is we're both. From an integration standpoint, and resource standpoint, we are more a real estate platform than we are a tech platform, but all the platforms do a really good job of integrating technology into this.

There are some key avenues out there. Google is a remarkably powerful tool. When you look at the value of Google, it's an impressive thing. Then, when you are managing an online platform, and you see Google Analytics, and their ability to provide specific data feedback on what's happening on your site, you have a whole new respect, and appreciation for the things that Google can accomplish.

 We, like a lot of our competitors, and a lot of people in this space, and, given that we're an online platform, it's obvious that online advertising is a prudent place for us to be spending advertising dollars. Twitter is one place. We've found that Twitter isn't necessarily the best place to attract the most relevant attention, but Facebook is obviously interesting; LinkedIn is obviously interesting. Google Ads are a part of our monthly ad spend. What we have found is that you give one of these platforms a budget, and if you don't limit it, it can take off like a rocket, and you can spend unlimited amount of money in a very short period of time. The challenge is, of course, understanding how those are converting into actual investors. It's a little part of our growing investors, but that, at least, gets attention for the platform.

I think, without revealing too much information, things that move, any type of video, gets more eyeballs. I think that LinkedIn is probably the most efficient social platform to be on, and it's impossible to ignore Google's remarketing capabilities.

Sourcing Deals

Given the 20 years I have in the industry, I have plenty of relationships that ... I have plenty of people asking for First Real Fund to help them raise money, so, if you put ... We also have on our site, "If you're interested in having First Real Fund raise money, submit a deal." We, like a lot of platforms, get to see a lot of deals that way. What do we like is kind of one of the key questions, and this goes back to our initial conversation about handling distress in the market. We like sponsors that have experience, or some sort of demonstrated competitive advantage. There's two things we like to see. One is local expertise, and at least a certain level of track record when it comes to per-unit, or per-square-foot history.

We also love sponsors that are in growth mode, and they've outgrown their current source of capital. That, frequently, is friends, and family, or a small private equity firm, where they're giving up a huge amount of the upside. We would prefer to have either a preferred, or mezzanine position, and limit the upside for us, and for our investors, in exchange for subordinate equity from the sponsor. We love to be in the 60 to 80, even 85-percent loan-to-value, and loan-to-cost, and we're willing to cap our yield, in order for that preferred position.

When you do a stress test, you can have a material change in value, and still have the investment position be sufficiently protected to not only have zero loss on principal, but also still achieve the return. We're comfortable doing mezz debt, or preferred equity. In fact, a lot of our preferred equity looks, and feels like mezz, but it's typically behind senior debt to prohibit a subordinate debt position. In other words, it'll have a fixed rate of return, and it'll have certain triggers, so that there's the equivalent of a maturity date. It'll be directly behind the senior debt, and it'll be superior to the equity from the rest of the sponsor, which is kind of like a mezz loan.

It's got a maturity date; it's got a fixed yield right behind the senior debt, and there's a lot of support, and equity, but it has the benefit of a lien. There's a little bit of a yield differential there. It can be as tight as one or two interest rate points. It can be as wide as four to even six, depending on sort of how high in the capital stack you're going.

Mitigating Risk

What we have done in the past, and I would say what we ... A great deal for us would be 50/50. If it's a $10 million deal, and I think that's a nice middle market sort of a round number, because we're only raising $1 to $2 million dollars per transaction, a 10, or 15, or $20 million deal, we're still a material portion of the capital stack, our raise.

We'd love to see 50/50. If it's a $10 million deal, there's a senior lender that comes in for really cheap, up to 60-percent loan-to-cost. We come in for the six-to-eight tranche, and then, the sponsor comes in for the eight to 10 million, the last piece. That's a homerun deal for us; that's 50/50. The maximum that we would go would be probably 80/20, where we would provide 80 percent of the equity, and the sponsor provides 20.

Our investments are kind of the pref-equity mezz debt, which has similar characteristics. Then, JV equity is a significant part of any of the aggregate commercial real estate universe. It's definitely a product that we like to participate in.  We like to have a transaction, where we're the sole other capital provider. The reality is, is that, in order to have access to some of the biggest, and best deals, we'll make a $2 million contribution, but if it's a $50 million deal, we're just not the only equity partner. We're simply one other limited partner amongst many others.

It's less desirable, because you're not the primary contact. You're one of many people in a larger pool, but sometimes, for larger deals, that's what ... We'd be crazy to ignore investors' potential appetite for a really high-caliber deal that's larger, and has a sponsor that has a tremendous amount of experience. Otherwise, investors wouldn't normally have access to that type of deal. We do do that; I mean, we do both.

Being a majority investor feels better, is one thing, right off the bat. You're really establishing a clear relationship, and it's less complicated to understand every relevant party's interests, if you just have fewer people involved. That's one reason.

It’s also a huge advantage, as majority investor, to be able to negotiate terms. When you're negotiating either a loan doc, or the operating agreement, you're the only party that's involved. If you're one of 50 joint venture equity partners, you're signing the docs, as is, more than likely, 90 percent, 99 percent of the time.

Knowing what to negotiate in the contracts is the level of expertise that you don't get as an analyst; you don't even really get any type ... As just a real estate person, you really have to have entity-level experience, or executive experience, and you have to have access to lawyers.

There's a few key things to look for in the offering documents to negotiate. You always want the control provisions to be favorable for you, and you want to treat your co-investor, your sponsor, with fairness, and you also want them to treat you fair. If they make mistakes, if something happens that's beyond their control, the ability for you to execute your workout plan, and this is relevant ...

Living through 2008 to 2012 was really relevant for me, and certainly, for you, because we learned to address, and how important some of these terms are. The market has evolved since then, and some of the terms have become more clear, and some a little bit less clear.

The best way to summarize it is you want to be able to take control of any property without too much hassle. Sometimes, frankly, being in a preferred position is easier than being in a mezz position, because foreclosure is a terribly long process, and, sometimes, simply the threat of foreclosure is your greatest asset, when it comes to that.

 If you're in a preferred position, and there's a series of provisions that allow the sponsor, or require the sponsor to hand control over to you, as the sole co-investor, that's a really powerful position to be in. That's top of mind, when it comes to what we look for in the offering documents.

Listen to this episode and read the transcript in the shownotes by clicking here.

Education wise I have a master's degree in economics; I completed Harvard's strategic marketing management program and I am a Ph.D. candidate at the Chicago School. I'm about two thirds of the way through or somewhere between a third of the way through my dissertation on organizational leadership. Hopefully by the end of this year early next year I'll be I'll be a doctor; Dr. Steve Kaufman. That's a little bit about my education. I'm a lifelong learner in fact when people ask my number one hobby I always tell them that it is learning and education. And regarding how I ended up as the founder of Zeus, I'm also a CPA. I'm not practicing but I am licensed and in my early days I went to school at night finishing my accounting degree and I worked in public accounting during the day. And this was when Bill Clinton was president. Dating myself just a little bit I'm not that old. Bill Clinton was the first president to recognize that in the United States GDP is sourced 18 to 22 percent from real estate. Said another way; somewhere between 18 and 22 cents of every dollar made in this country is made in the real estate industry. He realized that if there was one segment that he could easily influence it was the real estate industry by making financing a lot more available. He started pressuring Fannie Mae and Freddie Mac to lower their downpayment requirements from the 20 percent down to the 10 percent down to the 5 percent down to zero.

Much of what you think is the mortgage crisis of 2008 really started in the late 90s and that economic experience that we had was so positive was really a part of that. During that time I happened to be a student at night and working in the day in public accounting. The firm where I worked ended up getting mortgage companies and mortgage banks as clients. At the same time I was a real estate investor. I owned three rental properties last time I was 21 years old and I've never inherited anything other than a little bit of medical debt and funeral expenses, so I don't come from money. I grew up incredibly poor. In fact a lot of people who know my true story know that I grew up in a trailer park and for about 80 percent of my life until I was in high school, I did not have electricity. I did not have a telephone. My mother made my clothes and she gave us IOUs for our birthdays and most holidays.

I have four older siblings none of them graduated high school so I figured I would do what they all did which is I dropped out of high school in the ninth grade. I went to work like them because that's what you did where I grew up in a trailer park. Everyone went to work and then sometime around the age 17 I realized that I had to do something different than everyone else around me or I'd end up just like everyone else around me.

I became addicted to drugs. I drug myself to work, I drug myself to school, I drug myself to the bank to save money. I drug myself to volunteering. I started dragging myself to all these places that I know that everyone else in my neighborhood in my trailer park wouldn't do so that I could have a life that they wouldn't have. And I've been doing it ever since. Circa 2000-2001 I was working in public accounting and I decide that maybe I should consult in the mortgage industry or lending industry. During that entire process working for a few clients I decided to start my own firm and I called it Zeus because Zeus is the god of all the gods in Greek mythology and we could simply be the god of all gods in the lending space. That's where it started about 15 years ago and we've had an amazing ride. Lots of great people making a lot of difference for people.

JOBS Act Miracle

The Jobs Act helped in a major way. We were doing hard money lending prior to the JOBS Act and prior to that if you said the word ‘hard money’ even though it was a great tool that a lot of investors loved and used, the JOBS Act did something really miraculous. It's like the war on drugs or making the estate tax the death tax or what global warming is to climate change or in the 80s they had a variable rate mortgages and now they're called ARMs, adjustable rate mortgages. All of these name changes have a dramatic impact on us as consumers as a whole. The JOBS Act took crowdfunding which was basically sourcing investments for real estate from different individuals and opening up the opportunity to do transactions that a traditional bank wouldn't do. Well that's called hard money in the real estate industry and it's been a product for 30 years or more. The change of name transformed our ability to market mainstream a product that we were kind of keeping in the shadows. We launched a few years ago, ZeusCrowdfunding.com which last year was ranked the seventh best site in the country and the number one new site in the country for investors in crowdfunding real estate. A big part of that is because of our commitment to transparency. What it really did was it allowed us to move hard money with a slight name change into the center stage and market it in a way that people were willing to accept it.

Funding of Loans

The changes were significant; small shifts but they've had a major impact in. Prior to the JOBS Act when we funded a loan we funded it with our own capital and then we sought out individual investors that we knew, friends and family and acquaintances that may want to invest in that loan, one at a time to only accredited investors. Very slow tedious process. Then literally overnight we were able, thanks to the JOBS Act, to put that transaction on a Web site ZeusCrowdfunding.com, under our view investment section and then investors all over the globe including Singapore are able to see the deal and invest in it after we've already funded it. It made our job to solicit for funds so much easier. Ironically what used to be our number one problem, which is getting investor capital, now we do not even think about it. It is so overrun that we've raised our minimums we can't handle the amount of people who want to invest with us and that's not a plug. We really cannot.

Discovering Crowdfunding

I didn't even know that the JOBS Act had been passed. I didn't even know about real estate crowdfunding until a friend of mine who was an avid and real estate investor asked me to vet a site where he was going to invest in some transactions online. This is by far without a doubt one of the top 10 sites in the country and when we looked at the deal closely together he asked for my underwriting expertise. We like to say that our firm is good at two things. Number one by far is risk assessment thru underwriting and number two is marketing as in giving our customers borrowers and investors what they really want. Those are the two things we're good at. Well he knew that because of my accounting background and some of the things I've done in my career that I would have a good eye for this and so we looked at the deal. We thought well this is a terrible deal but more importantly I thought how are they able to ask you for money they don't even know you. Prior to that you had to be going to the accreditation process and everything else and so we'd explored their site and we read about the JOBS Act.

I had never learned about it before. I'd never heard it in mainstream media and this was probably four years ago five years ago and I really thought that this is going to be a place to be. With peer to peer business growing dramatically across the globe when you think about Uber or you think about Airbnb, Uber is not going to shut down all car services or taxis but it is taking them and making a meaningful dip. Airbnb is not going to shut down Marriot but it's taking a meaningful dip of their business. I feel the same way about crowdfunding for real estate that we're not going to shut down the banks but we are going to make a meaningful difference a meaningful dip in their market share. The way I tied them together is I saw what another crowdfunding site was doing. I was already doing that but doing it the hard way and I realized that we could create our own platform make it a little bit better and offer the same product but just make a little bit better.

We were in a place that we needed a web presence so we created the Web site and that was just simply from reading the JOBS Act and reading what was permissible. Anybody listening to your podcast or your interviews can read the JOBS Act. It's written in reasonably straightforward terms. We read that and we knew that we needed a Web site that had enough disclaimers that let investors know that they are at a risk of losing their investment if they do a non-guaranteed investment.

Guaranteed Investment

I'd be remiss if I didn't say that we are one of the only sites in the country to offer guaranteed investments through our 15 year corporate guarantee. We very rarely actually make non-guaranteed investments. Almost all of our investments are guaranteed which means if something happens to the asset we still pay the investor. We foreclose, repurpose it and the investor is never negatively impacted at all. We were highly discouraged, we were even mocked once in an interview that we were doing that by another by another platform. But it's worked, it's our model.

We've funded almost $3 billion in mortgages. Our investors’ only complaint is that we're we aren't fast enough or not have we don't have enough deal flow.

We’ve been guaranteeing loans for more than 15 years. Since prior to the existence of the company. When I was making loans prior to the existence of Zeus, I was making loans and if I had to bring in an investor to help me recycle my cash to do it so I could do more loans I would tell them Look my new company will guarantee this.

To describe how we do that, I use this example. If you're going for heart surgery you always ask for a second opinion because you want to know if someone else has a different view of what's happening. But when you get on an airplane you never even ask for the resume or the experience of the pilot and the co-pilot. The reason why is because on the heart surgery if something goes wrong you stay there but he gets up and goes back home to his family that night and nothing impacted him other than he's regretful But the pilot you don't have to ask for their resumes because if the plane goes down you all go down. In our business model we're partners with our investor to the point that we're confident in what we're doing. We want to give them the reassurance that we're pilots with you on this. We're not heart surgeons, you're not taking all the risk and we're just getting a slice and dice where we think is appropriate. We're in it together.

Think of it another way. If you're really confident in your underwriting, why wouldn’t you guarantee it? Then a third element is I'm already putting my own money in the deal upfront anyway. No investor ever sees a deal on our platform ever that we haven't first lent our money unless it's listed as non-guaranteed. I'm so confident in the transaction I've already given my own cash. I've already underwritten it with my team. My underwriter who works here, on of my first two employees from 15 years ago who both still work here, if she says if we're going to do the transaction based on our matrix and our underwriting criteria and we fund it why would we not guarantee it to an investor.

Underwriting a Guarantee

We have a less than 1 percent default rate on our portfolio. We've never had a down year in our portfolio. It's not a matter of if, it's when you take back an asset. If you're in this space that's not the issue. We even do a little bit of thriving through recessionary periods. We like this business during corrections and economic downturns because the industry itself is macro economically countercyclical on a full scale. This industry does better. It does better when banks retract and the economy contracts. People need alternative financing. You could say we were potentially losing business, losing deals because property values were dropping. On the other hand you could say we were gaining market share because of the amount of business we were doing.

I will tell you in 2008 the entire year when we took back five transactions and of those five transactions two of them three of them we sold within probably three to four months and we were made whole or made a profit. Two of them we had to hold for another year and a half. When that happened we gave the investor the option to pay them off and keep the asset, or to keep paying them as we were paying them before.  We ended up when we sold the assets about a year and a half give or take later we made a somewhere in the low 20 IRR in our money net of what we had to pay to the investor. We came out very ahead on the transaction and we were happy to have maintained the investors.

The question is do you have the staying power to do that based on your portfolio and so a small lender who guarantees they're guaranteeing that because they probably can't get the money anywhere else. But our company has no debt. We service and manage all of our own assets and we're perfectly positioned to repurpose based on the foundation of the company. One other thing that we do is invest in assets and so while we're not a home investors franchise, we don't actively buy residential property, but we do do a few commercial projects a year that we redevelop that are more what I call Mom and Pop commercial real estate which is $10 million or less. We understand what it's like to take back the property and to repurpose it. We prefer to only be in the lending business when we do a loan to lend on it. But we understand if a property has to be taken back what to do with it. That’s how we underwrite our guarantee.