REIA 344 Brian Adams: How to effectively raise capital as a first time sponsor.

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Hello, enlightened investors. Welcome back to Real Estate Investing Abundance. I'm your host, Dr. Allen. I'm so pleased to be back with you again today and looking forward to another enlightening episode. As we take a look at how we can effectively raise capital as first-time investors or as veteran investors. With us today is Brian Adams, and he is the president and founder of Excelsior Capital, where he spearheads the investor relations and capital markets arm of his firm. He has 10 years of experience in real estate private equity And prior to forming Excelsior Capital, Brian co-founded Prima Properties in 2010, where he provided leadership and direction for the firm in connection with capital markets, investment management, and investor relations. So Brian, take us into the show and share a memorable experience that helped form you are who you are today.

Thank you, Alan, so much for having me. What immediately popped into my head was You know, despite my liberal arts college education, I actually went to an all-boys military school for middle school and high school. And it was a very small, old school type of setup. And a lot of those basic tenets on the discipline and disciplinary side have stayed with me my whole life. And it was very impressionable for me.

Where was the school?

So I grew up in upstate New York, out in the country. My dad was a gentleman farmer. He was an attorney, but we had a big piece of land and the school itself was actually in Albany. downtown Albany and was one of the few remaining all-boys military schools that got spun up after the War of 1812. The US federal government decided that we were not prepared, and so they started a number of these smaller academies across the Northeast, and it was one of the few remaining.

So—

Oh, wow. Quite a history there. Yeah. Well, Brian, let's just start off here. Let's talk about the current state of commercial real estate markets. And the key demographics and metrics that are driving that. It's certainly some uncertain times and people are asking those questions and I don't know if anybody has any answers, but we can discuss it and take a look at it.

Sure. Let's start micro, right? So we're recording this in May of 2023. To your kind of, as you alluded to, there's been a real shift in the market over the last 12 months. Very, very much so. And we are dealing with an environment where valuations are falling, interest rates are rising, and costs are going up exponentially. It's a very challenging time to be a commercial real estate manager and investor, and I foresee quite a bit of pain on the horizon, honestly, for a lot of groups. And the question we often get, I'm sure your listeners and yourself, who's most at risk? What's going to happen? I mean, the reality is I know office and traditional office is getting really beaten up right now, but the reality is, depending on how long these interest rates stay high, it's just a function of how long that goes on and who will feel pain. Because across all asset classes, if rates continue to rise and valuations continue to fall, there will be a lot of defaults and a lot of giving the keys back to folks. And so office might be at the beginning of that, but I really think of it as kind of a rising tide tsunami where the longer it goes on, the more pain will be had across the spectrum. So that's kind of the near term. It's pretty scary. There are opportunities there. But I think big picture, what I try to remind people is if you kind of take a step back and think about the global investing environment, you know, US domestic real assets or frankly private companies, I think is one of the best places to allocate capital if you have a 10, 25-year-plus time horizon. I'm not a big fan of what's happening in Southeast Asia or Europe or South America. And so I think North America with the US in particular, domestic real estate has gone up about 3% on average over the last 100-plus years. So if you have a long time horizon and you believe in the US kind of as an entity, as an experiment that's worked really well over the last kind of century-plus, I think you should continue to allocate there and kind of ignore some of this noise that you're hearing in the market today.

Well, there definitely is a lot of noise in the market and a lot of upset, unprecedented things. The LIBOR is going away and the de-dollarization of the dollar. The LIBOR was going to upset things in and of itself. And then with the really acceleration of the de-dollarization, I guess it's really kind of been going on for some time, but it really, really hit the fan really within the last 2 to 3 months here. And I don't think we've seen really any of the— I don't think we've really seen the results of the de-dollarization as of yet. And who knows where that's— what that's going to do and where that's going to go. But just talk about the LIBOR a little bit and what's going to happen with that. When is that going away? Is it the end of July or the end of June? I can't remember.

Yeah, I mean, I think it phases out this summer, but for all intents and purposes, everyone's switched over to SOFR, you know, and that's kind of where we are today. When we get debt quotes or when we think about things internally, it's all been kind of transitioned over to SOFR.

So as far as those going into loans, they're already making that transition?

Correct.

What's it going to do for existing loans that were valued under the LIBOR? Is that going to make any difference or—

I mean, we'll find out. I don't think it'll be, you know, frankly that drastic. It's not something that we're worried about, but it seems like the market has already transitioned out of it. So it's interesting, we don't hear a lot about that in the media or the press anymore. So it hasn't really impacted us directly.

Oh, that's good. So what about the de-dollarization? What's, where, what's, I mean, what's that going to do for commercial real estate is my question.

Yeah. And so when you refer to de-dollarization, you mean the theory that the dollar will no longer be the reserve currency for global capitalism?

Correct. Right. Yeah.

Yeah. I mean, I don't see another option that's viable. You know, fundamentally, currency is built on trust. I don't think people trust China. I don't think they're a real threat to taking away anything from the dollar today. I do believe that we have a bit of an issue with the debt load and the debt service that the federal government has. We've been on a spending spree for really since the '90s. Clinton was the last president to have a balanced budget and to have a neutral deficit. And regardless of your political leanings, every administration since then has spent like there is no tomorrow. I'm not a believer in modern monetary theory. I think at some point you've got to pay those bills. And your cost of covering that debt service is going to be a problem. And we're about 30 to 60 days away from finding out where the rubber meets the road when the debt ceiling negotiations occur. So not to get overly political, I don't see another option besides the dollar today. Now, that being said, unless we get our house in order, there will be factions that look to detract from our ability to be the reserve currency of the world.

Well, Saudi Arabia is already trading in the yuan.

Yeah.

Which is, I mean, Saudi Arabia was the foundation of the petrodollar.

Yeah, so I agree that's problematic. Saudi Arabia really doesn't have a dynamic economy beyond energy. Their demographics are atrocious. I don't really see the Middle East being a player geopolitically over the next 25 or 50 years. As you know, we've become energy independent. We are a net exporter as opposed to an importer these days, and I don't think that's going to change anytime soon. And so I think strategically, over the, you know, last 25 years, the Middle East used to be a real focus for us in terms of international geopolitical strategy. It no longer is, really. We've pivoted towards Southeast Asia. It's going to be, you know, between us and China, and everyone's going to kind of line up behind China, and we're going to see what happens there. But it doesn't really unnerve me. I frankly think the Saudis are playing a very dangerous game. You know, they don't have a large population. They don't have a diverse economy. Their demographics are very poor. They don't really have armed forces. They depend on other people in the neighborhood to take care of them. And if they really do block out the US moving forward and they want to, you know, put their chips in with China, good luck with that.

Enlightened Investors, if you haven't done so already, be sure and click that like button and also click that share so others can take advantage of the content. And finally, be sure to subscribe so you don't miss a single one of our upcoming episodes. Yeah, we will, we'll see how it all plays out there. What about syndicated platforms that are focused on taxable high net worth investors and family offices?

Yeah, I mean, I think we've seen the evolution of the syndication platform accelerate dramatically over the last 10 or 20 years, really ever since the JOBS Act under Obama. Crowdfunding and access to alternatives becomes something that's been normalized. I do think the democratization of access to alternatives is a theme that we're going to continue to see play out. In our lifetimes, you know today there's roughly 13 million accredited investors in America. Less than 3% of them have exposure to direct private equity or real estate, and so it's a huge opportunity set. It's a very inefficient market, and more and more people want to learn about it, especially as Wall Street seems to blow itself up every three to five years these days. There's a lot of distrust to the products and the marketing machine that is Wall Street. I think people want to invest in things that they understand, that they can feel, and work with people that they you know know and not some. faceless group out of New York City. And so I think there's going to be continued interest in having access to these direct investments, be it real estate, private equity, venture, et cetera.

Well, what about the directing the co-investment structure for the IRAs and the boutique wealth management firms?

Yeah, you know, in terms of the IRAs, I don't think people get too excited by just continuing to deploy into a SPDR ETF. or into an S&P, right? They want exposure to direct opportunities and they want that kind of upside. And it's a really nice way to do it without having to take cash out of your account or pocket. And so there's a huge untapped amount of capital there and you're seeing the larger groups kind of start attacking it. And groups like ours obviously, you know, have the ability to do it as well. And so I don't think that's going to change anytime soon. In terms of wealth management firms, you know, the wirehouses are struggling with this demographic shift occurring from baby boomers to millennials and Gen Xs. You know, they want something different. A value proposition based purely on, you know, fee compression is no longer something that's attractive to people. So access to alternatives, having access to direct investments is going to be a real value proposition. And it's not a nice to have, it's going to be a must have. I think for boutique wealth managers, RIAs, and other groups.

And direct ownership. Well, tell us the difference between actually a general partner and a limited partner, and what are the differences in the tax advantages between general partner and limited partners? Sure.

So general partner is referred to as, as the GP. They are the ones who are operating, sponsoring, and managing the deal. They are the decision makers, right? So if you think of the investment into one particular property. The ownership structure will be through an LLC. The GP, the general partner, will be the one making the day-to-day decisions, managing the property, deciding what tenants get put into which buildings, which capital expenditures get made, etc. Limited partners are the investors, right? So they don't have a say in the management of the firm or the direction that the property is taken, but they have a right to profit sharing and fee distribution, et cetera. And so that's kind of the relationship with the GP and the LP. The nice thing about commercial real estate and what I kind of usually tell people is, you know, the tax code, even though I got a C in basic federal income tax in law school, the tax code is a series of incentives and disincentives to encourage or discourage certain behavior. And if you look at the tax code today, it really wants you to Own your own home, get married, have children, and invest into commercial real estate. And so you should not fight the IRS. You should go along with that. And there's just massive tax benefits that come from direct real estate ownership. And the nice thing about syndications is that even if you're an LP and you're not making those decisions, you're not a real estate professional, you still get the pass-through benefits of direct ownership, even if you have a fraction of the ownership of a particular property. So you get that pass-through depreciation. You can get that loss harvesting that you can offset gains elsewhere and all kinds of other things that, you know, my COO would be able to tell you.

So the tax advantages for the limited partner are essentially the same as that for the general partners. Are there any differences or is it pretty much the same all across the board?

I mean, I don't give tax advice, but yeah, I mean, generally speaking, you're going to get the same tax treatment that the GP does.

Yeah.

Okay. So in terms of where we're going here with the economy, you're thinking that the offices are kind of the canary in the gold mine and they're going to hurt the most and the first. Where's it going to go from there?

Well, you know, I think it's going to be, you know, office will be the vanguard of where things hurt the most. I do think some multifamily that were bought at really kind of high basis, low cap rate, and had interest only or variable debt put on them. Like I said, interest rates are going up dramatically, valuations are going down, and the cost to operate all buildings, commercial real estate, residential real estate, have gone up tremendously. And rent growth for the first time this cycle has plateaued and is decreasing. Right. And so If you were really skinny on those deals going into them, you now may be kind of underwater. And the problem comes that you can't go to the debt market and refinance them because there's no appetite there and you can't do negative leverage on your asset. And there's really not the opportunity to re-equitize them with new equity or common equity, at least, because nobody wants to come in at the same valuation that you bought it at 3 to 5 years ago. And so you're going to start seeing bridge lenders and vulture investors coming in to try to kind of loan to own some of these assets. Or you'll see more of what KKR and Brookfield and some other groups have done, which is give the keys back to the lender and say, you know, have fun, fellas, enjoy it. We're not going to fight this and accrue a bunch of legal costs and fees that we know ultimately will end in us giving the building away anyways. And so you'll see more and more of that. I think office and multifamily will be kind of the first. I do believe that rates will decrease heading into Q4. Q1, for political purposes, I think the White House will use its bully pulpit to force the Fed's hands there to make the economy running nice and hot in an election year. So if you can kind of survive the next 12, 24 months, I think we'll be in a much better position than we are today. That being said, I believe the days of very hyper-low interest rates are over. I think we're in a normalized interest rate of 4.5% to 5.5%, which if you look at the historical norms and averages is about right. So we were in a kind of artificially low interest rate environment for very long and people have to get reaccustomed to that, both LPs and GPs.

So have you seen valuations going down in the multifamily market?

We don't do multifamily, so I can't really comment directly. We do industrial and flex. And some medical office. Anecdotally, we have seen cap rates start to move. We have seen assets come back to market and reprice. The bigger challenge is on the debt side. Lenders are pretty much on the sidelines. Very challenging to get term sheets, let alone attractive term sheets that make sense to putting your deals together. And then when you do get one, the LTVs are going to be low, the covenants are going to be tight, and they'll be restrictive.

Yeah.

It's just a hard time right now in general to acquire new assets.

Right. Are you seeing a decline in the industrial markets or are they holding more steady?

You know, we do multi-tenant Class B typically, and our stuff has stayed pretty steady. We've seen NOI continue to grow up. We haven't seen massive vacancy within our portfolio, and we continue to find decently attractive opportunities. I do think the new Class A kind of Amazon distribution center warehouses, those cap rates are not what they were 12 months ago.

Well, a lot of movement there. Well, Brian, tell us about your company, what you have to offer, and how it is that our audience can get in touch with you.

Yeah, absolutely. I appreciate that. So we are a, like I referenced, we do deal-by-deal syndication. So we don't have a fund, we don't have a blind pool of capital, we don't commingle assets. We will find one particular building, we'll reach out to our network and folks will come in on just that one particular investment. We only work with private investors that are taxable. So for us, that means high net worth individuals, family offices, boutique wealth management firms, be they RIAs or multifamily offices. And we work with accredited investors, which is a defined term under SEC and FINRA. And we've been doing it for 11 years now. And like I mentioned, we, we buy mostly industrial flex properties. So think of single story, partial office or retail functionality and then partial industrial distribution warehouse. So a lot of the product that you might see around an airport or an industrial area, we like the dynamics there. We've been doing it for a while. That's probably 75% of the portfolio. And then the 25% would be medical office buildings. We're based in Nashville, Tennessee, and we have a focus on the Southeast. So Texas, Tennessee, Florida, Carolinas, and Atlanta. But we're in 30+ markets today, so we're opportunistic.

Okay. Well, very good. Well, Brian, it has been a pleasure having you today. Thanks for being with us.

Yeah, appreciate the opportunity.

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