The Future of Real Estate Liquidity with Derrick Barker - Episode - 557

Overall, we are looking for owner-operators that have low-leverage cash-flowing assets, and otherwise they might have some other need in their portfolio. We will look at their schedule of real estate owned and find what are the properties that are best operating, best positioned, that are, you know, they bought a lot of times they bought it a long time ago, rents have gone up, values have gone up, so they have a lot of equity and there's a lot of cash flow because Their debt stayed the same, but rents kept going up.

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Now take a breath, feel the reins, and let's ride together today into our conversation. Just a brief disclaimer, all information shared is for educational purposes only. It is not investment, financial, legal, or tax advice. All investments carry risk. You should always consult your professional advisors before making any investment decisions. Today's guest brings a rare blend of intellect, discipline, and innovation in the real estate world. Derek Barker, Harvard graduate and former Goldman Sachs trader, is the CEO and co-founder of Nectar, a fintech platform giving operators something they have long needed, and that is fast, flexible access to their own future cash. Derek has already deployed more than $41 million across 29 states, Helping real estate entrepreneurs scale without giving up equity or momentum.

His mission is simple and powerful: equip operators with the capital freedom to grow stronger, faster, and smarter. Derek, it is a real pleasure to have you with us today.

Thanks for having me.

So Derek, for those new to Nectar, can you just walk us through what inspired you to Can you help us rethink how operators access capital and why this kind of flexibility is so needed in today's market?

Of course, of course. I'll start from early on in my career where I started as a real estate operator, focused mostly on buying and renovating and upgrading apartment complexes. I worked at Goldman Sachs as a bond trader, but I left there and started and bought and renovated over $500 million worth of assets. And early on in my career, we were always— we could arrange capital for the assets, but there isn't— ultimately, these are small and medium-sized businesses that have, you know, capital needs that aren't attached directly to the asset. So you might have a deal that goes over budget where you have to come out of your pocket to help finish the project, or you might need Fast capital to close on a deal that's a fast-moving opportunity, or to buy out a partner. There are all kinds of needs, and there isn't really good capital to go to in the real estate market outside of financing the mortgage and equity on a specific deal. I started Nectar to solve that problem. It's a problem that I had as a sponsor building a $500 million portfolio. It started when I just needed $50,000 early on, and then I grew and grew, and I was like, well, if I could just get you know, $5 million to solve this one problem, then I, you know, uh, then I would never have it again. But ultimately, these are small businesses with stabilized cash-flowing assets but illiquid assets, uh, and sometimes they have big, uh, capital needs to grow and build their business. So that's why I started Nectar, to solve that problem in the market.

Well, for sure, for sure, it is a definite problem. It's always a Even with syndications, it's a problem getting cash, and through— either through lenders or through equity, it can be a challenge. So, real estate liquidity can make or, of course, make an operation, as you have mentioned and as you've been through yourself. So, how do you explain Nectar's approach to helping entrepreneurs tap into their own future cash flow? Without surrendering that equity or that control. This just sounds really theoretical and nice, but can you kind of break it down and show us how it really works?

Yeah, so overall we are looking for owner-operators that have low-leverage cash-flowing assets, and otherwise they might have some other need in their portfolio. We will look at their schedule of real estate owned and find What are the properties that are best operating, best positioned, that are, you know, they bought a lot of times they bought it a long time ago. Rents have gone up, values have gone up. So they have a lot of equity and there's a lot of cash flow because their debt stayed the same, but rents kept going up. We provide mezzanine debt or preferred equity to these properties. That's how we attach. So we're backed by their actual underlying assets. And we have an interest in their underlying assets. However, we give them capital that they can use at the operating company level. And so that's how it works. It's really— it's a— in a lot of our deals, amortized so that people never have to sell the property or refinance the property in order to pay us back. That allows us to not have to take capital event risk, not have to take— the market can go up and down in terms of value. But if that cash flow is there, then we are typically going to be covered because we have a strong amortization preference. Uh, we're subordinate to a first mortgage most of the time, but in general, because of the nature of our business, these are assets across our portfolio that are in the mid-60s leverage on average. Does that make sense?

Sure.

Yeah, yeah. And our key differentiator is that we ultimately are looking at, like, we're cash flow leverage and diversification. That's, you know, that's really kind of our focus. How do we— how are we diversified across multiple sponsors, multiple geographies? But no matter where we are, there's cash flow and there's low to moderate leverage.

Yeah, well, that ability to keep that cash flowing can make all of the difference. Um, but you've seen operators at every stage, and so What are the biggest challenges they face when they're running up against this block that capital, that traditional capital sources just aren't there and it slows them down? So how does your model change their trajectory?

I mean, ultimately, the majority of people in this space, they're running small and medium-sized businesses. Okay. Our average sponsor has between $500 million And let's say $50 million and $500 million in assets. So these are people that they can't go to Goldman Sachs if they need capital for their business. There is no venture capital market. And ultimately, you know, $200 million of assets can be 5 or 10 apartment complexes or 20 apartment complexes. So they're smaller deals where they can't go to institutions. This is a place where Local banks used to own this market before the S&L crisis. So where they could go to their local bank, they're a prominent real estate owner in the area, and they can get a signature loan. That doesn't exist anymore. Banks have been regulated out of this market. So mostly what people have done is they've refinanced existing properties and got cash-out refinanced, and that's how they've been able to operate. But that's incredibly expensive. So you have to— so you have a $20 million apartment. With a $10 million mortgage, and you need a million dollars to go buy another deal. You have to pay a prepayment penalty on the entire $10 million. You have to pay an origination fee on $11 million, and then you have to pay legal other costs like transaction costs and a higher interest rate usually based on where interest rates are now. For that one million dollars, that's a that's a lot of money. So we're able to so you know. We're able to come in and just provide that million dollars. It's at a slightly higher rate than if you had a mortgage, but it's less expensive. And we can move very fast. We can get close in 1 or 2 weeks as opposed to 2 or 3 months. So before, before us, you know, people would usually be doing refinances or borrowing money from friends and family. That's a lot of, a lot of our competition is a rich uncle, really, quite frankly.

So in terms of certainly that is going to provide them with faster liquidity so that they can move faster. But I suspect it probably goes even deeper than that because certainly one of the things that, that slows people down is the idea that, well, I just can't do that. So how does this help them actually overcome that barrier to develop the confidence and, and the decision to actually go, well, I'm going to do it? With this opportunity, I can really actually start looking at the long term rather than just from one deal to the next deal.

Yeah, great question. Real estate is a capital-intensive business, and the way that the capital markets are structured is that it attacks— you know, the— it's easy to raise money at the asset level for a specific deal, but there's no It's very difficult to get investment in the actual company. So if you like, but the GP, the people who are the owner operators, they are typically on the hook for things like minimum liquidity to sign. You know, if you do a loan and get a mortgage, the lender is going to say, hey, you have to keep at least $5 million in your bank account. Okay. And, you know, so that you require to have these requirements if to do To pursue a deal, you have to spend money to go visit the deal, to diligence it, to pay an engineer, to pay an architect, to do all the work to pursue a deal. It's hard to raise money to pursue a deal. A lot of times those deals don't close, but when they close, you get an acquisition fee that effectively pays you back for all the pursuit costs, for all the deals that didn't work. Um, you know, and then you'll have portfolios where, you know, you have— maybe the portfolio is fine, But your team is just not big enough to, you know, to continue to grow the portfolio. You have a great portfolio, you have a great, uh, you know, business model, but your actual team, you know, you need to make some hires. But again, with these real estate businesses, it's hard to get financing at the company level to allow you to do that. The result is there's not as much supply Of commercial real estate, because the small and medium-sized businesses that dominated this part of the market and dominated really apartments specifically and housing specifically for a long time, they just get to a size where they don't have the capital to continue to grow, to become a regional, to go from 10 properties to 15 properties. You know, and and so we're missing a big chunk of the market. Not because there aren't people with capacity, not because there aren't people who know how to do it, but there's just not the investment in the actual companies that create the supply, that create the housing. So the result is you have people who miss opportunities to build more housing, to do more deals, but also as a market, we miss the opportunity to generate the housing that we need for our society, you know, for our population. So it's a big issue where we are, where you can get the best-in-class operators who are still just chronically undercapitalized because they have to have so much cash sitting aside for liquidity covenants. And you have to have outlays for doing new deals. And if a deal goes over budget, because I don't know if inflation or anything happens, you know, you're trying to ship refrigerators from overseas and then the cost goes up all of a sudden. The owner-operator, the GP—they're the first ones who have to bear that cost. And so because of that, a lot of these businesses have to hold a tremendous amount of cash, which is just very inefficient. So you know we allow people to continue to grow, to go and instead of parking that five million dollars here and not being able to do that next deal, they can get money from us and go do that next deal and not hold, not touch the five million dollar liquidity, or they can. pay the extra for that, those refrigerators that are being shipped over, but still have the money on their balance sheet to hire that, you know, that servicing person who's going to help them to manage their investor relationships or to go out and get that next deal. So that's specifically how we're unleashing the small and medium-sized real estate operators to really solve a lot of the supply dynamic issues that we have in the market. Because it is not because there isn't enough capital at the asset level, it's that at the sponsorship level, there's a lot of capital need and there just aren't structural ways to get that capital to where it needs to be.

Yeah, well, thank you for clarifying that these are really asset-rich entities, but the problem is operating capital. And the way the industry is structured, it is structured for deal by deal by deal rather than really developing a company, and those are 2 very, very different things. And I can certainly see why capitalizing the company is going to make so much difference. I mean, you just can't— you're just going to reach a point, like you said, you just can't grow. Without that capital, and you just can't keep going from one deal to the next deal to the next deal and really scale your business. You just can't do it.

Especially if you're having to cut the check to do the next deal.

Absolutely, yeah. And like you were mentioning, hiring people, having services, you know, keeping an office going, that takes, you know, that takes a lot of capital. And so, yeah, and Uh, and it's, yeah, I can see why it's hard to come by. So you are actually coming in and like you had said at the start, you're coming in as second position, uh, to a first lien holder that could put you in a very vulnerable position. Well, it, I mean, it is a vulnerable position, but you're willing to do so. So what are, I guess, where is the risk reduction on your part? In order to be able to do this?

Uh, it starts with sponsors. You know, we work with sponsors who are experienced, who have years of executing on a business model, and they have existing assets that prove that. And then after we get the, you know, this is a sponsor who does this business and they have a reputation in the market, then we go to the asset level. We are only we're attaching to low leverage cash flowing assets. So we're you know a first mortgage. You know there's a lot of bridge debt out there, for instance, that's at seventy-five or eighty percent loan to value on assets that need to be renovated and leased up. And then after you and then their interest only with a balloon payment. So they have to be renovated, they have to lease up, and then they have to get another mortgage for more in order to get paid off. Like that's the typical thing in the market. We aren't taking any of those risks. We don't take lease-up risk. We don't take construction risk, and we don't take like you know sale risk. You know, by and large, we are attaching to properties that are already cash flowing, and we're underwriting their past twelve months of cash flow. So not projections, just like what did you do last year and the year before that? You know, can you keep that up? And based on that nature of the nature of these existing assets, a lot of times they're lower leverage. So across our portfolio, our average loan-to-value for our last dollar is 65%, which means that asset prices could go down as much as they went down in the Great Financial Crisis. And we still— which is about 20% in some markets, in some places. And we still have a lot of coverage there, you know. So that's really what we're doing. We're taking, you know, we're taking a position behind assets that are low leverage and cash flowing. And those are the two— my view of risk, you know. So at Nectar, we are a risk company. We think about risk. We talk about risk. You know, that's what— if you go to the, you know, to the to the, you know, the water cooler and what are people talking about, they might be talking about football because we are in the South, um, or they're talking about risk, you know. And the things that are risky in, in, you know, in markets, period, leverage is the number one thing. No matter what, if it's high leverage, it's more risky. And if it's lower leverage, it's just not as risky. So number one thing, we don't take a lot of leverage. You know, number 2, if it's cash flowing and amortizing, you can weather a lot of things. All of our deals as a baseline can withstand a 10% revenue decline sustained and still pay us and the first mortgage. You know, so back in the— again, looking back, we think about like everything. We look back, okay, what did things look like in '08 and '09? Okay. So even back then, If you look at— we use Fannie and Freddie debt as proxies because they have great data and they only finance cash-flowing assets. At the most, their default rate was 1%. It got up to 1%. Why? Because they're only financing cash-flowing assets that were already stabilized, already cash-flowing. So the market can whip around, and what's going to really get hurt are the properties that are In renovation, that after the renovation you need to lease up 100% of the units, or it was half empty, right? So if the market declines, then you know what? You're going to be cutting rents because you got to get a half full building full. You're going to be taking whoever will apply, which means you have to have a lower tenant quality possibly. We don't take those risks. We're looking at okay, what is your existing tenant quality? How much are they paying? You know, if there's a downturn. Well, it's full, you know. So every quarter or every month, you have to maybe turn over 2% or 5% of the units. That's not that risky. It's when you have to turn over 50% or fill up 100% of the buildings. That's where there's most risk in the market. And so we're just structuring ourselves to not take the big risk, the leverage, lease-up, construction. You can go wrong in construction, only taking Is this existing deal with an existing experienced operator able to keep up the operations plus or minus 10% for the next several years?

Well, that makes a lot of sense. I mean, because like you just mentioned, leverage is, is a killer and it's also a lifesaver. You just have to know how to use it. Well, looking ahead, how do you see flexible capital reshaping the real estate industry? Or do you even see it outside of you and a few other small businesses? I don't really see it happening on a very large scale, but how do you see it in the next decade?

A decade is a long time, and things can change dramatically in a decade. It's a short time too, but it's a long time in capital markets. And we have an industry that's dominated by the agencies: Fannie Mae, Freddie Mac, HUD to an extent. And it just takes a long time for them to change, and they set up the structures of the market. And then outside of that, institutional capital is a big, a bigger part of the market. Like more and more capital has pooled around just into large pools, which is different from 30 years ago. Where there are a lot more smaller pools of capital. I see that probably continuing. And this type of investment, investing in actual small and medium-sized sponsors, it's operationally intense. And they're going— they are just smaller individual checks. You know, someone who has $100 million in assets needs $1 million sometimes. Goldman Sachs isn't writing a lot of $1 million checks.

Yeah.

a lot of the big banks, they're not going to do the underwriting for that. However, with technology, it's become easier and easier. You know, we have been able to, you know, both empower our very experienced underwriters to become, you know, to have almost superhuman abilities with the advent of a lot of the new technologies. And that's going to permeate the market more and make it more possible for this type of Flexible capital, and as affordability is more in the spotlight as being a challenge, I think it's going to be even more of a challenge in the future because we've seen supply drop tremendously. Supply of multifamily has dropped dramatically, 75%, 80% in some markets. So it takes two or three years for that to show up because it takes two or three years to build an apartment. And the supply dropped last year. So in about a year, two, three, what we're going to see is. Even worse supply demand. There's going to be not enough apartments. So I think that there's going to be more and more people focusing on this issue. What are the things that are that will allow us to unlock supply? And there are four things: there is materials, there's labor, there's land, and there's capital. I can do a whole podcast on all four. And if you don't mind hearing me humoring me for a second, can I go through each one really quickly?

Yeah, sure.

So for, um, for land, it's just entitlement. A lot of, you know, local municipalities don't want people to build, and so they don't let them. You know, that's something that can be fixed. That's something where the spotlight will go there. Uh, and I think that it might be— it will be painful, it'll be politically risky, definitely politically risky at the local level. So you might need some states to step in. California has actually taking the lead there, taking power away from their municipalities in order to make sure that they can build. You know, so other states should follow along there. You know, but we'll need some something there that I think that's going to happen over the next 10 years to unlock supply. Labor. At one point, the United States used to teach people how to build in high school. There were things called woodshop, for instance, where you learn how to build. And then you started out as a laborer or started out as a plumber or something, and you built housing and you built a career. Then you became a developer, and then boom, you can create supply of housing. We've cut off that pipeline. We stopped teaching people in high school how to build. Instead, we relied on importing labor in order to— and it's an apprenticeship business. So someone brings their usually son or nephew onto the site and teaches them. That's breaking down. That's breaking down. We have to fix that. You have to start teaching people how to build so that, you know, 10 years from now, you know, so I have someone who's been building for 10 years, you know, and then they can start that development company that can then grow to build a lot of supply of housing. So that's— those are some things that are going to be needed. And for that supply, you need to capitalize those people once you train them. Land, labor, materials— there's a lot to say. There's modular. There are a lot of things going on that's going to be a spotlight. But then last is I get in, you know, to get to is capital, because that's where I sit. You know, there needs to be more capital in the space, period. Right now there's conventional capital, which works in a very specific box. A lot of real estate doesn't fit within the specific box of our current capital markets. Our current capital markets work very well for scaled operators. For for large developers, but large developers they're not going to do a lot of what we need. We need people who are going to develop a four-acre site in a city or like in a suburb or one-acre site. These are small. These are things that small and medium-sized people will do, and we don't have a capital markets for them. We don't have a capital markets developed for them, not only for their deals, although deals is more efficient, but what's even less efficient is for those companies. So what I believe is going to happen is. As the spotlight goes there, there's going to be a lot of pressure on the private sector and public sector to provide financing that's outside of the traditional box. And there's an opportunity to be an early mover there and to provide that capital to these entrepreneurs and to these assets in the small and medium-sized space. And I think that is an opportunity similar to the junk bond opportunity that Michael Milken exploited in the '80s and '90s. Where you have small companies, smaller companies that were not blue-chip companies, but still fine. They still should be financed. And he found a way to finance them and he made billions of dollars. I think there's that same market opportunity in real estate where there's a huge tail and a huge need to finance smaller and medium-sized commercial real estate companies that's not being met. And there's a Michael Milken-sized opportunity to create a market there. And I believe in the next 10 years, we'll see that.

Well, as we close today's conversation, one message really shines through, and that is that liquidity is more than speed. It is freedom. And Derek has shown how operators can scale with confidence, capture opportunities in real time, and access capital in a way that protects both their equity and their long-term visions. Well, Derek, thank you for the innovation and clarity you are bringing to the industry. And for those in our Enlightened For those in our investor audience who want to explore how Nectar can support your business, you can visit www.usenectar.com. And that's U-S-E-N-E-C-T-A-R dot com. And for the high-achieving professionals joining us today, we are ready to move beyond uncertainty towards the financial clarity. So we want you to be sure to pick up The Beyond the Paycheck Mini Masterclass. It is our free gift to you, and you can find that at www.go.steedtucker.com/beyond-paycheck. So thank you for being with us on Streams to Impact. Until next time, keep your purpose high, your possibilities open, and your wealth working as hard as you do. Thank you. Thank you, Derek. It's a pleasure having you today.

Thank you, Allen. Thanks for having me.

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