11. Ken Horn: From a $600 Law School Education to a Prominent New York Development Company

Welcome. This is Real Estate Investing Live from New York with James Nelson, the principal and head of Avis and Young's Tri State Investment Sales Group. In this program, you'll learn about the world of commercial real estate and find out why it is one of the largest investment opportunities in New York and around the world. Now here is your host, James Nelson.

Happy New Year.

This is James Nelson, your host of Real Estate Investing Live from New York. And welcome to our 11th edition of our podcast. Hope you all had a great New Year's Eve celebration and looking forward to this new decade in front of us. And hopefully this show is motivating you to go out for those of you have yet to make the plunge for your first real estate investment. And this show is going to teach you just how to do that. We teach you everything you need to know about investing and operating commercial real estate. On our show for today we have my good friend Kenneth Horn, who is founder of Alchemy Properties, talking about his story and how he got into the business. And then we've got a great panel with Michael Robinson from our Avis and Young's Appraisal department, Evan Weiss from LWH Hospitality and then Jack Mullen from Summer Street Advisors. They're going to be talking about all the considerations you need to know when appraising property and when when doing feasibility. But before we get to that, let's do the week in review. Powered by the Daily Beat in this past week, Xcel Development has bought out Hong Kong based Meridian Capital, 62% stake in its 13 part assemblage on Fifth Avenue between 46th and 47th street for $263.7 million. The firm also bought out SL Green's interest at 562 Fifth Avenue for $52.4 million. Xtel is planning on development of about 607,000 square feet elsewhere. Gotham Organization and Riseborough Community Partnership have secured 446 million in city financing for two residential towers on Second street and 57th Avenue and Hunters Point for a 968,000 square foot project with over 1,000 units in other developments. LIHC Investment Group, Belvaron and Camber Property Group has acquired an affordable housing portfolio in the Bronx from Cam and Bees International Group for $170 million. The Michel Lama buildings contain 1275 affordable housing units and 10 commercial units. The apartment buildings are designed for low income families earning 60% of area median income. These properties were built in 1970s and have been renovated in 2014. Finally, other development plans RXR Realty has planned for a 21 story mixed use tower at 4211 Ninth street in Long Island City. Sam Chang has filed plans for a 34 story hotel at 150 W 48th St. It's going to be a 300,000 square foot hotel with 974 rooms. And so with that we'll say we've got a lot of new developments slated for the New York New Year, which is great to see. Finally, in other news, the City in just two years from now, the city will have 65% more hotel rooms than it did in 2010, a mind boggling jump from 87,000 to 144,000 rooms. The building boom goes on despite recent declining occupancy and revenue, so there'll be plenty of places to stay if you all want to come visit. So that is it for the week in review. Please stick around. We're going to have a quick note from our sponsor and then we'll get right back to that interview with Ken Horn.

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When it comes to business, you'll find the experts here Voice America Business Network and now it's time for our Investor Spotlight. I'm here with my good friend Ken Horn who founded alchemy properties in 1990 and has been actively involved in development and other aspects of real estate in the New York Metro area for 30 years. Since founding Alchemy, Kenneth has been responsible for the acquisition, strategic development, financing, construction, renovation and marketing of over 3,000 apartments, including the ground up rehabilitation of 25 residential and retail buildings, most notably the Woolworth Building. Ken has also lectured at Yale University as well as UPenn, so we're really lucky to have him here with us today and above all, he's an incredible person who gives back. We're on the board. What was formerly the catalog for giving and now we are Spark Youth nyc.

That's right. New name.

Yes, yes. So thank you again for joining us. So maybe we'll start all the way from the beginning. Where did you grow up?

I grew up in Brooklyn before Brooklyn was Brooklyn, as they say. I grew up in originally Crown Heights and my family moved to Flatbush when I was about 7 or 8. So the neighborhood I grew up in was apartment buildings, a very mixed neighborhood. It was a combination of folks like us who were kind of lower middle class Hasids and folks from the islands. And then when I moved to Flatbush, I moved into a house, a semi attached house which we just sold for my dad probably about four or five years ago, which was 17 by 35.

Wow.

Yeah, wow.

The neighborhood definitely changed over time. I would imagine it did.

It did. And one of the ironies about the neighborhood, neighborhood I grew up in is about four or five years ago we expanded our company a bit and my son and my son in law came to us and we started to buy buildings in Crown Heights and in Bedford Stuyvesant. And my dad, who's 92 when I told him this, he of course thought we were crazy. Right. The first building we bought in Bedford Stuyvesant about four or five years ago was on a street called Madison Street. And believe it or not, my dad went to High School 75 years ago at a school called Boys High School on Madison Street. And of course he told us we were insane, that we were buying in a neighborhood which was terrible 75 years ago. You could picture what it looks like now. And of course they said, no, you can't picture what it looks like now because it's beautiful and thriving.

Wow. So what was it like as a kid? Was it you went to school around the block? What were you doing after school?

Well, I grew up. I went to public schools in New York City, public schools. I went to PS236, which was a neighborhood public school. And then I went to James Madison High School. And James Madison High School at the time had 8,000 students. I think I got a great education. I mean, my graduating class was 1800 people.

Wow. That's triple the size of most liberal arts schools.

It's true. And I graduated 20th in my class and I don't recall working very hard. My parents, of course, thought I probably could have graduated number one in my class if I decided to open books. But I was A pretty good natural student at the time. When I went to Madison, I also took the entrance exams for Poly Prep, which was a very prestigious all boys private school in Brooklyn. And I got in and I told my parents there was no shot that I was going to a school, that I had to cut my hair and wear a jacket and tie to go to school.

And he's still not wearing a tie right now. Your hair is cut, that is.

But the irony, of course, is my parents thought that was a fairly decent answer. I ended up not going there, but I went to Madison High School, and it was a great social education. We were surrounded by people from all different ethnicities, all different races, all different religions. And it was a wonderful education because part of education is not only academics, but it's the people you surround yourself with as well.

Absolutely. So was real estate in the family at all, or what did your parents do?

My mother was a New York City public school teacher, and hence probably why she thought New York City public schools were good. My dad's a cpa, and from Madison, I went to Brandeis University, which is a small liberal arts school where My class had 600 students in it. I thought I had really died and went to heaven. It was right outside of Boston. It was phenomenal. I'm a good tennis player. I play tennis for them. Then from Brandeis, I went to University of California Law School.

Nice.

Yeah, I was a carpet bed. It was great because the University of California only took 10% from out of state. So it was a very select group of people from out of state who got into the school. But I only applied to law schools where I could become a state resident. Because I paid my way through law school. I had to take student loans to go to law school. So after being in California for nine months, I became a state resident, and I paid $600 a year to go to law school.

There you go.

Yep. I took three $5,000 student loans and I worked. And so when I graduated from law school, I only had $15,000 in debt. When I was driving out to California to go to law school, my dad told me I'd gotten into Georgetown. I was on the waiting list. He also informed me it was $25,000 a year. I was in the state of Ohio, and I just kept on going west. So I. There was no real estate in my family at all. But I think what really created my interest in real estate was at Brandeis, I took a lot of art and architecture courses, and I was kind of enthralled by Architecture by the creativity of it, by how people create buildings, why they created buildings, where they created buildings. And when I went to law school, I was obviously interested in real estate law. And when I got out of law school, that's what I did. I began to work with one and two law firms and I specialized in real estate. So I began to learn the business really from a legal point of view, before I really began to learn from a business point of view. The challenge for me was how does one who does not come from a wealthy family get involved in the real estate business in New York? And that was a challenge.

It's a great question. So, yes, I'm sure our listeners would love to hear that. So you start as an attorney. Were you doing transactional work where you were handling sales or leasing? Because I know when you've been doing condo and co op conversions for a long time, was that where you specialized? Initially, yes.

I mean, I was a real estate generalist. I did understand the legal aspects of doing co op and condominium conversions, purchase sale contracts, et cetera. But I knew early on that I did not want to be a full time lawyer. I was more entrepreneurial. I was more interested in the business aspects than I was in the legal aspects. And to a certain degree it occurred to me that lawyers make the rules, the accountants keep the score. But there are guys who like to play in the game. And I was young enough and desirous enough to really learn how I was going to play in the game. But that took some doing. And most importantly, it took being in the right place at the right time and a lot of luck.

I would imagine, though, that background in law, where you've actually read a purchase and sale agreement, you've helped craft leases, you've helped create craft condo plans, I mean, that had to serve you well. I mean, I wonder how many investors out there have ever even read a PSA from start to finish.

Probably not many, but the way I got involved in real estate was totally lucky and circuitous. When I was out in California, gelato, the Italian ice cream, became very popular. And I decided that I was going to bring gelato to New York. So I was about 26 and I had just gotten married and I said to my wife, who was always enormously supportive of me, we're going to go to Italy, we're going to learn to make gelato, and I'm going to get investors and we're going to open up the first New York City gelateria. Wow. And she said, let's go do It. So we go to Italy, we learn to make gelato. And one of my friends at the time was the chief financial officer of Cadbury Schweppes.

Okay.

And independently, he ran out and raised the money, $200,000 just for us to start the business. I had $10,000 to my name, which I put in the business. And we started this gelato company in New York, which got rave reviews. It was insane how popular this one little store became. I mean, it was a lot of fun. I mean, we certainly. It was my mba. I learned how to start a business, how to operate a business. It expanded wildly. We had two stores in New York, we had two franchises at Long Island. We were supplying Macy's up and down the East Coast.

Wow.

Within a two year period, we were in Balducci's, we were in Zabar's. It was crazy how it was expanding.

So New Yorkers have you to thank for gelato.

It didn't exist before 30 years ago. If you really Google the company, it's called Grand Gelato. It was written up all over New York as the best ice cream in New York. Of course, it required capital and we didn't have any capital. And at one particular point, I was meeting with investment bankers at the ripe old age of 28 to try to raise millions of dollars for gelato. It was premature in the cycle. No one was interested in it. And I eventually sold the company to a former head of the frozen foods division of Bird's Eye, who proceeded to run the business in the ground. So we all got our money back, and I took a note back for about 100% profit, none of which materialized because the gentleman we sold it to kind of didn't pay much attention to the venture for various reasons. So here I was, I was, what, 28 years old, and I had to go out and earn a living. I had one child, another child on the way. And I began to interview at law firms. And one of the law firms I interviewed with said, you don't want to be a lawyer. I said, that's accurate, but I have to earn a living. I've got a wife and two kids. And he basically said, I've got a client who's a real estate developer you'd be perfect for. Because he looked at my background as a real estate lawyer and my entrepreneurial spirit, having started Grand Gelato, and lo and behold, I began to work for Steve Shallum. You have to be in the right place at the right time. I was interviewed on a Saturday, I remember, and I came Back and I met Steve later on that afternoon, he offered me the job. And for four years, four and a half years, I worked for him. He taught me the business, taught me construction. He was a genius in terms of how one designs things. And after being with him for a year, I remember him saying to me, any decision below 100,000, you make anything, just call me. He was a true entrepreneur, a true gentleman, traveled the world, was very involved in Israeli politics and Sephardic Judaic causes. And I worked with Steve for about four years. And I was about 31 or 32. I decided it was time for me to start my company, which I did.

And that was. Was that with Joel?

No, that was by myself.

Okay, so you hang out your own shingle. So instead of selling gelato, now you're.

Well, obviously in 1990, 1991, the real estate market was atrocious. It was not the greatest time to start a real estate company, but I had a very specific niche, and that niche was working with lenders who took over unsold share portfolios. So a typical scenario, you may have a developer who did a hundred unit co op or a condo, sold 40 of them and then took 60 of them and pledged them to a bank for a loan. A lot of those developers defaulted on those loans and banks took over those apartments. They did not know who to turn to to sell those apartments. That was a niche that I filled.

How did you get your first assignment? Because these banks, there's safety in numbers. They want to see your track record. Clearly you have the expertise from a legal standpoint. But how do they know that you could actually asset manage these and get approved? Because at this point you're just one person.

That's right, it was two. Actually had one other person working for me at the time. But the way it worked was my first client was a bank out of Minnesota called tcf, Twin City Federal. And I knew TCF because when I worked for Steve Shallum, we borrowed from them. So I had the relationship with them. They knew that I had the capability of handling this. And frankly, they got me started in the business. So TCF was my first client. Israel Discount bank, another client of Steve's who I did work for, realized they had the skill and the capability of doing it. So they were a client bank. Hapo Aleem, another Israeli bank, same situation. So a lot of the banks that I started to work for were banks that I had relationships with when I was working with Steve. Once I took on work from those three banks, the floodgates just Opened up Citibank, Chase, M and T, East River Savings. And it was a time when people were doing workouts on office buildings. No one wanted to do workouts on a 15 unit portfolio in Forest Hills. I did. So when all was said and done, we literally worked on 175 buildings.

So you would get retained by the bank to sell off the units to complete the project, sell it off. And was this kind of a fee for service?

It was a combination. It was a combination of fees and commissions. So I could be in a position where I would get a $10,000 a month retainer. And every time I sold a unit, I got a 5% commission.

Got it.

So it was frankly, enormously lucrative. And it got me started. So the way I started to buy is when we were in a position, when we recovered all the money for the lender, and the lender may have had 20 or 30 units left. The lender would say, ken, you could buy them and you could buy them for $5,000 an apartment, $10,000 a month.

And what were they worth at the time?

Probably more than that. A lot more than. But the banks just wanted out at this particular point, they just wanted out. So Joel and I went around looking for investors for this type of product, and there were very, very few, because people did not believe in 1991, 1992, that New York was coming back. So if I roll back the clock and realized what we could have bought, we literally could have cornered the market in unsold shares because no one was buying them. And we always looked at them as phenomenal investments. So the first investment that I actually did was there was a portfolio of apartments that a lender took over at two Tudor City places, which is the modern building at Tudor City, not the older ones. And the bank was American Savings Bank. American Savings bank went out of business and the Resolution Trust Company took over the bank. So there was a portfolio of 72 apartments, and I negotiated to buy them for $800,000.

All 72 apartments. How much is one of those apartments worth today?

A one bedroom today is probably worth six to seven hundred thousand dollars.

Got it. So, and were they cash flowing at the time? So you bought these? Maybe there was back taxes. There was common charges too. So you had to start throwing money into these. Were they at least renovated or did well?

No. So of the 72 apartments, I'm sorry, it was 80 apartments. Of the 80 apartments, eight of them.

Were vacant and everything else was rented.

All the others were rent stabilized apartments.

Ah, okay.

So I needed $800,000. And I calculated I needed another $300,000. I needed a million one to do the transaction.

Got it.

Again, I had saved some money, so I put my life savings in, which was then $100,000. I have two other real estate folks in New York who are very well known, who I knew from my shallum days, who gave me $100,000 each. And then I borrowed $800,000 from a hard money lender at 16% interest.

Wow.

And I had to give up 20% of the deal. I took the risk.

Right.

And I sold the eight apartments for $1,500,000.

So you were. You immediately paid everyone back, or your.

Investors paid everyone, got their money back. And I had 72 apartments left.

Wow. And you were in business.

I was in business. And what I did then was I went back and did a tenant re offering. I offered those tenants the ability to buy their apartments. And if those tenants didn't buy their apartments, I offered their neighbors the ability to buy their apartments as well. So from that, I generated probably about another 3 million 5, 3 million 6.

Wow.

And the remaining units I had left, I sold to another person who bought unsold units for about $3 million.

Wow.

That got me started in the business.

That seems like a pretty good deal.

It was a great deal. And so from my point of view, I probably had about 50% of the deal, and that really got me started in the business.

So what kind of arrangement did you make with those two investors?

Oh, they did great.

Yeah.

I mean, they did great. I think for the $100,000 they each put in, they probably had 10 or 15% of the deal. They did great. They were thrilled. Absolutely thrilled. Years and years later, they would always call me when. When things may not have going so well for them, they would always call me and say, could you just tell me how well we did the two Tudor City deal? But from my point of view as an investor, I was young, I had two kids, I had a wife, I took a risk, but it was a quantifiable risk. I think that's very important for people who invest in real estate to note is don't take undue risks. Take quantifiable risks, and don't only look at the upside, but look at the downside. Because a lot of times the downside is more prevalent than the upside. And if you look at an investment in a very steady manner, look at it conservatively, as we always say, maybe the upside will take care of itself, and that's certainly what happened here.

But in that case, when you said you put everything on the line, the $100,000 you had saved up.

I did.

And your wife was on board with that. You get young kids. So, I mean, I guess if it didn't work out, I mean, there's always gone.

If it didn't work out, I could always go back and be a lawyer.

Right.

Which is not so terrible. Right. I always knew I could earn a living. I always knew I could earn a good living as a lawyer. And frankly, most lawyers don't have business experience. I did. I would have worked on a transaction, put it together, albeit with usurious terms, which probably most lawyers would not have agreed to. But at least I was in a position where I knew what my downside was, and I had a skill set. And that skill set eventually began to be transferable into doing development, which was really the next phase of our business.

So you do a couple more of these unsold condo packages and then you decide, okay, I'm going to buy the whole building and convert it to condos. Was that the next step?

Well, I think the next step was really buying commercial buildings in neighborhoods in New York that you knew were going to turn residential. And even though I had the success of two tutor behind me, you never really had enough capital to be buying a 50, $60 million building, let alone $100 million building. So what changed? I think what changed and enabled people like me and contemporaries like me to become developers who had a skill set and a potential track record was the advent of real estate as a product type on Wall Street. So, I mean, if you really look at the history of New York over the last 60, 70 years, a lot of the real estate was controlled by very wealthy families, and they were very few. But when Wall street began to realize that real estate was a product type that they could invest in and potentially syndicate, that allowed me to start my development business.

And I remember when we met in the late 90s, there was a loft building that you were looking to convert, and we worked on that with one of the big investment banks. So by then you had tapped into some real money. So at that point, and were you able to demonstrate that at this point you'd gone from selling individual units that suddenly you could convert an entire building or even build ground up? Curious about that first ground up development, because at that point, and I've always been told that conversions and love to hear your take on if conversions are more complicated or if new development, there's a lot more risk, what's your take on that? And how did you convince everyone that you could go vertical for the first time?

Well, I think I agree with you that the. The rehabs are much harder than ground ups. And maybe I haven't learned my lesson because we just finished Woolworth, which was probably the hardest thing we've ever done, including ground ups, rehabs, et cetera. It was remarkably complex because we didn't own the lower 30 floors. We own the upper 30 floors, and we had to renovate on top of space that we didn't own, which, of course was complex. So remember then when I worked with Shallum, all I did was rehabs. We never did ground ups. We just did 2,300 units of rehab. So I really had a firm footing on how to rehab buildings. So the first six or seven buildings I did were all rehabs. They were all rehabs, mostly in Chelsea. And there was a large investment bank that I was introduced to, and at the time, they gave me 100% of the capital.

Wow. You mean they put up deposit as well?

Everything 100% of the capital. And the deal was if you hit a 20% return, you get 50% of the deal.

50% of the deal.

50 above a 20. Okay.

So it's all or nothing. So if you don't hit the 20, you're working for them. But once you go over a 20, it's.

You get some fees to cover your overhead. But this particular firm bet on two things. They bet on the real estate or they bet on the jockey. So if the jockey fell off the horse, didn't matter, they take over the real estate. They owned it anyway.

Right.

But every one of the deals I did with them did better than the 20.

Wow.

Right.

So the first, you had no money in these at this point.

Zero.

Wow.

So the first deal was extremely scrutinized in terms of their due diligence. But once they realized that I was an honorable guy who worked hard, knew what he was doing, the latter five or six deals we did with them, I would call them and say, I think I have a good deal. And they'd say, where do I wire?

Right, Right.

Those days do not exist anymore. They're gone because any investment bank who's investing in a developer is performing due diligence.

Even with your track record, you have dozens and dozens of successful projects at this point. They still go through. They want to.

The pendulum has swung so far that the deals that we did with this group, they would literally wire money, and three years later, you'd wire them back with their profit. There was no involvement whatsoever.

So they weren't checking day to day, how are sales coming along? Just they're on a return clock and if you hit it, great, and if not, they'll take the project back. And I guess they were happy with the basis.

Exactly. And now with investment banks, they attend every single meeting from a design meeting to a marketing meeting to a how are we going to do our renderings, how we're going to do our offering plan, it swung 100%. And I think one of the reasons is that probably where then there was a downturn in 2009, a lot of these folks got burned because they were doing investments that they should not have done with developers they should not have been working with. So now the scrutiny is really, really intense. And frankly, from our point of view, in 2010, 2011, it was a big adjustment because you really went from one end of the curve to the total other end of the curve. It should be a healthy medium, but it has not yet moved anywhere near the middle where it should be because the scrutiny is still very, very intense. And it's just the new paradigm. It's just what we're used to. Doesn't matter the experience you have. It's just the new paradigm and the new methodology of doing business.

So when you start a great run for three years, you start now thinking about doing ground up. Now you're out looking for new partners as well. So one of those early development deals where in New York It's 10% hard deposit on contract, you might not know. It was probably very helpful to know that you had a capital partner behind you. But those first few times that you kind of went back out to find a partner, was that a little daunting and that you had hard money at stake?

Well, I think every developer has a certain threshold for risk. Now, what we do is risky no matter how you look at it. But early on in our careers, we made the determination that we were not going to put capital down unless we had a capital partner lined up so.

That you would negotiate their agreement with them as you were negotiating the contract. And then you're putting deposit dollars up together.

Correct. So from our point of view, we probably lost many deals because we didn't act in a manner that other developers may have in terms of putting up 5, $10 million as a down payment and then looking for a capital partner and then looking for debt.

So talk a little bit about the total capital stack. Let's have an imaginary project. Maybe it's a piece of dirt that you pay $40 million for, and you figure it's going to cost you 60 million to build it. You get 100 million. All in today's climate, how much are you going to borrow? Are you doing kind of a 9010 deal? How does that work?

On a typical capital stack that you've got $100 million, that would mean that you would be borrowing probably about $65 million, and you need equity of about $35 million. So under that example, your capital partner would put in between 80 and 90% of the capital and you would put in between 10 and 20% of the capital of the capital that you put in. There are many times that what a developer will do is syndicate that share of the 10 or 20% to friends and friends and family. We occasionally do that. More times than not, we do. So in this scenario, if it were $35 million of capital that was required and we had to put in 20%, which would be $7 million, the Alchemy principals would be required to put in a minimum percentage called 30 or 40%, maybe sometimes higher 50%, depending on who your capital partner was, of that capital. And you were able to take the balance, the 40 or 50 or 60%, and give it out to investors. Now, on the alchemy side, when we started our business, we had friends and family who invested with us, and we were doubling their money every three years. So from a purely moral and really friendship point of view, these folks helped start our business. There's no way we're going to turn our backs on these people now. We don't necessarily need as much as their capital because they got us started 30 years ago. They've ridden with us for 30 years. We've made money with them for 30 years, and they should make money with us for the next 30 years as well. So from our point of view, we probably have a list now of 70 or 80 people who've been with us for a long, long time. And those folks are going to continue to be with us. What's interesting is some of them look at the offerings we send with a lot of scrutiny, and others realize that these guys have had a great track record. Where do I send my money?

Right. For the LP that you're bringing on. Is there typically a waterfall? Does that change with every deal or what's a typical arrangement?

The way a typical developer works is on something called a promote. In a situation where there's $35 million of capital, that $35 million is going to get a equal return, whether it's LP money or GP money. Let's say that first threshold is 10%. That would mean everyone gets their money back with a 10% return thereafter. If on the Alchemy side we've invested 10%, our 10% may grow to 20% up to, say, a 13% hurdle, and that 20% may grow to 25% up to a 15% hurdle. So if we really look at it, if all the capital is in the deal and there's a dollar that's distributed, that dollar goes evenly to the investors until everyone gets their money back. The next dollar that's distributed goes evenly to everyone until they get a 10% return thereafter. If the promote is now 20%, the 20% sliver goes to the developer, and the 80% gets distributed to all the remaining LPs.

Got it? And you like that better than the 50 over the 20?

I don't the 50 over a 20. It's hard to get 20% returns in this market. I think one of the reasons that it was so successful in the late 90s and early 2000s is because the market was really on such an enormous upswing.

Right. So what's the project that you're most proud of? There's been dozens and dozens over the years. I mean, maybe this is like picking your favorite child, but. What?

Well, I can't do that. Can we do that, James? Can we pick our favorite child? I don't think so.

Call them equal.

Yeah, I think it depends on the day.

Right, Right. I mean, you mentioned Woolworth. I mean, what a spectacular project to restore that. And I remember you telling me about just the facade work alone and the. The care that needed to be taken. And of course, in close work with landmarks, I mean, I know you had a project where in Chelsea, where you bought the air rights before you even had the building. I mean, you've done some gutsy stuff over.

We've done some fairly creative transactions. I think in terms of the physical results, the Woolworth clearly stands out. I mean, it was an obligation to design and build an iconic building and to renovate in a manner that was not only acceptable to the New York City Landmarks Commission, but acceptable to millions of people who regard this building as something that's treasured. So the physical plant of how that building turned out is clearly distinguished as a main goal and a main achievement that we've done. It is truly spectacular. Absolutely. We did 3,500 new pieces of terracotta. We restored it in a manner commensurate with its vintage, yet we made it modern as well. That is a crowning Achievement in terms of the physical aspects of what we've done. The other transactions we've done that we're most proud of are probably ones that we've done with religious institutions and families where we've been able to unlock real estate that they own. And they've made very grand profits from long standing assets that were passed down to them generationally. And I think what we're most proud of is really how we've conducted ourselves in our career. We've really conducted ourselves with a great moral compass which unfortunately, many people in the real estate business don't necessarily adhere to. And as we like to say in our end of the business, our greatest strength when we're negotiating deals and trying to get them done is that we're actually nice people.

Right? So the good guys can't get them done.

It sounds crazy to think that that's an asset.

You can't take it for granted, but.

That clearly is one of our assets. So that being said, we never coast on our laurels. I worry about everything. I'm up every single night worrying about something. It is in my nature.

I think it's attention to detail.

It is.

There's so many pieces, there are so.

Many things that can go wrong on a real estate transaction. And for your listeners who believe, gee, you know, you're going to invest money or immediately going to make money, that's not true. As good as the real estate investment may be, what's more important is to invest with someone who knows what they're doing. Because if you're investing in a transaction with someone who doesn't have the experience, doesn't have the wherewithal, doesn't have the confidence, doesn't have the hubris to know that he or she doesn't know everything, it doesn't matter how good the real estate investment looks on paper, it will fail.

It's great advice and we only have a minute or two left. But what is the advice that you would give to an investor? Starting off? Someone wants to get into the business and let's say maybe they're coming over from another industry, where would you suggest they start?

Number one, be careful, be prudent, don't be overzealous in terms of the amount of time or money that you want to put into a transaction. Start off small in terms of a three unit building, a four unit building, and understand that you're going to make mistakes.

Well, that's really incredible advice. Okay, thank you so much for joining us on the show today.

My pleasure.

And for everyone else Please stick around. This is your host, James Nelson of Real Estate Investing Live from New York. We're going to have a quick break from our sponsors and we'll be right back. Thank you.

Hi, I'm Mark Rose, Global CEO of Avis and Young, the world's fastest growing real estate services firm. And we are proud supporters of Voice America. With over 5,000 professionals in 120 offices in 20 countries, Avis and Young delivers local expertise in partnership with global reach. Because we are principally owned, Avis and Young prioritizes client success over shareholder profits through our open architecture. Our firm's experts provide value added client centric investment, sales, leasing, advisory management and financing services to clients across the office, retail, industrial, multifamily and hospitality sectors. Our culture is the bedrock for collaboration that enables each assignment to benefit from the collective intelligence garnered from a company wide database. Partnership performance. Learn how we deliver different@avisonyoung.com to learn more.

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Welcome back. This is James Nelson, your host of Real Estate Investing Live from New York. And we are now going to do what I am calling the triple A segment of the show because with us we have Michael Robinson, a fellow principal of mine at Avis and Young, who's a commercial appraiser. We have Evan Weiss from LWHA Hospitality who is an advisor, although he's saying he can also serve as an appraiser. We're going to hear about that shortly. Then Jack Mullen, who is founder of Summer Street Advisors, who is also an advisor. Welcome, gentlemen, welcome.

Thank you.

Good to be here for this portion of the show. It'd be great because our listeners are, many of them are aspiring real estate investors. I didn't want to deprive you all of a detailed introduction, but thought it would be helpful so everyone could hear what you do and your purpose. So, Michael, why don't we start with you. So you're an appraiser. Typically when you're buying a property, most people would say I need an appraisal because the bank wants one, but I have a sense that there's probably more to it. So why would someone be concerned with.

An appraisal first and foremost? Like you said, probably for a financing or a refinancing, that's typically the majority of the work we get is from that. But also for estate planning purposes, tax planning purposes, litigation, so that probably comprises a majority of the work we do.

What's involved in that process?

Oh boy. Tests at the state level as well. As a work log, I think it's three or four years at least now.

To get your general and about 300 or so hours of education in the classroom as well. Classroom or online.

Evan, what do you do today?

I'm not really sure. LW Hospitality Advisors. Is it okay if I talk about the questions? So essentially we are a full service real estate services company, but focused exclusively and solely on hospitality and gaming. So our firm acts as an advisor, a consultant, a third party asset manager, as well as an evaluation company, but specifically and solely for hospitality and gaming. Michael and I work really well together because we don't do commercial properties. He doesn't really do hotels that often. And so therefore we actually complement one another. I would say valuation, which includes appraisals, feasibility studies, market studies, some litigation support, export testimony. It probably comprises about 75, 80% of our business. And the other 20, 25% is true third party asset management, where we act as an owner's representative, consultant and advisor to folks that are either new or just require or institutional and require some level of oversight in the hotel space.

Got it. So you probably carry a lot of licenses to do this.

Our team certainly does. There's other certifications that we all are required and carry. I think for us, actually it's really challenging on the licensing side, talking about that because we're a national firm, no different than Davidson Young. Whenever you do work in a state, you're either getting a temporary permit or permanent. And each state has its own requirements. It's highly, highly regulated. We have to be very careful with what we do. Constant fingerprinting, background checks, etc. It's not for the faint of heart.

I should say that I'm thinking of that Chevy Chase movie, was it Spies Like Us, where his wallet comes out and he's got like 20 things and one was a picture of his sister or something. I'm trying to remember. Okay, I digress. I apologize, Jack. Okay. So, Jack, what do you do?

I, about 10 years ago, founded a real estate due diligence advisory company. And what we do is work with banks, private equity hedge funds, family office groups and help them figure out what they're looking at. It can be from a debt perspective. It could be from equity understanding, collateral, real estate collateral. And we have a kind of a process, again process that we do. Kind of looking at this stuff again. A lot of that came from my training at GE Capital. Part of this, that's where I was at. And being able to do that was a great training ground and actually also worked With Evan as well, specifically on the hospitality side. But again, it's all about trying to figure out what we're looking at. Understand either from this particular group audience, if you're looking at real estate, wherever it might be, and understand what it is and kind of start with the basics, if you will.

Perfect.

I have to be nice to Jack. Jack's actually a very good client of ours.

Good. I like that this is a complementary group as opposed to a competitive group.

But we're competitive with whom we need to compete with.

Okay. All right. Maybe it would be helpful also for our listeners to understand when you get involved in the process, because from what you just said, I would sense. Jack, you're probably one of the first calls. And when we were talking before, you said if you're advising a family office, they might be thinking about their real estate allocation. And maybe that means investing stocks, Maybe it's investing in an LP share, maybe it's buying a standalone property. Are you typically one of their first calls, their boots on the ground?

Yeah, I think so. I think what we try to do is if we're working with a family office group or the hedge fund or whoever we're working with, the thing we always like to think about, at least I always like to think about work backwards. What do we solve for? What do you want to know? And again, if you're a family officer group, you want to buy securities, you want to buy scratch and dent type loans or collateral, whatever it might be, understanding that risk tolerance and kind of start from that framework and then kind of, you know, working with Evan or anybody, kind of building that process. We have very kind of rigorous risk process that we do in terms of thinking about that. And I'm sure we'll be talking a little bit more about that. But for me, it starts there. If you're working with somebody or a group or even something here in Manhattan or it could be in Chattanooga, Tennessee.

Perfect. Evan, I assume, is this cradle to grave. You get involved at the beginning.

You see it through exactly in the two parts of our business. The one side is the evaluation, the appraisal side, the appraisal side. Typically, as Michael mentioned a few moments ago, we get involved when someone's looking to do a refinancing, acquire a property, sell a property, and really want to understand value appraised a property. On the other component, in terms of marketing and feasibility work, oftentimes a developer will come to us when they either have an idea in their head or even just a site and they say, hey, we know Shopping centers, and we know office buildings and other commercial properties. We don't know anything about hotels, but we have a gut. We know Bradenton, Florida, and we have a gut that this is a hotel site. But we don't know the first thing about underwriting it. We'll either get referred to them or we'll find them. We'll start with that. We'll start saying, okay, we're, what can you build here? How big can it be? What kind of zoning do you have here? What's the market demand, supply, etc. In that case, to your point, we'll start at the cradle. We'll start with literally a piece of dirt and the client having no idea what can or should or shouldn't be built there. Then we can take them all the way through the development process, market and feasibility work, help them through figuring out a brand management company running RFP and negotiation processes with both the big brands and the management companies. If in fact they're separate in the case, then help them through technical services, through general contracting, through help helping, through facilities, programming.

So it's almost as an owner's rep throughout.

On the asset management consulting advisor side. Absolutely. The way I usually term it, we are a non equity hotel partner. We are your eyes, your ears, and your hotel brain. We just don't have equity in the project. And we can be with you literally from the conception of the project all the way through its opening and its operation, and frankly, even through a disposition at some point in the future, which has happened with us.

Great. Michael, when do you get involved?

When a bank gives us a call and they want us to appraise a property. When a client calls and wants to potentially buy out a partner on a deal they own together.

That's interesting. Yeah, yeah. And you do some quarterly reporting too, for clients?

Absolutely. You know, national valuation work, most major cities on a quarterly basis. It's actually pretty interesting because you get to see what's changing in that market on a quarterly basis. You get to really follow those markets.

Yes, Evan, absolutely. I was just going to point out that in all of our worlds, folks often look at due diligence or appraisals or feasibility work as a check the box. I just need this. I don't necessarily want it. The way I explain it to our team is that just so you understand, if you're doing work on $100 million property on $100 million value and it's a 70% loan to value, a lender is literally taking $70 million out of their bank account. And putting it into that of the owner, the buyer, the seller, or whatever it may be to take it extremely seriously because we are the last stopgap and the last line of defense between that massive transfer of money and that's $100 million deal and the three of us work on billion dollar deals. It's really interesting to put it into perspective.

Perfect. Well, thank you gentlemen for joining us on this segment and look forward to having you back soon.

Pleasure.

Thank you. J.

Foreign okay, welcome back. This is James Nelson, your host of Real Estate Investing live from New York. It is time for our Triple A segment of the show. Back with us is Michael Robinson from my fellow principal from Avison Young, Evan Weiss, who is COO from LWHA Hospitality, and last but not least, Jack Mullen from Summer Street Advisors. And triple because we have an accountant and two advisors, although we learned last segment that Evan's actually an accountant as well. So maybe we're on to four A's. Is that what's the diamond distinction with? I don't want to get sued by aaa.

Five would be the max.

Okay, so we're good with four A's.

Okay, well, there's four as well, but it's okay. You're fine.

Good. Okay. So last, last time you all were on, we talked a little bit about what an appraisal was, what is advisory, doing some initial due diligence, feasibility, and really just so our listeners each of what you do. So now I want to really get a sense of how you all approach value, because as I've been told in the past, there's only one thing that you cannot change about an investment, and that's where you bought it. Right. So a lot of the money is often on the buy. Right. So how should our listeners be thinking and approaching value? So starting high level, Michael went When you're asked to value a property, what are you thinking about first?

As an appraiser, we have to look at what the highest and best use of the property is. If it's an existing office building, are there excess air rights, can it have an alternate use that would bring a higher return to the property? So we determine what the highest and best use is first.

And do they usually tell you that, or is it your job to make sure that they've thought of every angle? I mean, is that highest and best? Is that even as of right. Someone might say, look, it's an office building, but I think that I want to do residential. Is it your job to see if it can even become residential?

Yeah, our job is to see if the zoning permits it and what kind of density. And you know, based on that and prices per square foot for residential or office, what use would actually return the highest, would have the highest return to that property. We consider them all. That's part of our job. That's what we're supposed to do. So at the end of the day, that's what the appraisal is about. It's to. It can be. You could hold onto that property temporarily for a few years and have an interim use until the market returns for a different type of use.

Jack, you kind of have the down and dirt dirty. One or two pager, is that typically?

Yeah, we have a process. Right. And I don't want to limit you.

If you want to take three pages, you can take three pages. I'm not trying to cut you off.

For me, a lot of times, you know, James, the people we work with, you know, we have a lot of support, you know, to. It could be the 10, 20 pages, whatever, but it's ultimately sitting with whoever. If it's again, our group of, you know, private equity banks, whatever it is, and understanding what. What's the purpose? Right. Are we looking to buy this free development? Are we looking to buy this opportunistically? Looking to buy a note and foreclose whatever it might be.

That's interesting. So you're not just valuing the asset, but the actual business plan. Because someone comes to you and says, I'm looking for cash flow. You're probably very focused on the credit, the quality of the lease. Is this a safe investment, so to speak?

Can they do it? Honestly, James, anybody in their daily dealings with people, you know, you're assessing people. Right. So. And a lot of times that's what we get paid to do. We're working with a sponsor in a particular market, could be Florida, could be like say Chattanooga, Tennessee. And you're working with a hotel operator, you're working with a multifamily person or group. And you know, thinking about the feasibility, you know, again, they're buying a hotel or a multi family property, they need some help. Right. You know, reposition, value, add, whatever the strategy you want to talk about. But my big thing about that is, do you believe the sponsor? Can they do what they say they're going to do? They have the competence, capability not only to buy it, right. As we're talking about here and whatever that means, I have very specific thoughts around that. But can they tactically execute? We've seen in many cases where it doesn't Work. But again, that's kind of what we do.

The investments that you're analyzing, they're typically giving you a pro forma. They're giving you a deck saying, this is the asset, these are our numbers, and you're really vetting those.

Yeah.

James, you ever see a deck you don't like?

Yes.

You know, the thing I.

People don't like my broker setups. They say that I move out too much. You'd have a field day with my setups because you'd say that we left off half the stuff.

No, it's, you know, it's a story. You know, like I said, you know, when you initially looking at a ppa, looking at an offering or whatever, it's great to see, you know, but I always. I get paid to kind of evaluate that opportunity for my buyer, whoever it might be. It might be a bank. We're looking at finance. Like Evan was saying that, you know, $70 million type thing, or might be a family, office, group or private equity, whatever it might be. That's what we get paid to do. Evaluate that opportunity, that specific investment, whatever it might be, and not to poke holes in it, but just to kind of vet it and make sure that we believe the sponsor. We like the market, we like the game plan. And then we also like to think about it too, if we're getting an appropriate enough return so that we think about all those things in the overall context.

Evan, you're a third. How do you approach valuation?

The first thing is on the valuation side, from the pure appraisal perspective. As appraisers, we are supposed to reflect the market. We don't make the market. We're kind of lucky in the sense that we are super hyper focused on a particular asset class, hospitality and gaming. Because of that, we talked with investors, brokers, advisers, owners, sellers, buyers, lenders, literally on a daily basis. Because of that, we have such a great. And we do a fairly significant number of appraisals a year. Because of that, we have a great depth of knowledge on it, number one, that helps us reflect the market in what we're doing in terms of risk and reward opportunities, risk rates, and all sorts of metrics throughout the industry, whether it's growth or supply or demand. The other side of it is that in the valuation space, we always constantly say that it's part art and part science. The way we approach value is that there's a science of it, which are the numbers. Again, the supply, the demand, the actual average rates, occupancies, revenues, expenses, and noi net operating income. However, there's also an art part to it. The art part is that sometimes the value doesn't appear to be right because you know the transactions in the market. So even if the numbers within your spreadsheet and your discounted cash flow show a certain valuation, you need to inject a level of understanding of value and understanding really truly what creates value and what people are willing to pay. Because market value isn't necessarily market price. Market value is really a number of other different components within that. I think also in terms of value, maybe less in terms of value, but more so in terms of looking at an asset from a highest and best use perspective. Sometimes you put that on the side for feasibility. The reason we do that is to Jack's point that he made a moment ago, it's about what is the owner's goals. Oftentimes we'll look at a property from a consulting perspective or an advisory perspective. We'll say, hey, you want to make the most money? You'll do a limited service hotel, you'll do 400 rooms and that will make you the most net operating income and the highest ROI and the highest IRR internal rate of return. However, oftentimes an owner will say, well, we're going to own this forever and we want to build a luxury property. I'll say, well, that's going to be a 30% less return. They'll say we don't care because we are billionaires or we have oil money or whatever it may be. A lot of times value is a fungible thing in many ways. Obviously there's a true value and not. But again, there could be certain value to a certain client if that is how you're looking at an opportunity.

Evan first of all talked about the appraised value which is based on rear view mirror. These are known transactions that close as opposed to real time data where you knew it was on the market for $40 million for six months. I don't know if you're looking at was this property widely exposed, was it off market? But how much weight do you put on time on the market or if it was off market?

Well, we look at that for sure. But they would call guys like you and try to get your input because you're on the front lines, the brokers are on the front lines. As Evan said, we reflect the market.

But if you know that a current assets in the market and a high bid is at a certain level, you can't use that high bid in your valuation because that's more anecdotal or.

Oh, no. There's a section of an appraisal called the History of the Property. Any offers on that property have to be discussed in that section because you want the reader to know that there are three Lois X, Y and Z. You don't know which one's going to close. You don't know if any are going to close. But your value should take that into consideration if they're real players and they can really come to the table and deliver.

Wow. So we might actually be closer than we think.

It depends. Sometimes you're probably pretty close, sometimes you're not. Our agenda is a little different.

Okay. All right. Well, we're going to end on that note for now. And gentlemen, thank you again for coming back and looking forward to hearing you in future segments.

Thanks, James.

Thanks, James.

Thank you for tuning in this week to Real Estate investing live from New York. Please join your host, James Nelson for another program next Tuesday at 7pm in New York, 4pm Pacific Time on the Voice America Business Channel. All shows are rebroadcast Wednesday mornings and at 7:00am Eastern Time, 4:00pm Pacific Time, as well as always on demand. We'll talk again next week.