23: Own Your Space with Michael Rudder of Rudder Property Group

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Welcome. This is Real Estate Investing Live from New York with James Nelson, the principal and head of Avis & 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.

This is James Nelson, your host of Real Estate Investing Live from New York for show number 23 and just want to give you all a message that I delivered to my salesforce. We're still calling in for our morning meeting each day and just a word of encouragement. I know it can be really challenging to be home during this incredibly difficult time, but the meeting message was to stay active as best you can and try to use this time to improve yourself. And the good news is you all are already doing that by listening to this show. There's a lot of other great podcasts. We had Reed Goossens on the show last week. He's got a great podcast as well that you can check out. There's a lot of books out there that you could certainly brush up on and I'm actually now reviewing some of my favorites and sharing through my social media channel. So keep a lookout for those. Again, it's just staying in a routine which get up early, get some exercise in and we'll all get through this. But again, just wanted to send a word of encouragement and as always, a thanks to you all for supporting this show and spreading the word. So on that note, we have a great show for today. We have my friend Michael Rutter from Rutter Property Group and typically I have our service providers on the second half of the show when we have our panels or specialists who talk about certain topics. But Michael is speaking from the vantage point of an investor as he has bought two office spaces for his own use. So he really practices what he preaches and I thought it would be a great opportunity for you all to learn. Maybe the best way to start off with an investment is buying your own space. Afterwards, we do have a panel discussion with the Cassano sisters and Emily and Lara specialize in advising buyers looking to make 1031 tax free exchanges. So they're going to teach you about what you need to know in that arena. Before we get to that, it's time for our week in Review, powered by the Daily Beat. Last week stocks soared as the government came closer to approving a $2 trillion stimulus package to combat the pandemic. Although the Dow has been up more than 20% over the past three days and again this was last week. It is still down 21% as the time of this taping. A record 3.28 million workers applied for unemployment benefits last week as the coronavirus hit the US economy. That number blew past the Great recession peak of 665,000 and the all time mark of 695,000 in October of 1982. Many economists have been revisiting the US GDP projections with some predicting that the economy could in the second quarter shrink far worse than it did during the Great Recession. Many state labor departments have been inundated with people filing for claims, so not everyone who has tried to file has been able to get through. Now breaking down the $2 trillion stimulus package and analyzing what it means for tenants and starting with New York State unemployment Insurances range from $104 to $504 per week. The stimulus package adds federal benefits which will provide workers with an additional $600 per week for four months. Those who need extra help will also be able to extend the unemployment period from 26 to 39 weeks. The Daily Beat says that this means that an unemployed waiter who earned 52,000 last year will receive 4,400 per month. Americans will also receive a one time direct payment of up to $1,200 and married couples will get 2,400 plus an additional 500 per child. The payments will be available for incomes up to 75,000 dol for individuals and 150,000 for married couples. For large corporations, 500 billion will be allotted to provide loans, loan guarantees and other investments overseen by the Treasury Department Inspector General. These loans will not exceed five years and cannot be forgiven. With small businesses, 350 billion is being dedicated to prevent layoffs and business closures while workers have to stay home during the outbreak. Companies with 500 employees or fewer that maintain their payroll during coronavirus can receive up to eight weeks of cash flow assisted. If employers maintain payroll, the portion of the loans used for covered payroll costs, interest on mortgage obligations, rent and utilities would be forgiven. The big unknown is the macroeconomic outlook and the extent of the downturn. For the stimulus package to prevent lasting economic hardship, there must be a V shaped economic recovery where businesses and consumers return to their former state of robust health after the virus is ultimately contained. A more realistic L shaped recovery has the potential to do serious damage, especially if cracks in the secondary lender market are exposed. And this again is from the Daily Beat and Axios. Meanwhile, there are tax cuts for the real estate industry. Senate Republicans inserted an easy to overlook Provision on page 203 of the 880 page bill. It will permit investors to use losses generated by real estate to minimize their taxes on profits from things like investments in the stock market. The estimated cost of this change of the 10 years is $170 billion. Finally, ratings agency Fitch has warned that non bank lenders in particular could be in trouble if mortgage forbearance becomes widespread. The pressure on the non bank mortgage sector is particularly acute at present and could be exacerbated further as an unintended consequence of the government's mortgage forbearance program. There is some indication that the $2 trillion stimulus bill could provide the Fed and or treasury with the flexibility to provide liquidity support to the non bank sector. But FAIL act could lead to meaningful disruption in the mortgage industry. And this is from Fitch. So with that we will get into our interview now with Michael Rutter. Thank you.

And now it's time for our Investor Spotlight. And here with us today is my good friend Michael Rutter. Michael, how are you? Thank you for joining us.

Thank you for having me, James.

Perfect. I know we are all still working remotely, so dialing in from home even though we are next door neighbors and we're actually only a couple blocks away. But really great that you could dial in. Michael, you are principal of Rudder Property Group, a commercial real estate services firm that specializes in the sale of office condos in the New York metro area. So you've been involved in the acquisition, conversion and marketing and sale of more than 2 million square feet of office condos, including 35 West 36866 UN Plaza, 125 Maiden Lane, just to name a couple. Prior to founding the Rudder Property Group in 2010, you spent more than eight years as director of office leasing and sales for Time equities. And currently you are chairman of REBNY's sales brokers committee and a former board member of the YMW REA and a founding member of the same Jude's Real Estate Committee. But I thought it would be great for our listeners to hear your story as an investor. And I definitely, I want to get into your role as a broker and an advisor for companies who are considering owning their space. But I thought that since you have really put your money where your mouth is, so to speak, and have bought office space for your own business, I thought it would be a great thing to share with our audience today. So thank you again for dialing in. So Michael, why don't you start by telling us where you Grew up childhood. Was there any real estate in the family, or how did you get into this?

Absolutely. Thanks, James. I'm originally from a town called South Orange, New Jersey, and my dad's profession is he is a retail property landlord in Essex County, New Jersey. He owned some retail properties while I was growing up in Newark and now owns a variety of other properties around New Jersey. And as much as my dad is in the real estate business, and I certainly had exposure to it, he in no way, shape or form encouraged me to get into real estate on my own. And in fact, there was actually a close friend of mine who I would say was a greater inspiration for me getting into the industry. A friend named David Croman, who's with a development firm in New York City called Cape Advisors. David, the guy I grew up with in South Orange, New Jersey, and he went to the University of Wisconsin, which had a real estate program, which was sort of rare, you know, back in 1996, and sounded interesting to me. So when we got out of college, I got into the field of commercial real estate brokerage. From there, I worked for close to a decade for Francis Greenberger from Time equities from about 2000 to 2010. Time equities and Francis have always sort of been contrarian investors, and they come up with unique and different approaches to their properties. And I think that's just the nature of Francis's creativity and the fact that they're a privately held real estate investment company. So while I was there and doing some office leasing and managing of properties, one building in Lower Manhattan became vacant. And rather than leasing it up or selling the building or converting it to residential condos, in 2005 and 2006, Francis decided to take the route to convert the building to office condominiums. And it was sort of the first office condo in Lower Manhattan. And there really had been very few around the city at that time. And that's how I got into the office condo business, was working on that property and that project, 125 Maiden Lane. And from there I sort of built a niche and a reputation as being sort of the expert in this, what I call a hyper niche business of office condos.

What a great place to learn. And I know we do have Francis scheduled to be on one of our future shows. And I just finished his book, the Risk Game, and he's got such an incredible story. And I mean, the amazing thing is he really has done it all, all different types of real estate deals all around the world. And he was the original co op King he talks about in his book where in the 70s and 80s, I think, he co oped over 10,000 apartments in New York City. And so I'm sure this was kind of a natural transition for him to consider selling office space as well. So I want to get to that. But just for our listeners and many who are looking to get into the business. So talk a little bit more about. You said you did go to University of Wisconsin for the real estate program there, or that was your friend who introduced you?

That was my childhood friend who's now a real estate developer who went to Wisconsin. I went to pick a college. I studied anthropology, actually. Nothing to do with business at all. But I guess I found my passion in business right after college. And looking back, I probably would have taken some business classes had I been able to do it over again. But, you know, just to touch on Francis again, because I know we're going to talk about the office condos that I've purchased on my behalf. Yes, Francis was the co op king through the 80s, and it was kind of second nature to him to start converting office buildings to office condos. But he also owns his office condominium, where his office space is at 55 Fifth Avenue. And that had always been a point of pride he talked about prior to owning and occupying 55 fifth. He had always rented elsewhere around the city and complained about every time he needed to replace a landlord. He needed, I mean, replace it at light. Light bulb. He needed landlord consent. And, you know, really loves the fact that he owns and occupies his own space and always talked about how it was a great sense of security for him and his firm and his employees. And so he is my mentor in this business. And I would say, you know, following in his footsteps was certainly one of the things that led me to purchase my own space.

Great. So how did you land that job? I mean, you have no business experience. You're, you know, anthropology major. How did you find that job? And did you, did you interview at other places or how did you even know you wanted to go into real estate?

Yeah. So I look back on that experience fondly, Frankly. You know, 2000 was still sort of before you were emailing your resume around, but I knew I wanted to be in some sort of sales role, but I wanted to get experience working for an owner. So I remember sitting in a library, using their printer, printing out 30 resumes a day that I was sending mailing to every ownership company in New York City looking for a role in their firm, following up with phone calls. And so You.

So you did know you wanted to go into real estate by then. You said, this is what I want to do. Were you thinking you were going to be a broker? Or you just. I mean, if you were email or mailing out 30 resumes, you know, a week, who were you? What kind of companies were you sending these to?

Both brokers and ownership firms. And I wanted to be on the, you know, leasing and sales role. Not. Not necessarily property management, not necessarily acquisitions or analysis. I sensed that my calling was sales and brokerage. So I was emailing both brokerage firms and owners. Not emailing. I'm sorry. I was mailing and calling both brokerage firms and owners. And I probably sent my resume and really personalized letters to over 100 firms in the city and followed up with phone calls. I probably had 30 different interviews with brokerage and ownership firms. I was given a few different offers. I was close to accepting one with an industrial brokerage firm in New Jersey. And I got the call from Francis. And while I looked up who I was mailing and who I was applying with, these weren't jobs that were, like, listed as available on job boards. These were just companies who own real estate in New York. I really didn't know who Francis was. I really didn't know, you know, the background of time equities. And I got a call directly from Francis rather than some HR department, and we had a long conversation.

That's pretty amazing to think. I mean, even at the time, I mean, Francis probably had what, 50, 100 people in the office. And I know in his book he talks about kind of building out his kind of C suite, so to speak, but the fact that he was, you know, personally called you someone right out of college, seeing if you want an entry level, you know, position that. That was pretty lucky that you. You got that call.

Yeah. And I didn't realize that this was the principal, you know, the billionaire owner of the. The firm and all. I thought. I guess I thought maybe it was the HR department, but it's indicative of.

So, so did you. Was the job salaried at the time or was it commission?

Probably a combination of both. Or shortly became a combination of both and it resulted to very little money. I ate a lot of ramen. I ate a lot of cereal. I remember walking home from their offices. I lived in Gramercy at the time with some roommates walking home and like, passing, you know, restaurants saying, I can't wait till I can go out to restaurants with friends. And all. Now, all these years later, I still Eat cereal for dinner a lot. But it's by choice. But yeah, it was.

You and me both. Yeah, I definitely have a very similar story. You know, starting out over 20 years and you know, I started, you know, went right into brokerage, but was lucky that was given a starting salary, although a very, you know, small one of at least something that I could depend on because a lot of people today when they, you know, if they want to get into brokerage, it's, it's full commission. I mean, that can be really daunting, especially with investment sales. I mean, a full sales cycle can take six months. So. And that, that's, that's assuming you have business. I mean, usually, I mean, we used to tell people, don't expect to make money, you know, in the, in the first year. And really, you know, you're not even, you know, at a basic level until about two years in. So that's, that's great that you were able to have evenly something and to hold you over. But I guess the big thing there was really the experience and to be a part of it. So were you, you said you worked on the 125 maiden conversion, but what other kind of things did Francis have you doing? You. Were you handling leasing for his portfolio in house? Were you acquiring things? Were you working with the acquisitions group?

A variety of everything. You know, I actually started working out working with a guy named David Levenstein who is now. Yeah. Nonprofit broker with Cushman Wakefield. And he was wonderful and he was sort of a wonderful teacher for me. And we're still close to this day. And we were doing a lot of tenant rep sort of work out of Francis's firm. We would just be traditional brokers, although we worked out of an ownership firm. But I got involved in some asset management assignments. I remember looking after a portfolio of industrial buildings that Francis bought that were in Des Moines, Iowa. And I spent nights like sleeping at the hotel next to the Des Moines airport in the middle of winter. And you know, for 23 year old at the time, it was a wonderful experience and still would be to today. And you just get a tremendous amount of autonomy and you get the chance to kind of chart your own course there. And Francis is wonderful with that. And a lot of that occurred before I started getting into the New York properties and the office condo conversion of 125 Maiden Lane and then went on after we had a great success there. We went on to buy a number of other buildings that Francis purchased and converted from office rentals to office condos.

Yeah, the experience as a broker. And a lot of our listeners are real estate brokers across the country. I think it's a great foundation for becoming an investor. And you think about some of the legends in the business, whether it's Harry Macklow or David Levinson from L and L, they started as brokers. And when you have that perspective because as a broker, you know, you might not be getting knee deep in a transaction but you see so many from across the board because you've seen so many properties, you see what tenants like, you see what's appealing, you get a lot of exposure very quickly. So we would you agree with that? Would you think for those who are looking to become an investor that brokerage is a great way to break into it?

Absolutely. I love the stories of the brokers who transitioned to be tremendous owners. I live for those stories. Whether Terry Macklow or the guys from LNL or Taconic who were brokers, investment sales brokers at JLL back before they were its current incarnation and went on to buy 1/11 which they sold for 2/2 billion to Google. It's a tremendous broker to owner story and I love that. And I think there's many great examples of it that aren't as well popularized, popular. There aren't as popular stories where brokers make investments and make purchases on the side. And I think it's interesting, a great brokerage is a great place to earn good, unfortunately tax inefficient income but invest that money into tax efficient passive cash flow income. And yes, I think brokerages.

I'm glad you mentioned that. Yeah, and I'm glad you mentioned that. It doesn't have to be one road or the other. There are brokers and whether they invest as limited partners or they do projects on the side, I mean look, brokerage can be a full time career. Investing can be a full time career. So you want to make sure that you're giving yourself the right time and attention. And for many brokers, being a limited partner might be a better way to go about it. But above all, if you are going to be looking at that, disclosure is always also very important because brokers who are also buyers and kind of presenting themselves in certain ways always, if you know, for those brokers out there listening on the show and you're thinking of investing, you know, you always want to be very upfront with who's selling, you know, telling them that you know your role as the broker and just being clear. So Michael, tell us so you're at time equities, you Got a great little business where you figured out that you can sell these condos. You decide to go out on your own and start Rudder Property Group. So what was the impetus behind that and what was your focus there? Or what is your focus today?

Yeah, well, it took a little bit earlier than my decision to go out on my own. Of course, in 2008, the financial crisis came and a lot of. And at that time, I was focused on selling office condos on behalf of Francis and time equities and buildings he had bought and converted to office condominiums, like 70 West 36th street and 131West 33rd Street. He bought maybe around a million square feet of office rentals, which he converted to office condos. And we were busy going through the process to convert and sell those. And the downturn came. But by 2010, it sort of felt like a spring awakening, like business was coming back, sales were occurring, and I was feeling eager to do something entrepreneurial and go out on my own. I spoke with Francis about it and other friends and advisors in the industry, including Paul Massey and some others, and they encouraged me to do it. And even Francis did. And at that time, I had sort of built a reputation for myself and a name in this niche of office condo sales. So I decided to go out and start a firm. And the only firm in New York that exclusively specializes in the sale of office condos and represent other buyers and sellers and developers, other than just time equities represent others as well. And from 2010 to today, the market has been great. The office condo market has grown and has gained more acceptance.

Perfect. So right out of the gate, did you know that you wanted to buy your own office space? I mean, you're here advising clients and I want to get to this why you would advise that a company would buy space for their own business. But did you know right off the bat that you wanted to practice what you preach and purchase your own office?

I mean, listen, any broker who gets into the real estate business has dreams of partaking in some way, shape or form on the ownership side as well. So I guess to some degree I had a broad sense like that. But really, when I started in 2010 and I was just focused on paying the bills, you know, you'd come in, we're coming out of the recession. You hear so many stories about how most startups only last six months or shorter. And I was just so focused on paying the bills, but off the bat, business was good and we paid our bills and it was a success, but it wasn't until 2013 that we were like ready to move out of our space that we were sharing with a friend of ours and move into our own office. And I considered an office condo purchase at that time and that was our first one that we bought in 2013 for our own offices.

So tell us about that purchase. I mean, how much, what did you buy? How much did it cost? I've heard that when you buy office space that you can get small business loans. Walk us through the transaction and what it took to pull that off.

Sure. So we purchased an or, you know, at the time, Mike Heller was working with me and we had a small firm, it was about three of us. So I purchased about a 1400 square foot unit at a building in NoHo called 14 East 4th Street. Known as the Silk Building. What had happened was we were marketing about a 7,000 square foot unit in the building. I had loosely been involved in some other units that had sold in the building. And I really got to know the building well. I knew that the financials of the building were strong. There was not an underlying mortgage, there was not a lot of deferred maintenance. The carrying costs were inexpensive. It was well managed. And I learned it because.

So this is a co op, Just to clarify, because as opposed to a condo where you have fee ownership of everything within the walls, as a co op, you have a share in the over building, Is that correct?

No, sorry for the confusion. It's a condominium. But regardless, you still sort of have a share in the overall building. Like first of all, condominium can also have an underlying mortgage, which sometimes they do to cover some repairs or whatever. This didn't. So this was, this was a condo. And it was just. My point was I knew it was a well maintained and well managed condominium.

Perfect.

I had.

So you find this 1400 square foot space. So you see this 1400 square foot space, how much did it cost and how much did you have to put down?

So it cost around 650 a foot at that time, which in 2013, that was sort of a full price. You know, I didn't get just because I'm in the office condo business. I didn't get and I didn't seek some great discount. I, I, you know, if there's a great discount to it, there's probably some challenge to the unit as well in this case. It's a wonderful building and it was a great space and I paid a fair price for it. So at that time, 650 a foot was sort of a full Price, I think I probably got around 75% financing on it. And although, yes, there are SBA loans that are readily available to this day that are 90% financing. Plus I had saved some money from commissions that I had earned and, and had some more equity to put down. So I got about a 75% loan to value. Actually it was like a 75% loan to cost. I demolished the unit. I did a really nice high end build out. We had glass offices and a beautiful new kitchen and new bathrooms within the space. And I had like TVs planted on the walls and it was going to be great. So I got a mortgage that covered, I think 75% of the cost and I put in 25% of the equity and it was going to be great and I was excited to own and occupy it. However, at that time, towards the end of 2013, we took on a project with a New York based private equity firm called Meadow Partners. Meadow had bought a office building at 866 UN Plaza, which was about 450,000 square feet, that they wanted to convert into 100 office condominium units and sell those to United nations missions and consulates. And we got the assignment to represent Meadow in the acquisition, conversion and sellout. And we thought it would be best if we moved our office on site to oversee the sales process there. So just as we finished buying the space, building it out and getting ready to move into our beautiful new office space, we relocated elsewhere to this new project we were working on. So I ended up putting it on the market for lease and quickly having actually some competing tenants and ultimately one prevailed. And it was like a family law firm that, and we signed a five year lease with them that was around 68 bucks a foot and escalating every year and turned into a wonderful investment property, which it wasn't really intended to. The loan I got was really an owner occupier business loan. So the bank or lender was bank of America. And they had to kind of give us the blessing that we rented out rather than own and occupy it, which they did. And it worked out great.

You know. What kind of return did you. Yeah, what kind of return do you think after you pay whatever it was close to a million dollars for it, you put some renovation costs in. What did you figure your cap rate was after you take that all into account?

We were making ten grand a month. We had some expenses on it. It probably ended up being like a 6 or 7% return in growing.

Not bad.

Yeah, not bad. It wasn't even intended for that.

Right. So before you did that, and I'm sure a lot of our listeners are thinking, okay, well is this a great prop, a business proposition as far as owning versus renting? And the question is, is it cheaper than to own than it is to rent? So at the time, did you do the analysis to say, well, let's say you're the tenant now and you pay $68 a flight and you look at what that would have cost versus what your carrying costs were to own it. Is it cheaper to own your own real estate than it is to lease it?

Of course we did that analysis and I would say initially, no, it's not initially. It's more expensive to own your space and to pay a mortgage and common charges and real estate taxes and to have, you know, there's a time cost of money, of the down payment and the build out cost and the equity that you put in. So when you factor all of that in and you compare it to what you would be paying for a comparable space for rent, it ends up costing you more upfront. But over a five year or a ten year period of time as your lease escalates and generally your ownership costs stay the same. Our analysis showed by our sixth year we would have been paying more in rent than we would have for the cost of ownership. And certainly over a 10 year period, not even taking into account appreciation. And if the value of the property went up, it certainly was costing us less to own than it would to rent. So that was the analysis we did and we showed him we were okay paying a little bit more in the first few years.

And I'm sure, you know, there's tax advantages to have owning your own space, you've got, you know, depreciation of the space, you know, and when you're leasing, obviously when the lease is up, you have, you know, you got to pick up and move. And even if you've built out the space, you're not recovering that. Whereas, you know, if you, you know, renovated the space and if you turned around and sold it, the hope is that you would get value. So I guess those are all positives. I mean, what other positives would you say come go along with owning your own space for your business. And then I want to talk about what are some of the disadvantages.

Okay, for sure. So you know, we did do an own versus analysis, of course, but there were a lot of things that went beyond just, just the financial analysis here. For starters, I was so excited to build out a space, a really high end space that like really reflected our brand that we are a new, younger, you know, forward thinking, tech enabled, intelligent brokerage firm and real estate advisor. That build out and that money spent is nothing I would have considered on, you know, a three or a five year lease. And we certainly weren't willing or able to commit to longer, a longer lease than that at that time. So we were really able to build out a space that reflected our brand. We also could make intelligent decisions that accommodated for growth and we could end up even fitting into smaller spaces because we did a bunch of built in desks and built in millwork that made a really efficient build out that we could fit in better. And all of that is money we wouldn't have spent had we just been leasing. We would have just leased the more generic space or something like that. Also, you know, one of the downsides of owning is well, what if you outgrow it or have to move or whatever. We were faced with that issue before we even moved in. We had to move to the be on site at the project we were working on and we ended up renting it up. And more important than whatever rate of return we got was just the whole process. Our expenses on owning the office condo were basically on auto pay. We paid our monthly, you know, common charges and management costing and it went auto pay out of our account and the taxes went out of pay out of our account and the mortgage got paid out of our account every month. And then when we put the tenant in, they were paying us basically ten grand a month and it would go auto pay into our account. I think for their five year lease which recently ended and we ended up putting in a new tenant for five years. But like I would go down to the property once a year because I felt like I needed to check in, but there was really nothing to look at and nothing to do and it was really a management free situation. Any minor issues that arose, there was a management company there, there was a super and an engineer in the building that would really help out with the tenant. But basically none of it became my responsibility or my hassle. So yeah, I mean those were a lot of the positives of owning that unit. And we went on to buy a new space which we could talk about as well. But it's a pretty similar story and there's a lot of ancillary benefits to owning that go beyond just the financial analysis.

So you make a good point that even if you have to move, you can rent it out. But I mean for our listeners and maybe for there are companies that are growing at a rapid pace. I would still think that maybe leasing, you know, more short term might make sense. Is that fair to say?

I mean, sure, I think, I think that it's fair. I think office condo ownership is not for everybody, but I think there are many companies out there that are stable enough that it does make a lot of sense for. And I think that many companies that plan on signing a five or ten year lease, they plan on being in that space for that period of time without a bunch of expansion or contraction. And from a financial standpoint, it would behoove them to buy their space rather than rent. And as I said, there are a bunch of other benefits as well. So I think while for maybe some growing startup tech firm or someone like that, owning your space may not be ideal, but for many companies out there it is and it certainly worked out well for us. A couple other points I wanted to touch on is we've gone through one refinance on that property and I've ended up buying a new office condo in midtown which we own and occupy now at a building called 36 W. 44th St. Called the Bar Building. And we bought another, you know, similar size, like maybe 1500 square feet, which we paid about 1.4 million for. And we put in another $250,000 worth of a really high end build out there. And that's our current office where we own and occupy. We got great. Again, I didn't take an SBA loan, but I took pretty high loan to value loans from bank of America. And these banks are, they give such great terms and they're so eager to lend and such low interest rates and such high loan to values for real estate that is owned and occupied. It's really a great chance for somebody to be able to buy real estate without putting a lot of money down. Because when you own and occupy for your own business, they give you a much higher loan to value and rates tend to be lower. So we ended up refinancing our first property and, and pulled some money out and lowered our interest rate and kept our payments about the same and we purchased a new one and this one we plan on staying in for the foreseeable future.

That's fantastic. So we only have a couple minutes left. So just wanted to ask you, what advice would you give to our listeners out there investors? And it doesn't just have to be about, you know, whether or not to buy office condos, but, you know, to be successful in this business. And you, you have a lot of clients who Investors who have made this their business. You've witnessed a lot of success firsthand. Even you know, going back to your start working with Francis. What, what advice would you give to investors to be successful?

Well, I think, I think that one thing we touched on before is that real estate brokerage is a wonderful business and it's a chance for you to learn a market and become an expert in a market. My advice from being in real estate brokerage standpoint is to find a specialty that really specialize in something and become the best at whatever that specialty might be. There's a million different areas or sectors within the market that you can really become the world specialist in in. And I think that that's a powerful thing. And then you can translate that into investing. You can become a specialist in something and all of a sudden it kind of comes clear that it's not a super efficient market. If you are the best at rent stabilized buildings and Park Slope, Brooklyn, like all of a sudden, like you see some inefficiencies in that market, some mispricing or some poorly marketed properties that you can make investments with your own knowledge. So, so I think that that probably would be my advice, is that specialize in something, learn something better than anybody else knows in the world and then look for opportunities within that.

I think that's really fantastic because I think you see a lot of generalists out there, but it's so even you take an enormous city like New York or anywhere else in the country and really finding an area, finding a specific asset type, I mean, if you study that for a couple months, chances are you're going to know more that than anyone else. Right. Even the generalists have been doing this for, you know, 20, 30 years or more. So I think that's, that's really fantastic advice.

And yeah, when anyone else. I'm sorry to interrupt, but when you learn it better than anyone else, opportunities then present themselves, no question.

And then my last question would just be, you know, what would you say your own key to success is? I mean, you've, you know, you've built out this brokerage shop, you now own two office condos. What would you say your key to success is and where do you see yourself from the future?

Well, I think I have a few keys to success. For starters, I've always been lucky enough to surround myself with great people. As I mentioned before, I worked with Francis Greenberger at Time Equities. I mean, what a tremendous mentor. And you mentioned that you're having him on the show and that's Going to be a great interview and that you're reading his book and his book is so highly recommended by me. I love it. So just to be around Francis was wonderful. And I worked close with David Lebenstein, who's such a great guy and a great broker and a great person to learn from. And also you mentioned that I'm involved in YMW, REA and REBNY and St. Jude's and all these other organizations. And I've become close with so many great people, high level people, really successful people in our industry like you, James, and many others and your colleagues as well. So that's been a, that's been a great experience for me. I love our business because you meet so many people and you get to learn from them. But from that as well, I learned a specialty. And to go back to this a little bit, I think my, another secret of my success is that I did become highly specialized and I learned one small, very small niche, hyper niche of the market and became sort of the best at that little niche. And that gets me in the room with owners and investors and clients which had I been just a generalist, you know, I think they would have chosen somebody else rather than some anthropology major from Ithaca College to speak to, you know what I mean? But because I was so highly specialized in that when those opportunities came around, they come and talk to me rather than somebody else with, you know, better focus in college or connections or anything else, you know.

Well, this, this is really fantastic. Michael, thank you so much for joining us today and sharing your story and really inspiring for our listeners out there. So appreciate your joining us.

Thank you James. I appreciate it very much. I enjoyed it. When it comes to business, you'll find the experts here. Voice America Business Network.

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 collaboration. Collective intelligence garnered from a company wide database. Partnership performance. Learn how we deliver different@avisonyoung.com to learn more.

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This is James Nelson, your host of Real Estate Investing live from New York. And now in our studio, incredibly happy to have with me Emily and Lara Cassano from Rame Capital. They are buy side brokers who work directly for 1031 buyers throughout the entire exchange process. I've known them both for years. They're awesome. They really help buyers understand all the considerations when looking to reinvest. So let's jump right into it. So let's talk about the 1031 exchange to start with. So, Emily, you want to talk a little bit about what that is and then. Or yeah, whoever wants to start, start off.

You know, this is.

Well, first of all, thank you for having us. We're excited to be here and we're excited to talk about what we do. So Emily and I own a firm called Rame Capital. Our specialty, as you said, is 1031 exchanges. We are buy side representation for exchange clients. So what we do is we partner with many of the larger investment sales firms in New York. As you know, James, because we've worked with you in the past, and we help not only advise on the entire process, but really handhold and educate from start to finish. So oftentimes what happens is the investment sales team comes to us and say we have a potential client that needs education and understanding of the 1031 exchange process. From there, we come in and meet with them, understand their risk tolerance. What we find most of all is that or more often than not is that these are generational owners. They've held it for many years. Their basis is a large. There's a large gain that they're going to realize. So we educate them on what needs to be done and the type of taxes that they will incur if they were to sell and not exchange. So we come in with a team around us. Emily and I are really the two individual and critical members of the team, but we have built other members that support us. In terms of a real estate attorney that specializes in 1031s, we have great relationships with lenders. We work closely with the qualified intermediaries. So we are much more than a brokerage. We really pride ourselves on being an advisor throughout the entire exchange process.

Perfect. Now I'm really glad you set the.

Stage to start with it.

Before we just jump right into it. And I know you all would certainly agree that you should never do something for tax reasons alone. And for you listeners out there, before you do anything, check with your accountant to make sure that you qualify. But the 1031 exchange is a very powerful driver for our business. Oftentimes our clients are selling in New York. They're looking to exchange maybe into something more passive, maybe something with better credit, better cash flow, but there are considerations. Emily, just remind us again about the process, the timing. So our listeners, if they are selling and they want to take advantage of the exchange, what should they be thinking about?

Sure. Well, a 1031 exchange, you have 45 day ID period. So once you close on your Property, you have 45 days to ID. During that same time period, you have six months from the date of close running concurrently to close on your exchange property. So we work, we probably come in around 30 days prior and we start working to help, to identify, to educate. So we're not using up that 45 day window. So we have plenty of time. Do we want to talk about the different rules with regards to the exchange?

So there is three rules that fall under this exchange ruling, and basically there's two that we focus on. The third one is really used more for institutions who have a portfolio that they can continue to roll. So the first one is the three property rule where you can identify any property up to three properties at any price point. So if you have a five million dollar property that you sold here in Manhattan, you can identify three properties at any price point, a million dollars, $5 million, $15 million and so on up to three. The second one is the 200% rule. So 200% of the total exchange. So if you sell something for $10 million, debt and equity combined, you have the ability to identify as many properties as you would like up to the $20 million threshold. So those are the two that we focus on.

Right. And Lara did mention the debt portion. If there is debt on the property that they currently have, that too has to be replaced. So if it, let's say it's a $10 million sale and they have $3 million of debt on that current property in the exchange, that has to be replaced as well. So that has to be taken into consideration. Oftentimes clients aren't really sure about that, but that portion certainly has to be exchanged.

Yeah.

No, I really like what you said earlier about getting ahead of it because I know a lot of my clients panic when they hear, oh my God, I'm up against the clock. And we use that time working together well in advance. So when we're out and for our listeners, when you're marketing a property, now is the time to be out there starting to look at the options because. And we've even structured closings where we have a flexible closing period at the seller's options. So you can call for that closing when you know that you have some options. Because the last thing you want to do is be on day 44 of an exchange and be scrambling to say what should you be buying?

So that's why we really do try to start as much ahead of time as possible. Really hitting the ground with properties comes about 30 days out. But the education process, as far as as single tenant, as far as the triple net, as far as the different sectors were really like the locations that starts, I'd say three months out or so, really just to educate the client and have them understand what the process is going to be like and what to expect.

One thing I'd like to mention is that having an extended closing is not always the best way to handle it. Having the ability to do an extension or extend for 30 or 60 days have the option to do that. We had a client who thought it was in his best interest to wait out and have it close eight months out because it gave him ample time. In reality, Emily and I cannot start working on the exchange until about 30 days prior to the closing because these assets are relatively liquid, they move very quickly. So no seller is going to let you sit on their single tenant net lease property for X number of months until the closing date.

Great point. Yeah. And sellers aren't going to want contingencies on my sale. So let's talk about the team. The buyer needs you on board to advise them to find opportunities. Who else should they be working with to facilitate this exchange?

So good question. So Emily and I really have built a wonderful support around us in terms of professionals that we've worked with on many of our exchanges. We recommend that our clients speak to these individuals just because they've all worked together as a team. From the attorney that I mentioned earlier, who is actually an Atlanta based attorney, to the qualified intermediaries here in New York. So we have built a team around us. Our clients don't have to necessarily use those, but we know how critical it is that people can communicate effectively, adequately manage the time that's given to us and that there's nothing that is, I guess, dropped or falls by the wayside in the process.

Yeah, specifically an attorney, a 1031 attorney oftentimes will have clients say, oh I have my personal attorney or we have a liquor lawyer or whatever the case may be. But having an attorney that has done ten 31s ideally specializes, specializes in them is so essential because they are the main driver of these exchanges as far as contracts and as far as juggling three oftentimes we're working on writing right now we're doing three different opportunities so there's a lot of balls in the air. So having an attorney that understands timelines is critical. As far as the debt component, we work with a mortgage lender. Oftentimes clients will say, well we have debt to replace, we'd like to get some quotes. And what we'll do is we'll work to see what those quotes look like prior to going forward. So we can model out hypothetically if they go after this Taco Bell, what it would look like if they go after this davita, what the debt would look like. So they know what their cash flow is going to look like if they go after this opportunity or the next opportunity.

No, you have to have the team in place and the advisors and we get the same thing here in New York. Oh, my family's attorney who's a generalist, it's so specialized today and it's such a great piece of advice for our listeners and I would imagine also your council probably reviewing these leases to make sure that everything's in check.

Absolutely 100%. I mean they go through with a fine tooth comb the leases to make sure there's no issues or gray areas because triple net versus double net, there's differences in them that really need to be looked at by an attorney who knows what to be looking for.

So let's talk a little bit about that because first of all the, so you're going out, you're advising clients, you're finding opportunities. Are these typically already built and tenanted? Are you working with a developer and how are these. I mean we all see the McDonald's and the Walgreens. How do these happen? Do the companies go out and buy them and then they lease them?

It's kind of all of the above. So we'll work with developers who have a pipeline of product and they'll show us their product, let's say for 12 months out and they'll say we're working on 100 of these. City or Web, not WebMD, like a.

CityMD, the doc in the box type of urgent care walk ins.

So we'll see what sort of product they're working on at the time of delivery for our client, they would have already been built, the tenant would have already been in there paying rent. And paying rent because it's important. Because if there's any delay in any development, you want to make sure in a 1031 you do have that window. So you want to make sure they're in there and paying rent. So we do work with a lot of developers in the single tenant space. We also work with institutions, family offices that have product that, you know, they know that we're 1031 advisors and they know that we're coming to them. We have a deal that's, that's ready to go. So we work with the brokerage community as well.

Yeah, I was just going to say we also work with the large brokerage firms out there, the sell side firms for single tenant, net lease prosperity. We have created a name for ourselves so people know that this is what we do. They know that when we come to them, we are live and we have a client that is ready to place money. They're not a client that's out there testing the market and seeing, maybe I'll venture into investing in real estate. These are people that Basically we're either 30 days out or we're in the ID period and they need to find an asset. I think also something important to note is that we are principals and because of those relationships on a personal level, we often have brokers that come to us prior to things going on the market because they know we can close on these deals. We've worked with them in the past. And that's something that's very important to us, is the relationships that we've built out there in the industry.

100%. And the brokerage relationship on the sell side is so essential going through a 1031, because if you're making an offer, you really haven't dealt with that broker before or you really want to make sure that you have that relationship because you don't want that offer to be shopped. You want to make sure that this is actually a real seller. So there's a lot of things that as advisors that we bring to these 1031 clients because oftentimes people will say, oh, I'll just go look for property. It's so much more than just finding a property. You have to make sure that you're working with somebody who's actually going to.

Sell you the property and understands the 1031 timeline. We've had delays in our client closing on their property. Property in Brooklyn, a $10 million deal and they needed an extra two weeks for whatever reason on the sale of it. And we had already identified a property for them and we're going into contract and the client wanted to walk away because he felt bad to tie up the property, which we completely understood. But because of the relationship we had, we were able to go back to the sell side broker and say, this is the situation, this is their number one choice. We are going to close on this. Please allow us the time. And it worked out very well. So again, that's through the relationships we've created.

You know, I see these listings come across, you know, emailed, you know, dozens and dozens a day. And I mean the need for an advisor in the space because there's thousands and thousands of these listings out there. And where do you start? How do you know what a good opportunity is? I mean you can, I mean there's so much to consider. I know you all have been very graciously, you're going to come back to the show. So we're going to talk about this next time about really kind of looking at the tenants and what to look for and the considerations. But just talking about this whole world of triple net. How do you know what's real? What's the best bet? Where do you start?

I think, Emily, you could talk about that.

Obviously every client's mandate is very different. But when we're talking about general terms, we look for corporate credit, long term leases, ideally 15 years and more, but sometimes 10 years and above is fine, depending on each client obviously and their risk tolerance. We're looking for very strong demos, main on main retail. Obviously they're trading out of the New York market or the boroughs. So they're in a very, very dense populated market. We're not going to say, let's go to the Carolinas or Tennessee to some secondary tertiary market in order to complete your exchange. It's essentially they're buying real estate to buy in a good area. Additionally, square footage, we always mention the square footage is another point that is very important in our search process. Staying below a certain square footage is important because hypothetically, in 15 years, if that Taco Bell, let's say, were to leave, you want to be able to backfill it with as many options and opportunities and tenants as possible. If you're looking at a 10 million dollar, let's say Sam's Club or one of the larger big boxes, there's not that many people that fill or tenants rather that fill that square footage. So staying below, let's say 14,000 square feet, we often say, is another one of our mandates that we look for.

I think also our ability to identify deals comes from the fact that this is what we do all day long. Right. So things come into our inbox. And Emily says this all the time, hundreds of deals a week. She looks at both on a personal level, on a professional level, just going through it and seeing what's out there. So we have a really solid understanding of what is a good asset and what we feel is something that we would not advise our client on. Furthermore, we look at every deal as if we were going to be the owner of the deal. So if we are not comfortable owning something, then we would not be advising on it. And just to clarify, we do not buy single tenant deals, so there is no conflict here. But we take it as if it was going to be in our portfolio and therefore look at it with a fine tooth comb and say, is this something that, that we would feel comfortable owning? Because our business is built on reputation and referrals. So we're very conscientious about what we look for.

That's a fantastic way to go out. And thank you so much for coming on the show today. Will be great to have you come back because I know there's so much more to get into. But thank you again for joining us today.

Thank you for having us. This is great.

And thank you all for listening. This is James Nelson again, your host of Real Estate Investing Live from New York.

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 at 7:00am Eastern Time, 4:00pm Pacific Time, as well as always on demand. We'll talk again next week.