3. Partnership. Performance. An Interview with Mark Rose.

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.

Welcome back everyone. This is James Nelson, your host of Real Estate Real Estate Investing Live from New York for our third show. And wow, what an interview last week with Marianne Gilmartin. This was after our premiere with Bruce Ratner. So they worked together for several years. So great that you all could see and hear rather their beginning and end of the stories and they're certainly still continuing and talk about leadership by example. And we're going to have another leader on our show shortly, none other than Avison Young's CEO Mark Rose.

Mark led the opening of 50 offices.

In the US which are now over 120 around the world.

When he joined the Canadian firm, he convinced them that their truly client first.

Approach and way of doing business was.

Needed around the world.

Mark accomplished this unprecedented expansion with a.

Great hands on team in just a.

Little over 10 years. A born New Yorker, Mark grew up.

In Queens and excelled at a very early age, playing hockey and then graduating high school at 16, then finishing college by his 20th birthday.

So Mark's a true visionary and leader and going to be really excited to hear him and have the interview for you all. That was actually done in our office here. His presentations at our prior company's annual meetings are received with great expectation, along with laughter, sometimes tears, but always a standing ovation. So stick around after this week's update.

To learn about what it takes to.

Grow a business by delivering different so in this week's news, powered by the Daily Beat, the Qatar Investment Authority has acquired the St. Regis, New York hotel from Marriott International for $310 million. Marriott, the world's largest lodging company actually doesn't own many hotels, preferring to earn fees for its brands globally. They have more than 7,000 hotels but only 14 of them which they owned. Slate Property Group and Bental Green Oak have also secured $390 million loan from Mac Real Estate Credit Strategies to refinance that Orianna at river Tower at 420 E. 54th St. They had previously paid 390 million for the asset, including an additional 60 million for renovations, according to the Commercial observer and the Wall Street Journal. In real estate meets politics, the Wall Street Journal analysis found that there was a drop in sales in New York condos, which was steeper than past measures. And they are now estimating that there's going to be 9,000 unsold new condo.

Units on the market in Manhattan by.

The end of this year, a supply that could take nine years to sell. I might question those numbers though.

I think we've had more than 1,000.

Sales given year in the past. And then in real estate meets tech, Jersey City residents voted overwhelmingly in favor of stricter regulations on short term rentals that will shrink the number of Airbnb listings in the city. The new rules require owners of short term rentals to obtain a city permit and set caps on the size and number of Airbnb units. Meanwhile, Airbnb is still in a legal battle with with New York City over their request to disclose information on their listings and hosts on a monthly basis. This was according to the Wall Street Journal and a New York Times article. And then finally, before we take a brief break, some good news here, which is that the New York Post tallied all the current occupancy and lease commitments for 11 major new ground up Manhattan office properties that recently opened or will open soon. Out of a total of 20.84 million square feet, some 17.6 million square feet, or 84.5%, are either occupied by tenants or have signed leases to move there in the immediate future. So again, there's some good news for New York. So with that, we're going to take a quick break from our sponsors and then we'll be right back for that Mark Rose interview. So stay tuned.

A Different Approach to Putting Our Clients first Avis and Young's Tri State Investment Sales Group sells multifamily office, retail, development and and specialty sales throughout the New York metro area. As experienced thought leaders in our industry, our 35 member group is available to help you make informed investment decisions by advising you on your current holdings or identifying new opportunities in the marketplace. Our one unified team is built on an industry unique platform which promotes unparalleled collaboration and teamwork. We share core values of hard work, integrity and expertise. We we put our clients first providing tailor made strategies to achieve superior results. Please Visit us at aytristateinvestmentsales.com and follow us on Twitter, LinkedIn and Instagram amesnelsonnyc to learn more.

When it comes to business, you'll find the experts here. Voice America Business Network.

This is James Nelson, your host of Real Estate Investing live from New York on the Voice America Network. And for our Spotlight today we have Mark Rose, our company CEO with US Mark.

Thank you James.

Great to have you and welcome back. You just got back from London.

From London, yeah, for about eight months there. But it's certainly good to be back in North America. US and my hometown, New York. So it's good to be here.

Great leadership on your part. I know that earlier you. Last year we acquired GBA in Europe. Now we're 120 offices around the world. And for you it was very important to actually go there and help with the expansion. So thank you for that.

Really do appreciate. And what most people don't understand is that if you stay around long enough to run companies, you realize just how important the people are and the culture associated with people. And we really couldn't have it any other way. If we were going to bring 1500 people into the Avison Young family, you know, you know, you absolutely had to be there at the coal face with them.

Perfect.

Well, I definitely want to. We know that that's where the story is today, but we want to take you back to where it all started. So you're a native New Yorker.

Native New Yorker.

So where did you grow up?

Little Neck. Yeah, Little Necks are right on the Nassau county border.

Okay.

And yeah, I mean everything. You know, unfortunately I have unfortunate taste in sports teams. You know, I'm a Mets, Jets, Knicks, Rangers fan. You know, the Rangers were the latest to actually win something, but for, you know, the jets, it's been 50 years, so it's getting rather painful. So a fairly normal upbringing in, you know, just a New York suburb and.

You were a hockey player, Is that your sport?

I did.

I know you're an avid fan, but that was your sport growing up.

Yeah, I started out as a swimmer and my brother was a nationally recognized swim coach and he pushed us so hard that his three brothers all went to different sports and I went to ice hockey and started playing when I was around 10 or 11 and then played in university when I was 16.

Wow.

Well, you didn't miss much. So I was a swimmer and I can tell you a lot of chasing lane lines back and forth. So yeah, hockey does seem like a lot more fun.

Yeah.

Plus the 4am starts for your practices, you can do without.

Yes. So from there and your family, were they in the real estate business or how did you.

No. So it was actually somewhat complicated, but at the end of the day, simple. You're young and in College at 16, you're not quite sure what you want to do. Most people in their 20s don't really know what they want to want to do. But you know, you start out, you pick a major and mine was accounting. I wasn't sure that's what I wanted to do, but I knew that the school had a great major and it allowed me to graduate just after my 20th birthday and go into public accounting. And when I went into public accounting here in New York, I chose Eisner and Lubin over PwC because I just knew I wanted exposure to real estate. And they had an awful lot of real estate clients at the time, starting with the Helmsleys. And so I was working on the helmsley account probably 12 months out of the year as an entry level accountant and started to move up pretty rapidly. And at the two and a half year mark, the partner who was working for went over to the British coal pension funds REIT that was based here in New York at 521 fifth and he asked me if I would move over. The accounting firm tried to keep me, promised me partnership and I was only 23 and only there for two and a half years. And I was also getting married. And it made sense to take that step to push outside of your comfort zone, as I think all people should. And so moved over to the REIT as a controller, had a series of events that led me to become the cfo. And then kind of the defining moment was the stock market crash in 1987 when we had a quasi public company that needed to go fully public. That's what I was brought on to help with with. And when the stock market crashed, had a chance to go into asset management mode, really learn the portfolio. And with my mentor again something that I always like to expound upon. Mentors are very important to people and to their careers. I teamed up with him to build a business case that the British coal pension funds could trade in their own currency at 14% risk free. And instead they had a billion dollar asset across an ocean yielding 3% that needed about 50 million in CAPEX. And so we wrote a strategy to sell the company and obviously the CEO was not particularly happy with that. And I was the CFO working with the chairman and it made all the sense to the trustees for you know, the British called pension funds gave us the green light. I became the CEO at that point, at almost 27 years old. We sold all of the assets here in the US in 1989, got everything out at four and a half caps. And as it turned out in exactly what we saw was going to happen in early 90s that everything fell apart because we had topped out. And by the way that was specifically written into the strategy that things looked very, very dicey out there. So the last thing that was left was the Watergate Hotel and the Watergate complex. So I moved down to Washington, D.C. nursed that back to health, sold it off, started my own company, sold it to Jones Lang Wootton, became one of the senior partners at Jones Lang Wootton here in New York. And then there was that little merger on March 11, 1999. So I was at the table to merge and create jll.

Wow.

I'm still reeling from the fact that you graduated high school at 16 and then you're a CEO at 27. And as you can hear by the sounds in the room, we are in a live studio audience here today. So hopefully we don't all now feel like enormous underachievers, because I'm still trying.

To process this all.

So what was your key to success? I mean, most people when they're 16, they have. They're not even thinking about college or their professional life. So what was it that made you so driven at the time?

Well, this is a much longer conversation because it goes into the strategy of what Avis and Young is as well. But I believe that all people, every people, and I've got 14 active mentees, actually, I took on a 15th last week. Any and everyone should write down what they want to do and what they want to become. And as early as 12 years old, I had written down what it was I wanted to do, and at that particular time, it was to be an attorney. Yet in my last year of university, I went up to work at the New York State Legislature and was completely disenfranchised with the way that people behaved and said, really don't want to do that. Went into accounting. That took me over to real estate. But with that said, all through that period of time and even through today, I write down and I ask my children to do this every year as well. Tell me what you want to do and who you want to be so that you can measure it. And we have great confirmation. So the New Zealand All Blacks, which is the greatest, winningest sports team in the history of sports. There's a great story about the guy who's considered the greatest All Black of all time. His father made him write down at age 14, all the things he wanted to do, you know, to go to juniors, to make it to the national team. And he left off. And his father asked him, aren't you leaving something off? And he said, no, that's pretty much it. This is pretty aggressive he said, don't you want to be the greatest all black of all time? He said, dad, that's not realistic. He said, well, you can never become it if you don't write it down.

Wow.

So at 12, you were already thinking about being one of the world's most formidable attorneys. I think my 14 year old probably doesn't even know what an attorney does.

Well, 12 was to become one. 20 was to do certain other things. Early 20s, you think about a career and what you'd like to have, what you'd like to be, what you'd like to mean to people, and you carry it through. With that said, it's not all perfect. You're still young and you make mistakes. But here's where.

Where.

When you have a mentor and when you have somebody as powerful as this mentor was, his influence was teach people to be better than you are. It's good for you. Listen more than you talk and just be good to people. And I think all of you in this room have seen that the family atmosphere of Avis and Young, we're constantly on this, that everyone can make money, everyone can build a career. There are very few places left that will support you to build a family at the same time that they're developing you. And it took some errors and it took some, you know, things that maybe I didn't think were mistakes, but you realize that they were many times. It's all about ego. I think a lot of people suffer with. They can't raise their hand in a meeting when they don't understand an acronym. Happens to everybody. But that's the very time that you should raise your hand because embarrassment is actually the most selfish emotion. And we need to build safety and we need to build connection and culture. And all, all of those things came out of being young enough to listen to somebody who had forgotten more than I know. I can't tell you. It all came together at that point. It came together later where you saw the mistakes that you made, went, okay, I got that one. Think about this. I knew enough to write a strategy in 1988 to tell an investors sell all their real estate and get out of harm's way. I hadn't yet matured enough in 1993 to build the story to tell them to come back when the greatest creation of wealth, owning real estate, was about to begin in 1994 and 1995. But you learn. And that's why Avis and Young Again was launched into the teeth of 2008 recession. Because you saw buying and starting at maximum Chaos and at the bottom could be very, very powerful.

It's tremendous advice and I'm a big believer in goal setting as well and also having a mentor. And a lot of the listeners of the show are aspiring investors. They want to go buy their first commercial real estate deal. And I think it's incredible advice for them, even if they have never purchased a property before, to really, okay, what are my goals, what see themselves in the future, what type of portfolio do they want to own, and then having the right mentor there to help walk them through it. So getting back to your story, so you made the leap and you said you had your own company that you sold to Jones Lang. So what was your specialty at the time? What did the business.

Yes, that was. I was new to Washington D.C. because I was there for the Watergate. We sold everything off, thought we were coming back to New York instead, had our child loved. You know, the Maryland and Washington D.C. area stayed. And so one of the ways into the real estate community was in the retail space. And by the way, my portfolio was more than 50% retail. So started a retail investment leasing company in Washington D.C. and it became very clear to me I am not a small company person. And so even though we had grown to about 15 people, we had about 20 listings already and were starting to do things we really didn't want to be responsible for water, you know, making sure the plants were watered and the copying machines were working. And when Johnson Wooten came calling to help them in Washington D.C. and quite frankly in the U.S. at that point, it made all the sense in the world.

So after the acquisition, then what did you continue to grow that office? What capacity did they have you serve in?

Yeah, so it was just a Washington D.C. office. So we grew that into a Northern Virginia and then Maryland office. It became one of the top offices, by the way. It's still. And most of the people I brought in are still there with JLL now. And you know, it's a major player there. You know, we're doing pretty well ourselves there in Washington D.C. also these days. But yeah, no, that was. There was tremendous growth and we became the largest office in region for JLW pre merger. And then I was asked to come in first to oversee LaSalle Partners acquisition of Compass, which Equitable was spinning off both the asset management and the leasing and management. And the asset management was sold to Lend Lease and the leasing and property management was sold to La Sale Partners. So from the Jones Lane wooden side, I oversaw the underwriting of that deal. And I obviously had to be brought in to then know that there was a lot more going on. And so got heavily involved. Involved in the overall transaction.

So you're definitely on the leadership management track. And was that. That was more appealing to you than the brokerage side of it, it would seem.

Yeah.

Yeah, I would say, you know, I never intended, you know, even though now I've sold tons of institutional assets, never actually expected to be in the business because I've been running the businesses for so long. So.

So where did that. Your position there? How did that ultimately finish up? And then you eventually came over to, I guess, with Grubbine Ellis. That was the next move.

Yeah. So in 2004, Stuart Scott, who unfortunately passed away, extraordinary man. Earlier this year, he was leading LaSalle Partners and he had stepped down. A new CEO was brought in. I was brought over to Chicago to be put in line to be considered for the CEO role and given a new CEO. Just some issues that were going on culturally with the company. It just made all the sense. When grevinelas came calling, they said, listen, we need somebody to fix and build. And so on March 8th of 2005, we went over to Grovinellas, raised 100 million on Wall street, put it back on the New York Stock Exchange from the pink sheets, brought in 400 new people, took the stock from 4 to 14. And our chairman at the time, who had a large ownership position in the company, saw the, you know, the gains and, you know, as a public company is allowed to do, you know, took it out for sale. So we sold that company December 7, 2007, and then in 2000, actually, yeah, right around that time, right through the first quarter 2008, took 17 trips around the world, met with about 250 clients. And at MIPIM in March of 2008, in the hills of Magen, finished the strategy that is now Avis and Young.

Wow. Wow.

So you help Jones Lang in their expansion and then with Grubb, I mean, you triple the stock price. You said you brought in 400 people. How many offices did they have when you started? How many offices did they end up with?

It was more so there were over 50 owned offices and about 54, 55 affiliate offices. And we didn't do much with opening new ones, but they needed a complete overhaul. So it's bringing in the right people to drive the business forward.

So Avis and Young at the time was Canadian company. They probably had what, about maybe 15, 20 offices at the time, 11 Canadian.

Offices, 293 people, 53 partners $40 million in revenue and $2 million in profit.

So you knock on their door, or was it vice versa, where they say, we'd like to open up a U.S. operation.

Well, it's actually a little backwards. So Avis and Young and Grubbine Ellis were affiliates.

Okay.

The strategy that became what we are today was written in 2008 as a startup. And when I looked at, with my friends and advisors what we should do in 2008, the right thing to do was not start a new co, but to start with something, especially with everything that was going on. We wanted a company that was global, specifically, not headquartered in the United States. We wanted a partnership. Plus, we wanted to work with good people again. And, you know, sometimes, and these are some of the learnings, I just come off not working with very good people. And so we also saw the, you know, the other input was take a currency that would work. And, you know, as I've said for 32 years, I've been in the UK working there. But the pound at that time was trading at a discount, and the Canadian dollar was working at, excuse me, was trading at a premium. And so pulling it all together, the company that lined up with everything that we were looking for was Avis and Young, save one fact. They were four provincial companies desperately owned, trading as Avis and Young. And so we all got together after they had asked me if I would come over. And I said no. At a Strategy speech in January 2008, my last speech to them, I told them that they could be absolutely great. These 53 partners could rule the world if they built a company. And so they asked me at the time to come over. I said, listen, I'm just not a small company guy.

You were a Rangers fan, too, so probably, maybe, no, that'll work.

Hockey is universal. Hockey is universal, you know, and especially if you're part of the original six. But it just made sense that if you're going to start and you want to start with a group of people, start with people who, you know, you trust and have a cultural connection to the strategy. But they had to merge. And so I actually joined in the middle of June of 2008 without knowing where this was going to go. But on July 27th of 2008, we agreed the merger for the four companies. We merged them on October 1st. And as they say, the rest is history.

And that's when you opened the Chicago office. That was the first U.S. office for ABIS.

That was in 2000. That occurred in 2009. And then at the end of 2009, what? Washington and Atlanta opened up. Now there's over 50 U.S. offices open. There's 120 offices around the world in 20 countries. We have 50, I think last count was 5,245 people. And we're doing 1.2 billion in revenue.

Wow.

Happy to be a part of it. Happy to be doing our part here.

And, and we are excited to have all of you, you and everyone, you know, everyone at this table.

So I'm going to open it up.

For a question or two.

So everyone think about one or two good questions for Mark. But my last question right now is, and I think this will be interesting for our listeners as far as where to focus geographically right now. It used to be, from my perspective, New York was one of the only choices, maybe little biased, having spent my whole career here, but now there's options out there. So you decided to open up a US operation.

How did you decide?

You mentioned Chicago, dc, Atlanta. How did you figure out what offices you wanted to open up first and where, you know, the opportunity was?

Well, again, if you understand as a strategist, every everything, any and everything you build takes five years. And so if you're thinking over a five year plan, you know, you need to be in the eight major offices in what order that they come in. Irrelevant. What was impressed upon everyone was it has to be done the right way with the right people, has nothing to do with which one got there as long as the eight major cities in the US were opened. And as I said, now we're up to 50, but you had to get the major markets.

And so I guess, yes. One more question to add on. I mean, the expansion and the way that these offices were able to work together, which is not always a given in our industry, as you know. What is it about Avis and Young that separates us from, from other companies?

Well, this is the secret sauce. I mean, people who join have to sign up to the partnership strategy. Then you actually structure it and implement it where everyone owns the same company. And then the most important thing that you can do is when somebody violates the partnership culture and the structure, you remove them.

We have an acronym for that, right?

We do. It's called the nar. It's the no Asshole rule. It's in our bylaws, it's printed in everything that we have and everything that we do. We have used it several times. No real estate services company has ever fired a number one producer. We have either terminated or coached out two already in our 11 year history. Number one producers and still growing at 25x at everything that we've done from headcount to, you know, to offices to revenues and so on their profits.

That sounds like great advice also for our investors listening on. When you want to choose a partner and you're looking to go make an investment, probably a good rule to surround yourself with like minded people as well. So let's open up to the floor. Who's got a question for Mark? Yes, Eric. Erica Dean dialing in from across the table here at the New York world headquarters.

Mark, you clearly have.

Rise as a young person that I assume a lot of it was the development of a lot of your hard skills, but your emphasis on treating people right and managing well, which are soft skills. Can you talk about the role that each of those played in your career?

I'm not sure there's anything more important.

Right.

And I would say that it was at that moment, moment working with British Coal reit and there was a moment when we had the sale of the company, but there's still work to do after you sell a company. And there was a staff that said, okay, well this doesn't feel good, pay us to stay. And I wasn't quite there yet as a manager and I went to my mentor and said, hey, what should we do? And he said, show them all the door. And I said, well, you know, work has to get done. He goes, well, we can always bring in outside help. The second that you give any of them something that they don't deserve, they do deserve to be treated well, but they don't deserve to be paid twice just for staying. You will get by. Half of them aren't going to go and the rest will just supplement the resources and to listen to it, but then to execute and have the courage to execute was one of the greatest changes and moments in my life as a leader. The second one came when you truly understand and this one, I can't pick the time. But when you learn that people are not fungible and you have empathy for people and if you believe in family and want to drive it through an organization and your life, maybe that came with the birth of my kids. Maybe came with the birth of my kids. Plus seeing people in need or pain, pulling those things together were very, very powerful. And then the third item happened which was, you know, I had a chance to spend money and invest in understanding what makes people tick. At my time at JLL when I was the chief operating officer and the chief natural officer of the Americas and something happened which was, you're trying to find out why a company cannot move its employee satisfaction survey on compensation and recognition. And people automatically think that it's compensation. And you go out and hire consultants, and the consultants will tell you, and they'll show you. In every service vertical since the dawn of time, compensation normally comes out around number seven or number eight. The item that comes out at number one in every single survey is recognition. And so understanding that was incredibly important, by the way. Recognition. Most people will default to a crystal for doing something, a promotion, a title, but we still weren't going to be able to move the needle. And there was this moment, this event, where the consultant that we were working with told me what I believe is the secret to life. Without even knowing he was telling me. He said our company was doing the same thing because we couldn't move the needle. And they held focus groups like we held focus groups. And after he was done and he had gotten absolutely nowhere either, a woman comes up to him and says, let me help you. And she said, I would love for you to help me out. She said, do we make enough money? Well, of course we do, but we're human and we'd like to make more. Are our compensation plans clearly, you know, discussed and articulated? Of course. If you want a five out of five for me, here's all I want you to do. My sister's dying of cancer, and if my manager would just ask me how I feel and how my sister's doing, I'd give you five out of five every year. There are people that didn't take that to heart. The guy I was talking to, he had this gift, and he didn't even know he had it. And from that point forward, and that was 2003, that was going to be the foundation of. Of any and everything that I do. So it took a little time.

Right.

But when you see it, you see it so clearly, and you know that that is going to support and allow you to manage, to develop and be partners with. With other people. It's the gift of information. And that's. And that's really what I think changed everything for me 16 years ago.

That's powerful. Wow. Thank you, Terry.

Yeah. Can you talk about sort of what.

You could have told your younger, lessons learned from running these other companies that you've been able to successfully apply here? Like, what have you said? Ah, finally I've learned this. What can I do?

Well, I said one of them already. First one is, people talk so much and they forget to listen. And so that's the first I mean, the first is if you have clients, if you have people listen first, understand where people are coming from, because it's important before you're then able to build a strategy or to execute. So I think that's one. Please don't take yourself so seriously. Folks take themselves way too seriously. Three, and a lot of people hear this, make mistakes, try not to make the same one twice, but make mistakes. It's the. It's the only way that you learn. And then the fourth thing, and it's less I learn this and more, you know, from. From other events and more I love what I do. Every single day I wake up, I love what I do. And therefore, I think people should find the roles and the jobs that make them happy, because you can always make money, you can always be successful, you can always build the legacy. If you're miserable doing it, it's just not worth it. And so I think to go back, I've been fortunate to have then about two and a half years in my career. Out of the 35 years now. I've had a great experience, and I just love being around all of you, as I love being around our clients. And that's a gift unto itself.

So, unfortunately, we only have time for one more question before we have to go to a commercial break.

Alex, so you mention your mentor a lot, and I hear a lot about mentors in this business, especially, how did you meet your mentor? And do you have any recommendations on what maybe we should be looking for in a mentor? Like, I don't know.

Yeah, so we worked together when. When. So when I was over working for the accounting firm, working for the Helmsleys, a guy named James Boazzi, who was the vice chair of Morgan Guarantee, had mandatory retirement, and he came over to work with his friend Harry Helmsley at Helmsley Enterprises. And I crossed paths with Jim, and then Jim became the chairman of our reit, you know, British Coles REIT called Pan American Properties. And I just spent a lot of time with him. And as I said, there was one day I walked into his office just not to do anything, but truly thankful. I said, listen, I just want to thank you for taking the time. He said, you know what, Mark? There are many mentors who would love to mentor, but it takes a mentee that actually wants to listen and wants to understand. Some of us have forgotten more than you know, than you know. That's where I think luck comes into this as well. If I didn't bring that up, luck does come in. And so to have somebody like that and to be exposed to it. But he would tell you. And he passed away now, I think two years ago, two and a half years ago.

Now.

He will tell you, though, that it just takes a relationship. What I would say to you, we clearly have a great mentoring program here in the women's network at Davis and Young. But I would say it goes beyond that. I think that mentees should seek out their mentors. And I think that. And it's fine you raised her. You know, you raise your hand, you ask somebody, hey, I think this would be a good fit. But both sides have to commit because if they don't, it's, that's not mentoring. So I would say seek out. And it doesn't have to be in your office. It could be anywhere. Sometimes you have to go outside your office. Sometimes you have to go outside your industry. You know, my daughter who works for us in Chicago, her mentor is a woman whose father ran a company.

Right.

Getting the sort of reason why she went this way and wanted to be outside the influence of Ava se Young. So I think it just goes in different direction. But you have to have the commitment to want to be mentored. Listen, 15 people have asked me and I said yes, if you took the time to ask me, I am happy to help out.

Wow.

Incredible advice, incredible discussion. Mark, thank you for everything you do.

And joining us here today.

It's my pleasure.

So stick with us. This is James Nelson, your host of Real Estate Investing Live from New York on the Voice America network. And now we're going to go to a break with our sponsors. We'll be right back.

Welcome back. This is James Nelson. I'm your host of Real Estate Investing Live from New York. And now we are going to have another real estate fundamentals spotlight with Derek Aiken who is a professor at NYU. Can I call you Dr. Dr. Akin by chance?

As you wish. Depending on what I'm allowed to call you in return.

Welcome back, Derek. Today we're going to talk about the income statement and understanding when our listeners are looking at a typical broker setup, how you're going to take that information and then get it into one of your investment models. Just for simplicity, let's take an imaginary 20 unit apartment building and it is cash flowing. Let's talk about the top line. We've got gross revenue, maybe you can define that term and then maybe you could touch on vacancy and credit loss and how we're going to get to that effective gross income.

Yeah, sure. Basically a pro forma or an income statement or, or A, P and L are all really the same thing, just different names for the way that we do our revenue and expenses to ultimately generate our noi. Starting with what you were referring to, the revenues, you've got gross potential rental income. Of course, some sponsors underwrite things differently, but gross potential is the ability for an investment to perform a at its max 100% occupancy rate. Some sponsors will not start at gross potential and they may just start with their net rent. That would be a situation where say in that 20 unit building you had 16 units that were occupied. Instead of pretending like it's 20 and having a gross potential, they would say, well, those 16 units each generate 400,000 in rents and so that's our rental revenue and that's your kind of gross rents.

But I can assure you on a broker setup, you'll never see a zero.

If you've got those four apartments, you're going to get a projection, right? And I'm sure when you're underwriting a real estate deal, you're going to first vet that those projections are accurate. So that is how you're going to get your, your gross revenue. Now talk about what vacancy and credit loss is and then how we're going to.

Yeah, sure. So a lot of times in New York too, you have a combination of multifamily or retail as well. In this situation, we're only talking about a residential building. So when a vacancy is applied to the existing revenue stream, you typically will choose a vacancy rate that kind of is indicative of the greater market's stabilized vacancy. Now your property may have a period of time where that vacancy rate is significantly higher or lower than the stabilized vacancy rate. But the majority of underwriters or valuers of real estate will kind of decide that when their real estate is kind of stabilized to have a 2 or 3 or a 5% vacancy rate, depending on which market they're investing in.

So this allows for turnover. You have an apartment that vacates, maybe you need to go in and paint it, put down new floors. It might take a month to re rent it. So that's part of your vacancy allowance. Credit loss would be if the tenant doesn't pay you and you got to take time and obviously money to, to, to vacate them. So what, what you're trying to do in your projection I would assume is to account for that possibility. Because just because even if you have a building where in this example all 20 units are paying rent today, that doesn't mean that you're going to get all 12 months of rent unless that they all stay in place.

Right.

And are current. Yeah, that's right. And it's a game. Right. Because nobody, nobody holds the future and can't see exactly which tenant's not going to pay in June and which tenant's going to pay in August. But I think the idea being to get as close as you possibly can within reason to what you expect to happen in the future, that ultimately of course then generates you kind of what we call an effective gross revenue, which is those rents minus that vacancy and credit loss and any other miscellaneous incomes. That as well. Of course.

Yeah. So why don't we, why don't you touch on the miscellaneous income? What else could that be? Let's say it is a mixed use property and there's a store on the ground floor. I know sometimes tenants contribute towards a portion of the expenses. Are you putting that up top on the revenue or do you use that down below to defray the expenses?

Right, right. So any income that a property is going to generate is going to belong in this revenue section. So generally speaking, if you have a tenant in your example on the ground floor that's say a retail store and they pay a percentage of the building's taxes, they're going to be included up in that revenue section. So you're going to have your rental income and then you're going to have your vacancy and credit losses. And then you'll also have your income generated from these reimbursements and it'll be called expense reimbursement income. There's no exact way to do it. Some apply a vacancy to those expense reimbursement incomes, some do not. And some will take specific tenants in a building that are credit worthy and remove them from hitting them on the credit loss in general because they're deemed as more likely to pay.

Got it. And when we're also talking about other sources of income, that could be laundry income, it could be storage, even cell phone antennas. Unless if you're my friend, Richard K. Shout out to you in Greenwich, Connecticut, I know you do not like cell phone towers. So we're not saying you have to put them on top of your building, but just if they're there, that would go on the revenue portion.

Well, if you ever drive on the merit too, they have this really nice thing where there's these trees and you see them from afar and they're about 40ft higher than every other tree around and they're perfectly symmetrical.

That's right.

So yeah, it's a nice thing that has recently started growing along the merit in the last 20 years.

Right.

So let's talk now about the operating expense portion. So you know, for this segment of the show we're just talking about the income and expense statement. So operating expenses, real estate taxes, heat, insurance, water and sewer. What else am I missing? What are expenses that it takes to run a property at the property level?

Yeah. So I like to break them out into kind of fixed and variable because like you mentioned before, there's your taxes, insurance. Those type of expenses are traditionally considered fixed and they will not fluctuate.

Real estate taxes, I know has unfortunately been, we've been battling that here in New York.

I can assure you that.

I'm not saying they don't grow. Yeah, right. No, I'm not saying they don't grow. But typically when I say fixed versus variable I'm referring to how those expenses fluctuate with the occupancy of the building. So for example, if you have an empty building, your electricity costs are going to be lower, fair and that sort of thing. So you've got, you know, you've got depending on of course the property type, all different kind of expenses that can go into it A lot of the time In New York City if you're talking about a multi family deal, your taxes, your insurance, your RM are some.

Of the bigger R and M repairs and management tenants typically pay their utilities within the apartment. Usually an owner, the landlord is going to provide water and sewer. They're going to be providing heat for the whole building. But again when you're walking through the building, these are questions that you're going to need to ask as far as who pays what expenses.

Correct. And if you're ever confused about it and you feel like your expenses might be light, just go back and look at the broker setup because they never leave out any expenses. It's foolproof.

Derek is trying to take a cheap shot of it. The brokers, usually the expenses are going.

To be very thin and the projections.

Are going to be very, very full. So you do want to verify and, and sometimes you can ask for the sellers tax returns. They're not always going to give them to you but that usually they'll throw everything and, and the kitchen sink into those. So you can really see all those expenses including the exterminator, the accountant, legal. There's, there's a lot of items that you're not going to see on a broker's setup that, that, that, that are legitimate expenses. And, and we've had Doug Marshall on the show too. Who wrote the the Art of Commercial Real Estate Investing. I mean he, he would encourage our listeners, a managing agent, to really talk about the real operating costs. Derek, we only have another minute left. But looking at that revenue, taking out the expenses, what are we ultimately solving for at the property level?

Right, you're solving for something called net operating income or noi. Then depending on whether or not an investor wants to upfront capitalize for various capital expenditures or pay along the way. Meaning after you acquire a property, you can have what are called below the line capital expenditures. Those can be anything from putting a new roof on to leasing costs and so forth. Then ultimately you've got debt service as well, which if an owner decides they want to put leverage onto their property to enhance their returns, then you've got your income, I'm sorry, you've got your net operating income minus your capital expenditures, minus your debt service, which of course includes your principal and interest payments to ultimately result in your before tax cash flow each year.

Perfect. That's a great place to stop because I know next week we're going to get into the cash on cash return and ultimately solving for cash flow. Derek, always a pleasure to have you on the show.

Thank you.

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Okay, and now before we wrap this.

Show, it's time for me to answer.

Some of your questions and thank you all to have emailed into jnradiovisonyoung.com where.

You can send in your questions and.

Have an opportunity for Juanice Mickels from our office to read them and see if we can be helpful to you. Also, Juanice, what do we have from.

The mail room this week?

Hi James. One of our listeners asks why continue to invest in New York when there are other Hot markets that are not subject to rent regulations.

Okay, so we, there's been a lot of talk about this recently in that with this reform where they took basically a million housing units and froze them in time, making it impossible to decontrol them.

Now the only types of increases that.

You can get for these units are dictated by the city every year, typically one and a half, 2% increases. So that has made the landscape very challenging. We have seen some upward pressure on cap rates, but we've also seen a lot of investors and even a lot of New York families who've been here for decades start to look at other markets. And I have to tell you, I was down at a BizNow conference this past week in Miami and the number of investors, many of them who are based in New York now, saying that they're looking at Nashville, they're looking at Austin, they're looking at Miami, it's definitely opening up other possibilities for investment. And for Most of my 20 year career, I will say that no matter how high our prices were going, it always seemed that still there weren't a lot of investment alternatives because investors wanted to stay here in New York. And now it would seem that there are certainly other viable markets where even some of the global investors will entertain. So other than the traditional gateway market. So I think this really has opened up investment for the rest of the country. And you know, yes, if you're the contrarian, you would continue to invest here in New York, but certainly some other possibilities as well out there.

Great. Another listener wants to know, since the Housing Stability and Tenant Protection act, many investors are shying away from buildings with rent regulated units. Do you think there's still a way to invest in these properties?

Right. So another question on the same note, and you can, you can tell the New York audience is still really concerned about this. And I will say that not all these buildings that have regulation are fully regulated. Some of them are fair market, mostly fair market. In a strange way, this actually makes the fair market buildings more valuable. You know, with the rent regulated buildings, there are still some rent rules where if you have, for example, two apartments that are vacant next to each other, you can combine them, you set a new market rent. It's still within the rent regulation program. You still have the ability to buy out tenants if you're looking to develop a project, but if you plan to rent them again, it has to stay at the same rent. So again, it does put certainly a fair amount of restrictions on the operations. But as, as a result, the pricing is certainly adjusted. We're marketing something out in the Far rockaways right now, 90 units where we're offering at a 6% return that was certainly not available a couple years ago. The last thing I'll say before we need to break for today is that the financing is still really attractive, so you can still lock in great 10 year debt in the mid 3s in some case where you're really getting positive leverage. So that's all we have time for this week. But Juanies, thank you for coming back in and going over these questions. And please continue to send your questions in so we can get back to them. And on that note, it's time to wrap up for today's show, but look forward to your coming back and joining us next week. Thank you again.

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.

Sam.