Alignment with Ari M. Shalam

Foreign this is the Insider's Edge to Real Estate Investing with James Nelson, the principal and head of Avis & Young's Tri State investment Sales Group. In this program you'll learn game changing strategies to outperform the market. James will teach you how to source, execute and capitalize on the best real estate opportunities in New York and around the world. Now here's your host. This podcast is for educational purposes only and should not be relied upon for investment decisions. The opinions expressed are those of the guests and not their companies. Listeners should not act upon the information without first seeking appropriate advice from an accountant, lawyer or other professional.

Welcome to episode number 173 of the Insider's Edge to Real Estate Investing. This is your host, James Nelson. Thank you as always for joining. As I said last week, if you have not done so Already, check out jamesnelson.com no, that site is not about me, it's about you and how I can help you become the most successful investor to help you gain the insider's edge to real estate investing and outperform the market. That's what this show is all about. That's what the book is about and it's certainly what the website is about. And while you're there, you're going to have the option to sign up for that newsletter. Spending a lot of time and effort. So every single month, only once a month you're going to receive a newsletter that's going to give you highlights from these podcasts. It's going to share links to recent articles that I put out in publications like Forbes and Real Estate Weekly that are really designed to help give you the advantage. So I know you're going to get a lot of benefit from it. That's also where you can find exclusive video series as well as show notes. Now for today's show, really excited to have with us my friend Ari Shalom. And Ari I have known for at least 10 years, probably closer to 20 years. He's got an incredible story and has done so much for the real estate community and I've had a lot of fun collaborating with him at Wharton where he is now one of the top rated professors. He's got an incredible class and I love Ari's approach because just like this show in the book, he wants it to be practical and actionable. So today's show he's going to talk about choosing partnerships and how to qualify opportunities. Now Ari is the founder and Managing Partner of RWN Real Estate Partners llc, a New York City based middle market real estate private equity investment platform. Ari started the investment platform more than 10 years ago and is backed by Mark Rowan, the CEO of Apollo Global Management. So RWN found targets direct and controlled joint venture investment opportunities across most property types. Previously, Ari was the President of Enterprise Asset Management, a real estate centric multifamily office. And he was also a senior partner and Director of Acquisitions at Taconic Investment Partners, which is a fully integrated real estate investment development company here in New York. And Ari said that was really where he learned the bricks and sticks. So you're going to gain a tremendous amount of value today in learning about the importance of importance of honesty in relationships that are so paramount in your success. Ari also speaks on setting filters to choose locations to make investments. He shares that now RWN has transacted in various places including not just New York City, but Texas, North Carolina, Pennsylvania, Miami and Puerto Rico. So as always, you can go to jamesnelson.com that's where you can find show notes. That's where you can find out how to connect with Ari. I know you're going to get a lot out of this episode, so we're going to have a brief word from our sponsor and we'll get right into that discussion with Ari Shalom.

A Different Approach to Putting Our Clients First Avis and Young's Tri State Investment Sales Group sells multifamily office retail development and specialty sales throughout the New York metro area. As experienced thought leaders in their 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 put our clients first providing tailor made strategies to achieve superior results. Please Visit us at aytristateinvestmentsales.com and and follow us on Twitter, LinkedIn and Instagram amesnelsonnyc to learn more.

Okay, welcome everyone. Thrilled to have with us today my friend Ari Shalom who is founder and Managing Partner of RWN Real Estate Partners llc. Ari, thank you so much for coming up to the office and being here in the studio.

I appreciate, appreciate the invitation. It's great to be here.

Great. So we've known each other for a long time but just for our audience, maybe give them a little bit of a sense of what RWN is so they can get an understanding of what you do and then I think we're gonna have a great time kind of talking about how you got there and definitely want to talk about the class that you just wrapped up at Wharton.

Great. So RWN is an investment platform that I started 12 years ago. It is backed by Mark Rowan, who is currently the CEO of Apollo. We do not work at Apollo, we work out of his private office. And it's a small team that invests capital for the office across a myriad of different investment platforms and geographies. We do multifamily, we've done office, we've done retail, we do industrial, we've built buildings, we've done value add. And generally we are a limited partner in, but the majority limited partner in a transaction with partnering with a sponsor who has 10 to 20% of the equity. Sometimes we've done transactions by ourselves and we will invest in most cities that I can get to in at least a day. So the farthest we've gone is Austin or Puerto Rico. And a lot of our investments which were where we started are here in New York City. So that's the platform. Originally we started with smaller equity check sizes, 5 to 25 million. We're scaling that up a little bit now. And in addition we're not afraid to play in non performing loans or debt or participating preferred or any of these other types of securities that ultimately give us access to the real estate at the best risk adjusted returns.

Wonderful. So there's got to be a story to how this all came to be. So 12 years ago, did you have a vision, did you meet or did Mark have the idea? How did this all come to fruition?

Yeah, so I was at a place called Taconic Investment Partners, which was my second stop in the, in my real estate career. And during the great financial crisis. I left when I thought that the world was going to move quickly to the RTC days which were back in the 80s before my career where you had to have money, you had to move quickly and lenders were going to be selling loans and if you didn't have cash ready to go, you weren't going to be able to get those opportunities. And Teconics model at the time was a joint venture model where it was typically a 90 day cycle from finding the deal to closing and finding joint venture partners, et cetera. So I left during the great financial crisis. I had a quick stop at a place called Enterprise Asset Management, which was the Steinberg family office, which I ran for a short period of time. And they were fortunate that they had no headaches. They had sold all the properties in particular malls before the great financial crisis. And Everything else they had was well financed and they had a lot of cash. So I went there. But unfortunately, they moved a little more slowly when the opportunities started coming in 2008 and 2010. And I knew the cycle was approached. And as much as I have a lot of respect for them, I wanted to catch this cycle at a place that was a little more nimble and could be more decisive. So I gave notice at the end of 2010. They asked me to stay on for a while and transition. And at that time, I was introduced by a former Harvard Business School classmate who was working at Apollo, who had just left Apollo and was Mark Rowan's right hand. I was introduced to Mark. Mark had just set up an office to invest his personal capital. And I was told that he was looking for a real estate person. And this colleague of ours said that I was the only bricks and sticks real estate person that he knew. And he introduced me to Mark, and that was in 2011. So after a couple months of setting up the platform, I signed and started in on June 1st of that year. And I've been there ever since.

Wow. So at the time there was, you're coming right out of the great financial crisis. There was still maybe a little bit of uncertainty left in the market. And I know, I'm sure a lot of people are listening now. Here we are, October 2023. I wouldn't say that we have great certainty now, but for those listening, thinking about maybe building out a new platform, I mean, what did it take to have the conviction to jump into the market right now? And I'm sure Mark had a reason to.

Well, let's back up to context then. The great financial Crisis really hit 2007, 2008, 2009 was a brutal year. But by late 2010, you could see enough data points that the market was starting to move. The federal government had pumped a lot of capital into the markets, into India, into the markets, and the banks did not. There wasn't a relapse of rtc. The banks had done a lot of extend and pretend, and then they were starting to. Now assets were recovering and the opportunity was there. You could see it. It was relative to today. We're sitting now in October of 2023. We haven't seen those data points. We haven't coalesced right now. But by that time it was. And so at the same time, it was fortuitous. Rowan was looking to deploy capital in real estate. He greatly appreciates that asset class. And the question I was asked is if I was. If I give you $100 million, what would you do with it? Now, coming out of Taconic, where we were, which is really my true context, not enterprise, the market, I had this conviction that there were, for every big deal that required 100 million of equity or $200 million deal, there were 10, $20 million deals. And three of them were off market. And a lot of them were being pursued by very hungry, very aggressive, very well trained sponsors who needed capital. And so I thought that if we could play in the 5 to 25 million dollar range, we could meet and do a lot of business with these sponsors. And you know, because you sell a lot of buildings in this zone, not every building is a perfectly marketed, ready to go building with a bow on it. There's always some hair often. And for these sponsors, if you get into their head, if they need less than $5 million, they're going to raise that money with friends and family, Uncle Fred. And if they need more than 25 million or 30 million and they have a really good deal that they have tied up, they're going to be able to get an audience at one of the big funds. But in between is so tough, they're not going to put down a million or two million dollar deposit without knowing where the other 10 or 12 is going to come from. And so there was an opportunity to sort of drive pricing, drive relationships with these partners who needed that capital, that one stop shopping capital. And yet, you know, we could, we could bring a lot to bear because I came from the sponsorship side, so I could bring a lot of experience. And a lot of these first time sponsors needed some scaffolding, whether it was on management or construction or leasing, all stuff that I had learned already. So we were like a good partner because we weren't just money. We were also money with benefits and support and for the right personal, when we had the right personal connection with some of these folks where we respected each other, we could do deals. And they turned up a lot of really good deals because they were the ones making sure their first deal was their best deal and hunting really hard. So that was, and that interestingly, that Venn diagram sort of overlaid perfectly with Rohan's question, which is, you know, for $100 million, I'm not doing two deals. I've got to do like six or seven. So the bite sizes were in this 10 to 15 range. So I was able to marry what he wanted with, you know, my knowledge of, of all these different young sponsors who are starting out or people that I knew into the community and that thesis around those deal sizes and start. And so that was what we did. We've re upped a few times with Mark. We have since now we're moving to larger check sizes. But at the time that was the thesis and we caught a lot of up and coming really great operators folks that you do business with. The slate, the current forms of the slate, property groups and Dell and management and I could go down the list and all these folks, we were catching their first few deals as they were just growing their businesses. So it was a good match.

I love how you found that mismatch in capital and in my time with River Oak and we had the same observation that on one hand you had 95% of the deals happening under $50 million of total capitalization and yet 95% of the organized institutional capital was focused on the $50 million plus.

So.

So again and you found that sweet spot where it's not institutional but it's not friends and family. And it seems like there was a lot of room to play there. Now, interested to hear if you and Mark at the time had an investment thesis on the types of deals that you wanted to do and so you were looking for sponsors who could execute or did the sponsors come first to find opportunities? So trying to figure out kind of what comes first, the dealer, the sponsor.

The chicken and the egg question effectively. Well, you know, we ultimately were hunting for good deals. And because I was a former sponsor at Taconic and elsewhere and my. And everybody that was everybody, the one or two people working for me were all that way as well. We always looked at both. But it starts with the deal. If we really like the deal and we like the sponsor, we have to the check both boxes. Ultimately we would work on the deal together. There were some deals we did where sponsors came to us very honestly saying, look, I'm a former broker, I know how to find it, I have a good thesis for it, but I really don't know how to execute. We would still do that deal. We would just scaffold around them as long as it was an open interchange and there was honesty around what they were good at and what they weren't. But you know, the flip side of, you know, talking to a sponsor without a deal in hand was hard. Other than a meet and greet, we're not like a platform investor. We always find that those sort of. We never really got a lot of traction with those. So it always start. It starts with a good deal, but the sponsor piece has to be there. And again I had faith like I met a lot of these folks and I had conviction because I'd seen their other deals. A lot of them were spinning out of larger firms. So it's not that they didn't have a trust track record, it's just they didn't own 100% of their track record in terms of execution themselves. But they had enough training that you knew that they could find the deal and execute most of what was necessary to bring it to fruition.

So a lot of our listeners are aspiring investors or maybe they've done some smaller deals on their own and they're looking to take their business to the next level. So the question is, what do you look for in a sponsor realizing that some of them simply was the deal right, and then you could figure out how to build a team around it. But how do you go and vet a sponsor today? And maybe this is for larger transactions to really get a sense that they're qualified and to get a sense of how they do business. If it's a first time sponsor you're.

Working with, well, you, you have to first have an honest conversation about what they're, what they're good at and what they aren't. And when we meet, we've met so many sponsors over the years, years and we know so many people in the same way you, you know, in the brokerage business, you know the buyers that can close and the ones that can't in two seconds. And so we, you know, we meet folks. The only difference is that we, we're not judgmental as long as there's an honest dialogue about what they're good at. Like they found a great deal and maybe, but maybe they can't property manage it or maybe they can't handle the leasing or maybe they can't handle the construction. We'll figure that out. So honesty and transparency is important. The deal itself is important. And then, you know, there just has to be a willingness on their side to understand that this is an institution, we're not friends and family. So they have to come sort of hat in hand and understand that like the economics that they might have gotten on a friends and family deal may not be exactly the same, but then again it's one stop shopping. So they don't have to deal with talking to a lot of people, they're just talking to us. And they have to be prepared to, to have a good level of trust because we are going to be controlling a lot of the decisions and at the end of the day controlling their economic back end. And their promote from when we sell and everything. So there has to be trust, there has to be a good deal and there has to be a shared thesis on the business plan. So if they bring us a deal and they want to hold it forever and we want to get into the business and sell, we're not aligned. So I guess alignment is, is an easier way to say shared thesis. But alignment, trust, a good deal and a willingness to understand how the relationship's going to work. Especially when it's their first time with an institution getting a 60 page JV instead of doing a friends and family syndication where they get great economics and have all the control. Right, that's not happening.

That makes a lot of sense. So how much. And I understand that you can do the meet and greet, but it really has to be deal specific. So at what stage when someone thinks they have a great opportunity, do you want to hear about it? Do they have a contract? Do they have control? And what do you like for them to bring to the table? When you talk about that business plan, what do you want to see from that sponsor?

Well, what I want may not be what's best for them or anybody else. I want to see the deal the minute they, they saw it and they think it's exciting and they got a couple numbers scratched together because I don't want competition. You know, if I think that that's a great deal, I want to have an early dialogue with that partner, talk about the deal and start to work on it together. Where they feel that they've already invested time with us and don't take somebody else. Right.

Even if they haven't dug in yet. So there's, they haven't even scratched the diligence yet.

I mean they have to have a conviction. You know, if you see a good deal, often when you see a good deal, you know it's a good deal, you can do the numbers. So you, if we get, the earlier we get that call, the better it is for us. Now if you're the sponsor on the other side of it, I think, you know, you're balancing, you know, the complexity of trying to move forward on a transaction without money yet on one hand and yet not come, not giving, not being in a compromised position where you can't, you'll ultimately have no favorable economic terms. We're not like that. I mean we're not going to, you know, take advantage of somebody just because we can. Ultimately it'll be a market deal, but so we like them to come to us early and we try to develop trust and relationships in a manner that when we put a term sheet on the table to be their equity partner, they can check it against other investors and it'll be a fair term sheet. But for them, they want. If you put yourself in their shoes, your listeners, as soon as they have conviction and you start this kind of race where you're juggling finding the equity, trying to tie up the deal, trying to do your due diligence, it's a lot to juggle. And I would imagine that if they're in that shoes, the earlier they know they have an interested equity partner, the more comfort they're going to have that there's a second set of eyes doing the due diligence with them and that the deal is probably a good deal because there's always some doubt, right?

For sure. And when you all are then presenting an offer, is it done jointly at that point, do you already have your JV agreement hashed out or does that happen simultaneously? If you get to the contract stage.

The JV agreement really doesn't need to be in place until you close. There are ways to mitigate that. But it's really, it comes to bear when you start spending money. So when someone comes and tours a building with you and they're just looking in your data room, they really haven't spent money, they spend time. And so they don't really need our money yet and they're not committed yet to the transaction. And even when they get a contract, they're not necessarily committed. But once you have to put up the deposit, and that deposit is a non refundable deposit, that's when that's usually the threshold moment where the more up and coming operators want to know that they either have their capital or that they know they're going to be able to raise it. So for us, you know, we always would go on deposit with partners. We would, we would typically, you know, put up the deposit with them and that would give them incredible comfort and further marry them to us and sort of block out the competition when they're, when it's competitive. And so we felt that that was a good tool because listen, if we like the deal, we're putting up the deposit, we're happy. We would do the deal with or without the partner in a lot of cases because we were experts, sponsors. So we're a little unique. Most capital is not willing to do that, but we are. And so I would. So now do you need to do a full 60 page joint venture agreement by the time you sign the deposit? Like yeah, it's nice for everybody to know they're really locked in. But there are some shortcut deposit sharing agreements where you can sign a letter with a part, you sign a term sheet which is a three or four page document outlining how our partnership is going to work, staple it onto the back of a deposit sharing letter which is two or three pages and the deposit sharing letter just says, hey look, we're going to each put up some of this deposit money. If you don't show up, then you know, you lose your share. If I don't show up, I lose my share. And meantime, once the deposit is up, we're going to now take that term sheet as exhibit A and turn it into a full joint venture agreement. And if you, and if for some reason we get into an argument and we can't, then this letter with that term sheet is going to constitute the JV agreement and we'll let a judge interpret it. It never gets to that. But that's a shortcut way of not having to negotiate a 60 page agreement. By the time you're trying to also get hard on a deposit and sign a purchase and sale agreement, there's too many balls in the air often.

So putting economics aside and how you structure that, what are the major decision making rights that you want to be involved with? And I would assume that condensed loi or agreement before you go into a jv, what are, what does that relationship look like? What do you expect your sponsor to do and what is your obligation? And talk a little bit about those control rights.

It's super nuanced and I would say that there is no, there's more of a spectrum where on these smaller deals that we were doing, we generally took the position that we controlled all the decisions. And it wasn't like you first had to ask me and then I had to get, we just unilaterally controlled it. There's an old saying, the golden rule. And it's not the golden rule you were growing up with. It's the one that says he who has the gold, you know, makes the rules.

Yes.

You know, so I mean we're not, you know, we don't, we're not like preachy and heavy handed that way with our, our partners. But we basically say to them, listen, you know, we have a shared business plan, you're going to run the day to day, but we don't want to be in an argumentative position position where something is going wrong at the property and I have to first wait for you to ask me if it's okay to remedy the situation, we need to just go in and fix it. So if the house is on fire, we need to be able to go put it out. And then we'll sort out whether I removed you incorrectly or we overrode some decision that, you know, you should have felt you had. It's much cleaner in our case where we just say, look, we make the rules now. We tell our partners, you have to trust us. We've built up a long history of good partnerships. Call our former partners and ask them. They all have the same thing. They'll all say that, that we've never exercised anything in a heavy handed way. That way it's always collaborative. The document, good fences make good neighbors. The document goes in the drawer and we're working together. We speak to our partners every week if there's a lot going on, or once a month or every other week. And it's very collaborative. And from the first moment we start to deal, I treat them like an adult and we listen. We're trying to be great, good listeners and that all leads to a good partnership. I like to, I know most of my partners, I know their spouses, I know their kids often, and we go to closing dinners together and we try to do social things. We truly try to curry a nice atmosphere of trust and shared thinking. So the document stage, if that's awkward for them to say, oh my God, they control all the decisions. We try to gloss over that pretty quickly. And our track record speaks for itself.

Great. And what level of detail do you like to get involved with as far as decision making? So we're talking about maybe an office execution and you're talking about a proposed lease. Are you actually looking just at the term sheet? Do you actually like to go in and negotiate? I mean, how much are you getting involved in the day to day, or are you really, is it really Sponsor Reliant and you're just looking at the ultimate approval for that?

Well, we like to get involved, but there's a, it depends on the deal. But, but often, you know, okay, so stepping back, before we even close a deal, we have a calendar call. It's either every week or every other week or once a month. And on that call we ask our partners to put together an agenda. And on the agenda we ask them to put all the key indicators like leasing metrics, what leases are coming due, what's going on, what's going on with property management, what's going on with any lawsuits, what's going on with financing, anything we need to talk about. And the mere fact that they have to put that together before the call happens. And now it's on a zoom and we pull it up, share it on the screen and it forces them to sort of sit down for a minute and pull their people together and talk through everything we're going to ask. So just creating that creates preparation because you know, some people get busy, they've got five deals going on and it's hard for them to do these calls. But once we have that, then we talk through things and we talk through things as former sponsors. So we'll ask questions. And if it's for instance like on leasing, if there's a lot of commercial leases that are going to get negotiated in a new development, we'll probably be pretty involved in the first one or two just to make sure we're fully calibrated. And then after that, if we have confidence that the partner can handle it from there on out, we let them handle it from there on out. We just look at the term sheets. So it really depends on, it's really, there's a calibration. And then also coming back to that, understanding that concept we talked before is, you know, what are they good at and what are they aren't. If they're things that they aren't, we're gonna, we're gonna scaffold around that. And that's, that's, that's all risk management for us. So we know what's going on because buying the deal is just part of it. Asset management is really where the hard work starts. And, and, and, and a well asset managed deal can bring you an extra outcome, better outcome if things are going great. And if things are not going great can help you preserve capital and have a better outcome even if it's a downside outcome than just sort of being hands off. So you have to do it. I really think you have to do it.

This is wonderful for our listeners to hear. Even if they're not taking outside capital yet, but having that level of reporting and to put their business in the position where they can scale. So I think kind of having that right framework in port is really important. So Ari, I already know the answer what I think you're going to say this question, but bad news, right? So something that comes up at the property level, that's not great. What would you say to the sponsors out there? When do you want to hear about that? How do you want to hear about that? What advice would you give anybody that.

Tells you anything other than right away is should not be in this business. So, you know, there is always bad news lurking around every corner. There's good news lurking around every corner. I, you know, I've had plenty of partners call me up on a Sunday and say, listen, I know we have our call tomorrow, but I needed to give you with everybody on the call, but I need to give you a heads up. Something happened and I just want you to know right away and I want you to give some time to think about it. Tomorrow we'll hop on with everybody and we're going to brainstorm. At this point, you've never seen it all, but I've been amazed at some of the things I've seen that can go wrong. And you have to just be deliberate and stay calm and work through issues. But the earlier you know, the better. And you know, ultimately, it's like when you have kids and they hide something that they haven't told you. It comes out and then it comes out and then you get resentful that they didn't tell you and you could have like staved off or brought in some additional, you know, ideas to fix the problem and you lost time. So a good partner is going to be honest. Now in order to get that honesty, they have to feel comfortable picking up the phone to call you. So that goes back to the early days of trust and talking all the time. You have to create comfort. It's just like talking to your kids, you know, if they feel comfortable saying, hey, dad, you know, I didn't do well on something at school today, you're like, okay, great, like, how can I help you? How can I get a tutor? But if they don't, if they hide it and stick, take the bad test and stick it under in the back of their backpack, then it's often, it's like too late. They're four tests in by the time you get the report card and they're doing poorly. And now it's hard to write that ship. So right away. And you have to make people feel comfortable telling you no.

It's a great point. It is essential over communicate throughout. But let's also talk about upfront. When someone's presenting a deal and look as a broker. Everybody likes to paint this incredible picture of all the positives and all the reasons why you would want to make the investment. But how much do you want the sponsor to let you know what the pitfalls? Because no deal is perfect. I assume you're not just buying triple net lease coupon clippers. I mean, there are things that can go wrong with the deal. So I would imagine also up front before you go in to address what the challenges are is important as well.

Listen, if they're hiding something from us that they don't know that they know and they're not telling us, and that's not the right partner for us. Normally we're jointly pursuing something, or maybe they have something under contract, but they haven't closed yet because our equity has to come in before that. And we'll run our due diligence. And there's a lot of candidness about what we see, the positives and the negatives of the deal. And we in particular often collaborate well with the partners where we're pointing out things that they may not have thought of or vice versa because listen, they have money and reputation at risk as well. So we all want to go into something eyes open. So I would say that, you know, with time to do our diligence, we usually uncover a lot of the same things that they might see. And if they're hiding something from us, then I don't know why they'd want to do a deal that they're hiding something about. I mean, most deals are relatively good, transparency good and you can figure stuff out.

So I want to go back to your experience and, you know, we get listeners too, who are in school, some in college, trying to figure out how to get into this business. And you, you noted that your time at Taconic, where you really got that hands on experience. Talk a little bit about that and also thinking about some of the sponsors who you've partnered with and what makes them a great sponsor. What is that complete picture that they can hopefully bring to the table for you?

Well, there's a lot of questions. Let's unpack that for a second. You know, getting into the business with no experience is a little bit different than being in the business and making the jump to be a sponsor. So just to pull that apart, what I tell my students is that, you know, you first have to have an honest assessment of yourself and you know, do you hustle in the good way? You know, are you are someone who gets out of your chair and will go make something happen? Do you, do you handle good news and bad news? Because, you know, being an entrepreneur, ultimately everybody's sort of an entrepreneur in this business. Even if they're working at a large firm, they're trying to do their own deals. Has its highs and lows and they're both pronounced. Do you do well with that? Do you like to meet people? Do you like to oppress the flesh. Do both sides of your brain work well together? The part that can see the physical creativity of an asset and the numbers side, do you have the ability to pitch yourself? All those things are the key ingredients of being an entrepreneur. And ultimately, I think a lot of paths in this business lead in entrepreneurship direction. And if you're not. So assessing yourself will help you figure out what part of the business to go into. You know, are you feel more comfort in being a broker and really just being. Or an agent and really helping other people connect, but it's not your own money at stake, or are you willing to invest your own time and your own reputation and money, then you're more of an entrepreneur or anything in between. So that's important self assessment. It starts there. And I think that also applies at the sponsorship stage. When people have been working in the business and they're ready to go jump and do their own deals, they have to do a self assessment and really say, is this really what I want? Do I think I can hack it? You know, am I up for it? Being entrepreneurship is tough. I don't care what you're in, it's tough. And not a lot of people have the mental fortitude to do it. So self assessment, I think is really key. And that's what I tell my students. And then actually getting into the business for the, for the folks that are sort of in college or in their MBAs, I mean, I think that you have to figure, you have to get trained. And this is, I believe this is an apprenticeship business through and through. And the best thing to do is to try to work at a firm where you have good mentors and good people you can learn from. And they. And they're actively doing things that are complicated. So you can learn or at least learn a skill set, whether it's construction or leasing or management, come to the table with a few of those. So go work there if you can, or find a partner that complements you in some way where one plus one is three, three, and then go do deals. But going alone without experience, really tough. You have to try to get into the business. And I think actually a lot of the midsize or smaller firms are better if you can get in with the right people, because just more ends up trickling down onto your. You might work later in the night, but it's better, you get more exposure. So that's really key in this business. Right now is a really tough time to get into the business. It's not easy. A Lot of students that I talk to have having a tough time, obviously where we are in the economy. But those that find their way in, I think are going to get really good training right now because the world is not pretty, as we know.

No doubt. And I wanted to dig a little deeper into what you were saying about when people are really assessing what their strengths are and talking about their risk profile. Right. And as far as, are they an entrepreneur, are they willing to put their money on the line? I think that's probably one of the number one things that hold. Holds people back from investing to say, you know, to make that leap. So what would you say to someone asking that question, assessing, you know, do they go it on their own? Do they start off by partnering? I mean, what would those first couple deals look like for someone? Is it, is it easier to try to do it with someone else before trying to go at it on your own?

I mean, always listen, always. I think if you, you know, if you can, if you can connect with somebody else, a partner or a smaller firm, which is going to give you economics, that's the same thing effectively as being an entrepreneur. I would say definitely learn that. But there's a lot of people, for instance, who've been working at large firms but have been pointing deals for a long time, and they know how to do a deal and they know how to do due diligence and then so they can kind of go on their own right away. But it is really good to have a partner and have someone tell you, when you're right, I agree with you. And when you're wrong, I disagree with you. And vice versa. I think you can't, you know, any who can be objective with you. I think that's really, really key. So, you know, most of the, a lot of the successful groups in New York City here where we both play, are our partnerships. My old firm, Taconic, Charlie and Paul, Charlie Bend at Paul Pariser. And you look at like, L and L, Rob Lapidus and David Levinson, and, you know, you can just go down the list. There's tons of them. And I think that they'll all tell you, you that that balance has been really critical to their success. Also. It's good because being an Entrepreneur is a 247 business. And it's really helpful to have someone who can watch your back for a while while you take a few days off. You need to recharge, and it's really hard to do when you're just by yourself.

It's a great point. And to get that experience, as you said, is so important. So now I want to talk a little bit about what you're doing at Wharton and maybe talk a little bit about the class and, you know, maybe explain kind of how you go through the various sessions. I know I've had the chance to come in and speak, but what are you hoping that people are getting out of this class and kind of what are the major takeaways from that?

So having been having. I went to Wharton, and I was not a real estate major. And in business school at hbs, I took one real estate class. So I, you know, back, you know, a decade or two ago, there really wasn't a lot of formality around real estate education. There is now. Wisconsin has a great department, Wharton has a great department. NYU has a great. There are actual departments with more than one person there. So that's great. But a lot of those departments tend to approach real estate from the academic perspective, which is teaching you about NPVs and IRRs and urban markets and stuff. And, you know, you always know it's an academic and like, okay, let's ignore transaction costs and just assume X, Y and Z. So I was like, no, no, let's not ignore transaction costs. Let's not ignore the details. Let's get really into it. So I was guest lecturing for a while, and then when Covid hit, one of the people I was guest lecturing for decided to leave, but they had already registered the class for the fall. And even though Wharton had a hiring freeze, the professor said, I want to put your. Your name in. And I never really looked at a lot of his material. I thought he was good, but I had a different idea. And the minute I had the idea for the class, I knew I wanted to do this. So my pitch to the department was, you know, I wanted to create a class about how to do a deal, and I wanted to chunk it down into six sections. This is a half semester class, three hours once a week. And so I had this framework of the first class would be sourcing, which is the class you speak about, where we talk about diligence, how to find deals, how to talk to brokers, what to say, what not to say, how to get under contract, what letters of intent look like, how to manage costs when you're doing due diligence, all that stuff. And ultimately how to get into a psa, which in our case is complicated. And then we move to a second unit on valuations. And I teach them the four major ways that I think about valuing a Deal. And I give them the models and we go through the models and then the third class is financing. All about how to talk to banks, how to size debt, what's the right way to size debt, how to talk to lenders, how to go through bank letters, sorry, term sheets from lenders. And what do all the terms mean, how to be careful around guarantees. And ultimately what does a closing look like, what does the body of documents look like? And you know, how do you run a process? The fourth class is raising equity. So we now pivot to the equity side. How to position yourself in front of capital, how do you find capital, how to network there once you're in front of them. What does an equity term sheet look like? What are the puts and takes for the different components of governance and promotes and asset management and fees and what are normal fees? I have them run, I teach them how to do a promote waterfall. We get into all that. And then the fifth class is the now you own it class. It's all about asset management, construction, leasing, architects, design. And we get into all that, but it's particular focus on leasing because we know that that drives the value of deals. And the last class is selling and strategy. Should you sell, should you sell on market, off market? If you do sell, how do you mitigate taxes? And then that's not a full class. So I spent the last half of the last class talking about, about roadmapping careers into the business and all these points we were just talking about. Should you have a partner, should you go on your own, should you work for a big firm, when's the right time, is it for you, what are the qualities to help it make yourself successful, et cetera. So this like once I had this framework, I just then populated each class with everything I wish someone had taught me, right? And so I literally give them 30 different takeaway documents from mark. I take a purchase and sale agreement and I mark up to the 50 page like billion dollar New York City skyscraper type agreement. And I red line in, in each section, okay, this is what this section on reps and warranties is trying to do. I explain it in English and then I say if you're the buyer, this is what you want. If you're the seller, this is what you want. And here are the main points of compromise. And I do that. I give them a joint, a fully marked up joint venture agreement, same thing. And term sheets and, and property management agreements and sales brokerage agreements. What's important to watch the gotchas. And I give them models and all this stuff. So I call this stuff the deal toolkit. And I tell them all, listen, this class is too short. But if you take all my slides and all the deal toolkit stuff and you put it on a thumb drive and then you're in this business or in your Google Drive and then you are like five years from now and you're talking to your lawyer and you don't understand something, pull the document out and maybe it'll help you do demystify something or explain it, make you look smart. And more importantly, maybe it'll save you a couple hundred thousand dollars because they give you a pointer and it'll pay for your whole mba. And they all like, they just like their eyes pop open when they hear this because this is exactly what they want. There's too much material. This is a lifetime of teaching or knowledge condensed into six weeks. So that's the format. The class is super popular because everyone loves the practicality.

Oh, I, I can tell. And again, it's actionable. It's not theory. You're bringing in real life examples. And I know even when, when I've popped on just the questions of really getting under the hood and understanding how does brokerage work and what does off market really work and who, who are the players? So it really is, again, great actionable information.

All the guests that we bring in, we always ask them like, you know, what would you tell an entrepreneur? How did you start? You know, I always ask you, like, what mistakes do people make when they're walking buildings and being. And you're always really candid. You're like, listen, just be honest and be truthful about what you are in your process. This is what they need to hear. In fact, it's very funny. The first assignment is, you know, find a multifamily deal somewhere in the country, call the broker, don't tell them you're a student. Try to get the.

I love that.

Try to avoid signing the NDA and get them on the phone and tell me what that experience was like. And this is like a gimme points assignment. This is more just to get these kids who are like, have had this incredible pedigree of education. And a lot of them, you were a warden. These are really smart kids and just get them out of the box a little bit. The number one thing they all say is, oh my God, I couldn't believe you can actually call them and get them on the phone. I've had a couple students say, I actually went out and walked the building. It was great. And I'M like exactly like this is actually how you have to do it. And then that helps with their self assessment of whether they should go in the business, whether that comes naturally to them or not later on.

I love the fact that, and I'm sure for many of them it's really going outside their comfort zone. Maybe they're thinking they're a numbers person, they're going to be the analyst and look, leave that to the acquisitions person. But they actually have to go out there and figure it out because I think to be a great investor you have to understand how all the different pieces come together.

Well, what we're really trying to do is cultivate. You know, I always tell my kids there are four kinds of smarts in this world and one of them is book smarts. Being an academic smart. But there's also social smarts. How to network with people, how to be in, you know, how to, how to cultivate business relationships that can yield opportunities. And then there's, and then there are street smarts of how to actually do stuff and you know, know when to keep your mouth shut and know when to sort of preempt something that's bad. And then there's schedule smarts especially showing up on time is half of life. And so cultivating the things. These kids at Wharton are all generally good at a lot of these things. But understanding that they have to cultivate the, you know, the ability to get out and hustle and be a little street smart and have like a business social understanding of how that framework works. That's really how you're going to make them a well rounded, successful person in the world. And you don't need to be all four, you don't even need to be all three. But the chair will stand up at two legs or three legs, legs. But the more they have a self awareness around that, the more successful they're going to be. Especially as entrepreneurs, no doubt.

So talk about the relationship piece because it is so critical in the business. So what is the advice you're giving to your students about how to create those relationships, those networks? I mean, how are you. If they're coming into a new market, where do you tell them to start?

You have to meet everybody you can. It's sales brokers, leasing brokers, because they often lead to sales brokers. It's title people, it's transaction lawyers. It's if there are like business groups, for instance, like in New York, we have the partnership for New York. It's like, it's like the Better Business Bureau of New York, it's huge. But in a lot of smaller towns, there are networks of business community. You got to do that. You've got to be on the blogs, you've got to read the paper, you've got to just talk to anybody and everybody. You'd be surprised how like at the casual dinner conversation with your spouse and someone else that you start chatting with one of the other people, you're like, what do you do? And like, oh, I work here. Oh really? And then you find out that they're in the business or they're tangential to the business and that can. So you have to do all that in this current day and age. You also have to do all the data analytics now. You have the tools and study markets from the outside in and demographics and all that stuff. But nothing replaces getting out there and pressing the flesh. I always say that, you know, in the early days of trying to be an acquisition person, I'd go to the opening of an envelope, I'd go to anywhere, party, events, cocktail, just meet everybody I could meet. And that's how you do it.

It's such great advice. And I just had some undergrads in our office here from Colgate and giving them advice on how to find their next job. And I said, look, you know, the majority, what does everyone do? They email, they link in. You know, these are things that everyone does. So how do you separate yourself? And I said, look, it's of kind scary to show up to an event where you don't know anyone, but the idea of going to a conference as a student, reaching out, making connections. To your point, there's no substitute for that in person.

I actually think it's getting easier. It's like who writes handwritten thank you notes, right? Nobody ever sends emails. So you send the handwritten thank you note. You differentiate yourself. So now extrapolate that to networking. Instead of emailing, showing up, calling, meeting people. The counterintuitive thing too is that the people who have been relatively successful in senior, in business, they actually, a lot of them really, actually like paying it forward and talking to the younger folks in the business. And they try to be helpful, whereas to the, to the person trying to get in, they often find like the senior people very intimidating. Those are the people that actually want, often want to help. They have kids, they get it, they understand. It's the middle management. The people are just five or ten years in front of you who, who don't have the bandwidth for you or don't want to be threatened by you or Whatever. So just, you just have to go out and do it and meet people and it's okay if someone shoots you down or they say no, it's fine. Don't take it personally. Just keep trying to network until you hit someone that you really think can help you.

That's a great point. So the capital raising, besides somebody just calling you up with the deal, what advice are you giving your students about how to form? Even if it's finding friends and family and trying to build an investor base, what types of, of advice do you give on that?

I think it's really important first that you understand the deal. You don't have to understand everything, but you understand enough that you find it really interesting. And you can answer basic questions about the transaction and you have a thesis about the asset and what you think you're going to do to it. That's really important. You don't want to be pitching stuff and doing it just because the capital partner likes it. You want to walk in and believe in it as well. So that's, that's a big part of it. And then, and then being honest about what you don't know yet. You know, there's always a continuum of knowledge creation or knowledge gathering. And often when people meet with like, listen, I've done some diligence. I haven't done all the diligence. I'm like, okay, that's fair. But you love the deal and you think it's really interesting and it's compelling. And based on what you told me, I think it is too. So let's jump in together and, and, and catch me up and then let's finish the diligence together so that it's important to come in with, with conviction, being honest about where you are in the process. And yeah, and then ultimately, you know, you have to better like the deal and then we'll sit down and talk. Now, the last thing is, don't come in presumptuous with what fees you want to make and what promotes you want to make. One of the things that I find as a turn off is when somebody sends me a model and you know, there's more than just property level returns in there. They've actually modeled out, out promote waterfall, which implies, hey, this is how much you're gonna give me over such and such hurdle. And I'm like, you know, like, you know, don't be so presumptuous. Let's start with the deal. Bait me with the deal. Bring me, just show me property level returns and then we'll Work out how we're gonna sort through the economics and if you don't like what I put on the table, you'll tell me. But like I, I don't like being people, being presumptuous. Like, you know, it's like some me meeting someone in the first minute interview, like, okay, how much do you pay? Right, don't do that.

I love that. I'm sure people are taking notes here because that is such a great point. It starts with the deal. So, all right, you're now in multiple markets. Texas, North Carolina, Pennsylvania, and you didn't even know, but you're in Puerto Rico as well. So how are you figuring out a market? Right. Are you really relying on your sponsor if they're there? Or how are you really digging in and getting conviction?

Well, as we, when we started, I will say it was all spear phishing. You know, we tried to find the right deal and the right marker with the right partner. I think as we've gotten larger, we are like a lot of people do. We have, you have to create parameters. So this is so you can be efficient. And I have thought through some filters. For me, my filters are not the same as everyone else that I think about markets. And so I have six filters that I use and those, those filters help us triangulate in on places that we're more likely to do a deal. Now will I do a deal that doesn't meet all those filters but meets some of them? Yeah, if the deal seems interesting enough. Or could we do a deal in a market that doesn't meet a lot of those? Maybe if the economics or something about it is really incredible. But generally speaking, when you're taking a top down approach, I think it's important to establish filters. So I can tell you what mine are if you want mine very quickly are I like to look at markets that have generally lower taxes on a relative basis to the high tax markets. This is income taxes because this is where people want to live. I like to go to markets that have anchor institutions, like large, especially large universities that can feed employers and feed housing. I like markets that, where they're investing in infrastructure, where they are like, you know, like for instance in Raleigh, North Carolina, every time I pull out of the airport, they're, they're widening some highway, they're adding a Runway, there's new exit ramp. That just shows me that they're being thoughtful about growth. I like markets that have generally good weather just because I think people like to live in places that, you know, tend to be more conducive to outdoor sports or whatever you're doing. And I like markets that generally have some element of fun and fun for the people that are living there. There like good restaurants and good areas to go. Like Charlotte has the south end and good restaurants or whatever. The sixth one is different from weather, but it's. My newest filter is really climate and I think about climate more from the risk standpoint of, you know, is a market susceptible because insurance prices are now getting out of hand and that is the number one risk to our business. And insurance is just a reflection the high cost of the underlying problem with certain geographies. And you know, is it a place that I think is going to be long term sustainable? Like I worry about these markets where it's 110 degrees for three, two months straight. I wonder what's going to happen 10 years from now. Buy our property when it's time to sell. So you create your filters, you use those filters to help screen markets and then ultimately it comes down to the deal itself in those markets. And let's check everything.

So with only a couple minutes left, and that makes a ton of sense, what I wanted to ask you is the name of the show the Insider's edge to Real estate Investing to you. What does that mean and what would you say is your insider's edge when you look to make investments?

Well, I just think it is honesty. Honestly, you have to be honest with yourself and honest with your assumptions. There's always another deal out there there. Don't get carried away with the deal. One of my favorite exercises which I think people should do is stand in front of the mirror and say to yourself on any situation, if I'm really being honest with myself, I would X. Now I did not invent that. I've heard that years ago, but I think and then, and then do X, you know, and so I think honesty is really important and integrity because your reputation is the one thing you can lose pretty quickly and then, and then just treating people fairly and trying to be level headed in different situations. These types of soft skills constitute who you are as a person. And I generally think that they're going to keep you on the rights more doing the right deals, less doing the wrong deals or when you're in a bad deal, they're going to help you navigate to a better place and you're going to end those relationships that you develop by having a reputation as being honest and having integrity and being thoughtful and smart is going to pay dividends down the road. Especially as you get Older. It was like that's. People know you for your reputation. And we've seen a lot of people flame out in our business who are just, oh well, you know, you shake their hand and you feel like you have to count their fingers afterwards. A little slime. It's not my thing critical.

And I forget that the saying of reputations take a lifetime to build but can lose in a minute. So I think doing the right things again when no one's watching or when things get tough especially it's just being.

Candid and honest because honesty will most of the time lead you to the right decision. And then the right enough right decisions will. Will create it will. Will put you in the right career path and help you build. It's like it's a virtuous cycle. So that's important.

And then what would you say about. I mean, you've built this incredible company team. So what is the. What was the driving force behind that? What is what your mindset going into this? I mean, how did you create this? And is it what. What is in essence the secret to success with. With the company you've built?

I mean, you know, I view it as not built. I view it as a work in progress. There's ups and downs. Covid was very tough for us and things like that. So it's a work. Work in progress. It's continuous improvement. We're actually not a very big team, but we try to. We're always trying to figure out how we can do better. And we have a lot of honesty inside when we tell each other if we think things are right or wrong. But ultimately like my goal is to just keep growing and cultivating and now interesting at the point is to cultivate people who can do it as well and delegate to them and let's smart people do their thing. They won't always get it right all the time, but you can't be a company of one. So you have to grow. And so that's kind of where I am at career wise. Directionally it's been a listen Covid, and the current rate environment hasn't been great. But you know, we are definitely seeing that this is a career, this is a marathon, this is not a sprint. Take your time. There's always another deal. If you don't like it, you don't do a deal for a while. That's fine. Don't be overly angry. And ultimately those. A couple of different things we talked about, you put them together and you're gonna. You'll land that plane in the Right place at the end of your career, which is what you want.

That's great. And last, your why. So as far as doing this course, you've been very generous with your time, giving back a lot of charitable organizations as well. So you know what, what prompts you to do that? I mean, when you went out to do the course, what was driving. Driving that.

It's, it's interesting because, you know, I've been, I, you know, life is like a humbling experience. I, you know, I have four kids. Nothing's a straight line with anybody. You do your best. I, you have a career. Nothing's a straight line. You do your best. And as you get a little older, you realize that and you start to look for things that are beyond money. And I've not, I'm not like one of these like ultra wealthy people who, you know, has money gushing out of my ears. But you try to, you try to just define, you know, have, be successful. But you also hit a point where you want to do things that feed your soul that are beyond just the money. And teaching for me is that thing. I just had my 25th reunion this weekend at HBS and you know, everybody, I found the most common thing was that everybody was doing the similar stuff that they're 25 years in and probably have 25 years to go. They're at the finish 50 yard line of the meat of their career and a lot of the priorities are changing and people are starting to try to do things. We're paying it back. And this is what I said before, some of the older people in the business, they want to give it back, they want to pay back, they want to talk to the student. And that's why you can access those people. And that's why I love doing that. It gets me up in the morning. It's not just a paycheck. It's trying to do things that are interesting where you can give back.

I love that. And that's a perfect way to end.

So.

Thank you.

Thank you for listening to the Insider's edge to real estate investing. We appreciate your subscribing and sharing with your friends. If you haven't already, please connect with James at James Nelson NYC on LinkedIn, Instagram and Twitter. Please also visit jamesnelson.com where you can find the show notes and other episodes along with an exclusive video series and other helpful resources so you can gain the insider's edge to real estate investing. Until next week.