Housing Strategy with Adrian Berger

Welcome. This is the Insider's Edge to Real Estate Investing with James Nelson, the principal and head of Avison Young's U.S. Investment Sales Group, and his co-host Kim Trohler from his investment sales team. 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 are your hosts.

Welcome everyone to episode number 236 of The Insider's Edge to Real Estate Investing. This is your co-host, James Nelson.

And I'm Kim Trohler, also your co-host.

And today we have Adrian Berger with us, and you are going to learn how a national family office thinks about growth, partnerships, and market selection in this conversation. Adrian is the managing director of acquisitions at Cypress Equity Investments, a national multifamily portfolio with transactions that exceed $13 billion. Built across market rate, affordable housing, and selective self-storage investments. Adrian explains why Cypress focuses on top MSAs and how co-GP partnerships have enabled disciplined expansion.

You'll also hear about an affordable housing strategy, including low-income housing tax credit development and solving equity gaps in complex capital stacks. Adrian discusses how regulatory environments shape opportunity and how zoning changes, ADUs, and inclusionary housing are creating new paths forward. I just loved Adrian's conviction in LA specifically. He's working on a lot of exciting projects from CEI's new affordable housing platform to their new mixed-use development on Wilshire Boulevard. So they're doing a lot of exciting stuff.

Yeah, and Kim, I think this is a great opportunity for a lot of our emerging sponsors who listen to this show. Again, the idea of bringing on a co-GP partner is actually something I talk about right off the bat in my book because oftentimes, again, if it's a larger project or, you know, lack of capital, expertise, partnering with someone is a great way to get a deal done and experience. And so I really thought it was interesting as Adrian talked about expanding into other markets, how he was focused on sponsor first, finding that the right co-GP sponsor as opposed to just the deal. So I, I know our audience is going to get a lot out of this. As always, you can go to jamesnelson.com. That's where you can find the show notes. That's where you can find out how to connect with Adrian. I'm also going to be announcing, or maybe by the time you're listening, it will be out there, a new educational course online and with a James Nelson AI. And I've tested out, it's wild. So super excited about that. We'll have a brief word from our sponsor and we'll get right into that interview with Adrian Berger.

Avisen Young's United States investment sales platform executes on multifamily, office, retail, development, and specialty asset transactions across top US markets. As experienced leaders in the industry, our integrated national team is here to help you make informed investment decisions, whether advising on your current holdings or identifying new opportunities nationwide. Our one unified platform is built on unparalleled collaboration and connectivity across 120 full-service offices around the world, giving clients direct access to the deepest pools of capital. We put our clients first, delivering tailor-made strategies to achieve superior results.

Welcome everyone. We are thrilled to have with us today Adrian Berger, who is Managing Director of Acquisitions for Cypress Equity Investments. Adrian, great to see you. Thank you for joining.

Hey, good to see you, James. Thanks for having me.

Good. So I, I know we go quite a ways back, I think to your, your days when you were doing brokerage here in New York. So we, we'll definitely get to that and your transition ultimately to, to your position now at, at Cypress. But maybe for our audience, you could just give a little overview on, on Cypress Equity Investments. Talk about your portfolio and, and strategy.

Yeah. Cyprus Equity Investments is a privately held family office. We basically invest in multifamily assets across all kinds of product types, specifically in market rate and affordable. We have both purchased assets for value add and we've done a lot of ground-up development. I'd say the last 15 years have been mainly focused on the ground-up development of market rate multifamily. The company was founded here in Los Angeles, but we are now a national company. We've developed and invested in about 16 markets around the country. The company's been around for 25 years. I'd say during that time we've transacted, you know, more than $13 billion of real estate. We currently have about a 10,000-unit development pipeline across the country. We have about 8,000 units under management. We also have a smaller self-storage division that's very local to Southern California here where we do development and acquisitions. As a company, we're primarily been capitalized institutionally on the, on the equity side, but we are run like a family office. So we're very entrepreneurial. We've done a lot of co-GP investing. So the company really can look very institutional on paper, but at the end of the day, we're really run like a, entrepreneurial family office. And our growth going forward is really focused on the affordable housing side of the business. We definitely continue to develop and, and look to purchase market rate housing opportunities, but we see a lot of tailwinds on the affordable side. And I've been here for 10, over 10 years. So I joined the company back in 2015. I moved from New York to LA early 2015 and joined the company mid-2015. We've had some great growth. We've really expanded the company since then and, and we've developed about 3,000 units in LA and have about a 2,000 pipeline here.

Great. I saw Cypress recently launched an affordable housing platform, so we'll definitely want to get into that. Before we kind of dive in, it would be great to hear about your target markets because it seems like you're focused on more core markets like LA, Bay Area, New York, Florida, Texas, Boston, Chicago. Like what are, what's the kind of common thread among all of these markets? And if there are any more markets that you're focused in, please let us know.

Yeah, I think we start off by wanting to be in the top 20, 30 MSAs around the country. I think we're very focused on where we see great economic growth, whether that's population growth, that's diversity of, you know, economic opportunities in those markets. And we want to be focused really in areas where we see that growth is going to pay off in the long term or the short term, depending on the strategy. So historically, it's been really the, those top markets. We start off in LA, as I mentioned. And then as we expanded out of LA, that was through a series of co-GP investments. And a lot of that was driven by the people themselves as well. So one of the first co-GPs we partnered up with was in Las Vegas, which at the time, this was back 10 years ago, we saw as an interesting market, but it was really more the, the people that were on the ground and what they could see locally that allowed us to feel confident to go into that market. And that's obviously become a, a great secondary market. I think also it also depends upon whether the strategy is a market rate strategy or an affordable strategy. I think we're open to going to places we've never been before, so long as we are finding local people to partner with. I think we're not so cocky to think that we can just go parachute into anywhere and, and take it on. I think we like to find the right partners in a market we've never been in before. And that's been sort of our way of getting in and that's how we've really expanded nationally.

Right. It's interesting. It does seem like the relationships are often what lead people to enter a certain market rather than just opening up a map and saying, I want to go here.

Yeah. Talk about how you would go about finding that co-GP partner. So you said you're looking for those local boots on the ground. So, so obviously it's— I would imagine it's a developer who has a track record in that target market. But what else do you look for in a partner and how do you vet them? Are these usually relationships that you you've had or introductions, or are you actually going into saying, hey, we want to be in Las Vegas, let's figure out who the best-in-class operator is. So again, how do you find that partner and then how do you divide up the, the workload?

Yeah, great question. So really the, the way of, of doing the business development side of finding a partner is all the things you mentioned. It's, it's through relationships, it's via brokerage networks, it's via going to conferences and then targeting certain groups. That are at those conferences that might be worthwhile meeting with. It could be a developer, it could be an operator. We typically want to find somebody or some groups that have experience in what they're doing, especially in that market. We have, we have in the past looked at people that are a little bit less experienced but are in a location we want to be at, and we feel like we can back that, that person to open their own shop. We've looked at those types of opportunities before, but those are less common. We have the most success where it is either a couple of people that are spinning out of a bigger shop wanting to start their own shop and they don't really have the back office support, they don't have the balance sheet support, they don't have as much GP dollars as they want to. We can come in and provide a lot of that to them. Or it's also sometimes on the very other end of the spectrum, a very, very large developer that's taking down a, let's say, a master plan, which is how we got involved in our San Francisco and Boston opportunities. And there are some elements of the deal where we as a co-GP can be really helpful, whether it's our capital relationships, whether it's our expertise in an asset class in the master plan. So really it starts off with groups or people that have the experience doing it, and then we really understand who they are, what drives them, what their goals are, where they're going. Do we see the world the same way? And then it, it really then flows on more to what you were asking about the, dividing of responsibilities. We want to make sure that both parties feel like they're bringing something to the table to add to the totality of everything, and not just, in our case, be seen as just, you know, money that's going to invest and not do anything, because that's not how we, how we invest. And they don't want to feel like, you know, they're doing all the work but like giving up a large part of the upside. So that's really where the rubber meets the road in trying to figure out what the right partnership ends up being once you get through the, the upfront of understanding the people, the right people to do business with. Because ultimately, we're not doing co-GP investing to do one deal. It's too much effort and energy and cost. It's really, can we really invest in a platform and do multiple deals with this group in this market? And so once we get past feeling good about them, then it's really a matter of like really digging in and trying to figure out the deal and, and how it's gonna look.

Adrian, what is your breakdown of your current portfolio by asset type? And how do you generally think about diversification in your portfolio? Are you more heavily weighted towards one strategy over another?

I think one of the, the great things that have been, been for a CEI is that we're very nimble. So as the market starts to change and shift and we see one of our strategies starting to suffer a little bit. We're very open to pivoting and, and working in a, in a different direction. I'd say 95% of our portfolio is in multifamily for-rent housing. Of that, I would say in terms of development pipeline, I'd say 80% of it is market rate and 20% of it is affordable. When I say affordable, I mean low-income housing tax credit development. So using state and federal funds for, for that development. The other sort of 10% of the business is in our self-storage space. I think within, you know, within the multifamily realm, we are, we look to look back at what's been happening the last few years and we have a development pipeline, like I said, of about 10,000 units. And a lot of that is multifamily market rate in places like Texas and Colorado, San Francisco, Boston. And as equity has sort of moved away from that asset class right now in this part of the cycle, we start to think about where do we want to pivot ourselves to take advantage of our team, take advantage of our expertise and where we see things going. And one of the early co-GPs we had was in the low-income housing tax credit space, a woman based in Florida. And we've, we've ended up doing about 2,000 or 3,000 units with her, a lot of AC rehab, some development. And over the last 2 years, we saw that as a really good opportunity to grow in that space and to take that on. And so that's been where we've pivoted in the last 2 years is to understand that market rate multi-development is kind of not workable right now, but we are able to then pivot and grow in our affordable business, which is what we've been focused on and had some great success out recently. Right.

So tell us about this, this new affordability platform that you've launched. What, what's the structure like? Is it a fund? And why now?

Yeah, so we were working really well with our partner out of Florida. We did some very creative financing with the GP interests of those low-income housing tax credit deals because you're not typically capitalized in the same way as a market rate deal. And we like doing those deals. We thought that it was very interesting from a cash flow perspective, from a back-end value perspective, and we really wanted to grow in that space. We looked around of the affordability issues that are happening here locally in California and all the places that we're seeing where even cities like Denver adopting, you know, inclusionary housing ordinances like California has been doing. Even places, you know, in Texas are starting to want certain kinds of housing in certain markets. We were starting to see this sort of proliferate in more and more places. And so we thought there were great tailwinds in, in that business. And so we decided to tackle it by really investing in going into the space. So we actually went out and found a couple of very high high-level people within that, in that industry, in that sort of subset that were experts at capitalizing the deals, at doing land acquisitions. And we brought those, those two group— those two people in, and we very quickly built a portfolio of about 10 or 12 land sites in California that would be ground-up light tech development deals. So this was the way we were going for a while, and then At the same time, the capitalization of these deals really is with debt and then with bond financing from the state. And those bonds are priced and they move around like any bond in a market, in a tradable market. And so when those bonds move up and down, when interest rates move up and down, the capital stack sort of changes and equity gaps can form within that stack. And so we would try to figure out a way to go and solve that equity gap issue through our traditional private equity relationships. Because historically most groups in that low-income housing space are using what's called soft money. So they'll go out to a school district or a not-for-profit that has money, but that's really competitive and it's not guaranteed and it's hard to get. So we tried to solve it in a slightly different way by raising private capital. And this led us to a lot of conversations with larger groups. And ultimately we found someone that wanted to make more of a strategic entity level and Property Level Investment, you know, a large, a large hedge fund that has committed to growing our company and then helping us, you know, fund deal costs. And the goal there is for us to do these deals directly in markets where we have expertise in the light tech space, which is, you know, California, Florida, Tennessee, and then go out and try to identify potential co-GP partners or buy portfolios or buy into other entities. To really grow and scale that business. We see that the demand for affordable housing not going away, and no one can predict what AI is going to do, but ultimately there's a lot of disruption coming, I think, in a number of different places, and it's going to be, you know, see a large demand for more increased demand for affordable housing. So that was kind of the logic behind how we, the last 2 and a half years, pivoted I really invested in this place.

Right. And obviously with affordable and workplace housing, the regulatory risk can really make or break the deal. And I know you're, you're focused on the tax, but are there any other incentive programs that you feel are, are very effective for helping kind of advance these types of projects? Or if they, there aren't currently any incentives, like what types of incentives do you think would be the most beneficial towards like advancing these projects?

Yeah, I think the tax abatement programs that exist in certain places have always been great. So we've done some development in New Jersey. You know, they've always had a pilot program, very hard to get, but if you can get that, like, it's— that's a real game changer for developing sort of more affordable, sort of mid-tier affordable, you know, that sort of 80 to 120% AMI kind of realm. In California, of the welfare tax exemption, which is also linked to an 80% AMI type strategy. And that's something that we are pursuing more for existing apartment buildings as opposed to ground-up development. Recently, Texas had the HFC and PFC programs, which have now kind of gone away. So they do exist and they are definitely strategies to allow you to take advantage of lowering your taxes, being able to provide a different subset of of apartments for different income types. The challenge with those deals today is that they still require, for development that is, and even for buying existing, traditional JV equity sources. And the JV equity market is just so tough right now. There's lots of groups raising money. There's lots of money that's being raised from more opportunistic funds for more distressed deals. Those things sort of really haven't occurred as much as we all had thought was going to happen. And so it's much harder now to find a deal that works from a vintage standpoint, a strategy standpoint, a location standpoint, and find that equity that's going to mirror to the returns that you could achieve today. So why we like the light tech space is it's— we're not as solely reliant on going out and trying to find, you know, private equity, JB equity to do our deals.

So Adrian, maybe as you oversee acquisitions, and you said you're in 16 different markets, you're in different strategies, so are are you spending most of your time trying to find potential co-GP partners, or is it about the deal? Do you sometimes find the opportunity and then plug in the sponsor, or do you like the potential co-GP to come do a deal? Just trying to figure out how, how you spend your time, and because obviously it's a lot of ground that you're covering.

Yeah, I love my job because every day I, I come, I come to work and there's different things pulling me in different directions. It's, it's, you know, it's Affordable housing, micro-rehousing, it's self-storage. You know, we've been, we've been open in the past to co-GPing outside of those categories. And so we're going to really try to dig into other things to understand those is also really exciting. I'd say for really most of my time is spent either doing business development or deal sourcing or helping my team to move deals forward or to close deals. We don't have a very large acquisitions team. We've probably got about 4 or 5 people in total on that, on that team. Covering different strategies and different areas. We try to be very focused in terms of geographies at certain times for certain strategies. But yeah, my, my days, I'm speaking with brokers, I'm talking to owners, you know, I'm working with our associate pool on deals that we're underwriting. I'm talking to our principal about deals that we want to make offers on and chase. So there's a lot of the deal-making elements of what I do, a lot of the sourcing. And then I have my team that's working on deals that come to me to help get those across the line. I'd say about half of my time is spent on our affordable housing business. So identifying deals, trying to find partners, trying to educate people on what's going on in our business right now with the exciting news that we've just shared. I'd say about 30% of my time is on our self-storage business and the other 20 is on macro opportunities and various other things.

So what does a typical week look like? I mean, I don't know if you meet every week with your investment committee, but how many deals are we talking about and what is the filter? Because again, if you're in 16 markets and I'm sure you get tons of inbound deal flow, you've got new potential, you know, co-GPs to consider. So, you know, what does that filtering process look like and kind of what is the goal to make sure that you have enough actionable investments to work on?

Yeah, so we, we really try to minimize the number of, like, markets that we're really actively chasing at one time because you can't be everywhere and you can't be an expert in every market. So what we're constantly doing is, is sensing where the local market is moving and what the appetite is for us to be in that market, as well as our capital partners, depending on the strategy, obviously. And then we decide to kind of get a little bit more detailed. So for example, you know, we just going in hindsight gives a good example. I think during COVID we had raised a standalone fund for a Santa Monica strategy. And so we had money raised and we decided our focus was going to be 99% on finding land deals in Santa Monica. And we built an entire system around assessing land sizes, density, value. We sort of systematized our entire underwriting process, our entire offering process, our entire investment committee process, so that we were able to really take fast action when we found the right deal. So that methodology of coming up with a strategy, identifying a box, and then just being very, very disciplined around saying no— I always say to my team, like, it's the fastest path to a no that you can get to, because we get a lot of inbound inquiries and you can't underwrite, you know, 20 hours on every single deal. So what we do is we, we get very definitive strategies that constantly moving and changing as the markets are moving and changing, as capital's moving and changing. And then that allows us to alter the filter to only include things that are going to fit into the strategy. So what we do every week is we have on, on a Monday, we have our weekly work in progress calls for our affordable housing platform, and then we have a separate one for the market rate housing and self-storage. And in those ones, we're going through a litany of opportunities, and they're all different stages. They're just got this broker email of an off-market deal, just put it on the tracker and we'll get to that one later in the week. Or this one, we're getting ready to present to investment committee, which is once a week. And our investment committee is just our principal, and it's 30-minute meeting, we present very high level. It's a kind of no, it's like either a yes or a no or some follow-up questions. And then it's up to us to try to make that deal, right? So those happen early in the week and then the rest of the week where we're spending our time either moving these deals up and down or off the pipeline. A lot of times it's hard to know if it should be included in the pipeline or not because you kind of get a sense and James, you know, you guys have been doing this a long time, right? You get a sense if like, that seller is real or not real, or that broker is BSing you or not BSing you, or if the capital really will stretch to this or not. So some of those edge case ones you end up working on and going nowhere. But like, that's, I think, part of the business. You got to try to fill the top of that funnel with as many quality opportunities as you can and, and then try to pull through as many as you can, which is very difficult at the best of times and, and even more so today.

So when you're evaluating a deal as the head of acquisitions, what is the first thing that tells you it's worth pursuing versus walking away from? What are the major signals that, that Cyprus is looking for?

Yeah, so I think, you know, on the development side, it's pretty black and white from a zoning standpoint. Like, let's talk about self-storage specifically, which is a very unique zoning for that, that use and Unfortunately, every single city has a different zone for that. And if you look at Greater LA, because we're only focusing our strategy in Southern California, so it's, it's probably a good example. But if you look at Greater LA, there's, you know, half a dozen or more cities within Greater LA, like City of Beverly Hills, City of West Hollywood, City of Santa Monica, City of Culver City, City of LA. All their zoning codes are completely different. They all have a different interpretation of what's allowable, not allowable. Their processes are all different. So the, the first thing in that example is, you know, how big is the land and what's it zoned for and can it support storage? And if the answer is yes, like, how do you get there through an entitlement process? And that then leads to another set of questions of like, okay, you can get there, but it's a discretionary process. How confident do we feel that we would win that, you know, entitlement process? So usually it starts off in that case with the zoning. On, on things like market rate housing, it's really a vintage and going in cap rate question. It's a pretty fast feel for, oh, that's a certain going in cap rate with a certain price per unit in this market for this vintage. We're not going to get capital for that. And so that might not be an automatic pass. If it's a marketed deal, it's probably like we might not compete. If it's off-market deal, then it's really drilling into the broker, like, why is this guy selling? Or this this person selling today? Like, it's the worst market to sell in 15 years. Like, why are they selling to you, no-name broker, off-market, you know? And how real is this opportunity? So unfortunately, it's, you know, sometimes it's not just an immediate like, no, you gotta kind of like look into it. But if it is in the wrong market, you know, we'll just be like, no. On the co-GP side, it's a little trickier because People really want to kind of like hook you on that they're really great at what they've done, they have a good experience, and they're, you know, they really need what we have to offer. So with that, it's a little bit more of like intuition and just sort of gut feel of like, we're just never going to be— we're never going to do that strategy, or we like that market, but this person doesn't seem to be the right fit, you know. So I think again, it's what makes coming to work so exciting because all these things are so different and require different parts of my brain.

Right. And on the market rate side, what vintage are you all typically looking for and why?

I think we've been really focusing on '90s and newer vintage. I think where we've had the most sort of success in either tying up deals or getting close on the bid-ask is really '90s to early 2010s. I think has been where we've seen more success than let's say, you know, more recent vintages. I think we just have more capital providers that are willing to go in that 1990 to 2015 range. But we've been really focused. We've just stayed very focused on Dallas. We've stayed very focused on South Florida. And those have been our two key markets in those for that market rate. We'll look at stuff in Vegas and we'll look at stuff in Colorado just because we've owed a lot of a lot of property there, and so we understand those markets well. But like, for example, in Denver, like, I just, I can't get anywhere near this bid-ask spread, you know, with the capital that, that we have. So we've kind of, you know, we're keeping an eye on it, but we're not actively underwriting or chasing deals there, and like, in this moment. But that could change, you know, we, we're talking to capital every day.

So I'd love to hear what gave you conviction. I mean, again, maybe it's because you're based in SoCal, but, but you all have, have developed multiple projects in Santa Monica. You know, many would consider— and, you know, we sit here in New York and certainly when people talk about the New York market, they would say it's a highly regulated market. I don't know when you began those developments, if that was before some of the, you know, the rent guidelines came out as far as on renewals. But how do you still consider California an opportunistic place to invest when, you know, at the same time you're also investing in Dallas, you know, Southern Florida, which would be considered, you know, most investors would say, oh, that those are the most pro-business markets that you can invest in. So again, it seems to me, you know, very different type of mindset or playing field, if you will, in SoCal versus some of these other markets. How do you justify that all?

Yeah, I mean, it hasn't gotten easier for us. I mean, the last 10 years, I've been here in LA and with CDI, we've seen so much change in the political landscape here in LA, in California. And I think ultimately we go back to the fundamentals, which is that LA still is, you know, it's the second largest city in the country. There's a lot of job drivers here. A lot of people want to be here. I know it's cliché, but like the weather is a factor for a lot of people. And a lot of people that left like during COVID have come back. Like they, you know, they survived an Arizona, Nevada, or Texas summer and then they're like, okay, I'll not do that again. And they come back. But really, I feel like we've sort of shifted our strategies over the last 10 years locally based upon what we're seeing happening. So Santa Monica is a market that we've been developing in for 15 years. We've done 7— we've round-tripped 7 projects there. We just broke ground on our 8th project in the summer, and we're getting ready to break ground another 3 next year. And we have a pipeline of another 7, you know, developments after that. Santa Monica, when I moved here 10 years ago, the zoning code was completely different. It was a very difficult discretionary approval kind of process place. Now through the most recent, you know, state-enacted obligation to assess housing and to commit to developing housing and therefore going through a change in zoning code to allow developers to, you know, try to achieve those goals, they've become a much easier city to deal with. It's much less discretionary. So that's always shifting and changing. I mean, that's not even tackling things like rent control or rent freezes or You know, City of LA right now is studying the impacts of increasing minimum wage for residential construction workers to a certain level, which would be really challenging for our industry. That's not even addressing transfer taxes that have come in the last 2 years that have been very devastating to our business. But at the end of the day, it's still a place that's undersupplied from a housing standpoint, and it's going to be even more exacerbated now because of what's going on. Within the context of that, there are other sort of strategies you can use that allow you to work within it. So for example, we partnered with a group locally recently as a co-GP. Their strategy is to really buy older rent-controlled small properties that have some either surface parking in the back or a single-story detached garage. And the state of California has an ADU law that allows you to build ADUs as of right over the counter 8 units per parcel. So their strategy is to go out and find multi-parcel properties and increase density using ADUs without having to get into the whole challenge of buying tenants out and the whole value add of that. It's really mainly geared around adding density through state law. And that's something that we had a lot of interest from institutional equity in and found a capital partner that want to do that programmatically. So that was a little sort of niche strategy that we really liked. You know, I think with the welfare tax exemption, that's a really popular one right now because that sort of locks the housing stock into a certain level of affordability and you get a tax benefit for that. And there is capital out there that wants to invest in that. I think you are going to see some other market-rate developers build projects. You know, the other land that's traded in Santa Monica is under contract right now. You know, certain areas of the South Bay are still very popular because historically there've been no new projects, and so super desirable places to live. So those are sort of a few ways in which I think the local groups have navigated what's been going on. And then more broadly, you know, I think affordable housing, like I said, has really strong tailwinds. So on the low-income housing tax credit side, we're very bullish about California because There are a lot of parts of California that need affordable housing, and it doesn't have to be infill. You can go and do that in more suburban areas where the cost of construction is cheaper and it still sort of makes sense to do it. But ultimately, if you look at California, I think it's what, the 5th largest economy in the world? So it's really not going to disappear overnight, but they certainly have made it more challenging for people in our business.

Right.

Speaking of, we saw you're planning to build 170 units with ground floor retail on Wilshire Boulevard in Santa Monica. In— that's in response to the updated zoning that you mentioned, right? Can you tell us more about that project? And is this part of your affordability strategy as well?

So Santa Monica has inclusionary units, so you have to build a mandated percentage of your units as affordable, deed-restricted affordable. And they can be in different AMI levels depending upon what percentage you opt to do. Our Santa Monica strategy is mainly a market rate development strategy. So Santa Monica has the highest rents of new product in all of LA. We're currently leasing up 2 properties, smaller sizes. One's 40 units, one's 55 units, and they're getting, one's getting over $8 a foot., you know, for a very boutique property close to the beach, or close to the, sorry, the Palisades, close to Ocean Avenue. The other one is sort of mid, mid Wilshire, mid-city, which is getting, you know, into the mid to high sixes, almost $7 a foot. So, you know, that still allows a developer to be able to build a project, you know, to a financeable yield. And so everything that we own on Wilshire Boulevard and other parts of Santa Monica really are geared towards that sort of higher-end Class A. Type tenant. We, we've also really debated the retail elements of these projects. Unlike, you know, New York, which is a walkable city and there's retail on the bottom of every single building, and that's what sort of makes the block feel a certain way, and there's so much foot traffic and people drive, but it's not really such a driving culture, you know, leasing out retail on the bottom of the building is usually pretty pretty straightforward. Here in, in LA, it's a more tricky thing because people are used to driving onto surface lots, getting out, grabbing their coffee or their sandwich, and then getting in and driving away, right? Whereas if you're building a large-scale project in a place like Santa Monica, you have to go subterranean in your parking. And so that is a different mindset for people. And so that has an impact on the retail, it has an impact on the rents, on the kind of tenants that you get. You know how sticky those, those tenants are. So Santa Monica is really now also working with developers to allow less retail or to waive out of that, you know, so there's not just empty spaces, you know, all over the city. But Santa Monica is still, you know, a really— I'd say it's a Class A type development market if you want to get it financed.

So Adrian, when you do these mixed use projects, not just with retail multifamily, but a portion being affordable by statute and then market rate. How do you— does the fair market, I guess it has to be strong enough to carry the affordable, or can the affordable— can that be more of a fee-based business for you? So how do you find the right mix where you can accommodate the affordable, especially when construction costs are what they are?

Yeah, I mean, the market rate has to carry the affordable units because, you know, the, those affordable units do, do charge rent, but they're very, very small rent numbers. And like the operating cost for that unit is the same whether it's a market rate unit or a, you know, a non-market rate unit. The cost to build that unit's the same. There are a few different sort of strategies you can approach. Different, different cities have different approaches. Some have in-lieu fees, which that's kind of gone away a little bit in Southern California. There are ways of, you know, off-siting your affordable units into a separate parcel and build a standalone affordable project and try to do that with tax credits. It's a very challenging way to do things, but it's something that Santa Monica does allow you to do. There's a very complicated timing element of all of that. But that's another way that you can sort of offsite those units and build a standalone project. But for the most part, you've just got to absorb the cost, both operating and development cost of those affordable units. And you typically are able to get there because, you know, your rents are so high. I'd say in broad brushstrokes around Greater LA, like it's very hard to get to any meaningful land value today given the combination of construction costs, flat rents, increased expenses, transfer taxes, things like that. But in a place like Santa Monica, there's still, there's still a little bit of that spread to allow you to pay something for land. It's down, you know, 75% from where it was at the peak of the market, but it's still a place that I think is interesting to, to developers. And that's why when a site comes on market, you see there's still a lot of competition, you know, for, for that land.

Right. Adrian, I, I'm sure you're asked this all the time, but I, I'm really curious to know, how do you underwrite environmental risk given, like, after the wildfires last spring? Obviously wildfires are, are common in that area, but it was just a devastating time. Has that shifted? Have you shifted your strategy at all since that time, or how, how do you kind of, how are you thinking about all of these risks?

Yeah, I think the, the biggest one for us is around insurance costs and where the property is located. All the maps, you know, the GIS maps that are used have, you know, fire rating for each area, and that's certainly a consideration because, you know, insurance companies are going to want much higher premiums to build a project in a high fire risk area versus low fire risk area. So that's been the biggest impact. I think the other environmental impacts that are really prevalent locally are, you know, LA being a car culture and, you know, massive oil field. You know, you've got almost every sort of corner was a gas station at one point. So you've got a lot of historic subterranean, you know, challenges. And when parking here in LA for new construction is subterranean because the parcel sizes are not big enough to support, you know, surface parking, then we've got a lot of experience cleaning up dirty dirt. We do a lot of upfront due diligence on that. Another added challenge locally in Santa Monica here is there's a fault zone that runs down a few different spires right off through the city, including on Wilshire Boulevard. So, you know, that's pretty expensive and takes a long time to do testing for that kind of thing. And you really just carry your extra insurance around all of that. And then, you know, the, the subterranean, you know, environmental cleanup costs are up really high. Uh, you know, it's part of what you need to do to be a developer in LA.

Right.

So Adrian, I was going to ask you about your international experience. So you grew up in Sydney where you went to school, but you've also held roles covering, you know, based out of Hong Kong, Singapore. To what extent has that experience helped bring foreign investment to the US?

Yeah, I think that those experiences were firstly, personally unbelievably impactful to me. It was going to a new place, I feel like, and learning a new way of doing business, a new culture, you know, sometimes a new language, currencies, you know, transportation. Like, you just, as a human, you're like growing. And, and at the end of the day, like, that's, I think, such an important element in life is to just get out of your comfort zone, go to places and experience the world because, you know, it's a very big place. I think that, that the, what, what it really taught me about foreign investment is the types of groups and, and how the cultures are impacted from a negotiation and a standpoint. And really what questions you need to ask for upfront to really vet how seriously they're considering making investment, you know, outside of their, or their country. I mean, even Australians who are very large real estate investors And I spent considerable time going back to my home country trying to convince Aussies to invest outside of Australia. And my time in New York, specifically in New York coming out of the GFC, was, was really hard because there's a lot of tax considerations, there's currency hedge, you know, forex risk, there's questions around on-the-ground operations and who's going to support that. But, you know, one of the, one of the deals I did early here from, for our principal was involving a Chinese company that wanted to buy a site from us. And my experience in New York working with a lot of companies coming out of China and the Asian markets is really to understand first and foremost, like, how many deals they had done locally, you know, how much experience did they have on the ground, and where was the money? Was it overseas or was it in a current account? And in that particular, particular example, the commercial banker was able to demonstrate to me that this foreign investor had made 7 or 8 investments in LA. They had a local LA office, they had a large amount of funds in this, in this commercial banker's bank. And so that allowed me the confidence to go to our principal and say, look, I think there's an opportunity here to sell to this group at a, you know, really strong, strong price. And then the other part of the experience of living overseas is that learning how to actually make that deal, which that one took about a year just to get that deal, you know, under contract and then, and then closed. So invaluable experience just allows you to understand different cultures better, you know, how to talk to people, negotiate, how to build relationships. Um, you know, it changed my life, all different stages of my life too, at different ages and stages, but allowed me to be, I think, a much better assessor of investment opportunity, you know, a much better negotiator, and, you know, much more open to other people and where they come from.

Well, speaking of your background, I know you and James Nelson originally met back in New York when you were a broker. What inspired you to move from the, the brokerage to the principal side?

Yeah, so when I moved to LA 10 years ago, I had spent probably almost 9% of my time in New York. I was in New York for almost 7 years, you know, in some way involved in working for brokers, doing transactions. And I really enjoyed it. I, I love the, the excitement of it. I think what I realized was when I sat at the closing table, which is a very unique New York thing where everyone still sits at a closing table, I could see, you know, the, the seller handing the keys over to the buyer and then And the buyer's off, the buyer goes, and he's going to go effectuate a business plan. And I was like, I want to be part of the effectuation of that business plan. I want to see what happens after all this hard work that everyone's put in to try to make the deal, which is really still one of my favorite parts of the job. So when we, you know, when we moved out here, I saw it as an opportunity to try and move on to the principal side. Coming out to LA, I didn't have a deep network, so I knew I'd have to start my network building from scratch, and I felt like it was a great, great way to try to jump out of brokerage and into more of a, a role where I'm working for a family office or an investor or, you know, a developer. And I think the way it happened was through my network. I had a, you know, a person I knew very well here locally. He knew our principal Michael very well. And it was just also great timing. Michael was looking to expand the company outside of LA through these co-GP opportunities, and he'd never really had a full-time acquisitions person at the company. And we got along really, really well. And he saw some potential in me. I saw some potential in the opportunity. And 10 and a half years later, we've really grown the business. So I took a chance and it worked out.

Was that a different difficult transition to make, or did you feel like you were well equipped for that?

Yeah, it was a little challenging at the start, to be honest, because, you know, I think I was less exposed to the institutional side of the business when I was in New York, when I was transacting. And, you know, our business here is, is very focused on, you know, capital structures and capital stacks and who's investing in what part of the stack and how do they think about things.. And so there was a lot of, you know, learning of, of how those elements all came together. I think there was also some learning of what kind of investor he was and what he was looking for and sort of trying to kind of marry that with being in a completely new market. You know, like I didn't know LA that well. I, I, I have a very big belief that coffee is a great harbinger of what's to come in an area. And so I spent the first 6 months in LA drinking coffee in different neighborhoods to get to know the city a lot better. And that allowed me to identify opportunities. And we ended up buying a piece of land in Echo Park and doing deals in all parts of LA because I had a coffee and be like, oh, I can see the hipsters are here and I can see the cool bar here and the restaurant everyone's waiting to get into over there. So yeah, there was definitely a good intellectual growth for me in pivoting over and just exposure to a whole other area of our industry and a whole different group of people that I wasn't as exposed to before.

I listened to Barbara Corcoran speak one time at a conference, and she said the exact same thing, that back in the '90s she would go and sit in coffee shops and, like, follow the hipsters because that's where the next kind of boom was happening.

Absolutely.

You want to know, actually, in Brooklyn, I had a friend of mine that opened Australian-style coffee shops. And, you know, he opened one in— where was it? I'm sure I'm blanking on the neighborhood, but we kept going further and further into Brooklyn. He kept saying to me, like, find me the next location. And I would keep going and I'd come across a corner store with exposed brick and 20 people with Apple products, paying $5 for a latte. I'm like, I think this is the next area, you know?

Yeah.

So, you know, again, it's just— that's also part of what's great about what we do. It's like getting out from behind the desk, getting on a plane, going somewhere new. Like recently, we, we got a property under contract in, in Broward County in South Florida, a land site for our light tech business. And I got on a plane and went out there, and for 2 days I probably drove 200 miles, you know, driving sites, driving neighborhoods, getting coffee, meeting brokers, like learning what was going on in this area and whether it was going to be the right, you know, investment for us, you know, or not. I mean, I think that's what's great about our jobs and not chained behind desks all day.

So Adrian, as we start to wrap things up, so, so you've spent your entire career on the principal side at the same place at the family office, right? And so just curious, I mean, and maybe it was, you know, great fortune that you ended up in this incredible place, but I have to imagine that, you know, clearly you've been able to grow while you're there, but the decision to kind of stay working at the same place as opposed to going off on your own, working for a bigger shop, what has kept you at Cypress for your entire career investing to this point?

Yeah, it's a great question. I get asked that a lot. You know, I think ultimately, you know, there's a lot of creativity and a lot of, of, of entrepreneurship here at CEI. We, like I said in, in the past, we've looked at where our investments are going and if it's working, and if not, we're very, very comfortable pivoting and even going into a field or an asset class that we've never done before. We're happy to be entrepreneurial that way. And I think that that's coming from our principal, Michael. And I think that gives me— that empowers me to think really creatively and, and have a view where if I feel really convicted about a strategy or an opportunity or something, I can go to him and say, hey, I think we should really investigate this. And, and he's generally very supportive of that. And so I think that that variety is really unique I think that we are truly a family office. You know, Michael is the principal, his first cousin is the CFO, his son is in the business. They kind of adopted me and my family as their family when we first moved here and didn't really know anybody. And, you know, we've really grown something every single year. We've been a very high-volume deal shop. I think that we are one of the companies that is always transacting, and if we're not transacting, then we're sort asking what can we change to so we can transact there. The last 2 years I think has been a great example of that as we've pivoted to affordable housing and self-storage as 2 really focused strategies. And the result is we've done almost 20 deals in the last 2 years under those 2 categories, which is I think quite unique for, you know, an investor developer, you know, family office. So the culture that we're growing here is really is excellent. We've got really, you know, high-caliber people here. It's a great environment and there's track records. So there's a lot of comfort in all of that. And Michael wants to continue to grow. And that's really— I want to always be growing. You know, I'm still got many years to go in my career and I see CEI as the best place for me to be the most successful.

Great. One final question before we wrap up about just the future of LA. What keeps you investing in LA? Why do you believe in it? As a city?

You know, I, I, because a couple of answers there. I think one is the, the change that I've seen in the last 10 years and how much that's shifted around politically. And, you know, taking some comfort from what you see like in San Francisco with a new mayor that's come in, and that's going to change the sort of vibe of the city. So a lot can change, you know, over time. And so I think that's something I still feel optimistic about. I think fundamentally there, it's a very big economy. I think ultimately there's just a big supply and demand imbalance. And I think that really what we're going to see is some of these measures that are coming in now are going to have really negative impacts on the real estate industry in the short term. So the place where there's going to have to be a shift back, and I think from there there's going to be huge opportunity because if you are an owner of a building, a lot of building owners here are not corporations or big entities. They're small owners that own 2 or 3 buildings here or there. They're not going to be able to, you know, upkeep their units or, you know, repair things if they are capped on what income they can earn, or improve a unit when someone moves out if they can't re-rent that at a market rate. And eventually the quality of that stock is going to deteriorate and make an even larger imbalance for supply and demand. So I do feel like That's just going to move over time. And I think more broadly, the economy is still, you know, pretty strong and going to continue to grow. So we believe in LA, you know, it's, it's, I remember people when I moved, when I first visited here from New York, everyone was always like, oh, it's such a high barrier to entry market. It's such a high barrier to entry market. And I never really fully understood what that meant until I actually started working in it. And it really is. There's a lot of, groups from outside of LA, outside of California that have come in and really sort of struggled because of the local, you know, dynamics. I'm sure that can be said in a lot of places, but I think LA is, it's a tough place to do business. So if you're, if you're here and you get it and you understand your niche, like it can be really successful.

Well, Adrian, this has been awesome. Thank you so much for sharing your story and everything that, that Cypress Equity Investments has been up to, especially this new affordable vertical. So congratulations on that. And we just once again really appreciate your, your joining and sharing with our audience today.

Well, I really appreciate you guys inviting me on. It's great to see you, James Nelson Nelson Nelson. Nice to meet you, Kim Nelson. And thanks so much for your time.

Thanks so much, Adrian.

Wonderful. We want to thank our audience as well, as always, for joining. And please, if you have not already, subscribe to the show. We love comments, your feedback, and forward this to a friend if you found this of interest. Adrian's got an incredible story and perspective. Especially talking about the LA market and opportunities there. And you can go to jamesnelson.com where you can find the show notes and how to connect with Adrian. So thank you again. Until next week.

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 sign up for our monthly newsletter, find the show notes, other episodes, exclusive video series, and other helpful resources so you can gain the insider's edge to real estate investing. Until next week.

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