The Insider's Edge To Real Estate Investing Dennis Cisterna

Welcome, everyone. Thrilled to have with us today Dennis Cisterna, who is co founder and CIO of Sentinel Net Lease. Dennis, great to see you.

Thanks for having me, James.

Good. And I know we were talking just before. It took us a couple attempts to do this and last time, certainly no explanation needed. I, I know you're LA based and again, we've all been thinking of what's going on out there and just hoping it sounds like that, that, you know, that the rebuilding process starts. So, so hopefully that's, that's what you're seeing out there at this time.

Yeah, I think it's just going to be a massive coordination between public and private agencies and really the whole community to kind of get things rebuilt in a timely manner. Obviously, you know, thousands of houses and other structures affected and L A doesn't necessarily have the ability to turn on a construction spigot overnight due to the regulatory environment here. So we're hoping that, that everybody can understand the importance and we get back on the right track quickly.

Wonderful. Well, yeah, in a couple of weeks ago we had Sean Burton on the podcast. I mean, he's got multifamily deals in LA as well up down the west coast, but I know your business is Net Lease, so your holdings are national, but obviously living there and being affected again. So Dennis and I met and coordinated this interview at one of my favorite retreats, which is the Biz Now Escape. And Dennis, have you been going to that for a while now?

I had been going to Ascent, which is kind of the younger person's version for that. You know, they generally kind of break it down for under 45. Is, is ascent and over 45, escape. I'm 40. I'm 47. I probably hung around the kids table a little too long. I figured I'd get away with it without a lot of gray hair. But that was my first time doing Escape. But it was really great to. It's all the same concept, right? It's the ability to have full access and have transparent conversations with a lot of your peers in the space. And I just think there's really not enough of that. Right. There's so many of these conferences, you're just, you know, sitting in panel after panel kind of hearing a sponsor's take on anything versus the real opportunities and challenge in a marketplace. So I think Biznow absolutely crushes it when it comes to putting together a cool event where it puts together, you know, guys like you and me that have never met before, but have a lot of commonality and can can share our experiences.

Yeah, I, I'm a huge fan and I've been going for at least 10 plus years and I, I've certainly graduated with the, the Escape. So I'm definitely in the, the elder crew. But it's, it's a great thing, as you said, to get together, not just talk about what's going on the market, but how are you building a business and challenges that you're facing, opportunities for growth. And that's definitely what this show is about as well. So. So Dennis, I love what you've built here, not just from the company standpoint, but in researching and looking at your website, your LinkedIn profile, you open it up with, I love this statement. I'm Dennis and I'm building a $1 billion CRE investment portfolio. So you're not beating around the books. You're very clear about the objective here.

Right.

How are, how are you coming to log in that goal? Maybe give the audience a little sense of Sentinel Net lease, kind of what your portfolio consists of right now and, and how you're going about building and. Yeah, to achieve that goal.

Sure, absolutely. Yeah, it's, it's a bit of a bold statement, but if you don't put your goal out there, you know, how is anybody really going to recognize what you're trying to do? And helps keep myself honest as well to kind of stay on mission. The billion dollar mark is really just, it's a goal. Right. But the, the biggest priority is buying high quality performing real estate. And I think that's what's really helped us scale. We started the company right when the pandemic hit. Like literally our first closing was late March 2020 and it was an Amazon facility in West Virginia. And oh boy, it was tough because this is literally when everyone is shutting down. Like we were one of a handful of commercial deals across the entire country that had closed that week and we had, when the pandemic hit, we had lost, you know, almost a quarter of our equity in the span of two days because everyone got spooked. We walked everyone back in because we said, look, if there's one company that's going to survive this pandemic, it's Amazon. Right? So, but really since then it's been a point of acquiring mission critical office, retail and industrial properties, mostly single tenant, almost all net leased across the country, buying these stabilized assets at what we consider to be kind of opportunistic prices. So we're very basis oriented investors. And so We've closed on 26 properties since we started. We've acquired about $340 million worth of real estate. So we're on our way to a billion. And we launched our first fund about seven months ago and we've raised about half the capital for that. It's $100 million fund. We've already acquired $30 million of assets in the fund and we have another 70 million under contract right now. So we're moving in the right direction. And I think with our thesis buying these high yielding properties, especially on Office, which is a four letter word for most investors, it allows us to really go in there and buy deals that make sense in our opinion, in the current climate, as opposed to buying deals with negative leverage and hoping that tomorrow interest rates are going to save us.

And we'll definitely get. I want to get more into that and what you look for and how do you determine, you know, what are these, you know, really stable opportunities, what to look for in the real estate, in the company. But just to go back with a little bit of your history, so you've been doing this for more than 25 years. Your bias is you've completed more than $4 billion of transactions. So before, maybe just give the audience a little bit of your history and kind of maybe starting right out of school and talk about, you know, your journey. Yeah. How you ended up to where you started. Sentinel.

Yeah, absolutely. So I actually thought I. When I was in college, I wanted to run for office. Not exactly the best political climate to do that anymore. But I was going to go to law school because statistically that was the best path to get, get elected and kind of work my way up ultimately to the White House. I was, I was very hopeful at one point. I think once I realized I worked on a political campaign, I realized that most of the money coming on that campaign was from real estate developers and investors. And so I said, you know what, I don't really want to be an attorney. Real estate's always intrigued me. And I was able to get an internship at a, at a consulting firm. And I just fell in love with it from that point forward. And so I started my career as a housing market and economic analyst. Did feasibility studies for home builders and developers all over the country. And that was probably the best way to start my career is really understanding the nuts and bolts and economics of any kind of deal out there. And so not to stop you, but.

How did, at that point when you made the transition to real estate, and again, that's not what you went to school for. How did you get the hard skill? How did you figure out, say, how to underwrite deals or is that not really the function that you started off at? Because, because at some point, you know, if you want to be a good investor, you've got to, you know, understand the financial aspect of it.

Yeah, I, I didn't get as much technical training on financial modeling. It was really more about understanding demand and supply, understanding how to assess the right inputs for that model when it comes to, to demand, pricing, everything else. So it was a very good starting point. And it also gave me a core ability to be able to be, you know, basically very tactical where I can drop into a new market and within three days I understand what makes it tick. And that's been hugely important throughout my career where I really started to learn more of the technical skills of underwriting, putting together a pro forma. It was when I started to work for Lennar and Toll Brothers, which were my, my next two stops professionally where I was on the project management and acquisitions teams and really got into understanding how to put that proform together, how to make reasonable assumptions and ultimately, you know, Toll Brothers, very conservative company. It was a good way to understand that, you know, you're not supposed to fall in love with any, any kind of real estate. That was one of Bob Toll's favorite quotes. And that ultimately the numbers today should speak for themselves. You shouldn't have to force a deal to make it work. And I think that is probably one of the best pieces of advice I've ever got. And, and since that time, you know, I stopped working in, in when the housing market exploded during the recession, I had to transition. And so, you know, I, I've done probably just about everything you can imagine in this space, kind of working my way up the corporate la, whether it was, you know, working in the debt and equity markets and raising capital for operators. I've been a lender, I ran a technology company. And so I don't know if I'm amazing at any one thing, but I'm pretty damn good at a lot of things. And that's allowed me to kind of pivot into different aspects that I find interesting and have some success. Ultimately I worked my way up the corporate ladder, got to the C suite for about three, four years and ultimately became CEO of a company. And I didn't like it. I didn't like that I was working for somebody else. I didn't like that I thought I had made it the top and I still didn't have really the decision making ability that I wanted. And so in 2018. I had just turned 40. I quit the company I was at. I started my first investment platform called Guardian Residential. And. And, man, I just hit. I just caught that entrepreneurial bug where, okay, every decision I make matters. It's all on me. And taking that risk took probably a lot longer than it should, but I had a little bit of PTSD from the GFC previously. I had lost my house at one point. I was even on food stamps. It's not a great story. I mean, maybe it's a great story, but it was a very shitty thing to live through. And so that probably kept me in the safety zone longer than I. Than I should have. But once I branched out and did things on my own, I just hit the ground running and haven't looked back.

So Guardian Residential and you were doing sfr Built to Rent sector. It's interesting. I just did a podcast with. On that topic with someone else who I met down at BizNow. So you were in that space with Lafayette Real Estate in the Carlisle Group. So, yeah, imagine if this was something new for you, you know, to land Carlisle as. As a backer that they must have had. How were you able to prove to them that you could actually do this on your own?

Yeah, well, yeah, that was a. That was a very nice career win there early on. So the benefit there was. I was an early adopter of BFR because of my exposure to home building early. And I had been in the SFR space in various capacities really, since it got off the ground. I was one of the first lenders in that space when I worked for Cerberus Capital Management when we launched First Key Lending. I had helped Blackstone launch their lending platform. So I really understood the space cold. And because of my background in home building, I was a bit of a hybrid where I said, man, it doesn't really make efficient sense to go buy these houses one by one, hire individual crews to go renovate them. It just didn't seem as scalable as partnering with a home builder or ultimately even building the houses yourself, having new product with less capital expenditures, less turnover. And so I leveraged my connections in the home building space. I partnered with Lafayette, who was an existing operator in the space that was a former borrower of mine. Their CEO and founder, Thibaut Adrian, has done a fabulous job building their. Their platform. And so, you know, basically my idea and concept bolted onto an existing operator with a great track record. It was. It was pretty easy to get Carlyle interested because they wanted to be exposed to the space they thought it also had a similar Runway and we did awesome. I sold the portfolio in 2022 to another large institutional investor and I would love to claim credit for the timing being perfect. It was just a little bit more lucky than good. But you know, we were able to dispose of it at a cap rate well inside what you're seeing today. And it was a great, profitable deal for all of us. So it's a huge, you know, green check mark as an independent investment manager, showing what we're capable of doing.

That is. And I really hope people are taking notes here. And for those of you watching on the live stream or listening in on how you started your own investment platform, I talk about this in the Insider's Edge to Real Estate investing book as well because I believe that one of the number one things that holds people back from taking the leap and investing on their own is it's lack of capital and lack of experience. You could call that track record. Right? So I mean what you did, we talk about how to find a great partner. So you, you clearly had the expertise and the knowledge, you had the thesis of what you wanted to do. But bolt that on to an existing operator who had a track record. So you could say, okay, I'm going to be part of the vision here, what we're doing, but here's my partner that can show that we can execute and that is what allowed you to bring on that institutional capital. Right? Because I got to imagine if it was just Dennis and hey, this is my first four way I'm doing it and you went to Carlisle, they'd say, okay, that's great, come back to us in 10 of these. Is that a fair statement?

For sure. I think when I started Guardian, I actually did some different types of deals. I did model home financing, some sale leaseback deals with builders. And you know, that first deal I did, I raised three and a half million dollars of equity. I did a personal roadshow to everyone I knew that could write a fifty thousand dollar check or better. I wasn't going to look to get Carlisle this. I was just looking to get off the ground and I, luckily I did that and I did that with a few more and then by the time I went to, to Lafayette to partner, we had a great, you know, 10 year plus history. I was bringing something special to them and I think that's a huge part of anybody that wants to be an investment manager and kind of wants to take that next leap. You got to have something that differentiates you from what they're doing already. And so with Lafayette, they had no exposure to build for rent other than that I had put together a portfolio of 20 houses that I bought that I had sold to them early and they liked the concept. And then I said, look, my home building connections, my home building knowledge, our joint expertise in the SFR space, we can go build and buy, you know, thousands of these units. And although I've exited now because I, I don't see the same kind of Runway of success because so much capital entered the space. You know, Lafayette is still in it. They've actually created their own home building arm to capitalize on this business. So very grateful that I had someone to go to, but it certainly wouldn't have happened if I didn't have a unique proposition for them.

Yeah, this is so helpful, I know, to the audience and thinking about finding the right partner because, I mean, I'm sure it was a little bit of a, I don't want to say a risk to reach out to them, but you're basically showing them your business plan. This is the opportunity. And maybe part of the fear, maybe what holds people back is, oh, well, what if Lafayette, just to say, thanks, Dennis, we're going to go do this, what do we need you for? So, so clearly you had specialized knowledge that they didn't have, but they were adjacent to it. So I guess what you found in them was they had the balance sheet, they had the capital relationships. Is that really what you were looking to identify in a partner?

Yeah, I was looking for someone that could really help me scale. And I think that's where a lot of emerging investment managers get stuck. They try to do everything by themselves. And it's, it's just, it's a tough road because ultimately who has the. He who has the money wins. So having that experience, that track record allowed us to go out. Carlisle had actually reached out to me just at Guardian Residential, but I knew there was no way that, to your point, I was going to really pass the sniff test as an operator because I was so, I was so new to it being, being on my own. So it, luckily in this situation, you know, I had a decade long relationship with their CEO. He is of the highest moral integrity. He's not someone where I'm going to show an idea to him and he's going to go say, thanks, I'm going to run with it. I have done that before. I have got screwed on that before. I caution anyone listening to, not necessarily do that unless you have a great, a great counterparty. Ultimately, you know, NDAs are going to only protect you so much anyway. So you have to be very thoughtful about the people you're presenting these ideas to, especially if you think you are going to be a differentiator in the market.

And Dennis, you don't obviously need to go into the specifics of the partnership structure and how that works, but I'm sure people are listening to this is thinking. Okay, you're bringing this idea to this operator who's got the balance sheet. Is this. How does that discussion go? Hey, we're starting a new separate P and L, and we're going to be 50, 50 partners in this. Or is it, hey, Dennis, this is great. Go find us a deal and, you know, we'll kind of give you a finder's fee kind of baked into this. Like, how do you approach that discussion when you. And because I love the idea of going to a big partner to do something programmatic. So how do you, how do you strike that deal?

So in this situation, we were creating a new platform. They, they, they didn't have really any kind of build for rent particular strategy, right? So we were creating a new co. And in this situation, it wasn't just an idea. I already had deals under contract. I had even bought a build for rent deal and closed on it before we finished our transaction. That was a smaller deal with just one individual investor that partnered with me in an opportunity zone. But I still had, again, that green check mark of, okay, he's done this, he's done this, and he's executed. We agree with his investment thesis. And the special sauce that I had at that time was I knew every one of the biggest 50 builders in the country, and I could ring up their division and regional presidents or C suite and say, hey, let's. Let's work on some deals together. At that point, the homebuilding community looked at BFR as a way to kind of shore up their quarterly balance sheets. Like, okay, we were a little light on this year's, this quarter's numbers. Let's go sell 100 houses to Lafayette and make sure we hit our numbers for the street. They didn't quite understand how scalable that part of the business was. So we really got some incredible deals early on, before more people entered the space. And when we structured the deal with Lafayette, my focal point was, we're going to create a new company. We're partners on this 50, 50. We're going to give some equity out to the employees so they're aligned to do what we want to do. That's not typical. I don't think on most deals that you're going to go, you're going to get a 50, 50 kind of split. Now the, the, the part of that that made it more aligned was I was willing to contribute half of the GP capital, so we were aligned. If you're an under capitalized guy, that's going to be harder. But really you're not looking, you're not looking to get rich on your first deal. You're looking to prove your concept and start establishing your track record. And I think that's where a lot of operators get lost because they are taking such a risk. They think they got to hit a home run right out of the gates financially. And that's not what it's about. It's about showing that you are a good operator, that you can ultimately execute your business plan. And the more often you do that, the more often you're going to have a chance to be financially rewarded in the end.

So Dennis, I appreciate, I know our audience appreciates kind of pulling back the curtain and kind of explaining because I, I'm sure we have so many listeners right now who, you know, they, they've, they have proof of concept, right? They've done some smaller deals, they're going out, they're raising the friends and family, but they're saying, hey, I'm onto something here and if I had the right partner, I could really scale this thing. So we, we really appreciate your sharing, you know, how you went about that and what to look for. And I think also a great point on your part that this was not just you started, you know, opening the, the, you know, the virtual phone book. You, you, you know, you had a relationship, you knew the founder, it was a trusted part and it was, was clearly a win win. Okay, so, so that ran its course and then you said, okay, I, I may be too crowded, the returns aren't there. So then you decide to start Sentinel Net lease.

So I actually start, I started Sentinel at the same time I was running Lafayette. This is what I meant by I caught the entrepreneurial bug. And so this is, this is where this is the downside to if you start to have a little success in one thing, you kind of think you can do anything. Now luckily I'm good at putting self governors on so I don't get too far ahead of my skis. But we, we started Sentinel. I started Sentinel with another, another partner who basically had a family office, wanted to look into the net lease space and said hey Dennis, you're, you know, you're, you're A great acquisitions guy. I think we can go put some of my family's money to work. Go find me a couple deals and I'll pay you a finder's fee and I'll keep you in the deal for part of, you know, part of the upside. I was like, that doesn't seem like a bad thing. I didn't have a lot of free time, but I had enough to explore it. And so Sentinel in its early days, was not going to be this platform that it's grown into. It was going to be me buying a couple of Walgreens or Starbucks or something. And what I found when I started exploring that net lease space, especially on the retail side, is it is the land of commoditized investments and 1031 investors. And what I think is not appropriately priced risk adjusted opportunities. And so I'm not interested in buying assets that are going to generate a four, four and a half cap. And you know, I'm going to go bar at that time, go borrow it at three and a half. That just didn't. Looking at it compared to the build for rent sector, I was like, why would I even waste my time with this? I don't know how I ever get to a meaningful return for anybody. And so I just started looking in other avenues of the net lease space and I moved up into the middle market where the 1031 crowd is a little lighter. Institutions have started to move away from those deals in the 10 to 30 million dollars space as their fund sizes get bigger and bigger. And I found that especially with single tenant net lease deals, the pricing was just wildly inconsistent. A lot of brokers don't know how to analyze the credit risk of the tenants properly if they're not credit rated. And sometimes even if they are, they don't necessarily take it into account. And so I found that inconsistency led to some potential arbitrage opportunities where I could make money on the buy on something that I didn't have to lease up or build from the ground up. I could just make money off the basis of what I was buying at. And because interest rates were so low and we were very picky on what we were buying, it just made sense to, I think, build a platform around it. Because I saw the scalability here. Where one market was kind of, the institutional investors were kind of moving away from this market that they wanted to be in, to be in. And then with COVID we saw a lot of people kind of hit the pause button and we just jumped in with both feet and so, you know, we bought that Amazon deal, we bought a couple of grocery stores at, you know, double digit cap rates and we just started, you know, adding on to the business strategically and all of that was done raising capital from retail investors. So my other partner in, my partner in Sentinel Fred Lewis, he's a career entrepreneur himself, he doesn't take institutional money. And he said, look, I don't want someone like, like Carlisle to boss me around. I want us to make the decisions. And so, so we've raised all of our money and we've raised close to $150 million of, of equity. Almost all of it is from your average retail Investor. We have 400 investors on our platform. We've got a few family offices, a few small fund managers, but no big PE shop that's backing us or anything like that.

Wow, that is tremendous. And I love how you found the space that it's, it's, it's bigger and more complicated for the amateur investors, but it's, it's kind of below the radar of the institution. So, so you really kind of defined your niche of where you're going to play. Now, Dennis, the only thing I would challenge you about that strategy is and maybe you'll tell us, hey, these are just long term holds and we let them cash flow. But if the intention was that, you know, you're going to buy, improve, resell, you know, obviously you're buying and selling into the same market. So if there's not a lot of appetite to buy and so there's less competition, but then if you have to. Yeah, exactly.

We're opportunistic buyers of these stabilized assets. So the benefit here, and I promise I am not blowing smoke, so since our inception, we've averaged an 11.4% net cash on cash just from lease income alone across our entire portfolio, no appreciation.

So it's just on the cash flows.

That's just on the cash flow. On our dispositions, which we've had three. Our average net IRR is 28. We are going to sell assets opportunistically. And so the reason we're okay not selling is because the cash on cash is so elevated relative to the rest of the market. The, the office assets that we're buying right now, you know, they have a decade or more of lease term remaining and we're buying them at 9, 10, 11, 12 caps. So worst case scenario, and I'm, you know, granted the debt markets aren't great, so I'm borrowing at 7, but go find any other asset right now where you can go get positive leverage to the tune of 300 basis points of spread or more. It doesn't exist. And so we like our basis, we like our cash position, we like the stickiness of the tenants, and it's an overall good story. When is the right time to sell? The market's going to tell us. I find it kind of comical when brokers come to me and say, hey, you know, are you interested in selling any of your assets right now? I was like, why would I want to sell any of my assets right now? What is, what is the upside? Right. The capital markets is, is really not that functional right now. Cap rates for everything are really elevated and I'm producing a cash on cash that beats every other sector. I'm fine holding it until any of these assets make sense to sell, and at which point we'll sell. But we like the long term hold. I think our investors do. And so that's really part of the general thesis here is we're buying at such a discount relative to the historical basis and producing such strong cash on cash that we will gladly just kind of kick our feet up on these assets, other than great asset management, of course, and hold them.

So I want to talk about how you analyze and get comfortable with a company's credit. So your first example was Amazon. I think we can all appreciate that, that, that was, you know, not, not a credit risk. But yeah, I know you've, I think you bought an LA Fitness. Yes, it's grocery stores. So I mean, I don't know if LA Fitness is franchise or if it's got a credit rating.

Yeah, corporate, corporate credit rating, a B. It is improved. You know, they've got, I want to say like 700 plus locations across the country. That's, that's a fairly easy one because even though they're privately held, you have access to their financials and because they're credit rated, you get a good understanding of their overall, the overall company's financial health. And that's a company that got beat up pretty poorly during, during COVID obviously was shutting all their stores. They had to renegotiate a bunch of leases. But they have, they have really bounced back in a very meaningful way and are having great success at all their locations. They've honed in on kind of how to attack each segment of the fitness market, whether it's the entry level folk that use their Esporta brand or the higher level that uses Club Studio, which is kind of closer to an equinox. So they're servicing all these different levels. They're a great overall landlord to work with and that's, you know, that's a known brand. So it's a little easier. Where it gets tougher is where you may not have the full financial picture and you have to essentially do a shadow rating of the company. And so you really have to dig into the financials yourself. Nobody else has done an audit, nobody else has done a true underwriting and analysis of their credit. And so that's where, you know, my background as a lender, my partner Fred's background as a lender really serves us well because we dig into those financials and are looking to understand what their debt load is now, what the free cash flow looks like, are they trending in the right direction, which business units are thriving, which ones aren't. And it obviously depends on the industry and the company itself, but it's, it's so important to do that. And if we ultimately, if we ultimately like the real estate enough but we don't like the credit as much, then we'll build in credit enhancements on the deal. Like we'll do that on a, on a sale leaseback, which we've done a few of, where we say, hey, we think you guys are going to be successful and we'll do this long term leaseback with you, but you're going to have to hold some of that money back in escrow in the event you default over the next five years. And we'll put some clauses in there that allows that to kind of be chipped away or eliminated over time as long as you reach certain financial thresholds. But we've got to be covered in the event you, you evacuate or you leave the space. And then we've got to be in a position where we can release and re tenant that and not have to come out of pocket for it. So that's worked out pretty well for us.

So again, it depends on the profile of the tenant. But if you have a LA Fitness, for example, and you got 700 locations, you've got their corporate guarantee, you know, if, I guess, you know, it wouldn't be a great situation. But if they said, okay, this location is no longer working for us for whatever reason, we're making a company wide decision that we're going to, you know, we're going to dispose of maybe the smaller locations, whatever it is, so the box goes dark, right? But if you've got their credit, they're still paying the rent, right? Ideal. Because the, that kind of calls into question the long term value of the Real estate. So that's one scenario. So I guess with something like that you're really just concerned if the whole company goes under, that's another thing because then you don't have rent to collect.

But right, hopefully you're not buying a ton of properties where the financials of the company are that in question unless you've got some bulletproof credit enhancements. But to your point, locational analysis and the utility of those, those buildings is highly important. On the retail side, you know, luckily we've got a lot of data now that's, you know, that's one of the benefits of technology right now, is it? It gives, you know, mid market operators like me access to a lot of the same tools as the biggest financial institutions in the world. So we'd run a place or AI analysis, we look at key fob swipe data to understand how many members are, are in a location like that and see not only where it ranks within the chain, but also nationally how it performs against other fitness centers in the area. So on the retail side it's really, it's really easy to get our hands around where that performance of that individual location kind of fits into the bigger picture. On the office side, it's a little more daunting, especially as we've worked our way through, you know, remote work, now the hybrid, and now I think you're starting to really see, you know, this tip back towards the full time return to the office. A lot of our companies that we've worked with had said, look, we would love to do this but there's not enough leverage in the market. We don't want to lose our employees. It needs to kind of become the industry standard before we start to invoke that requirement of people coming back to the office five days a week. But when you see JP Morgan, the federal government, Amazon start to employ that return to work mandate, it gives everybody else the confidence to do it as well. And this was an early part of our thesis that ultimately the leverage would shift back to the employers. And I think we're still in the early stages of that. If you see unemployment start to go up from 4% to 5% or even 6%, which is technically still full, full employment, you're going to see the return to the office be much stickier for a lot of companies, both big and small.

So I mean, that makes me think of what you were talking about earlier when you're in your career, when you were figuring out demand drivers. So I mean, what are those key things when you're Trying to figure out if a neighborhood is a growth market, Is it, Are you getting really micro on population growth? Is it employment? Is it like you said, you're getting as micro as what you know, the key fob swipes are, what are those things that give you conviction about a market?

Yeah, so if you're looking at demographic and economic information, you obviously can go down to the block level. I don't think you have to be that micro for, you know, 100,000 square foot office building. But I think you definitely want to understand what's going on in a three and a five and a ten mile radius. And then you want to understand where that we only buy suburban, we don't buy downtown locations. That's another demographic kind of point of conviction in our investment thesis is that it's going to take a long time.

For.

Central business districts to recover post Covid. And because you're now seeing a lot of suburban locations become the de facto cultural hubs where the nice restaurants are, the new entertainment venues are, you know, we want to follow that demand. We think return to work is a lot easier in the suburban markets where people live than the urban markets. But it is looking at household growth, employment growth, number of companies, and it's really overall a big focus on the quality of life because we think we want to be in the areas where the schools are good, the crimes are low, incomes are high, the workforce is educated. Those are all what we think are really sticky variables to keep demand high in those markets. So we definitely look for factors like that from a general location standpoint. And I'll use this even in a place like Chicago, most people, you know, avoid Chicago like the plague because it's a hard place to do business. But most of that difficulty is placed in Cook county, which is where the city of Chicago is based. But if you go to some of the suburban counties, I'll use Lake in an example, which is up to the north. That's the country club environment. Taxes are lower. That's where half of the Fortune 500 companies in, in the greater Chicago metro area are based. Incomes are super high, home prices are high, education is quality, crime is a fraction of what it is in Cook County. And so again a much stickier basis. That's where people want to live. And even though Chicago has been losing population overall, Lake county is one of the few places where population has been growing. And so it's looking for that hole in a donut. That's kind of my, my, my, my saying for, for a lot of this of what we're looking for, needle in a haystack, you know, use whatever, whatever analogy you want. But ultimately it's looking for that high quality opportunity in what I think are generally overlooked markets, which is why we focus a lot in the Midwest, in the Southeast.

Yeah, Dennis, that is super helpful of how you kind of analyze the market and kind of look for, you know, again, these outliers maybe, you know, if most investors are just saying, oh, it's, it's Chicago, I'm not even going to look at this. But you're really, you know, digging in specifically to the submarket. That makes a ton of sense. The other thing that I heard you say earlier, especially when you're analyzing, if it's, if it's a tenant that has shadow credit and you're trying to get comfort, but you talk about the underlying real estate, I mean, just simply put, whatever rent that they're paying, you know, you probably don't want a situation where you know that tenants paying double what the market is. You want to feel comfortable with the underlying, you know, asset. And so if, you know, on the off chance, you know, that tenant doesn't make it because you're buying these, these properties with long, especially if you're striking a new sale leaseback, you're getting a 10, 15 year lease. So the hope is they just stay, they pay the rent, everybody's happy. But on that off chance that they, you know, something happens and you do get the keys back, you need to make sure that you can replace the rent. I'm sure that's part of.

Absolutely. It's a, that's a critical piece of this. So obviously by buying below replacement cost and below what kind of the rest of the comp set has been for anything that's transacted from, you know, before 2023, you're going to have a better basis than just about everybody in your market. And so you have flexibility on what kind of rents and incentives you can offer to the market in the event you have to lease up. But it is, there are two things that I really would focus on when you're looking at the property itself. Number one, to your point, you want to be at or below market rents. And I would strongly encourage you to be below market rents whenever possible just to give yourself some extra cover. The other part is the quality and condition of the building itself. So it's one thing to make sure the building systems are in place. Of course, you want the roof to be in good condition or at least you want a capital expenditure plan to Take care of that. Whether it's you or the tenant's responsibility. Maybe you're getting a credit from the seller if you know it's got a short useful life. But ultimately what's really important right now is also the quality of the tenant improvements inside the building. And so what you don't want to do is go buy a building that looks like it's a great cap rate, but maybe it's got like a 1980s vintage tenant improvement because whenever those that tenant leaves, you are going to have a massive lift and ti bill to get anyone else in there. And so yes, your basis might be 100, $120 a square foot on the buy, but you're going to spend that same amount to get a new tenant in on a long term lease. And it's really going to screw with your long term irr potential in that situation. So most of the buildings we buy right now have had significant renovations in the last five years or so where it's kind of that next generation of, of tenant improvements so that if someone does leave, it's almost like leasing a spec suite. You know, the, the new tenant doesn't quite have the leverage to say, give me, you know, $50 a square foot in tis because your, your pushback is, what are you going to do with it? We, we've already improved. This space has already improved. We'll give you a couple bucks to change the layout here and there if you want. But you know, you're not going to improve the lighting systems, you're not going to improve the flooring. So what are we really talking about here?

So, Dennis, that kind of answers what my next question was going to be. Because I guess the flip side of that would be, okay, you've got a new installation, but it's completely purpose built. And so then the question is, if this tenant did leave, is that what, you know, the market's going to want or is it such a specialized build out that someone's going to have to gut the whole thing? So I would say that, you know, this kind of office, you look at it, okay, and these are all single tenant. So you say, okay, well, if this tenant doesn't make it, there's another tenant who'd probably, you know, sure, they change some aesthetics, but overall, this is something that would work for another company, right?

Yeah, yeah, exactly. And the specialized build out is a good point because if you have, it doesn't happen too much in the office space. I mean, an office is an office is an office. Yes, they maybe want Somebody wants a higher concentration of private office offices or a training room or something special. But at the end of the day, most offices, good offices look the same inside. The specialized use comes to other elements of it. We've got, we do own a few multi tenant buildings and that's some of the case. So like in one of our buildings, Thermo Fisher is one of our tenants. And so Thermo Fisher has lab testing and demo space that is specialized and highly built out. If they leave, you're right, we've got to account for the proper renovation of that for a new tenant. Now the whole point there is when somebody makes those specialized improvements to their space, they're stickier than not stickier because they've gotta go do that at a new building. And the mobilization of that is much more difficult than just moving a standard office. But yeah, but I think ultimately you should know that when you're buying the property, you should understand what each of your tenants is doing, each little nook and cranny of each space. And if you do keep it with that special purpose use the way it is. What's good is you're very attractive to the other specialized users. What's the problem is you're not attractive to the other 92% of the population.

Got it. So, Dennis, one thing and I wanted to make sure and bring this to the audience's attention before we start to wind things down, but I was really impressed with your branding, your marketing and what you built out. So, you know, we always say go to the show notes, you know, see how to connect with Dennis, check out the website. But I think you're going to want to see how you built this out. So maybe Dennis just again, the website, what was kind of the vision in creating this? I don't want to call it a kind of a sales funnel kind of thing, but you go on there, there's an opportunity to log on, engage with it. I mean it's a very kind of user friendly. So was that part of the thought when you built this out?

I think I'm more lucky than good on the marketing front because I'm really just a real estate guy. But I think I understand elements of marketing. So what I do know is we kind of try to lead with thought leadership and that helps attract people to learn more about us. I don't want to sell anybody. You want to invest in my fund, great. You don't want to invest in my fund, do whatever you want. I'm happy to give you advice on other people's Deals if you want. I'd rather have a smarter investment community than worry about whether someone's investing me with me or not. And I think that helps kind of tell the story because I, I am authentic in that regard. I want there. I, I think the, the, the better the community gets, the more information sharing, the less mistakes the average investor is going to make, whether they're an LP or a gp. When it comes to the website itself and how we structured it, we have two websites. We have the Primary Sentinel Net Lease website, which kind of tells you all about us, you know, shows you what our portfolio is, who our team members are, and then we have our, our Opportunity Fund website, which is our primary investment vehicle. And that's really for people that want to know more about our investment thesis and want to potentially invest with us. And that is definitely more funnel driven. You know, let me tell you about the opportunity at a high level. If you want to, if you want to learn more, give us your information and we'll let you download, we'll let you download the investment summary for the fund. I think it's important to set some type of gating up there and you don't just kind of put everything out there for everybody. You obviously want to have conversations with interested investors. And I think your average LP investor, especially on the retail side, you know, if, if you let them download it on the site and you don't get your information, they're probably going to read about it, looks interesting, then they got to go pick their kid up from school or something and they forget about it. So I think keeping that touch point is important for, for every investor. And we are super relationship oriented. So, you know, we want to have a conversation and understand people's investment goals and share with them the, you know, the successes we've had. And if it's a fit, awesome. And if it's not a fit, that's okay too.

So, Dennis, I'm watching especially the live audience who's been sticking with us, not only sticking with us, but growing through this conversation. So obviously people are definitely engaged here and I'm glad they are because this last point that you made is so important as you think about how to grow your brand. And I don't know if you're a Donald Miller fan, you know, this audience, my audience has heard me talk a lot about story brand. If you look at the insider's edge to real estate investing and what we're doing, and even if you go to james nelson.com, the site's not about Me, right. The site is about the audience, how to be helpful, and so important. What you said, the thought leadership. And, you know, maybe that's a term that's overused, but the point is it's not, oh, hey, look at how great we are and what we're doing. It is you're putting thoughtful information out there to help people, and if that helps them align with your investment strategy, great. If they, you know, read it and they say, okay, well, I want to go do something else, great. But you're, again, you're really putting great content out there, and that is so important. So I really want the audience to listen to that. And as you think about whether it's your personal brand, you're looking to launch a company, grow something, become the subject matter expert and have something to say, because people want to engage with that. They don't want to just hear about your victories and how great you are. They want to hear about, you know what, how can you help them become a better investor? How can you help them grow? So I don't know if that was all the intent as you built that out, but you certainly embodied it. So, you know, Dennis, with that, I'd love to. As we wrap up, talk about, you know, we have people who are listening right now who maybe they haven't made their first investment. We've got people who've probably been five, ten years working at a big shop, thinking about taking the leap like you did years back. So what is the right time, right? When to go out and, you know, make that leap? Right? So how do you know when the time is right to go and do that first deal or decide?

I don't know if I'm the expert because I think I jumped in at the wrong time. I think I could have jumped in five years earlier, but I think what I learned was this. And it really depends on your personal risk level because I have a lot of friends who, for lack of a better term, I thought they would be a lot more successful than they were. And when I kind of challenge them on this, not, not saying why aren't you more successful? But like, why aren't you pushing to get to the next level at your company? And a lot of them are comfortable. A lot of them, like coming home at, at 5:00 and being able to coach their kids, T ball team, I think that's an awesome goal. I think being, you know, putting family first is, is a very noble priority for a lot of people. And I know other people that are wired to, to, to make sure. That they have the security for their family. I think the right time is a very personal decision. But what I would tell you is, if you are thinking about that, think about what happens if you fail over the next 18 or 24 months. And you need to give yourself at least that window to succeed. So I like to say, hey, look, you should have enough money saved up where you don't need to earn a dollar for at least the next year and a half. And, And. And you can invest some capital into your business. If you can't do that, I think you're not giving yourself enough of a Runway for potential success. But I would tell a lot of people out there, you know, a lot. A lot of people are so worried about the failure. You know, there's nothing that stops you from failing and just going back to what you were doing before. And that was something that I came to grips with when I had a conversation with a couple colleagues that were entrepreneurs, and they're like, hey, man, you know, if this doesn't work out, you can just go back to doing what you're doing. Like, anybody would hire you. You're. You have a great track record as an employee. And I would tell most people that are considering entrepreneurship, it's a long and difficult road. But as soon as you start working for yourself, you find an extra gear in what you're able to accomplish, a certain level of focus that you didn't have before. Because every decision you make matters now to a greater degree than it does when you're making it on somebody else's behalf.

Wow, Dennis, this was amazing. And what a great way to end. So, again, just really appreciate. It's been so awesome getting to know you, seeing you down at the BizNow event, and now you really appreciate your sharing your story and going deep, and, you know, it's. I know it's going to be tremendously helpful for our audience, so just really appreciate your taking the time.

I. I appreciate you giving me the opportunity to come on. I'm a big fan of the show and, you know, look forward to seeing you again next year, if not sooner.

Awesome. And thanks so much to the audience, as always, for joining. And, you know, the best thing you can do, if you like this episode, is just to share with a friend. I do that all the time. I. I listen to dozens and dozens of podcasts, and when there's something that I hear, and there were so many things that Dennis talked about, and I know I'm going to be forward forwarding on this episode to friends as well share it with someone and pass it along. So we really appreciate the support. And until next week, thanks again for joining.