Paul Kaseburg came back on the podcast to discuss 12 ways to unnecessarily add risk to deals.
In this episode, Paul also went into detail on the latest report from the National Multifamily Housing Council(NMHC): "Explaining the Puzzle of High Apartment Returns".
Paul joined MG Properties Group in 2010 and is responsible for the firm’s acquisition, disposition, and capital markets activities. At MG, he has been involved with the purchase of approximately 12,000 units totaling $1.7 billion in total consideration. Paul has 17 years of experience in real estate private equity investment, capital markets, and corporate M&A.
Prior to joining MG, he held various roles in commercial real estate debt and equity acquisitions, development, and financing. He has a background in corporate M&A and venture capital investing at Northrop Grumman (NOC). Paul holds a Bachelor of Science degree in Mechanical Engineering from the University of Notre Dame, and an MBA in Finance and Entrepreneurship from the UCLA Anderson School of Management.
Paul is also the author of the book: Investing in Real Estate Private Equity: An Insiders Guide to Real Estate Partnerships, Funds, Joint Ventures & Crowdfunding (available on Amazon).
RealCrowd - All opinions expressed by Adam, Tyler and podcast guests are solely their own opinions and do not reflect the opinion of RealCrowd. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. To gain a better understanding of the risks associated with commercial real estate investing please consult your advisors.
Tyler Stewart - Hey listeners, Tyler here. I wanted to make a quick announcement. We've just launched a brand-new educational course called RealCrowd University. This is a six-week course on the fundamentals of commercial real estate investing. In this course you will learn to start with risk approach. How to evaluate real estate sponsors, what to look for in the legal documents. What questions to ask about in the deal and much, much more. RealCrowd University is completely free. Just head to realcrowduniversity.com to get started. That's realcrowduniversity.com. Thanks and I hope to see you there.
Adam Hooper - Hey Tyler.
Tyler Stewart - Hey, Adam, how are you today?
Adam Hooper - Yeah, I'm great, I'm excited about this episode.
Tyler Stewart - Yeah, how come?
Adam Hooper - Well we've got Paul Kaseburg back.
Tyler Stewart - Again?
Adam Hooper - Again. I think this is number four.
Tyler Stewart - Four, I think is he officially a friend of the podcast?
Adam Hooper - He's a friend of the podcast.
Tyler Stewart - Oh man.
Adam Hooper - Everyone's a friend of the podcast. Of course, yeah, listeners and speakers, guests.
Tyler Stewart - Yeah.
Adam Hooper - All friends.
Tyler Stewart - We're all friends.
Adam Hooper - Paul's back to talk about how to unnecessarily add risk to deals.
Tyler Stewart - Yeah.
Adam Hooper - I have got more notes on my sheet here than I've had on any episode before so there is so much to cover in this one. We started off talking about a little bit of an update in what they're seeing in the market. We've got a link in the show notes here to a report that we reference. And then we just dug in.
Tyler Stewart - Yeah, I took a lot of notes too, listeners, this is one of those episodes. We say it every time Paul is on the podcast, but have your notepad ready. Paul just dumped information overload on us and it was awesome.
Adam Hooper - It's all good stuff too. I'm trying to think what my key takeaway was, there's a lot of them.
Tyler Stewart - The whole episode.
Adam Hooper - Yeah.
Tyler Stewart - The whole episode was a key takeaway.
Adam Hooper - I couldn't agree more Tyler. You know what my key takeaway was?
Tyler Stewart - What was that?
Adam Hooper - How do you PPM?
Tyler Stewart - How do I PPM?
Adam Hooper - How do you PPM?
Tyler Stewart - Saturday mornings, poor a cup of coffee and that's how I PPM.
Adam Hooper - Listen to the episode and you'll figure out what's your PPM style.
Tyler Stewart - Yeah.
Adam Hooper - All right folks, well that's enough of us talking. In all seriousness this is a great episode, Paul laid down a ton of just really, really, really fundamental good information. Real estate deals are complex enough on their own, don't do these things to add additional risk to it. But I think that's pretty much the summary. Well with that, as always though if you do have questions, comments, concerns, anything you want us to talk about on future episodes, and we would actually like feedback on this episode too. How do you feel about these risks? Are these things that you do? How do you avoid doing these things? We'd love to hear from you. Send us an email to firstname.lastname@example.org and Tyler with that let's get to it.
RealCrowd - This podcast is brought to you by RealCrowd, the leader in online real estate investing. Visit realcrowd.com to learn more about how we provide our members with direct access to commercial real estate investments. Don't forget to subscribe to the podcast on iTunes, Google Music or SoundCloud. RealCrowd invest smarter.
Adam Hooper - Paul, thanks for joining us yet again here on the podcast. In 2018, it's been awhile since we've had you on. Thanks for coming back.
Paul Kaseburg - Thanks for having me, it's always fun.
Adam Hooper - Yeah, we've got a lot of really interesting stuff to talk today, how to unnecessarily add risk to your deals. Which not many people probably willingly want to do, but I think they do all the time.
Paul Kaseburg - Yeah, whether they mean it or not.
Adam Hooper - Right. So before we get into that let's take a quick update and talk a little bit about where the market's at, what you guys have been seeing. We were talking before we just started recording where volume where we're at we're seeing interest rates rise as we just talked about with Alisha on a prior episode. Why don't you give us kind of a 30,000 foot view where you're at so far past Q1 and looking into the rest of 2018 year?
Paul Kaseburg - Sure, so you know we have seen volume come down in the marketplace for the first half of this year. I think the last year we saw the same thing and part of that was a result of the elections where there was just some uncertainty in the market and people didn't really know what it meant, what it was going to mean you know? And this year I think that probably the big driver is for at least for us in our space, is the 10-year treasury, interest rates in general, you know the 10-years at, it went up from about 2.4 to just under three at its peak in about three months which is about 25% increase so that really has impacted the market and that always, that happens every year or two years, we have this little run up and everyone kind of takes pause and just evaluates what that means and then you know if the economy is doing well, then everyone comes to the conclusion that it doesn't impact values and they continue to buy. And that's the situation we've seen for the last couple times so that's probably what we're going to see this year. We're hearing about a lot of money on the sidelines and that can kind of get placed at market value so we're just now seeing kind of the first big punch of deals that are really rising for the year, after that run up. It'll just be interesting to see how that shakes out and what that means for prices going forward. Based on history I wouldn't expect prices to be going down materially and part of that is just expectations for the economy and part of that is although the 10-years gone up, the spreads have come in quite a bit
Paul Kaseburg - so we haven't actually seen loan rates go up as much as that 10-year has gone up.
Adam Hooper - Yeah, I was going to ask at the end of the day what is your borrowing cost increase been, you know you said 25% increase in the 1-year treasury, what does that relate to in a percentage rise in your actual financing costs?
Paul Kaseburg - Yeah, maybe significantly less than that, so I'd say the treasury's went up about 50 bips, give or take, kind of depending on what day you pick. Maybe it's a little bit down in the last couple days, and all-in rates have gone up maybe 20, but it depends a little bit on what waivers you're getting from lenders that, the all-in rates have not gone up quite as substantially as the 10-year at least for the deals we're looking at, which helps out there.
Adam Hooper - Do you expect that to stabilize at this 20-basis points higher, do you expect that to come back down or increase or where do you guys see that going? Hard to tell, but?
Paul Kaseburg - Yeah, you know long-term I think we all kind of expect, I guess the market is pricing in rates to continue to increase and we would expect that, this year and next year. Short-term I wouldn't predict that one, we will play it as it goes.
Adam Hooper - Okay, and then you sent over the National Multi-Family Housing Council, NMHC, came out with a new 30 report, we can put a link to that here in the show notes today. What was your takeaways from that? Anything major coming out of there?
Paul Kaseburg - Yeah, so I sent over that report just because I just thought that was kind of an interesting take on the market and that's actually, NMHC looked at returns and did some analysis to talk about you know returns for apartments compared to other asset classes and of course, it's a report by the NMHC, the National Multi Housing Council, so you would expect them to be positive.
Adam Hooper - You take your source with a grain of salt, right.
Paul Kaseburg - Yeah, but what's interesting is we've done kind of the same analysis internally, I did that for an annual investor meeting we had about two years ago, and so setting aside its implications for multi-family it has some other things about investing in private real estate generally. My takeaways from it, I think its a workable read, it's only a couple of pages and some of it's a little bit purposefully dense, but I think it's kind of worth looking through. The takeaways are if you have average returns and standard deviations of investments for different time periods, then you can just really clearly see that if you hold properties for longer periods you're standard deviation of returns, you know basically your risk goes down substantially. For overall apartment returns are about, they're over 9% annually, regardless of where you're core period was. But your standard deviation returns for a three-year hold was over 5% and for a 10-year hold it goes down under 2%. So it really just tells you, you know if you're in it for the short term, you're going to do well or badly, probably one or the other and that has a lot to do, you know it sort of magnifies your vintage risk when you're buying it, but if you're going to hold it for a longer term, that really has the effect of decreasing the volatility of your investment. I'm sure we'll talk about it but you're ability to have a hold for a long period if you need to is really important and you can look and see that in numbers there
Paul Kaseburg - so that was one thing that I thought was interesting. Of course I would point out that out of all the product types and locations, apartments are the least risky type of commercial real estate. And apartments on the West Coast in particular have the best risk adjusted for returns but of course I would point that out, because that's what we do. And then one thing I thought was kind of interesting is they looked at core and moderate growth cities and you know very like low growth, like a Pittsburgh or St. Louis and what was interesting to me is risk adjusted and returns were highest for the higher... the kind of median growth cities. That just goes to show that you get different buyers in core spaces who have other focuses rather than all-in return and then when you go to really tertiary locations you run into some volatility risk in those locations. Especially because of liquidity and so when you're in sort of just kind of boring, straightforward, maybe secondary market, maybe kind of an outlying area around a primary market, those are, you know on a risk adjusted basis, that's probably the way to go. That was kind of interesting to see that quantified.
Adam Hooper - Yeah, and that's something we've talked with a few different guests about is there's so much emphasis on making money on the buy but if you can't exit you're going to be stuck, so you got to make sure there's enough depth in the market for you to move into that you feel comfortable once you actually execute the business plan that you can exit the deal and then harvest that.
Paul Kaseburg - Yeah, If you can't sell it then you know you're not in a good position, for sure.
Tyler Stewart - Does this report change anything about how you're going to operate or does it reinforce what your strategy has been?
Paul Kaseburg - Actually a lot of this we had sort of concluded on our own from playing around with the data ourselves, it was kind of fun to see that come out in the report as well. I don't think any major changes for us, but I think that's stepping away from us in particular because we're very multi-family focused and looking at it from a commercial real estate investment perspective. It's just that it's good data to think about in terms of, you know overall returns they're fairly better on a risk-adjusted basis for apartments based on this data set. It's pretty wrong, I think it's from '87 or something going forward. But all of the product types and all of the locations are in the same ballpark, give or take. And that supports the thesis of it's probably a good idea to diversify across locations and product types because you know on average they all end up being, give or take, kind of similar. But they're going to have different drivers and so are going to go up while other's go down. It supports overall the thesis of it's a good idea to diversify.
Adam Hooper - Okay, well I think that's a good segue into some of the topics we want to touch on today. We've got our Dirty Dozen, our 12 ways to unnecessarily add risk to deals. I'm going to see if Tyler can whip up some fun sound effects for us to add here in post production and see what we come up with there.
Tyler Stewart - Yeah, we'll come up with drums or, we'll see. It'll be good.
Adam Hooper - This is something we've wanted to do for awhile. In our position we see all this stuff happen all the time. Investors ask us these questions all the time. Sponsors talk about this stuff all the time. But there's really no concise resource for a lot of these things that happen to kind of bring awareness for investors our there and folks who are listening to the podcast. We thought you'd be a great person to help us through this. We talked about a bunch of these different things on different episodes, but it's unnecessarily adding risk to a deal, probably not the greatest idea, right? That's not usually in anybody's plan.
Paul Kaseburg - Shouldn't be.
Adam Hooper - We've got a list of 12 things that we see and you know if we don't cover everything, if there's other stuff that you want to add, certainly let's do that. But starting with number 12, the concept of starting with the deal instead of starting with some of the other factors that you and I you know we talked about on the podcast of your own strategy or the sponsor. Let's talk about that a little bit, not starting with the strategy first but going with the deal.
Paul Kaseburg - Yeah, from what I hear from talking to investors I think that's a common mistake. By it's nature it's a little tough to find private real estate deals and so you know come across kind of a list of available options and there's a natural tendency to just pick between those. That's normal but it's important to figure out first what you ultimately want out your allocation of real estate and then break that down. You know start with how much money do I want in the sector? And then break it down and say, do I want to be in equity or debt or some sort of structured product like prep-equity or Mezz. Then beyond that what product types do I want? What locations, you know it's profile, is it going to be un entitled land or is it going to be core? Or something in between? And so I've kind of come up with a game plan and of course as deals come up you're never going to be able to perfect that game plan but it's good to have a plan in place up front and then go out searching for deals and sponsors that do deals like what you're trying to get. As opposed to have the deals kind of come across the transom and just say, oh this one looks interesting and that one doesn't. You just want to come up with as well diversified of a portfolio of real estate if you're doing deals first as opposed to planning out where you want to end up first.
Adam Hooper - Yeah, there's a lot of factors that go into these decisions before you get to where, again like you just said, before you get to the deal, right? How much do I want to put in total of my portfolio, where do I want to put in the capital stack? What's the product, what's the strategy? You know what's the location? And then you can try to find deals that fit within those criteria once you kind of a better framework for how you want to put this money to work.
Paul Kaseburg - Yeah, yeah.
Adam Hooper - All right, one down, 11 to go.
Paul Kaseburg - Next.
Adam Hooper - Next, okay underestimating your tolerance or capacity for risk. How do feel about that?
Paul Kaseburg - When I think about this topic I think that, especially for long-term owners, and for investors in something as illiquid as real estate it's 10 years or even five years is a really long time. When you have to kind of wait through it. When you're looking at a deal upfront, you may like the profile, but a lot can happen to you financially, personally, in the economy, you know over five or 10 years that can change. Once you pull the trigger on a deal you are stuck with it for as long as it takes for that sponsor to decide it's time to sell and you want to make sure you like it that whole time. It just really pays to be kind overly careful about making sure you understand your tolerance for risk because once you get into a deal if that deal isn't going well or you know you change your mind about the risk profile of your portfolio it's already too late and you can't go back. That's really important and I think to the extent that you can just plan ahead of time that any private real estate deal is going to be a really long-term hold whether that's planned or not, just knowing that it may be is probably really important because you know if it's good real estate, there's an aspect of mean aversion in the market where you may have a couple rough years and if you're holding it for the medium term you're probably going to be holding it through a downturn, at some point right. So you should factor that in and if you can hold it through that downturn for the long-term you're going to be great. But if you can't, you know,
Paul Kaseburg - if you don't have that staying power, that's going to put you in a risky place. Knowing what you can tolerate and what you like is an important aspect of investing. You know partially because that'll help you do deals that are going to give you better returns but also because if the deal is going badly and you put too much money in it in comparison to what you should have based on your growth portfolio then that's just not fun and you're going to lose a lot of sleep and nobody wants to do that for 10 years.
Tyler Stewart - So you're saying if a deal is projecting say a three-to-five-year hold the mindset should be well what if it's an eight-year hold, a 10-year hold, is this still a deal I would be okay moving forward with?
Paul Kaseburg - Yeah, absolutely and kind of having that mindset I think sort of generalizes that what the game plan upfront is not necessarily what's going to happen. In fact it's almost certainly not what's going to happen, right?
Adam Hooper - Yeah, Tyson says, everybody's got a great plan until they get punched in the face.
Paul Kaseburg - Exactly. It's just there's so many variables and so much uncertainty in any kind of investing, not just real estate, but something's not going to go as planned so one of those things may be the whole period. And even if the game plan is to hold for three-to-five years you know it's not uncommon for somebody to get five years into a deal and the market is not conducive to selling or there's an additional opportunity to hold that deal longer and create some more value or whatever reason the sponsor may choose to just hold that deal longer. So you know that's really out of your control as a limited partner and so you just need to be prepared to hold longer than expected if you need to.
Adam Hooper - And when it comes to listeners and investors out there trying to really get to what their individual tolerance or capacity for risk is, you know we talk about that a lot here on the podcast and with some educational stuff we put together, we're working on some tools within our platform that will help investors get there. Before that launches though, do you have any resources or other areas that you can point to for investors and listeners that can maybe help get them a better understanding of what their capacity or what their tolerance is for risk?
Paul Kaseburg - Probably the most important thing would be to talk to your financial advisors about that. Because it really, you're tolerance for risk is really in the context of your entire investment portfolio and so there's nobody who's probably better suited to give you advice on that then whoever you're advisor is that you've chosen. You know nobody, you know whoever's giving you advice you know nobody knows you like you do so just think about it for yourself and think about what makes sense for your own situation.
Adam Hooper - And that is a fantastic unplugged segue into number 10 here, which is the, I am not an advisor, but here's some advice websites, I mean this happens in all industries, right? We've seen a lot in the real estate crowd funding space and other, you know the robo-advisor space, other alternate investing platforms. Websites that position themselves as gurus or experts or this kind of singular voice of trust, how do you feel about that?
Paul Kaseburg - Yeah, that's been a problem in the investing world for as long as there's probably been an investing world. You really have to think for yourself in the world generally, and especially in investing. Just work under the assumption that everyone out there has an interest, so it's important to know what that interest is. Whether they're an intermediary, whether they're an advisor, whether they're putting deals together or some kind of a sponsor. You know everyone has a business that they're in so you just want to understand how they make money and what their relationship is to you and are they a fiduciary or not. So just kind of think through that before you take someone's advice and it's really at the end of the day you really need to kind of take it upon yourself to take responsibility for your own investing. And if you're not really comfortable with the deal or you just don't understand a deal for one reason or another, it's just not clear, then you just shouldn't do it. You know it's better not to do a deal than to do a bad deal or a deal that you don't understand because there will always be more deals in the world and hopefully there will be sponsors to make you comfortable and you know clearly communicate what they're trying to do with the deal. It's kind of not worth taking the risk and you know there's no one-size-fits-all solution for people in real estate or financial management and so anybody who says they know the right way to do things that's probably, you know if it's true at all it's only true in a very narrow context
Paul Kaseburg - for a very narrow group of people.
Adam Hooper - Yeah, I mean this is something that we see in our role as a marketplace happen frequently. And just recently, as you said, the communication right? When there's a breakdown between the source of truth and information which would be the issuer, right, the sponsor, the managers actually doing the deal. We've had instances where there's someone acting on behalf of a group or individually and maybe sometimes those things aren't communicated correctly to the rest of the members of those groups, right? And then the group members trust this kind of single voice rather than necessarily getting the truth from the documents which again we'll probably talk about later. And then that can cause some challenges in the process, right? We just recently had a sponsor request a waiver of liability from everybody that's coming in from one of these groups because of that separation of communication. They couldn't necessarily rely on what was being communicated to this group because there was that layer in between. So you know like I think you said, you got to think for yourself, you got to talk to advisors that have a fiduciary obligation to you, if they don't then again you kind of check the motives of who's giving out this advice and this information.
Paul Kaseburg - Yeah, absolutely. You got to think for yourself.
Adam Hooper - Yeah. Okay, number nine. Going for quantity instead of quality. Spray and pray versus focusing on better deals that are a better fit for yourself.
Paul Kaseburg - Yeah, well this is an interesting one. I guess there's an inherent trade off between doing more deals and creating some diversification there, which has some real benefits, you know for sure. Versus doing deals that are just the best deals that you can find. At the end of the day you want to make sure that the deals that you're doing are the highest quality deals that are out there and probably the most important way to do that that I can think of is just to look at a lot of deals. The more deals you look at, not necessarily invest in, but more deals that you look at will give you a better understanding of what makes a good deal versus a bad deal. And you know is this a good sponsor? Is this good real estate? Does this track record fit with the sponsors, do they have the track record that they can execute on strategy that they're planning to do. Do the fees make sense? Kind of the whole structure of the deal, the more it is you see the better chance you'll have of recognizing a good quality deal when you see it come across and you know having a lot of deals that are not good deals, it just doesn't help you.
Adam Hooper - Yeah, right.
Paul Kaseburg - So, yeah you don't only want to do one deal, just the only best deal that you found, you know that's probably not a good diversification strategy but at the same time you want to make sure that every deal that you do is really kind of the best-in-class deal, with a best-in-class sponsor and strategy that makes sense. And you know something that you expect to do well in the context of other deals that are like it.
Tyler Stewart - And then we'll touch on this later, but when you say looking at a deal, what document are you looking at when you say, looking at a deal?
Paul Kaseburg - The documents that most investors are going to use to understand a deal is on the first cut at a deal is to look at, usually there's a slide deck with all our executive summary, it just goes through the basics of the deal. Like what is the real estate maps? The business plan, basic financials, sponsor information, track record, just kind of other like basic information about sponsor and the deal. That's kind of your first cut to see what's going on with this, particularly on the sponsor. Then if you really want to understand the deal what you really have to do is download the PPM.
Tyler Stewart - Got to read the PPM, have to read it.
Paul Kaseburg - Have to read it right. And we've talked about this before, I mean that document, if you only do one thing to understand a deal you want to read the PPM. And it's super boring but it has everything you need and it's important because you know slide-deck is really about communicating the overview of the deal, but not necessarily the details of the deal and the PPM, you know the goal of that is to really disclose everything good or bad about a deal to investors. And that's good for investors and good for the sponsor, right. I mean for investors you want to make sure that you understand all the risks in a deal and potential kind of pitfalls of that deal, as well as the opportunity. And from the sponsor perspective, we want to make sure that all of our investors are fully informed about everything that could potentially go wrong. So sometimes it seems like a little bit of a laundry list of you know just these unlikely things that could potentially go wrong on a deal. But it's important to think through it all and make sure we disclose it all to investors and make sure investors have kind of walked through it. So there's kind of no shortcut to doing that and real estate is complicated, and every deal is complicated. And really the only way to really evaluate a deal is just go through that PPM.
Tyler Stewart - Yeah, and I know you've been a strong proponent of reading the PPM. We actually had a listener, he told me on the phone, his Saturdays are no longer about watching sports. He downloads PPMs and he's looking at deals.
Paul Kaseburg - I love it.
Adam Hooper - There we go. So we're making a difference.
Paul Kaseburg - I mean I love to hear that and every once in a while we'll get you know we'll get questions from investors about things and you get a surprisingly small number of questions and every once in a while I'll get this really obscure question about the PPM and that's my favorite thing that happens. Because I put so much time into those documents, we all do, and the fact that someone actually reads them it just makes me feel good.
Adam Hooper - Nice. Okay, well continuing on to number eight in the same vein of shortcuts, we'll call this one regulatory shortcuts. You know this is something that again as our position in the marketplace we get to see and we're probably more privy to the regulatory environment when you're raising capital offline, online, in this new environment. Some of those things that are I would say small nuances, and most people, sponsors, investors or otherwise may not even know that they're out there, but can have huge ramifications for all parties involved. We operate under Reg D Rule 506(c) which was part of the Jobs Act that allowed for public advertisements of these private deals. With that comes additional accreditation requirements. That's one of the biggest pieces of feedback that we get from investors is my gosh, I just went through this accreditation thing, why do I have to do this again? In other places I can just check a box and I'm good to go? That's not us being meanies, that's the SEC that says when you do these things you have to follow certain rules. Advertising non-general solicited deals, right. We see some other platforms out there that are making public advertisements of private investments, which you know again runs afoul of SEC regs and can trigger a whole laundry list of ramifications for investors and managers and the platforms. Any thoughts, Paul, on how an investor might be able to make sure that the platform they're investing through or the sponsors are investing with
Adam Hooper - aren't taking regulatory shortcuts, they're doing it the right ways, so that you can minimize any kind of regulatory blow back as an investor?
Paul Kaseburg - Yeah, you know this is an interesting area because it's new, I guess relatively in sort of--
Adam Hooper - In the grand scheme of things.
Paul Kaseburg - In the scale of syndication, right. Syndication's been around for a long time, but these particular regulations are kind of relatively new and you know we don't make public offerings and so all of our investors are accredited and we rely on that exemption as well. We have talked to our counsel about the potential benefits and drawbacks of using some of these other exemptions and for the time being our position has been for ourselves, we'd rather just let that sector of the market mature and let some people get some experience in it and just understand the mechanics of how the regulatory environment is going to be enforced. And just kind of let there be some best practices out there first before we explore that. And we just kind of don't really need that at this point in the market as well. And so we'd just kind of rather let that play itself out and get some maturity before we do it. So I think it's just a little bit unclear you know what is going to be an issue and what isn't going to be an issue and so there's some risk associated with that. Like you said, it's probably important that investors understand what exemption is being used and the potential risks associated with that and really I guess I'd look at that as you know what, it's a really hard risk to quantify right. Because what are the chances, it's probably not an issue if the deal does well. It's really only going to be an issue when the real estate doesn't perform as expected, you have some investors who are going to ask for a redemption
Paul Kaseburg - because for what ever reason based on the documents that were provided. And it's kind of unclear how that shakes out, and we really haven't seen that happen because we haven't been in the market-- This kind of all hasn't been tested yet. I mean is that kind of what you're seeing with these market folks right now?
Adam Hooper - Yeah and I think as you said a good market that we've been in, that can cover a lot of, less than great practices right. That doesn't reduce that inherent risk though right. And I think that's from our perspective and we have I think a pretty unique view into what's going on in the space. As you said syndication's have been around for a long time. The way that they're being done on platforms like RealCrowd and others is relatively new, right. We've been around for five-and-a-half years now, the mechanics are the same, it's some of the regulatory nuances that have changed and can have some pretty serious impacts if it's not done correctly, if it's not done in compliance with all of the SEC and state laws as well. Again this is where I think we've got a pretty unique viewpoint on, just from our position in the marketplace. And you know our advice as always to investors and sponsors out there, just ask the questions right. If you're investing on the platform, ask the question what exemption is this relying on? How is this regulatory compliance assured? What are my risks if I'm investing in a deal on this platform and it isn't done correctly? Those are perfectly fine, above-board questions to be asking and I think investors owe it to themselves to have that awareness and to ask those questions to make sure that they aren't adding that risk that they might not even know existed before.
Paul Kaseburg - There are so many sources of risk, you know why add to the sources of risk in a deal? Real estate is complicated enough.
Adam Hooper - Yeah, which again Paul, you are just crushing these segues. So number seven, great looking returns but maybe not the most experienced sponsor?
Paul Kaseburg - Sure this is another thing that we've talked about a little bit in the past and you know at the end of the day I think the most important thing that you can do is pick a sponsor that you're comfortable with. And you know at the end of the day that's going to be, you're going to rely on their capacity to manage the deal, to pick the deal in the first place. And you know to exit the deal to make you money and you know the returns on paper are they're not created equal across different offerings. So different groups will underwrite deals in a different way. Some groups are going to be more aggressive with their assumptions than other groups. And I think what people find is certainly what we see, when we review other people's offerings, is a less experienced sponsor who needs to go out and raise money, you know many of them tend to be more aggressive with their assumptions because all else being equal investors prefer to have more experienced sponsors and so if it's a less experienced sponsor then to incentivize investors to put money into the deal they need to see higher returns on paper. And there are, you know we talked about the complexity of underwriting deals, and the many dials that can get turned in that underwriting and how, really how hard it is for an investor to understand the entire financial model and how that build up happens to get to those returns. Not only that just the uncertainty involved in those returns. Because there's just a lot of uncertainty in the index of that right.
Paul Kaseburg - You know what's your rent growth, what's your exit cap going to be? You know really the minutia of the underwriting, you know the expense assumptions, the value-add strategy assumptions, those can all really have a big impact on underwritten returns, but it's hard to evaluate as an LP even reading through the PPM just the amount of uncertainty there is. So I think it's worth, I mean obviously you want to look at the underwritten return and I guess all else being equal, high returns are better than low returns, but I think it's far more important to pick a sponsor who is not incentivized to go out and have aggressive assumptions and who has a lot of experience doing what they're planning to do. That's going to contribute a lot more to your investment success than just pick to just deal with higher returns.
Adam Hooper - And I would add to clarify higher returns are better returns for the same amount of given risk, right?
Paul Kaseburg - Right.
Adam Hooper - Let's make sure we append it with that, right. I think that's one of the things that we're working on right now and launching some product pretty shortly of you know for us returns and projections that's almost an after-risk conversation, right. You've got an underlying risk inherent with every deal, with every sponsor in every opportunity, the returns should have some correlation to that risk and then you can figure out you know is this a good risk adjusted or not. But the focus on a lot of the industry has just been purely on what is this return? Is it high enough, is it giving me enough cash flow that I feel comfortable with it without any appreciation of the risk their taking to get there. And I think that's one of the things that we are always trying to work on how we can best communicate that and help, maybe that's why we're doing the podcast, right. Is how we can help listeners understand what the underlying risk is, figure that out, figure where you're at on that scale and then the returns are almost, you know they will be what they will be, 'cause they're all projections, right?
Paul Kaseburg - Yeah.
Adam Hooper - They're all numbers in a model that have varying levels of certainty like you said.
Paul Kaseburg - You know it's easy to evaluate an IRR, but it's really hard to quantify risk. And there are a lot of things you can do to sort of juice that, whether it's your underwriting or even just how you build your capital stack. And how you structure your deal and in engineering school I remember if we had too many significant digits on our answer, you would get marked wrong, but in finance that's not how it works. You know everyone just assumes that you can forecast 10 years worth of IRR to the thousandth place and no one really thinks that's humorous. It is really important to think about the risk first and then think about IRR, I think that's a good point.
Tyler Stewart - And you were saying, it is hard even if you read the PPM it can be hard to see what those assumptions were. What are some ways some investors could start to sort that out? Is that just a matter of looking at more deals and reading more PPMs so you can compare and contrast?
Paul Kaseburg - I think so. It's probably important to just accept that that's a hard thing to do as a limited partner. The best way to do it is to look at a lot of offerings and to look at the initial underwriting and you can start to see across different deals. You know if you really want to spend the time you can look at, all right what are the payroll assumptions here, what are the turnover assumptions? You know what are the assumptions for the growth rate of utility expense over time, I mean you name it, there's kind of a million things you can dig into to think about and compare and contrast different deals. You don't always have all the information you need to do that, but you could probably reverse engineer a decent amount of that if you really dig into the financials that are provided. I wouldn't discourage people from doing that. You really just want to focus on picking a good sponsor who's going to underwrite appropriately. Thanks again for listening to the RealCrowd podcast. If you like what you're hearing please visit realcrowd.com to learn more and subscribe on iTunes, Google Music and SoundCloud. RealCrowd, invest smarter.
Adam Hooper - All right, moving on, number six, too much focus on fees over quality of sponsorship. Again kind of segueed into this last conversation we were just having. You know fees are required, they're part of every deal. They keep lights on and help incentivize managers to execute out the asset level and on the strategy. What are your thoughts on prioritizing fees over caliber of sponsor?
Paul Kaseburg - Yeah, you know it's interesting. You know I would say fees, you would expect that fees would be higher for higher quality sponsors, but that's not always necessarily the case. And sometimes I'll be surprised by some offerings, you know particularly kind of smaller, obscure sponsors and when you actually back out the fees they're exorbitantly high in comparison to really established sponsors. It's important to think about fees, but it's also important to think about sponsorship and between the two I think that sponsorship probably has a bigger, within sort of a reasonable range of fees that you see in the marketplace. Sponsorship is a lot more important of a factor than the fees are because you know it doesn't help you to have low fees on a deal that loses money. You know whereas if you have substantial fees on a deal that makes a lot of money, you know it just doesn't seem quite as painful at the end of the day. We all just care about, what do I make net, right? That's the only important thing that matters. And so I think the factors, really the idea is that you pay fees to a sponsor to you know, everyone has to make money somehow right? And so you're paying them to go out and find those deals and to have a platform and to do all the work on your behalf and a good sponsor is going to make that up over lead sponsor because of all the advantages they have. So it's important I guess thinking about why is it important to have a good sponsor, so just from an investment perspective right. When you're buying a deal a strong sponsor has relationships with all the brokers
Paul Kaseburg - and the sellers and so if you're not a strong sponsor the only way you can get a deal is to overpay for it and if you are a strong sponsor you may not, you're not going to be paying top price when a deal falls out of contract you're going to get the phone call. When the deal is only going out to two or three groups, you're on that list of groups that sees the deal in the first place. Buying the deal in the first place, you're going to have better access to a good sponsor and you're good sponsors are going to have the information through their existing portfolio to allow them to more accurately underwrite deals and avoid problems that they might otherwise run into. You know a good sponsor is going to have a strong balance sheet that's going to get them through tough times. And that's really important right, I mean if your sponsor is in distress you know it doesn't matter how low the fees are, there's going to be a problem. And then even when you go to sell the property you know that sponsor, when you're buying and selling a lot of properties on an ongoing basis and you have a big portfolio it's a really small industry, right. So people take that into account when they're dealing with you so there's a lower chance that you're going to get re-traded as a deal is getting sold.
Adam Hooper - Again I think what you said there, it doesn't help to have low fees on a deal that doesn't make money. That pretty well sums it up.
Paul Kaseburg - Yeah, there we go.
Adam Hooper - Okay, moving on, number five. Again this is something I think we have a little bit more interesting insight to, adding additional entities or complexity by way of aggregator vehicles to a deal. You know that's something that at RealCrowd we've been very transparent about from the get go is we operate on a direct model. As an investor you have a direct relationship with the manager, you know again access to that single source of truth, no additional complexity, no additional fees, just a straight-up, direct investment. Aggregator vehicles are something we've seen on other platforms structurally. We've also seen some of these, you know back in risk number 10, the, I'm not an advisor, but here's some advice websites, we've seen them form, kind of aggregator vehicles for these all of which adds opacity, it adds fees, it adds complexity and it adds, again another layer of regulatory complexity to these deals too rather than just investing directly with the manager. What are your thoughts on that?
Paul Kaseburg - Well, you know I think one of the values of you know I guess one of the values of sort of the crowdfunding world becoming popular is that people have maybe a better understanding of just how the space works and there's more access and it's easier to go out and you know and just find deals and find sponsors. It kind of just got the word out about private real estate and the opportunity I think to more people. And like you said you know kind of one of the downsides is everyone's out there trying to figure this out which I'm sure you can weigh in on, but there are a lot of people trying to make money in different ways on this space and I guess overall my opinion is simple is better and it doesn't have to be complicated, the people who are investing in real estate and they need money and there are investors who want to put that money in. So those the fewer things that are in between the investor and the sponsor probably the better. Because in an age of you know information being easier to access, there's just kind of no reason for all those intermediaries.
Adam Hooper - Yeah, that's something you commented and we discussed a little bit earlier, a good market can cover up a lot of bad behavior. And I think that's what I'm curious to see how that's going to work out when a lot of these aggregator vehicles, you know as soon as the market turns these platforms and issuers, these securities have maybe only been in the business in the up-cycle. You know they haven't been through down markets to see what that looks like when you're portfolio turns from a performing portfolio to one where you got to work out a few deals. I think that's going to be a really interesting shift in the landscape to see how some of these companies that have you know 10s or 100s of deals that are going to be crossed in workouts and some pretty sticky situations. So I think that'll be, and again that's just our philosophy. As you said before, everyone's got an interest, everyone has an angle, our angle is just transparency and trying to keep it direct. So that's how we've always approached it is making sure that the investor has a direct line and a direct relationship with the manager who's going to be the one who's actually working that deal out versus relying on some kind of a barroom kind of note or something where they don't actually have the security of that underlying investment, that's something that's always been a concern to us. We'll see how that plays out. If the market continues where it's going maybe we'll never find out, but once it does start to shift I think we'll see how that turns out.
Paul Kaseburg - Yeah, I'd almost sort of generalize this to say that all else being equal, simple is better than complicated. That applies to your capital structure, you know the more that you have complicated prep-equity included or mezzanine structures, you know just sort of unusual situations and structures the more that you get misaligned interests between all the people who are involved with the deal. And misaligned interests and lots of people being involved in the deal, it's just not a good thing. It creates friction when things aren't going as planned and like we talked about real estate just doesn't always go as planned, in fact it almost never goes as planned, one way or the other in some respect and so you want deals that are simple and robust uncertainty and you know that are going to allow you to kind of wait things out if they don't unfold the way you expect to. So simple is probably a good thing 'cause you hate to see things go bad for any reason, but particularly when the real estate is doing fine.
Adam Hooper - Yeah, I think as you just said there in the '08-09 cycle, there were plenty of deals that were still performing but because of the capital structure or organizational structure they had to be abandoned, right. You had to jettison, you had to replace a capital partner or do some convoluted financial structures, while the underlying real estate might have still been performing okay. You know again we've said that many times, a stock, real estate deal is complex enough, you don't need to complicate it any further. And that's again the whole purpose of this episode is why complicate it further when you don't need to?
Paul Kaseburg - Yeah, it's important to know those different parts of the structure, again if incentives are not aligned. We were looking at a deal here recently that was a big deal with a really heavy value-add and we were chatting about it with a potential JB equity partner to do a deal with us and it their price really ran away in the market, it got priced right out. And I was just chatting with that JB equity partner the other day and they said, oh yeah, you know we ended up just going back and doing the debt on that deal. Because we didn't think the price made sense but we were happy to lend at the basis we had. And you know I said well someday we may own it at that basis and that'd be great. So it's just not everyone is investing in deals because they necessarily believe in the same outcome.
Adam Hooper - Yeah and that's something we covered a couple episodes back with Justin Palmer from Synapse. He's active in New York and San Francisco and he's seen similar to what you just said, the traditional institutional, quasi-institutional equity investors have started to put out much more debt and maybe even higher leveraged debt, we see their going higher up the capital stack because you know if it all works out great they get a pretty good coupon risk adjusted for where they're at in the capital stack and if all goes bad they're in that property at a basis at substantially less than what we would have had to pay on the equity side. So I think that's an interesting shift in the more institutional capital markets where more people are switching from equity and trying some higher leveraged debt out there.
Paul Kaseburg - Yeah, we're seeing it a lot.
Adam Hooper - Yeah, okay number four, we're in the homestretch here. Falling in love with a strategy whether that's you know asset strategy, market strategy, product type strategy. You know I gosh I made a killing in this multi-family deal in Texas and that's all I want to do now? Any challenges with that?
Paul Kaseburg - Yeah, it's I guess like anything when something's been doing well for awhile you gravitate toward doing more of it so that's just a natural human thing to do. And in investing in a world that has mean aversion and cyclicality you know that's going to come back to haunt you at some point, most likely. It's important to diversify and we talked about kind of the data earlier and it shows that it's probably not a bad idea to diversify, there are some regions and asset classes that are historically superior to others, but they're all generally in the same ballpark so you want to make sure that you're not overly exposed to any one asset class or location that's going to come back to haunt you. Because things change and a big employer could leave, the price of oil could go down and that could change your entire portfolio and it'd be better just to have that impact in one or two deals in your portfolio.
Adam Hooper - Yeah, I think that's one of the benefits of platforms like RealCrowd and others out there to, not just us, but this whole industry has elevated the level of access so far beyond whatever it was before, right. Historically you'd get deals from either finding them in your own backyard, maybe your buddies you went to college with or you know through the country club network and that was the only way you really had access. So there was a very real barrier to building a diversified portfolio whereas platforms have come up now and you can get into deals for 10, 15, $25,000 and build a really well diversified portfolio across the country, across product-type geography, market, you know sponsor, the whole nine, that's a very new thing that just historically has become available.
Paul Kaseburg - Yeah, this is kind of the flip side of the quality versus quantity conversation we had earlier to right. I mean on the one hand you want to make sure that you're doing quality deals with quality sponsors and on the other hand you want to make sure that you have enough diversity in your portfolio that you're not overexposed. So I guess it's up to everyone to find that own middle path for themselves.
Adam Hooper - And that takes us to point number three. Which is diversifying by location or other factors but not necessarily time. Paul, you were the first one to introduce the concept of vintage on the podcast and kind of spreading out the time horizon over which you invest that capital, rather than you come into the space, you find a platform, you're super excited, you put all your money to work in the first month. And then you kind of sit back and then watch.
Paul Kaseburg - Right.
Adam Hooper - And that's what you were talking about before with the NMHC study that we'll link to again, timing is important right. Riding out things and looking at deploying capital over a longer time horizon is a good strategy.
Paul Kaseburg - Yeah, absolutely I mean if you put all of your money to work in private real estate in 2006 you probably had a very different outcome than if you put it all to work in 2010.
Adam Hooper - Yep.
Paul Kaseburg - From the perspective of managing risk you don't want all that concentration just in one year for sure. And in any particular year you're going to have to kind of overcome the market one way or the other to deviate from market returns and hopefully if you picked a great sponsor, you know they're going to do fine regardless of what point in the cycle that they've invested. But it's a whole lot easier when you have that market tailwind than a market headwind to do well, so I think diversifying your investment over time is important and it's probably, you know on the way in that's important and it's also worth thinking about you're rollover on the exit too, you know are all of your deals going to be sold at one time and are you planning on 1031 exchanging? Do you even have that option? You know how do you manage your ongoing portfolio over the next 30 years as opposed to just what am I investing in today that's going to have the highest underwritten IRR over three years? You know it's important to think through that long-term game plan for yourself so you can dollar-cost average over time and make sure you kind of manage your portfolio smoothly.
Adam Hooper - Yeah, that's one of the things we've talked about repeatedly on here is also making sure that you're expectations of return are inline with the market in that current period, right. The deals that were originated in, yeah certainly 2010, you know all the way up through '13, '14, '15, even last year this time, right. I mean that was a different market, different dynamics, than what we're seeing this year and going forward. Especially you're comments earlier about the treasury rates going up, you know interest rates are coming up. Spreads are tightening so the return expectations today is a different market than what it was last year which is even more different than it was two, three, four years ago. Being fluid and more current with the expectations of returns certainly as the market matures I think is a big part of that too.
Paul Kaseburg - Yeah, I know our underwriting and our projections, our performance projections, you know the return expectations on the yield and kind of all-in ROI based have come down substantially in the last couple of years because that's what we're seeing in the marketplace. We expect rent growth to be lower and you know financing may not be as attractive although historically speaking it's still pretty good where it is. But you would expect returns to be a little lower now than they were a couple of years ago and every once in a while you run into sponsors, you know they always have the same, year in and year out, they always have the same return right. And that just seems a little implausible, so it's important to be realistic about where the market is and of course part of that is comparing your private real estate allocation to everything else. And you know you'll get equity returns right now in the bond market and there could be you know I think there's a real case to be made that real estate is you know one of the least worst places to put your money right now. Just because of where evaluations are right now, elsewhere and so everything's relative. So it's all about you're talking to your financial planner, understanding your portfolio you've got and just because prices are up and return expectations are down, that doesn't mean that you shouldn't be investing in private real estate because it really depends on your alternatives.
Adam Hooper - Okay, we are at the final two, the top two. Number two, one of I think probably more risky things to do at this stage of the cycle certainly, always risky though, over leverage.
Paul Kaseburg - Yeah, this goes back to that conversation we had about you know complexity and this is where I consider over levering deals to be just complicating them and creating some friction right because there's just that much more of a chance that you'll hit cash-flow, breakeven and go below it and at that point you start to have conversations with the lender about how to manage the property. They have a different interest than you do and that's when properties start to perform, especially poorly, in investments start to perform especially poorly. You just want to avoid situations where deals are over levered. You know if you can, like we were talking about, if you can hold a good deal for long enough that market is going to make up for a lot of short term ills and so we definitely we held a lot of deals through the downturn and because we were able to make it through and to the other side and the markets recovered those returns will end up being okay. It's important to be able to have that staying power and make sure you don't get mark to market before you really want to exit a deal, just because you're lender is forcing you to. So yeah, over levering is, it could help, but it could hurt, and it's just a little inefficient and I think most people think that we're well into this cycle, a later stage in the cycle so you just want to be very cautious about what your deal can tolerate and what it can't. I guess from an investor prospective, the way I look at that is to, you know this is something that investors can do is you look at the underwriting
Paul Kaseburg - and just think through what has to go wrong before I can't make my debt-service payments? And you know you can look at it, from multi-family it's really the appropriate question we call it our stress-test, that's how much does revenue have to go down on a percentage basis before I hit cash-flow breakeven? And if that happens you can probably play around with some other things and maybe skinny up your capital expenditures on the short-term and you can kind of manage some things around it, but you really just don't want to get to that point. And for retail or office, you know if a major tenant leaves, can I pay my bills and what's my exposure here? And what are the chances that they're going to leave and just thinking through those scenarios to understand what can go wrong in a deal before you have that critical problem is really an important thing to do.
Tyler Stewart - To determine if an opportunity might be over levered you would look at the tenant base and the cash flow?
Paul Kaseburg - Yeah, absolutely if the question is just what can go wrong here before I can't pay my lender? Because as soon as you stop paying your lender things get bad really fast. So you just want to kind of think through the business plan for each particular property and just think about you know what are the chances that happens? And is that a chance I'm willing to take?
Adam Hooper - And then Paul, in your experience going into the last cycle, you know '05 through '07, credit markets were on fire, right. Fog a mirror, get a loan, right, very, very loose underwriting standards, a lot of easy credit out there. Which precipitated a lot of the downturn. Have you seen credit standards becoming looser? Is it easy to get credit out there or has it stayed more disciplined this last bit of the run up and this part of the cycle versus what we saw heading into the last turn?
Paul Kaseburg - It is more disciplined right now, actually which is a good thing.
Adam Hooper - That's a good thing.
Paul Kaseburg - Probably for everyone. I think a lot of lenders were really burned in the downturn and it's you know memories are short in this business, but they still remember and so I think in general lenders have been less aggressive this go-round and we've seen that. So we don't feel that necessarily at our company as much as some other groups just because we're not necessarily using maximum leverage and complicated structures which is where you're kind of on the bleeding edge of maxing out your leverage, and you know trying to get really complicated making short-term bridge products. That's where you really see the underwriting kind of get pushed in the aggressive lending market. There's just a little bit left of that right now, although I will say there's a lot of debt loans out there right now that are getting pretty active and I've heard that the cost of that debt has really come down and means that the sizing can kind of go up. We're starting to see the market get a little more aggressive but from our perspective which is lower leverage, for the most part Fannie Mae and Freddie Mac, that product has stayed pretty even through downturn and through the upside also, it hasn't changed a lot. But from what I've heard on the development side, again not a space we play in, it's tough right now to get development loans and that's really constrained the volume of new product that's in the pipeline right now. That's a good thing for the market overall. There's been a little bit of a governor this time
Paul Kaseburg - I think was not there quite as much last go round.
Adam Hooper - And then just a quick snapshot, you know kind of back of the napkin, you know where would you put some of those different breaks in terms of loan to value or loan to cost that would be more conservative, and maybe a little bit aggressive and then pushing the higher end?
Paul Kaseburg - It's really deal specific, but in our space which is, call it the kind of B minus, A minus, multi-family, West Coast, you know what we see is most of our deals we tend to use 10-year, fixed rate, full term IO debt that ends up being in the, call it 65% range. Most investors would consider that conservative, fairly low risk. We can easily lever that up by giving up some IO to get into the mid-seventies and I wouldn't call that high risk necessarily but I would call that using kind of most of the debt you can easily get from a first trustee perspective and then beyond that you end up needing some kind of a more complicated structure, whether it's structured debt that's underwriting some potential upside, whether it's a situation where you just don't have cash flow to cover your debt-service and so a bridge that isn't necessarily earning capital but it's funding an expectation of some value that you're going to add operationally, maybe a lease-up situation, a development situation, something like that. When you don't have the cash flow in place to cover your debt or not cover it by very much that's when it starts to feel a little bit more risky or just when you look at the kind of stabilized level of cash flow and compare that with what your debt service payments are and it's thin, you look at your stress test and that's low like single digits, that starts to feel a little aggressive.
Adam Hooper - Okay. All right, well that gets us to number one. Number one, Tyler will hopefully put in some drum rolls and a cymbal here. If you haven't figured it out by now, it's not taking time to read the documents, right. Got to read the PPM, read the PPM, read the PPM. That's been the longest running theme on the podcast and that we've talked about it already on this episode, we talked about it a bunch with you Paul, but that is, you know that's not a good idea to not read the documents.
Paul Kaseburg - Yeah, it's all there in the PPM right like we talked about. That's the chance for us as a sponsor to disclose all the potential risk, make sure that investors know what they're getting into and that's the chance for the investor to you know actively decide, do they want to take those risks or not and is this the deal you want to do or not. It's all in there and it's worth the time. You know if you're investing an amount that you care about which I think most people probably are, if you're doing it then you should just take an hour or two and do it.
Adam Hooper - Yeah, two of the other points we talked about when you see some of these investment clubs out there, as you said you've got to kind of think for yourself on this one and relying on somebody else to do that work for you isn't necessarily the best strategy. The big takeaway, do the hard work, right. You can't just set this on autopilot and go, you got to commit, you got to do the hard work and it's like we said it's not necessarily the most exciting reads but there's a lot of really, really, good information in there that you really need to digest for yourself and see does this opportunity really fit for my specific profile right now, for my situation, is this the right deal for me? Rather than either just not reading it or relying on others to just fill in that information for you.
Paul Kaseburg - Yeah, it's illiquid and inefficient market right in private real estate which is part of what's exciting about it and interesting and fun and it's part of the opportunity but at the same time it's not taking your money and putting it in a big index fund. It's going to require a little bit more work.
Tyler Stewart - Okay, Paul, as someone who loves a PPM and gets excited when listeners and investors ask questions from the PPM how do you PPM, how do you read the PPM? Do you do it all in one chunk? Are you pouring a beverage? What is your process?
Adam Hooper - We might need to make that a t-shirt, "How Do You PPM?"
Paul Kaseburg - Yeah, well the way I PPM is I sit down and just do it all at once and if I can I'll, I know this is probably not the most environmentally friendly way to do it but I'll just print the thing out and sit down somewhere where I'm not going to be disturbed and just go through it all at one time with a red pen and just start making questions and comments as I go through it and value gear engages. It takes some focus so you don't want to do it five minutes here and five minutes there and be distracted, so just sit down and kind of power through it and you know put together a big long list of notes and then go back to whatever else you have to do.
Tyler Stewart - Putting on your sponsor hat, when a investor comes to you, they've read the PPM, they've taken notes, do you prefer to go page-by-page with the investor? Do you prefer to just jump around through the notes? How does that conversation look?
Paul Kaseburg - Yeah, when it does happen and I'll say like it's surprisingly and perhaps distressingly uncommon for us. I do get investors who call up with questions about it, but a lot of what we have, we have about 800 investors and we have a very small investor relations team and so that just kind of demonstrates that we don't really have a high volume of questions and part of that is we have a fairly simple structure and part of it is a lot of our investors have been with us for so long that whatever questions they have they've had in the past already and they've already kind of figured them out or they're just not going to ask them. We don't get a huge volume of questions. When it does happen, usually we'll just sit down and I'll pull up the PPM and they'll pull up the PPM and we just kind of go through their list of questions one at a time. And that's usually how we handle it.
Adam Hooper - That's a big point to right, it's one thing to read the PPM, but you don't just end there, right. Ask the questions, I think that's, as you just said you love it as a sponsor when people ask the questions because it means they're asking the right questions right. They're doing the research, they're putting in the time and doing that work and that would be echoed I think across almost all the sponsors that we work with. If you have questions, ask the questions, right. Just don't end at reading it. If there's uncertainty, if there's things you need clarification on you got to take initiative, ask the questions and that's the only way you can really be truly informed enough and make that confident decision that it's the right move for you.
Paul Kaseburg - Yeah, absolutely. The last thing that we want as a sponsor is an investor to not understand what they're signing up for with us. We want people to fully understand our program and the investment and the risk and the opportunities and so we want people to understand that we want them to pick up the phone and give us a call and make sure everybody's on the same page.
Adam Hooper - Perfect, I think that's all we've got. I think that was a pretty good overview of how to unnecessarily add risk to your deals.
Paul Kaseburg - All right, there's 12 things not to do.
Adam Hooper - Anything else, Paul? That you want to add on to this, anything we missed or anything else that you feel is important for listeners out there?
Paul Kaseburg - Yeah, that was a good overview. I like it and at the end of the day just you know enjoy the process, and take the time to think through it, don't be in a rush and that's it, follow the 12 rules and there you go, get started.
Adam Hooper - That's a good start. All right, listeners, well hopefully you made it all the way to the end here with us. We appreciate you listening, as always if you have any questions or comments or any feedback on these, the Dirty Dozen, these 12 items to unnecessarily add risk, please send us an email to email@example.com and thanks for listening.
Tyler Stewart - Hey listeners, Tyler here again. I want to give you a quick reminder to head to realcrowduniversity.com to enroll into our free, six-week course on the fundamentals of commercial real estate investing. That's realcrowduniversity.com. Hope to see you there, thanks.
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