Phase 2 - Real Estate 101 (How to or one big idea)

Podcast - What Can Retail Investors Learn From Institutional Partners?

Tyler Stewert
September 13, 2021
Podcast - What Can Retail Investors Learn From Institutional Partners?

On this episode, we are joined by David Saxe, Managing Principal at Calvera Partners. We discussed the process of raising capital from Institutional Partners, and how that differs from working with Retail Investors. David also shared some of the important lessons he's learned from his families history in real estate.

California native, Dave, credits his grandfather for his early interest in real estate—and has not forgotten his motto: operate with integrity. As Associate Vice President, Investments, for CIM Group in Los Angeles, David completed over $575 million in investments in apartments, condominiums, retail, commercial offices, and hotels, a role that demanded a balance of creativity and financial acumen. David graduated Cum Laude and Phi Beta Kappa with a B.A. in Economics from Northwestern University and received his MBA from the Haas School of Business at the University of California, Berkeley.

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RealCrowd - All opinions expressed by Adam, Tyler, and podcast guests are solely their own opinions and do not reflect the opinion of Real Crowd. 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.

David Saxe - To the extent retail investors out there have the time. It's how detailed I think they get. Learning the terminology, questioning or looking at assumptions whether it's my rent competitive set or sales comps or where I'm buying, or what new supply is coming online.

Adam Hooper - Hey Tyler?

Tyler Stewart - Hey Adam, how are you today?

Adam Hooper - Tyler, I'm fantastic.

Tyler Stewart - Yeah?

Adam Hooper - Yeah,

Tyler Stewart - You sounds great, lots of energy.

Adam Hooper - It's just a really nice day, the sun is shining outside here in Portland, had a great episode really good conversation.

Tyler Stewart - Yeah, anytime you get sun in February and have David Saxe on the podcast is a good day.

Adam Hooper - It's a good day. So David joined us today, we talked all about institutional investors. We talked about retail investors, some of the things that he's learned from his family's history in the real estate business which goes way back down Bay Area.

Tyler Stewart - Yeah, 50s and 60s.

Adam Hooper - Yeah, so his grandfather built up a lot of the Palo Alto area from multifamily didn't know that before today but again just really interesting conversation in comparing and contrasting some of the processes and the pros and cons of institutional capital and why we're seeing firms like his and a lot of others looking to raise capital from retail investors.

Tyler Stewart - Yeah, it was a great conversation and then David really broke down how institutions operate especially on due diligence and what investors can take away from institutions.

Adam Hooper - Yeah, we talked about the process, the timeline, some of the key points that investors both institutional and retail tend to look into when they're looking at managers and deals. Rounded it out at the end with some icebreaker questions for investors that are maybe feel a little intimidated to ask a real estate manager some questions. You know how can you start with some softballs and can start the conversations.

Tyler Stewart - Yeah, real estate so much of it is about relationships and David pointed out that not only is the manager trying to grow a relationship with the investor but investors are trying to grow a relationship with the manager. It's two sides and both sides are trying to meet each other where they're at. It really just comes down to their relationships.

Adam Hooper - Yeah, and this is a new way for managers and investors alike to build those relationships so listen in there for his outlook on 2020 and going forward. Yeah, again, just really really chock full of good stuff in this episode. Hope you guys enjoy it as always. If you have any questions or comments, if you want to hear more like this or if you have any recommendations for the show send us a note to and Tyler with that, let's get to it. Perfect David, thank you so much for joining us on the show today. Super excited to talk about your background going from institutional now to retail. Very excited to hear your story and see what we can talk about today.

David Saxe - Thanks for having me.

Adam Hooper - Well, why don't you tell us a little bit about that background where you got started, how you got into real estate and a bit of your time with CIM before you started Calvera.

David Saxe - Sure. So I have actually a family background in the real estate world. My grandfather moved with his family so we obviously, my grandmother, and dad, and aunt, and uncle to Palo Alto in 1959 and ended up being a pretty successful apartment developer in Silicon Valley. So a lot of the older buildings that exist in Silicon Valley today many of which have now been turned into a value-add place, he built about 1500 of those units. So I've always had kind of the real estate background and passion since I... as young as I remember. And then I also developed an interest growing up in architecture due to my love of art and in math and numbers and all that fun stuff. And then I think when I was in undergrad or was looking at undergraduate schools, someone suggested that I get into business side of architecture which was real estate. And since my first job in real estate back about, I don't know, 18-20 years now at Equity Office in Chicago I've been in the field ever since. And to answer your other question about CIM. So I had a stint at an Equity Office before business school, Berkeley and then at CIM I worked there after business school with my two business partners from 2007 to 2010. The reason why I thought that would be a great fit is I was very interested in real estate private equity and switching into the acquisition side of things after being in more the research economic side of things at Equity Office. And that kind of led to a pursuit of mine of an internship at CIM when I was a POS business school, Berkeley and then ended up doing acquisitions there

Tyler Stewart - for a few years with my two business partners before founding Calvera Partners.

Adam Hooper - Very interesting. And how does the background obviously again family dynamic there in Palo Alto in the 50s 60s is very different than a lot of our listeners that are down there today. You know what they know of Palo Alto these days but how did that background in it being kind of a family business and then this appreciation for the architecture side. How did that inform maybe your approach to when you got into the acquisition side? Did that give you any different perspective on things, a different way to look at things that maybe somebody coming from just a purely financial background might look at acquisitions?

David Saxe - Sure. So one thing I learned as I started exploring careers in Real Estate and getting some experience was development, ground-up development which my grandfather specialized in was probably not going to be something in today's world especially here in the Bay area that was going to be of interest to me just given all the red tape that exists and potentially working on the same project for 10 years. Yeah, a little bit of an exaggeration but not really here in the Bay Area. So the value add space that we ended up getting into and that I was interested in was a little bit more transaction oriented, use some of the same skills as development. But I think the main thing I learned was number one, I thought that doing this on our own or my own would be a great experience. Once I had the proper experience and that ground-up development as I mentioned was probably not the best fit for me. And then I'd say, my love of architecture and art that led to I think our careful attention to detail on all of our value out apartment projects when it comes to design and branding. Clearly we're working with older buildings oftentimes in the Bay Area from the 1960s but that doesn't mean that one can't get creative with how you redesign it and kind of use those same skills at a high level.

Adam Hooper - Have you bought any projects that your grandfather built, out of curiosity?

David Saxe - Funny you mentioned that. So we've toured some of them on these projects were somewhat of a very very large deals, 150, 200 units. And when we started our company you know just working our way up candidly those buildings would have been too large for us to pursue. Now we probably could partner with somebody and do it or at a different point in the cycle so it probably wouldn't be something of interest to us. And funny enough, he liquidated his entire portfolio for the most part right before the Great Recession. so he had good timing.

Adam Hooper - Had a good timing, yeah,

David Saxe - Yeah, and so a lot of those Buyer number one, two, or three since then have already kind of done the value-add place so there wouldn't be as much to do there.

Adam Hooper - Yeah,

Tyler Stewart - I would be curious. Are there any lessons you've learned from your grandfather that you still carry with you today as it relates to real estate?

David Saxe - Yeah, operating with integrity, treating people well you know, it's not squeezing out every every last dollar. I mean, there's people on both sides of a transaction. I think he conducted himself well with when it came to just how to do business but also I got access recently to all of his old files from the 60s for these buildings including comp sense of Sunnyvale, California and his background one column financial analysis of the value of one of his apartment buildings 'cause there was no Excel. So it seemed like even back then he was ahead of his time when it came to amenities to choose in the 60s kind of just other things that we still think about today. You know with somewhat different criteria but the same idea of trying to just have a vision of where the market is going, what people want in apartment building.

Adam Hooper - Fundamentals, right? I mean, it hasn't changed too much over the years but, yeah, operating integrity, that's pretty good. You think that sound like table stakes but you know it's not necessarily given anymore, is it?

David Saxe - No. Yeah, I mean, I've worked at different places with different cultures when it comes to that and I think we're known by just the people that we work with and investors and things like that. We tend to do things the right way and many retail investors that we'll get into are investing in the people so that's the big point. And so now, I think we definitely want to kind of contrast throughout this conversation the differences between your institutional capital, retail capital. You kind of what deals with the process is different for those. But before we get to that I'd like to learn a little bit more. CIM and equity office, those are super institutional groups, right? Yeah,

Adam Hooper - What were some of the biggest things that you learned in that institutional space how have you brought that forward? I mean, what are you doing differently now with Calvera versus how things might operate in a more institutional scale?

David Saxe - Yeah, it was in both places I just learned a tremendous amount clearly very different one was a very large REIT, that's Equity Office Properties based in Chicago. I was there from 2002 to 2005 and I had a fantastic experience because Sam Zell happened to be the interim CEO for some of the time that I was there and because we are in the research group so projecting vacancy and absorption and supply down to the submarket level, I got to interact at a very young age with the executives of the equity office. you know from a career path, I guess just starting there. Yeah, I think I was always interested in the entrepreneurial side of things whereas obviously a company like Equity Office is a behemoth and doing really really interesting deals. But you know just a big company where if you write it, for example, an investment committee memo you're outsourcing every part of the investment committee memo to different groups within Equity Office. Whereas now, obviously, we do everything ourselves and it's more kind of entrepreneurial and we take pride in getting involved in doing every step of the process. CIM, at the time I was there it's gotten much bigger since we all left. What was more entrepreneurial was doing deals that were a lot hairier with some more risk in a good way finding development, funding investment, buying debt, bought the old building or buying distressed condo loans. So I would say the risk profile and the creativity was there at CIM whereas clearly for a big public REIT that's not necessarily what they're focused on.

David Saxe - They want to create value but it's just a different side of the risk spectrum, they're buying more core assets. So kind of what we've pursued and the skills that we've learned and just kind of the way we operate our company from an entrepreneurial standpoint, I'd say we picked up more act at CIM as well as just tremendous experience there doing everything, even though we were acquisitions guys after business school, CIM was one of the few private equity firms that also made you asset managed, the deals that you acquired And so bringing that skill set of asset management and really understanding that if someone hands over a building to you, what do you do with it? Versus potentially just looking at numbers in an Excel model.

Adam Hooper - Right, those are two very different disciplines, right? Going out and hunting and finding deals that you don't have deal with after the acquired, it brings a certain level of, I guess you're more accountability if you have to be responsible for the management of that after that acquisition happens, right? Kind of seeing it through from acquisition out to eventual disposition that's just a different, very different discipline to take something full cycle rather than just focusing on one of those discrete stages?

David Saxe - Absolutely. Then one other point I think that I didn't mention is that I happen to be a Equity Office after the .com crash and being in the research group, I was tracking the rents at various Equity Office buildings and just saw how the rental levels and many of their office projects just cratered. And then again at CIM, we happened to be there after the Great Recession. So I think one of the things that I've took from most places is not to always thinks that things go straight up and to be careful with assumptions and just invest carefully 'cause things will turn at some point it's a cyclical business.

Adam Hooper - Yeah, well, since you brought up the cycles you know one things that we talk about here on the show is we're in a very long recovery right now. This is the longest that we've ever had. I think generally there seems to be a sense of cautious optimism but we've been saying that again for the last three or four years. You having been at two pretty influential firms in two pretty dramatic times, .com crash and then the 08-09 recession. What is your take generally I guess, on the market right now? How are you feeling? Are there any indicators that you guys are watching or seeing right now that would start to cause some concern as we look out in the next 12 to 24 months?

David Saxe - So we've clearly operate here in the Bay Area although we've now expanded to other to other markets and clearly do a lot of reading and looking at deals and reading various different publications on what's going on around the country. But the Bay Area has been a very unique place since we started our company around 2010. You know we write a quarterly newsletter, for example, and we have not had to write in that newsletter once in our national market apartment update that rents have gone down. So it's just as you mentioned, it's been at unprecedented I guess, the expansion. We continue here in the Bay Area which is making national news to have you know a housing crisis where no matter what people try and build, there is not enough to counter the demand of people wanting to come here for work and thus to live. So while rents have started to flatline a bit we're still seeing very strong rents when it comes to the apartments that we operate here. So going forward, I'd say you know in 2020 kind of looking more to the national at the national level given that the Bay Area is kind of a unique place. You know, we're seeing and hearing and expect is that you know rents should continue to go up in many of the metros that we track as long as affordability is a problem and there continues to be a housing crisis. One of the things that we're really carefully watching that's tied into that and affects all apartment investments is rent control gaining steam in various different municipalities. California just passed statewide rent control and apparently on the ballot or on the ballot.

David Saxe - I know very soon here is going to be more strict rent control and so we're seeing that everywhere and really paying attention to that. And then the final thing I'd say is that we're seeing a lot of new supply kind of a luxury class A level. And so in some cases yeah, you're seeing concessions on rents there. But the Class B, C market still seems to be pretty small because they're strong because it provides a lower cost alternative and a several decent spread between tends rents after the value-add business plan is complete in Class A property.

Adam Hooper - Yeah and that's something we've talked about quite a bit on the show is that you know a lot of the new activity obviously has to be class A construction just due to the economics. I haven't seen any real class B new supply coming online. Do you see anything in the future that would change that dynamic? Any innovations, anything you guys are looking at that would maybe get some of those construction cost down to where you can deliver new Class B product?

David Saxe - It seems like such a challenge at this point. I mean, again, I'm for operating here in a very strange place where when we started our company you know, it might have cost 12 to 15,000 to renovate a one bedroom from the 1960s and now that prices cost as well over 30,000. There's just a lack of contractors, people doing... out there to do the work which is driving the costs up and up and up and up. Then when you add in all of the regulations in the Bay Area that seem to be increasing by the day and the red tape, some of the tariffs and other things, we haven't seen any sort of softening of those costs. Obviously, as we mentioned everything is cyclical. So at some point here, something is going to cause, you would think a downturn and take us in the other direction but for now no I don't see new supply coming in in the Class B space which is one of the reasons why we like it.

Adam Hooper - Okay. Well, perfect, thanks for setting the stage there. Now, let's talk a little bit again hopefully today about the differences between institutional capital and retail investors. So for a lot of our listeners out there they're more on the retail side. You know we have some folks that are in the real estate industry that listen to the show but both of them are new individual investors that are looking to get involved in this direct real estate game. So why don't we take a step back and talk a little bit about what is institutional capital? Who are some of the names that you might think of when you think of an institutional capital provider? And what is that process look like if you're out trying to source institutional capital?

David Saxe - Sure. Having worked at CIM, I had a lot of experience and obviously still have experience with it today. But institutional capital if I was going to describe it at a very high simple level are really kind of just the big guys on the block. So pension funds, insurance companies, in some cases invest banks if they have an investment arm, endowment funds. I guess you could group some large private equity potential partners and investors in there. But the bottom line, writing very very very large checks. So to answer your other question on some examples, you know here in California you would have Calipers, McAlister's, and nationally Prudential, MetLife lots of countries have sovereign funds, you know Goldman has a new real estate investment arm. To see a pattern here, it's people that are going to write very very very large checks and have processes in place that are very different.

Adam Hooper - And that's the world that I came from before we started a Real Crowd was dealing with the institutional joint venture equity into to kind of add to that similar to you in the venture space. A lot of those big institutional players some are writing direct checks or they're getting involved you know investing in individual deals but a lot of time they're working through allocators. So they'll write a 15 or $20 million check to a manager who will then go out and then either buy deals themselves or do the joint ventures. So there's sometimes multiple layers between the property in that institutional capital investor which creates an interesting fee dynamic. A lot of times you need to chase juicer deals into chase deals with higher yields 'cause everybody's got to get take their cut before that you know kind of 2x or 20% NRI that was your pitch to that institutional partner will make its way back up to the capital. So interesting dynamic there of it's not necessarily going direct although, I think we've seen more direct investments from institutions lately. How was that changed? Have you seen more direct investments from institutions or still primarily through allocators or managers?

David Saxe - Well, you bring up a good point too. I mean, to kind of add on to that and answer question, you know one thing that we track is, I guess, "Young Company" even though we've been around for a while. But in the whole scheme of things, I guess, it were "Young company." To your point there is a really big wave towards more capital coming towards emerging managers which is a broad definition. So to your point, you know Calipers or Texas Teachers might allocate to another institution or firm whose job it is to deploy that capital and find groups like us and other emerging managers. So that's another trend that we're seeing and there's a lot of conferences out there to attend in that. I mean, we've done it in a lot of ways. I mean, you'll see direct investments into deals, you will see groups that want to do what's called a programmatic joint venture with a group. You will see a group at the high level that might invest directly into a fund. And many times, to get institutional capital you're kind of going through that process. The first deal might be a one off deal with a institution or someone that's allocating money on behalf of an institution and then they might move to a programmatic JV with you and then kind of the Holy Grail is if they make a very large investment say in a discretionary thought. So to your point there's, just a lot of ways that institutional capital can find groups like us. I think one thing you mentioned earlier that we hadn't gotten into yet is just the process. That can be a very rigorous process when it comes to finding...

David Saxe - There could be very rigorous process when it comes to finding that capital, you can work for years at it. Ending confer... I'm not exagg... I'm not really. That's not. No, I wouldn't say that is exaggerating. I mean, it tool a long courtship. I don't want to make it sound impossible 'cause it's not and I used to work for a company that was raising money all day long from institutions but it's challenging as a young company to find that body and just spend the time doing it and going, jumping through all the hoops and networking and attending to conferences and getting the system set up and things like that.

Adam Hooper - And I think, I mean, it's almost... a lot of our listeners again are from the technology world I think there's almost a kind of B2B versus a consumer type approach, right? I mean, it's very much enterprise sales. There's layers of decision makers, the person that you're working with on the acquisitions or investment team might not be the final decision makers so you have to figure out, you know, how do you get through to the investment committee or talk to the right people? So there's just many more, I think layers of process and tape that you have to go through to finally get that approval and that you kind of get in. But once you're in, like you said, they can it can progress from that one off deal to more the programmatic, to maybe even a you know an entity level investment in some cases, with some of the firms out there?

David Saxe - Right. They also work oftentimes with consultants. So your first kind of level of I guess, thinking about the process a little bit, they do... They should, but most of them if not all of them underwrite the company first in a very detailed fashion and in the leadership of that company and dig in and look at every single one of your past deals and tie out your projections to make sure those are all done correctly. You know they look at your track record, make sure that you have the right infrastructure, you know lawyers, accountants that you report the right way that you have the right staffing. So there's just a lot of things that need to be set up correctly to get these institutions to write a check which makes sense in some way and that they're reporting to oftentimes, they're deploying say, the pension funds of teachers so they want to make sure they get it right and it's a governmental I don't know, I guess institution that is eventually writing that check.

Adam Hooper - Into the amounts of capital that they're dealing with are so large that they have to have those structures in place to be able to run a consistent and repeatable process. You know, you mentioned I think the background and the kind of corporate infrastructure but are there other things that they look for in a sponsor? Or maybe specifically, what are they looking for when they're doing diligence on a manager? Is it just kind of corporate setup? Is it the team or is it the personal backgrounds or is it the relationships? What get somebody across the line with an institution from a manager perspective?

David Saxe - So kind of working on both sides so I think I have a unique perspective and how is someone that's actively starting to look in some cases, for institutional capital and then work that CIM having seen it. Not to sound funny here to exaggerate again but they look for everything. They want to make sure that you have a long detailed track record with exits and returns that meet the returns that will interest to them. They want to make sure that you have the right people in place so that if you're given a large check that you have the resources and infrastructure to deploy that capital efficiently and successfully. They want to make sure that you're reporting standards are very detailed and fit what they're looking for. One big thing that I think it always comes up as well that people may not think about, they want to make sure that you have a pipeline of deals. So if they're going to write you a large check you know it's not... they want to make sure that you can continue to execute and find additional real estate. And to that sense, is your business plan unique? How do you differentiate yourself? Does your business plan fit into their portfolio whether it comes to their return targets in portfolio composition? So I could go on and on and on and on. I mean, I've even been at a conference where they want to make sure that you write checks in the right way and that process is a setup. I mean, it's endless. Again, in many times for good reason but we could talk for an hour I could take you through probably a list of

David Saxe - 75 other things I'm probably not even thinking of.

Adam Hooper - And so, once you're working with an institution, at what point does it become about the deal? Is that a 100% on the manager's perspective and they underwrite the manager and trust the manager in a discretionary situation or where does that breakdown of manager versus deal dynamic come into play?

David Saxe - Well, from our experience I mean, they're spending a tremendous amount of... let's say, you bring them something or a business plan or a fund or just a creative business plan with a competitive advantage even if it's just for a programmatic J.V. You know, if that catches your attention they're going to first do all the work to underwrite and you know look at the company and the people. Once that long process questionnaires and other things is done, at that point, I think there's a level of comfort from then on if they like what you're doing, it's all about the deals that's what they want to focus on. I think the big hurdle that groups like us and emerging managers have to get over is getting their attention and going through that process. And then once that happens, sure, absolutely, you're set. These guys can write big checks and you're good to go to just keep showing them deals or at least through the... I don't know the current offering or fund that you're working on and then, of course, the next time, you hopefully that they re up, you never know though.

Adam Hooper - I'm assuming that again that changes with institution by institution in terms of how deep they're going to get involved in underwriting and structuring and reviewing forecasting every deal depending on level of sophistication and size of their operations, that's going to look a little bit different between institutional partners, yeah?

David Saxe - Oh, absolutely. I mean, institutions can range from writing. I'll just $10 million checks to you know a Calipers or a McAlister's that might write a couple $100 million check or when you think of companies like Blackstone that are raising billions and billions and billions of dollars. They're well, they have a great reputation so I'm sure their underwriting process is going to be very different than underwriting me. But point being is that yeah, groups to agree with you, groups that write larger checks, yeah, the process might be similar but every group has their own unique ways of looking at people I'm sure or things that they've had to deal with in the past. So from some sense, you would hope that all the questionnaires were the same but they all not always the same.

Adam Hooper - Right. And then are there particular? You mentioned the $10-ish million kind of floor of a check that institutions are going to write. That was a lot of why we started Real Crowd was this challenge of raising capital for sub institutional size deals. I think 10 to 15 million is pretty much the smallest check size you're going to see some of those more well-known institutions. There's a handful out there that are writing $2 to $10 million checks but the majority of them because they manage so much capital it's more efficient for them to write a $50 million check than it is to write 5 $10 million checks in a lot of cases?

David Saxe - Absolutely. And CIM has grown, for example, I don't remember exactly the specifics but as they've grown they probably used to write. I mean, I know they did, $10 million checks and now you got to show them a deal that may have to put out 25 million of equity plus for them to even take a look at it.

Adam Hooper - And I think that's an interesting dynamic. I mean, even in our space as the amount of capital that's being raised for individual deals becomes more into that range. I'm curious to see how it's going to play out of will this method of raising capital via crowdfunding and kind of mass indication, how is that going to play if it gets to that institutional scale? How is that going to change some of those dynamics or we know there's always going to be a need for those sub institutional size deals 2 to 10 million which is squarely our focus right now. So I think it's going to be interesting to see definitely how that goes on. One of the things to that I think was attractive why we started this company was the the ability to structure the capital for what's right for that particular deal versus what that investor requires. So maybe we can talk a little bit about your structuring for institutional capital versus what may be the ideal capital structure for any investment might be?

David Saxe - So like with everything else that we talked about which is kind of a long list of things that they look at. Once you actually get down to the deal which is the exciting part, there's a lot of factors. It can be a very involved negotiation whether or not you're looking at a deal, programmatic J.V. or a fund investment. Clearly the latter of which is going to be a discretionary funds going to have the most involved. They're all going to be involved but discretionary, money is hard to get so you can imagine that that negotiation process is going to be intense.

Adam Hooper - Can we explain just for your listeners out there Can you explain a little bit more about what a discretionary relationship might be or discretionary funds?

David Saxe - Yeah, absolutely. That's kind of as I've called it the holy grail of what you're trying to get. As opposed to me showing a specific deal to an institution and having them say, I am interested or not, interested in a specific property. What you ideally can want to try and get assuming that a group like ours is trying to raise investment funds. So buying multiple buildings out of the same vehicle versus one off buildings is you want what's called discretionary capital. So what that means is is that say a Calipers through CIM or a Calipers directly is investing in your platform and business plan and they might write you a check directly for an investment fund not knowing what you're going to buy other than you're going to follow a specific framework or business plan that's going to acquire multiple properties. So it gave us a lot of... I don't want to use the word control but the sponsor which would be us in this example more kind of flexibility on what to acquire.

Adam Hooper - So it absent that? Again, there's kind of an approval process you're through the process, you're proved as a manager, you go out you find a deal, you then present that deal to the institution and you propose some kind of a structure, you propose some kind of financial structure, some kind of control structure and then they say what?

David Saxe - Yeah, exactly. So I mean, they're focused on as they should be and as we would be, all sorts of various terms ranging from fees paid, to the carried interest that promote that that we receive on the back end of the deal, to how much that we're going to put in the deal. To things that we... We could go into another time called key man clauses or how long you have to put out the money. So these documents can be very involved and are exactly the parameters that the institution is using to get comfortable even investing in a direct deal or investing in a discretionary fund in a way of kind of keeping control over what you're doing.

Adam Hooper - And there is no typical setup or structure within these institutional deals, right? I mean even with the same capital partner from deal to deal, there might be completely different terms, completely different structures within those, right?

David Saxe - Right. And that's one of the reasons why in an ideal world if you can raise you know, going back to that discretionary fund that requires a number of deals, you don't have to keep renegotiating because you've negotiated just for that fund and that it is going to require a number of buildings. Yeah, you're correct. Every negotiation on a one off deal could be different. Now, there are certain things and you can start seeing patterns in typical promote structures or management fee structures and things like that. But absolutely, it could vary by product types.

Adam Hooper - Pros of institutional capital you know obviously a larger check, they have a larger checkbook. More access, maybe more consistent access to capital than syndicating on the deal by deal basis. What are some of other benefits that would drive a manager to choose institutional capital over other sources of capital?

David Saxe - When we think about this, I mean, you mentioned the key one that people have probably been... listeners are probably able to pick up on. I mean it's really the size of the of the check. So we'll get into I think next some on the retail side. But if I can get somebody to write me a very very large check, it allows me to focus all of my time and resources on finding the deals. Now the processes we described to achieve that is difficult. But once you do achieve it, it just relieves some resources and stress and headache around where is that next dollar going to come from to acquire something. You know, I think also there's a reputational side of achieving institutional money. It often also leads to other institutional money. So if you're in with one, you're likely you're going to have success with some others. Very simply, that's how we set... we think about it, it's simply that they're writing just much larger check

Adam Hooper - The efficiency side of it. I think too, like you said, the reputational aspect of when you're bidding on a project you know saying, hey, this is our capital partner, this is our X, Y, Z institution, known quantity name brand, that kind of certainty of closure, certainly that kind of reputational impact comes with that, absolutely.

David Saxe - Absolutely. I mean, when we first started our company before we were raising funds and we're looking at kind of one off institutional deals or a portfolio of small apartment buildings in San Francisco that was going to require a big check, we said we were bidding with in terms of an institution or private equity firm allowed us to be taken seriously or not.

Adam Hooper - Yeah, definitely. And that's again being on that side of the road having those name brands in your corner certainly makes a difference to a seller that's a very very impactful thing. So challenges. We talked about just the process to get through it can be a pretty intense diligence to get that kind of final approval structure. Let's talk a little bit about kind of the downsides of some of the structural challenges of dealing with institutional capital maybe some of the other challenges that you guys have found in institutional money?

David Saxe - Yeah, we've touched on this earlier. I mean, the biggest challenge is it's very very very difficult and takes a lot of time and effort, and networking, and track record, and all the long list of things to put in place to get that first institutional check. So simply the process and timeline which we covered I'd say is the biggest mental hurdle for many groups. There's a lot of pain associated with it for good reason. I'd say another one that we talk a lot about internally and again, might think we get to retail investors next. Is it general, there's less control over what we're doing. So in exchange for receiving that large check there are going to be a lot of things through the negotiation that institutions can demand to make sure that you're doing and following directions and fitting within the box that you said you would follow to the point where I've seen things in our past where institutions can kick sponsors like us out of the deal if we don't hit certain performance thresholds, cost overruns or just deviate from the business plan. That is a very stressful thing. Now, if you perform, you're going to be fine. And if you're okay giving up some of that control, it's absolutely a tradeoff. And then the final thing I'd say is, as we mentioned, this isn't necessarily a bad thing but having all the systems in place, and infrastructure, and staffing, it's rigorous. It's very very rigorous and expensive to get people comfortable.

Adam Hooper - Yeah, I think on the controls perspective you know there's typically institutional LP is will have certainly input if not outright control on some of those kind of "major decisions," That would be financing, maybe even down to leasing, if it's you know bigger over a certain square foot threshold bigger tenants you know, leasing approval obviously, sell decisions, refinancing decisions. I think that we've seen that in the past too if you're dealing with a fund that has a five-year lifecycle or seven year lifecycle. If that institutional capital needs to return the money back to their investors, they don't necessarily care if that's the right time to sell the assets or not. They have to do their thing and they can force the sale even in some cases on a manager where it might not be the optimal time to sell based on the business plan. So I think the control provisions a lot of the managers that we work with I think that's one of the most attractive parts of retail capital is being able to keep that control over those major decisions and operate how that asset should be operated rather than kind of reacting to what that institutional partner is dictating.

David Saxe - Absolutely. I mean, you pretty much nailed it there in terms of all the things that come up. They can say if your net operating income for the year deviates... I'm just going to make something up, 5 to 10% from what you budgeted you've got a problem with the institution so they can get down to that level of detail. And I think the biggest one above and beyond that the business plan control is one you mentioned that I've seen happen a number of times where we see a sale happen here say in the Bay Area of a large large apartment building and we wonder why it's sold for a certain price or why it was sold so quickly? And then you come to find out that the institution demanded the sale even as the sponsor didn't want to do it.

Adam Hooper - And that's again, depending on how those docs are written there may or may not be anything as a manager you can do to prevent that, right?

David Saxe - Usually no. They have a lot of leverage when they're writing you a large check.

Adam Hooper - Yeah, Alright, so let's switch to the world of retail investors. How do you look at or how do you define I guess, "Retail investor," as opposed to an institutional investor?

David Saxe - Yeah, this has been our focus and we've loved this space well, leading up to today as I sit here with you. So I would define retail investors, mom and pop... there's a lot of words I would use. Individual investors, mom and pop accredited investors, investing for themselves sometimes non accredited investors depending on the platform. You know, you might see investors that are investing through their wealth management firm and a little bit of a larger scale. As I'd put it, investors kind of investing for their own account rather than say for an institution and typically smaller checks.

Adam Hooper - Yeah, I think that's the big distinction, is they're investing their own capital on their own behalf rather than other people's money. Essentially, I think that that's one of the biggest distinctions. Where would you put family offices in that spectrum? I think they can kind of act as both in different cases?

David Saxe - Yeah, I was thinking about that when before we started this where I would put them. And I didn't mention them for a reason 'cause I've seen them classified in both categories. I think it really just depends.

Adam Hooper - Depends on their...

David Saxe - I think they'd like to say that they operate with more flexibility than say institutions. But I've seen everything so I could put them in both categories maybe depending on the size of the family office and both in terms of the checks that they write and the infrastructure that they have and who their capitals is coming from. I mean, same with registered investment advisors as RAs I guess, back in kind of go both ways.

Adam Hooper - Yeah, wildly different level. You know the spectrum of sophistication is very very broad when dealing with those categories. So I think again, we've seen the family offices that are just you know, investing on their own as if they were just a normal kind again, retail investor and we've seen more that are, there's multifamily office or some other family office that have a much higher level of sophistication that they do act more as an institutional capital partner. So I think again, very broad spectrum within those different categories. How does your process for finding retail investors differ from institutional investors? Are you still there you going to conferences? Are you filling out these 30-page due diligence questionnaires? What does that look like for retail investors as opposed to institutional capital?

David Saxe - So it's a very very very different. And this has been more of our focus to date just as a small company starting kind of at the friends and family level and eventually maybe working our way up into two institutions. So it is from you know, all the way down to our own networking and just getting in front of people we think have capital in our networks. Like I said, often not just described as friends and family to once you know, we've done a good job they refer to other folks that are their friends. There's many groups that do outward bound marketing whether it's on social media and trying to find folks that way or to mouth and PR. And then the biggest one that you know credit to your company is now there's this new way of doing it. I guess it's not that new anymore but still evolving is the crowdfunding, the space of crowdfunding, that did not exist before. People had to know someone to find access to deals like ours. Now you can put an opportunity on a platform like Real Crowd and get access to a large network a lot more efficiently.

Adam Hooper - Yeah, I think that's one of the things I think it's funny you say it's new. I mean, we're seven and half years into this but it still feels new. It still is relatively new. I think we're still very early days. The conversations that we have today have changed a little bit from what we were having six-seven years ago. But fundamentally, it's still very unknown how this works. Mechanically just the same as you were syndicating capital before it's just that now you can kind of broadcast that message on a different platform. So definitely, I think it's funny, it's new but I mean, still is kind of new.

David Saxe - Yeah, it still do. To my mind, the industry is evolving we track it very carefully and yeah, I mean, it's a... As I mentioned, we're a young company and we've been around for almost 10 years.

Adam Hooper - So when retail investors are going through their process and trying to look at you as a sponsor as a manager maybe kind of compare and contrast what that looks like going through the institutional channels. I'd be curious how that process is different for you?

David Saxe - Sure. My role within our company is I spend most of my time actually on the fundraising side a lot. I've experience and insight onto this 'cause I'm having many of the conversations. Yes, some of it's the same. I mean, clearly people want to see a solid track record and be attracted to your business plan. However, I would say that a lot of the conversations that I have are very different. You know I might go sit down at a kitchen table with a husband and wife and they bring their college kid in and I'm having a conversation that's very different than if I'm getting interrogated by the institution. What I mean by that is... and I think I mentioned this earlier, many of these investors they're incredibly successful, incredibly sophisticated but this may be their first experience with real estate investment. So at a start, they're looking at our integrity who did the referral come from? The questions that they're asking could be very very different. So whereas you know, an institution might really dig into all the details of how we underwrite a deal and dig into us, I might get more high level questions from retail investors that are... I mean, I'm not trying to sound funny here but what happens if there's a 15 point earthquake in San Francisco? How do you choose your paint color? The conversations is really vary from person to person and one conversation that I have is not like another conversation. Whereas many of the institutional questions I get are exactly the same.

Adam Hooper - Yeah, I think that's what's been so fun for us and again, a lot of why we do this podcast is because thinking as you said, these are very very very intelligent people, they're very successful in their own right but they're not necessarily real estate experts. And so to be able to share that knowledge and see that excitement of how how cool it can be to access this asset class. There's lot of interesting nuances that are a whole new world, a whole new language that people can explore and discover. That's a lot of, I think the joy that we get out of this podcast is kind of sharing that message and helping people. You understand how this asset class works as they might not have had access to it before.

David Saxe - Right. To credit for platforms like yours I think you mentioned it there, if I heard it correctly is you've helped to educate people on the language that we use, the terms that we use, the metrics, how we may structure a deal. So I've even noticed the difference over the last five years or whatever as people had been exposed more to platforms like yours where they come in with a knowledge base that's just way different than it used to be or I don't have to explain. I mean, this isn't everybody but cap rates are preferred return or what is it? How does a waterfall work? There's been more instances now due to the amount of information and knowledge that young groups like yours are putting out that is made. I guess my job, I guess easier although the questions can be more difficult now because they have more knowledge. I've noticed the difference.

Adam Hooper - Yeah, that's good to hear. And again I think that that's just, I think a testament to the desire of people to learn about this 'cause it is a whole new language. There are terms and jargon that you know, abbreviations out there was used it mean nothing without that context. So sponsor again, sounds like kind of similar things that the retail investors looking for institutional investors. What about on the actual deal specifics? In individual investor is going to have wildly different goals necessarily than an institution when they look at a deal. Has that been more challenging? Is it easier? What does that dynamic look like at the deal level versus the kind of once they trust you, once they look at you as a manager or any manager? What's that next level look like for retail investors versus institutions?

David Saxe - Right. Now, as we continue to grow our investor base, there are many different buckets just within our own investor base that I start to notice 'cause I talk to people all the time. I mean, there are some investors that are very cash flow focused. So don't go, in acquire a building, fix it up, add a ton of value and get out. Hold that thing and start writing me monthly or quarterly checks. Oftentimes, that group of people might be a little bit older looking for cash flow to live upon, retired, somebody that might be less liquid through their other businesses. So again, liquidity or the ability to get out, in and out of these deals is a question I get a lot from investors. How long are you going to hold this and when am I going to get my money back if you're successful? But then I have investors that like a mix kind of more of what we do of cash flow and appreciation. And so, I really see people all over the board which I guess to your question can make it a little challenging because we try and do our best to appeal to everyone but that's just never going to be the case. I mean you might even have investors or you do have investors that only want to invest in one off properties 'cause they want to be able to touch it, drive by it, ask specific questions about it whereas other people love the idea of a fund. It's really all over the board. And every day I might have a different conversation with somebody that's slightly different.

Adam Hooper - Yeah, and again can different motivations as to why they're investing in real estate versus an institution, it's 100% financially driven to meet those goals as their mandate or they promised their LPs versus an individual, every even within the same family, the husband and wife might have different motivations for why they're investing in certain things. So you can see how you're managing those different motivations might be a bit of a challenge across versus you know having one capital partner you know what their boxes, you know if the deal fits their right to the check, right?

David Saxe - Yeah, I get a lot of questions too on... individuals are very focused on tax implications. Now, I may get a lot of questions or I do get a lot of questions on down to when do I receive my K1 tax form to can you do a 10? What's called a 1031 exchange? Are there tax benefits to investing in real estate? Which is why a lot of people like it. And I get those questions more from retail investors than institutional investors. And many institutional investors aren't paying taxes anyway and focus on it.

Adam Hooper - Yep. So now onto structure we talked about some of the structural challenges I guess of dealing with institutional investor. Do those remain when you're dealing with retail capital or what does that cause structural flexibility allow you as a manager to achieve or I guess optimize what's going on at the investment level?

David Saxe - If a group like ours can raise endless amounts of retail... our capital from retail investors there is a lot of advantages to that for a group like ours. So number one, the process just generally it's going to be rigorous depending on the retail investor but clearly it's not going to be down to the letter level of detail that we described earlier where I'm filling out a 70-page questionnaire, to exaggerate a little bit. So what you're getting here is they want to see materials and as long as you put together good materials and have great reporting and answer the questions that they want it answered I would say the time that it takes me to convert or the process that I go through of first getting intro to a retail investor and closing that investor is less rigorous depending on the person. As we mentioned earlier, the kind of questions that I get are going to be very different than institutions in many cases. And the terms that typically you get from a retail investor because they're writing smaller checks are not going to be as difficult for groups like ours. Clearly, as I mentioned earlier, you want to make sure your market and that every group on both sides feels as happy with it but you're not going to be giving up as much control if any. We're able to keep total control of the business plan and only in very extreme cases can retail investors you know say remove us. So it's remarkably different and that's why for groups like ours if we can raise retail capital whether it's through you guys or through anybody else or through our own networking

David Saxe - you're going to want to do that all day long. And I'm assuming next you'd ask what the downsides of that are? And really for us, I'd say given that the checks are smaller, I'm dealing with many many many many many more people. So the back office whether it's accounting, distribution, writing a distribution check, reporting, answering questions from hundreds of people versus one, it's different in that in kind of on that level. But you know, there's technology that has now entered the industry through platforms like yours and other investor management platforms out there that make my job much easier in a larger scale.

Adam Hooper - Yeah, and I think again, that's to me what's going to be an interesting calculus for a manager is how do you weigh that tradeoff of dealing with one big institutional check and one person to talk with versus and the control and everything that you give up with that versus that kind of operational weight of dealing with maybe 100, 200, 300 investors in a particular deal but retaining that control and being able to optimize structure for that particular investment. I think that's going to be an interesting dynamic to see how that plays out as our industry grows. Then I guess to that point, you know since you kind of straddled both sides of that world, when you're out looking at deals or you're looking at your pipeline how do you decide whether you take that out to some of your institutional relationships or go straight to retail investors with those individual deals?

David Saxe - Jump on that, I mean, there are groups like CIM that I've noticed are now doing both by the way. They're raising institutional money and kind of an army of people raising retail capital that's got interesting there too. But typically it's a matter of deal size. So a young group like ours, if I have a, you know few hundred unit building in the Bay Area that I want to buy on the apartment side and that can be a tremendous amount of capital required. So the advantage of being able to go to an institutional partner and talk to one group and try and get them to joint venture with you is going to be more efficient if not the only way to go, in some cases if the check is large enough. You know just simply the paperwork and everything required to get to a level of investment of that size is going to be very difficult from the retail investor. That's kind of how we've I guess looked at it but there's hybrids of that. Like I can raise the money for my say, a fund from retail investors on your platform and then joint venture with that group on a large deal. So there's hybrids of all these structures as usual where in that case there's a combination of retail and institutional level.

Adam Hooper - Right, and we've seen that a handful of times on our platform is kind of GP capital So they're going to syndicate part of the you know if you have, again, maybe get a little bit jargony here a $20 million equity requirement, typically the sponsor is going to put in maybe two to three million of that equity. We've seen where sponsors will syndicate a portion of that two to three million and then go find an institutional partner for the remainder of that. That's where you've seen some retail investors get access to more kind of institutional size deals. Outside of that though, you know we haven't really seen a lot of kind of mixing of institutional and retail capital. I think there's still a concern for an institution that if they're putting $20 million into a deal and they're coming in with you know 100 individual investors side by side with them to maybe round out another three to five million. They haven't really got comfortable with that yet. Have you seen anything in that space or do you expect that that will become more accepted from the institutions here in the future?

David Saxe - I think we've had conversations over the last number of years where you're you're kind of... you're right in that people, they don't want to... they just don't want to be mixed together with that. So you know, we'll get people saying, you know, we don't want to be mixed in say, on the limited partner side with your other... with your other LPs. It's just not something that they're interested in. So now, yeah, I really haven't seen a mixing of that. The way it's gone is more say, the general sorry... the institution comes in for that large limited partner position and then we raised the general partner part from our friends and family or retail investors. Sometimes the institution might also invest in the GP as well. No, really not... Haven't seen a big mixing of that. I guess, the CIM's of the world might say, I don't know how they're defining retail investors but I assume the people they're talking to are Uber high net worth so they may say a $5 million check is a retail investor and maybe in those cases it can go in with the institution but that might be one exception.

Adam Hooper - Yeah, have you seen. I guess like the CIMs of the world and I think it was Jamestown just came out with their kind of retail initiative.

David Saxe - I saw that.

Adam Hooper - The institutions are now looking at retail investors as like you said, I think from manager's perspective, discretionary of capital is the holy grail. I think we're seeing some realization from institutional investors that there's a whole swath of capital that they haven't been able to address in the retail investors and in some of them are starting to try to figure out how can they get access into that markets. Have you seen anything like that in dealing with?

David Saxe - Oh, yeah, it's everywhere now. We're starting to see that trend. I am reading about it in various industry publications and articles. Absolutely, groups are hiring people, institutions are hiring people they'll reach out to the retail investor and I know, for example, as a group that was raising a big opportunity zone fund and they had people reaching out to retail investors. To fill the capital, you just need a lot of people and an army of resources to work with that. And these groups have the money and the infrastructure, and the systems in place to make that happen and now we're looking at it.

Adam Hooper - Yeah, I think again we're still early and I think we'll see more of that as it kind of becomes more aware of how to efficiently get into that retail investor network. I think that's the the blocker as they're trying do to it efficiently in a cost effective way.

David Saxe - It a lot of work.

Adam Hooper - Alright, David, before we let you go. I think it would be good to kind of wrap up with as a retail investor which the bulk of our audience is you know, how can they apply some of these things that institutional investors might do when they're looking at reviewing a manager or a deal? What can they maybe add to their process or what can they pull from the process of an institution to help make them a better real estate investor?

David Saxe - Yeah, I gave this some thought because and I also deal with this as well. I'd say, it's the level... People are... Obviously, retail investors are very busy which is and want access to these deals and therefore just aren't going to have the time to dig in as much for better or for worse. But to the extent retail investors out there have the time, it's how detailed I think they get on some of the things we discussed. You know, learning the terminology, questioning or looking at assumptions whether it's my rent competitive set or sales comps, or where I'm buying or what new supply is coming online? I guess just the level of kind of deal level scrutiny is important and to ask those questions and to make sure that you're on board with the deal and how a group like us has presented it and make sure that you believe, which in our case, is our investors have because we're trained to be very conservative in how we look at deals. So we kind of joke that if something meets our criteria, we're like, why does it meet our criteria? And then we go buy it. That's what I would say.

Adam Hooper - I think there's, you know we've certainly got feedback over the years that you can be intimidating for someone that maybe doesn't know the jargon, they don't know what questions to ask you know, to reach out to someone that's buying massive properties 10s, 20s, 100s of millions of dollars of properties. It can be pretty intimidating to reach out and ask those questions. So any kind of encouragement or you know, I'm assuming you because you're dealing with retail investors you actually enjoy talking with them, right?

David Saxe - Well, yeah. You wouldn't be doing it if we are... I really enjoy talking to retail investors. I mean, I just like to network and talk to people in general but I just like how everyone's different and have different backgrounds and I learn a lot from them and how they look at things. It's part of the thing, the joy that I get out of out of this is interacting with that investor base. Institutional capital is absolutely great too and in its own way it's just very different.

Adam Hooper - Yeah, so do you have a couple kind of softball questions that someone who might be a little bit more intimidated can kind of break the ice with when they're talking to a new manager?

David Saxe - Yeah. I think the ones that I get that are from some folks that have experience whether it's through your platform or you know investing with us before. I'd say making sure interests are aligned. So really getting an understanding of when something... When there's distributions bender, let me take a step back. When property is sold or refinanced, where's the money going? So how do we get paid and when do we get paid versus when the retail investor gets paid? Really kind of trying to get a high level understanding of how that works and making sure that we're incentivized which we are and our deals to perform. And then the other one is, it doesn't have to be very complicated but really just making sure that things that are driving our projections say are buying an individual property are reasonable. So how did you get your the buildings that you're comparing your building to to decide what rents to put in your model? How are you getting? How did you underwrite your expenses? How are you looking at your exit price on a deal? I think those are pretty basic questions where you don't even need the terminology but you can quickly figure out if you think someone is being legitimate in what they're presenting to you.

Adam Hooper - Perfect, I think that's super helpful. So again, kind of alignment who gets paid what and when? And are those assumptions for those financial projections are they reasonable? If it's a market with 3% historical rent growth, why are you projecting 9% rent growth, right?

David Saxe - Yeah, exactly. We don't do that by the way.

Adam Hooper - Good. Perfect. We already got your kind of outlook here going forward. for listeners of the show, how can they learn about what you guys are up to with Calvera?

David Saxe - Yeah. Thank you for having me on by the way, I really really enjoyed it. You can check out our website, We're on all the social media accounts and feel free to reach out to us versus on any of those platforms. And we always have a newsletter that goes out if people want to learn more about what we're doing either on a quarterly or monthly basis.

Adam Hooper - Perfect, and we'll have links in the show notes to all of those. David again, look really appreciate you coming on the show today. I think this was a super informative episode and thanks for spending an hour on the podcast with us today.

David Saxe - Thanks a lot for having me, keep up, good work.

Adam Hooper - Absolutely, and listeners as always, any feedback, send us a note to And with that, we'll catch you in the next one.

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