S.E.C. Real Estate Observer

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Throughout human history, people have always liked a good story. Our admiration of a person’s achievement in overcoming great adversity often makes a good story great. A tale with the greatest adversity is often viewed as an epic.

In the great unfolding story of the United States, we no longer have the heroic journeys of pioneers with threats of predatory animals or the unknown territory on the other side of the mountains. However, our lives are certainly part of an unfolding journey of changing capital markets that are struggling through some type of historical puberty. We now have the challenge of new types of unknown territories and new forms of predators.

This maturation of capital markets has presented many of us in the Society with imposing challenges. I’m sure that when you started your journey, it was full of promise and you were excited to participate in an adventure to achieve the extraordinary. I’m also guessing that today’s challenges have made your journey into entrepreneurial real estate more of an epic than you anticipated. For many of us, our goals of heroic profits have been narrowed down to hopes to break even or fulfilling a personal obligation. If you have not been experiencing challenges personally, perhaps you surpass the ordinary, or maybe you have been sitting on the sidelines. I sincerely hope it is the former.

Many epic stories consist of a group with certain character strengths, armed with weapons and specializations undertaking a formidable and arduous journey. The paths are not easily found and the mission not easily undertaken. Like the heroes in epic stories, the Society has its fellowship, and possesses more tools (weapons) than most real estate practitioners. Through that fellowship, we often meet, although rarely around a campfire, to compare how our individual journeys are progressing and how to pursue our quest before once again embarking “into the wild.”

I am humbled by the challenges that previous generations have overcome, and don’t feel that my difficulties rise to the level of deserving the label of “epic.” However, they are sufficiently daunting that I have to often remind myself that there are many things for which I am grateful. Like many of you, I face challenges and, as we sit around the hypothetical campfire, I am happy to relate some problem-solving approaches that I have seriously considered or that I have successfully executed during my journey. I hope that one or more of the ideas presented here will help you in the pursuit of your goals.

Partnering Equity or Debt: I’ve found it helpful to bring in a partner’s guarantor signature and/or the partner’s real estate equity to alleviate lender problems. Have no real estate equity? How about an agreement to hypothecate a note owned by a partner? Or perhaps give an incoming equity partner the safety-first equity benefits while you manage the asset, making the investment a passive, safety-first position for the partner.

Syndication: If you need more than just a few partners, you could organize many investors into a debt-free syndication by way of a Private Placement Memorandum (Reg D offering). It could be income or growth, but always providing safety-first benefits.

Transferring equity: Partnership problem in troubled real estate? Do you have an asset with stable income or with high growth potential? Consider transferring partners from the troubled asset into the more attractive asset. I am currently doing this with current preferred equity owners in a difficult property into a growth asset that I own. In the process, I am winning friends and establishing long-term investor relationships.

Understanding Lenders: Before the crunch, an equity investor’s viewpoint of lenders was something akin to my teenage dating days – “I don’t really understand what makes her tick but I am very interested and looking forward to the second date.” That was then; now we need to understand our bank’s capital structure before we go on a first date. I find that the insights given by Ted Blank and Steve England have been very valuable. Recently, Ted Blank explained to me why one of my banks was acting the way it was on a loan that I have. That valuable insight might turn out to be helpful in resolving the issue I have with the lender. At the very least, I am able to understand the banks actions that previously seemed incomprehensible. With better information, I am better able to communicate and I am now equipped to act with more intelligence.

Brainstorming with Trusted Friends: Don’t try to do it all by yourself. Most of us find it helpful to have a “sounding board” to discuss important issues. Strategic moves should be discussed with those who have earned your trust and confidence. I am blessed to have several confidants with whom that I can discuss serious questions. Sometimes, just expressing the issue, or presenting a question to another person, brings into focus the variables and often leads to the answer. For me, that is more likely to happen talking to a friend than sitting alone at my desk. These relationships are valuable and I make a point to have discussions with trusted advisors as my special conversations of the day.

Teamwork: In addition to my in-house attorney, I am fortunate to work with people in my company who are willing to work for modest income and equity bonuses. Most importantly, they work well with others, have a good work ethic, and communicate well with clients and among themselves. I have found that, despite it being tough to do, anyone who doesn’t share my objectives needs to be released from the team. Otherwise, it’s not fair to the others who are working hard towards the company’s goals. In considering issuing an “unconditional release” of a team member, a friend of mine suggested I should ask myself two questions: 1. Knowing what I now know about the person, would I hire that person today? 2. If the person announced that that they were leaving the company, would I be disappointed or would I be relieved? The answers to these two simple questions help me to make the critical decision to keep someone or let them go.

Lawsuits: Other than attorneys, no one likes lawsuits. However, sometimes they are a necessary evil that you have to undertake to protect your rights. Before initiating a legal action of any kind, I have to consider the high emotional cost and weigh the effect of being slowed down on all the more productive activities. But, sometimes, you just have to do what you have to do.

Create a Future Cash Bonus to Sell Higher Now: Are you dealing with a problem lender or need to rid of a difficult equity partner? These types of issues diminish your focus on the highest and best use of your time and energy. Consider selling one of your “A Bag” properties at an above market price. Yes, sell at above market price! As an incentive to buyers to pay the higher price, create a cash bonus, or future “kicker” in the property being sold. The future cash bonus needs to be attractive enough to sell your high-quality property now. For example, I have an income property that is secure, provides for annual increases, but in today’s market would sell for a 9% cap rate. I am offering the property at a 7% cap rate, but as an inducement to pay the higher price, I am also offering the buyer a large cash bonus to be paid in five years. The cash bonus will increase the buyer’s effective yield to 10% per annum for the first five years. The annual rent increases will push the yield to the 9% cap rate by the time the cash bonus is paid. The extra cash I receive from the higher price today means that I can solve today’s problem.

Your Quiet Time: Stop and take the time to think. Sit back and have a cup of coffee late night or early morning. No phones, no employee questions, and no e-mails, just you, a pad and pen, and your thoughts. Later, after organizing your ideas, talk with a trusted friend about some of those thoughts. There are probably some alternatives that are closer to you than you realize, but you’re too busy putting out fires and solving the “problème du jour” to stop and look at the big picture.

Communication: It’s always amazing what could have been if only we had communicated with the bank, the old investors, the new investors, and our spouse. People hate uncertainty. Let them know what’s going on, good, bad, or even the mundane. It is all about transparency.

Seeing the Exit: Rest assured, there is an end. You’re strong and even though your journey might qualify as “epic,” there will come a time when you can look back and be proud to say “I made it.” That means that you will have the right to tell some grand stories. Bring the hot dogs and marshmallows and I will join you around the campfire.