Darren Fisk

Ladies and gentlemen, welcome to The Business BREW. I am your host, Bill Brewster. This episode features Darren Fisk. Darren is the CEO and Founder of Forum Investment Group. Forum does everything real estate related. They do credit, they do equity, and this conversation happens to be mostly focused on multifamily. I hope you enjoy it.

I enjoyed it. It's a asset class I have an interest in, so there's going to be more and more of these, but this is a good perspective on the private side of the business. Additional disclosure.

This material is provided for informational purposes only and is not intended as, and may not be relied on or in any manner as legal, tax, or investment advice, a recommendation, or as an offer to sell, a solicitation of an offer to purchase, or a recommendation of any interest in any fund or security offered by Forum Capital Advisors, LLC or its affiliates. Private market investments are complex speculative investment vehicles not suitable for all investors.

An investment in a private market investment entails a high degree of risk and no assurance can be given that any private market investment objectives will be achieved or that investors will receive a return of their capital. The information contained herein is subject to change without prior notice and is also incomplete. The industry information and its importance is an opinion only and should not be relied upon as the only important information

available. Information contained herein has been obtained from sources believed to be reliable but not guaranteed, and Forum assumes no liability for the information provided. Past performance is not a guarantee nor a reliable indicator. Future results? As always, nothing in the show is financial advice. Please consult an investment advisor before making investment decisions. Everything in the show is for entertainment purposes and educational purposes. And do your own due diligence.

All right, ladies and gentlemen, thrilled to be joined by Darren Fisk today. Darren, how are you? Doing great. Might be a little bit too early to tell, but off to a good start. It's like 8 and you get up at what, like 4:30? So you've had a full day I. Know it's almost time for me to go to bed. Yeah, well that's a it's an interesting schedule. That'd be nice if you could only be up 4 hours a day, although you'd miss a lot, I guess.

Anyway, it's neither here nor there, Darren, do you want to tell people about yourself and what you do? Sure. Just a little background, our company here Forum, we're actually the only multi family group in the US that has three different strategies all under one roof. When I say that we do debt, we do credit in in three different fund vehicles and then we have

ground up development as well. So a lot of folks are investment managers and they allocate, we actually manufacture our own stuff meaning we develop our own assets, 7580% of the loans that we make are direct to our borrower. So been a unique journey over the last I would say 23 years of which I started off in the real estate finance business and saw an opportunity in the GFC in 2008 to start developing and

buying multi family. And so Fast forward today, we roughly have, as I mentioned, three different strategies. I mean, obviously you were lending, but what specifically were you doing pre GFC? I knew I wanted to get into real estate. My mom and dad were school teachers and a principal, and so I was our we had about 13 units in the Bay Area, Northern California. And I always loved real estate, but I was our framer and our drywaller and electrician and doing all these things.

And right after college I got a little try out with the Atlanta Falcons. I said well what am I going to do? I want to get into, you know, real estate. And I was tabling bathrooms at 10:00 at night and talking to some friends. I realized if if I did financially how things went together, I could go buy things. I could hire a development person, I could hire property managers. And so we were a company that was called Johnson Capital.

We had 17 offices and myself and a partner ran the office here in Denver and all of our loan servicing. So we represented Fannie Mae, Freddie Mac, HUD and a bunch of different life insurance companies. And so I just had this, you know I don't know it was like a pull towards multi family and I don't know if it was because I grew up in a small town and small community but really took the

multi family. So there were a bunch of reeks here in Denver, Aimco, the former Archstone UDR and then one commercial group called Black Creek and really was just focused on the multi family side from large REITs to the mom and pops. And the lending business got me into buying with one of my own partners in 2003. And then when the GFC hit, like I mentioned, we started our

development company. We bought about 9000 units from 2009 to 2012. So the lending business is really what gave me the start to to building forum. It's a nice time to buy. Wish it was back. Wish we had more money and more opportunity. But there was, excuse me, there was plenty of opportunity. I had real, real young kids at the time and I was gone on the

road flying around everywhere. HUD at the time had this 221D4 program where they provide non recourse construction loans and they were foreclosing like a lot of lenders were on their multi family assets. So we were flying around the US look at these different properties that HUD had in these big pools. The problem was we didn't have

the money. And so a lot of these larger groups, real estate groups that are out there, we're buying these pools and then we'd buy directly from them, you know, 30-45 days after they closed and we'd go syndicate, you know, kind of from Oasis. We'd pass around an offering memorandum and bunch of folks. I had No 3 at the gym. The first deal we ever bought, we raised 3.3 million for a 252 unit apartment building in Albuquerque. And it was folks like that that I would call on each and every

time. And one of the things that ironic things about that first deal, we still own it today. We've refinanced our money out three times since 2003. So 2021 years ago we bought that property and about a year later we refinanced it and got 100% of our money back. And I thought, wow, what a racket this is. Yeah. Is that good?

That seems good and. It that that seems pretty good to me, especially when you don't pay tax on that refinance at the time that you do it. So I think people think that real estate is a, you know, get rich thing. But I think with cap rates declining and interest rates coming down, it seemed that way and now we're back to more of the norm where it takes time to create value in real estate. And we did that and we're patient.

And really, you know, Bill, one of the things that that I learned early on and it was actually saying that my father-in-law said to me, he said, Darren, if there's one thing I teach you in life, remember this. And I thought, oh God, don't touch your daughter or what, you know, what's it going to be? He said cash is king, but cash flow's queen. If you wake up next to Queen your rest of your life, you're going to be a happy man. And I thought about that forever.

And so I think so many times people think about having cash. In my mind the secret to life was having cash flow where when you wake up in the morning you have a check coming and you're not waiting till you retire to cash in your IRA or your 4O1K. And so the basis of of Forum in the early years we were just cash flow, cash flow, cash flow. If we couldn't get 1% a month be

nice. You know on an amortizing basis we wouldn't do it. And as you know interest rates started going down, cap rates went down and it's probably five years ago it was 7% a year maybe interest only. And so the markets definitely changed over the years and I think as as we'll probably talk about, we've changed with it. I mean, obviously cap rates have changed. I mean, how competitive was the market, let's say from like 2015

to 2020? I mean, you're talking about buying things in the global financial crisis. I mentioned it on the pod before, but I I was listening to Steve Schwarzman talk at some lunch. It was just a like a lunch that UBS had and he talked about buying, he was buying real estate at like 6 times cash flow basically. And you know, he's talking about if you can do that and you lever it like you're always going to

make money. And I was thinking to myself, OK, well that's that's like a very nice story, but where the heck am I going to find that now? And I'm just kind of curious to hear you talk a little bit about what it was like getting deals in the financial crisis versus, you know, sort of like when things normalized leading up to whatever 2020 and 2021 was and where you see us now and how over time you've sort of shifted where you're playing.

I I think that should be a question that'll take about an hour to answer. Yeah, wow. Well, you know when the GFC hit and I was a lender, 2 of my clients were parted on a perspective development in Boulder, Co and I had arranged a HUD 221D4 loan form while one of them got in trouble and the other one said, hey there, I I can't move forward without Jim. And I said well to Lou was the other part. I said Lou if you get this property entitled in Boulder, I'll get it built.

He said what do you know about building? So I said well my father's a retail developer and I can find a development partner what have you. So his 2009 we own you know 4 1/2 acres in the 29th St. Mall in Boulder and nothing over 50 units had been built in 25 years. Oh wow. And not only were there no land comps, but there are also no rent comps to support it. So we actually had to go out of

state to get comps. But I knew one thing that real estate in Boulder was like a piece of gold if you could get entitled. So we had a non recourse loan with HUD. All I knew is I couldn't afford not to get that Commission for the loan. So if I couldn't get the Commission, I might as well, you know, build this as well. Throw the Hail Mary? Why not? Right. And and look, it's easy to look back on life and tell a story.

But back then I was like I just couldn't believe I had the opportunity to do it, that I actually could get this site. So we ended up building it. It turned out great. We ended up buying the property next door. We built Google's campus up there in Boulder as well, but going back to multi family, I was the only one in Colorado in 2009 developing so I got a call from another gentleman here in Denver. We then had another two projects, 300 and 362 units going by 2010.

Oh well, my day job, a real estate finance, I'm now a real estate developer at night found a wealthy partner here in Denver. So we had almost 1000 units under construction by 2010 while we're also trying to buy things and you ask the question, you know how it was like for me it was like Fred Flintstone and Rock Vegas, it was like bet, bet, bet, bet, bet, bet, right. Like there was just like deal,

deal, deal, deal, deal. And as fast as we could fly around the US to buy these HUD loans, you know, to get these development going developments going. And if I hit the pause button, Bill and I looked, I wish I could write a book like the lessons Learned or what not to do, Not what to do, but what not to do. I learned through the GFC in O Eight that my friends that were single family home builders went bankrupt.

They were out of business. And I realized something just kind of connecting the dots that if you're a one trick pony in the market shuts off and you could Fast forward today. Real estate development's really tough today if you're just a developer. You're either laying everybody off or you're going to, I don't know what you're doing and if you're just an acquirer of real estate and like in multi family right now, you're probably not doing much either.

And so looking back, I said OK, well I want to be able to invest throughout a real estate cycle, not to a cycle. We today have debt, we have credit and we have our equity products and if we didn't have our debt products today, I don't know what I'd be doing. We haven't bought anything in four years. We had eight developments planned for 2023 and they didn't pencil, we didn't start one of

them. We have one development we're working on right now in San Diego did actually pencils and pencils well just because the land basis. So going back to O 8 again what do we learn? We were buying as fast as we could If we you know you're buying stuff at such a low basis, you know 40,000 a door and we were in Michigan, Ohio, Indiana, Alabama, all these secondary and tertiary markets. Fast forward today, we sold out of a lot of those markets during COVID because again, there was

another demographic shift. People that were in New York or that lived in Montgomery, AL like, hey, I'm going to go try Denver out and then their parents are saying, hey Johnny, when are you coming back to, you know, Montgomery and is Johnny says never. I'm never like I found Denver, this place is great or I found, you know, Austin, TX.

And so also understanding these demographic shifts and where they're going has helped our awareness of where we want to position our portfolio moving forward. So we are buying a lot. You asked about 2015, it's really about the time we started slowing down on the acquisition side. We really started focusing more on the development side. We never did value add.

We were either buying for cash flow or we were developing ground up. And so you know again cap rates were compressing, we weren't doing value add. We could get, we're not an IRR shop, right. Like we we create this promote structure with our investors 21 years ago where we cash flow promote if you will, where it's not a GPLP structure, it's a member managers and an LLC.

And we had a 51% vote of all of our partners, which were our investors, always called them partners because they were for major decisions like a sale or refinance. Because I didn't want anybody ever to say, hey, you're conflicted, you're doing this as the GP for your promote. So we wanted to have something where, you know, we weren't

taking all the fees. And I go back to my real estate finance days and the lessons learned I I was able to watch what so many owners and operators and developers were doing, and I took the best of what people were doing to kind of create forum. What about the GPLP structure? You know, for those that don't know, what are some of the sort of adverse incentives that you've seen go on and what did you want to avoid when you set your structure up?

I appreciate that. You know I think the biggest thing was the lack of alignment of interest in the sense that they were the and again this is generally most GPS have to have fees to keep the lights on. I was fortunate that I had my real estate finance business funding by keeping the lights on while I was building my real estate business.

And they take, let's just say it's a 2 or 3% acquisition fee and then they have to have a 5 or 10% Co invest and they go get that from their buddies and it's like well how. And then they do all this work and it may be a great cash flowing asset, but all of their equity if you will their built up equity, their sweat equity is stuck in these projects until they sell. So their incentive is to sell but the best thing for the L PS might be to hold in cash flow.

And so there was that lack of alignment that I saw where it was just like fee fee fee. So we never actually took an acquisition fee on any day. We still to this day don't rather we had this contingent profits interest that we would roll in to these deals and we wouldn't take any fees out at

closing. Rather we'd keep 100% and it was contingent in the sense that let's just say that there was an 8% preferred return and after all investors got an 8% of their money back, we'd get a 20% back in. Well, we did that. And so because we had this upfront cash flow promote if you will, we got cash flow and refinance proceeds along the way. But upon a sale investors had to get all their money back in that 8% preferred return before we got anything and rarely did we

sell right. We wanted to buy these things. We wanted to cash them. We we would refinance a lot and if we could pull 50 or 100% of our dough out, you know we would and we always use 10 year fixed rate debt. Maybe just another subject that I think people need to be aware of real estate. In my mind people get in trouble for two reasons. One their debt comes due or they're over levered, right and it comes down to debt because I've never met anybody that had no debt on a property that they

gave back. Now I'm sure it's happened in in the history of of our our country, but. Environmental liability or something? That's right. Yeah, who knows what it was, but coming from the lending side and I had some buddies when I was financing for them in California, they said, oh, well, we use real low leverage. We're 5560% low leverage. And being the lender, I said, yeah, but what what's your debt

service coverage ratio? And I said, well, we're at a 120 in in California. I said, well look, I said I'm in Michigan, I've got an 80% loan to value and I'm at a 210 debt service coverage. They're like, well, that's way too much leverage. I said no, no, I don't think you understand. I'm at 2.1 times debt service coverage, you're at 1.2 times. You don't get in trouble because of loan to value, get in trouble because of debt service

coverage. So now that cap rates have really started to squeeze and come down in all markets across the US you know today loans are debt service coverage constrained, not loan to value. So typically in the lending world it's the lesser of A12O or 125 or an 80% loan to value. Well today just given how you know where we are on the cap rate environment, you know you're gonna be most loans are price sizing in the multi family world to 60% anyways because they're at that 125 debt service cover.

Yes, said slightly differently, in a market like California the the rent to asset value is lower, right. So, so your debt service coverage is tighter even though your LTV is lower, right. So but but banks care about cash flow, right. Banks care about cash flow when you're when when the loan is getting serviced, they don't. I mean you know you're the asset coverage helps your LGD but if you never default it's better than worrying about loss given default. That's right, yeah.

Do you remember the GFC? Most people had two black eyes and a broken nose, right? They didn't know what happened. We we're in tertiary markets like you know Fort Collins Co and Pueblo Co and Albuquerque, NM which may not be so tertiary anymore, but we didn't have any problems. And I would say if if you're playing defense it's really hard to go on offense. And so like right now in today's environment we've just been patient, patient, patient not buying and shelving our developments.

But I think that that I would say you know today's opportunity is dead and tomorrow's opportunities could be on the equity side. But I might also say that I think there's been capitulation. I think the equity opportunities right are front door right now as well.

The interesting thing, you know I follow like the the multifamily Reit's, I had this guy Bill Chen on Bill if you're listening what up Anyway, the and the multifamily Reit's have not moved and the stock market has seemed to be on a quite a Ripper lately and it'll be interesting to see what what goes on in the future. Have you seen the what are the debt markets doing for development right now? I mean I noticed the the mortgage market hasn't really

come in all that much. I don't know if it's correlated or not. Well, well, two things there. On the construction side, we have 71% less lenders from 1980 till today, so seven, 1%. It's astronomical. There's a great chart I'm happy to share, McKenzie put out. And so I think the buzzword of the day is real estate credit, right? Like how do you know?

Well I I think there's a secular and structural change in our banking system that has created this you know and the GFC you know Wamu Wachovia which they're not here they were doing 90% non recourse loans and it was like jokingly say you know what could go wrong. So you Fast forward today these big bulge bracket banks like Wells Fargo, I mean they're they're not even making construction loans, it's really the local or regional banks that are making the loans today.

And again I I have a bias and a tilt towards multi family. So I kind of look at it you know, in a box from that, but you know trying to get a construction loan for an office building today is is extremely, yeah. Forget about it. Very right. But on the multi family side, if you can get a loan, lenders are only going to their best borrowers and they might give

you 5055% loan to cost. So our credit vehicle, we being a developer ourselves, we get a lot of lenders that call us and say we've got a borrower they can't get 4550% equity together. Would you provide them a preferred equity slash mezzanine loan and take them from 5055 up to 7075? So for us, we've got a huge pipeline. We do like Unitron stuff instead. We do, right. We would like to do more of

that. A year, year and a half ago we could do note on note financing and just structure a whole loan and we'd bifurcate the A note, the B note or sell off the A note to a pack West or you know Bank of the Ozarks really, really tough today. It's just gotten even tighter just given all the commercial real estate loans that are out there, the ones that aren't paying off if you will, but huge opportunity going away. The debt markets are a great place to be. We're, you know, in that.

I could just stop you. I don't, I don't mean to stop you, but what is going on in multi family debt service coverage? It seems to me from the outside that the debt service coverage pieces is pretty OK, but am I reading that incorrectly? No, I think you're right. It depends on the existing construction. I think some of the issues if is that where you're going, what are we seeing, kind of what are the issues we're dealing?

With well, sort of what I'm really thinking of is it's interesting just hearing you talk about the lack of appetite potentially from banks. It's somewhat interesting to me how the, I think some of their commercial exposure might be tainting some of their willingness to touch multifamily, but I think multifamily is fairly healthy at the moment. But maybe maybe I'm wrong? It is across the nation. I think we're 94 and a half, 95%

occupied. There are markets where we have oversupply, you know, the Phoenix Metro, Austin, TX, the Southeast, but given the lack of new construction starts, so. We're. Predicting in 2024 we're going to see 10 to 15% of normal construction starts. So as we the the demand side of multi family is unassailable right, They're just more more needed. It's 50 more expensive for monthly mortgage payment today than it is the monthly rental payment.

So you look at that, we're not building enough single. We're not building enough housing as it is. You know I was reading the economic report yesterday from you know the president's office and you know there's just I think the statistic was that between 2020 twenties housing prices have tripled while household income has doubled. So in other words the price of housing rose by 50% more than household income has in the last 20 years.

So it's the renter nation right in the in some people it's OK that it's just they actually prefer renting. But from a from multi family fundamentals, if you Fast forward two years and we absorb through this product because the lack of new that's coming, I think we're going to see another run and inflationary pressure in multifamily.

It's it's like if there are two seats left on a Southwest flight, what happens to the price of those seats, They go up where we're starting to see or where we see the stresses in

multifamily. On the value add kind of you know depth we're going to go do the value add in our interest rate takeouts going to be 4% now it's five and a half 5 3/4 people are just I think the hope of rates coming down has in the last probably four to six weeks gone away because if somebody's it sofer plus say 303 twenty you're at an 8 1/2 percent rate. Today that if the Fed funds rate goes from down 50 or 75 basis points and that's what my index I was borrowing against.

It's just like my line of credit if I have a home equity line of credit and goes from 8 1/2 to 8 it really doesn't make a bit of difference or or the seven three course it really needs to go down to like 5 1/2. But the other thing I think that the construction and value add world is based off of short term floating rate. So the Fed funds or SOFR long term real estate debt permanent financing is based off the 10

year treasury. So we could have a scenario where and I don't know necessarily believe this where the Fed funds and SOFA comes way down but the 10 year treasury, the take out the permanent debt market stays high. So for a 10 year Fannie Mae Freddie Mac loan today, you're probably in the five six to five 8 range. For a construction loan, you're probably sofa Plus. Yeah, you're at 8 1/2. Cool.

So I'm borrowing at 8 1/2 and then I'm exiting into a market that's got higher than than his at least recent history borrowing costs, right? So my my exit value is lower than it used to be, and my cost to construct from a financing perspective is higher. Not to mention whatever inflation's done to my building costs. That's right. But I think the way that developers think about it versus you know existing value add is hey the interest reserve is built in my total cost.

I've got an interest reserve to cover this now a lot of folks behind schedule you know blew through their interest reserve have to rebalance their loan that's some of the stress and I would like to delineate. I don't think multi family, it's not distressed, it's stressed because the financing on it. But when you're 94 and a half, 95% occupied, you're fully occupied. I would argue that your rents are, you know, if you're not, your rents are too low, right?

Like we always think about. Your rent a little bit, yeah. Right. Push your rent. But the stress is there where, you know, people are saying, hey, I've been feeding this thing. I thought we were going to have a takeout loan. And I think the capitulation has actually hit where it's like, hey, interest rates are not going to save us this year. We're actually going to have to sell. And I've got examples of it like real life.

And I think that I think when Chairman Pal came out a few weeks ago and he was on 60 minutes, maybe it was a month ago, it. I think what's happened is we've now that we know rates are probably not going up and I'm talking about Fed funds, there's a floor on values and then people can say, OK now we know where the floor is, but how much are rates going to come down? That's the $1,000,000.

And when and again inflation is stubborn, the Fed's knocking all of a sudden just like hey we're dropping 100 basis points to you know that could be over a two or three-year period. Now when your debt comes due and you can't refinance out, your debt comes due and you can't refinance out. So I guess the question becomes, why would you build the day if

you can go buy? Yeah. The interesting thing to me is if you Fast forward this discussion, like I I think if it is true, like you said, inflation sticky, I think true inflation would disagree. But I think that some of the recent numbers are sort of appear to be getting hotter. Maybe I'm misreading that, maybe not. If if the Fed short term rates stay higher, I I I don't know what conversation we're having in 2027 'cause it feels like a big shortage is on the com.

Right Big Shortage of Housing, 100%. A single family homes, the home builders, they seem to be as well positioned as anybody because they can buy down mortgage rates and have sort of a financing arbitrage there. But man, I I don't know. It's going to be very interesting to watch. When I I I'm not leaving my 3% mortgage for a 7% mortgage as a home owner.

Yeah. Interestingly though, I've just, I mean, I've just transactioned on 2 houses and I'd argue both the values that I got were very fair. I don't know that, you know, I mean, obviously if I sold them two years ago, 2021 or whatever 2022, they'd probably be a lot better. But like, it was not terrible by any stretch. So values don't seem to be coming down. And that to me is sort of anecdotal evidence of what appears to be a shortage in the data. Yeah, they're just not a lot of

trades. And to your point about single family home builders, some investors with us are partners here in Denver. They enlarge you know publicly traded single family, you know they're buying, they're like it's it's as good as it gets right now. You know they're buying that 7% mortgage down to five, you know existing home you you can't do that and even in multi family you know we can buy our rate down to 100 basis points and in fee meaning it might save us 2530 basis points and overall

rate. So it's meaningful, but it's not like we can buy it down 2% and we can't go from 5 1/2 to 3 1/2 or everybody would be doing it. That would change things overnight. But I agree the lack of housing that we're producing, most of the developers that were financing today are vertically integrated. They're AGC, they're a developer and they're squeezing things on

all sides. Like for us at Forum outside this one project in San Diego that took through a rezone, our basis is so low, we can build to just over a six on cost, which is unheard of in California. It's if we can't get to 6 and a quarter 6 1/2 on costs. So the unlevered return on development, we're not doing it now. There's a project in Glendale, AZ we've been watching.

We actually had under contract for 105 million three years ago was the first deal we were going to buy kind of at at Co and we dropped it. Offers are due next week and I think it's going to trade around 72 to 75,000,000, so a $30 million drop over the last three years. Now that market's a little over built today, ton of job growth, they'll work through it, but it's hard to want to go build

when you can buy. And we're finally starting to see a decrease in construction costs here and subcontractors as they're getting done with work are finally calling saying, hey, do you have any work for us. So we estimate costs or down come on wood construction here in Colorado around 1011%, but we're also pricing. So insurance, we should talk about insurance. I mean, you want to talk about wild? Card dude, I'm in Florida. You want to have an insurance conversation?

I'm happy to have it. I think that's actually the opportunity to buy in all these developers in Florida like as they under wrote 600 a unit and it's coming out at 1200 a unit, you know stabilize. I don't know how they make any money or that maybe they get their money back on a development that if they're selling it. But you know what's kind of interesting about that 'cause you, you're talking about the opportunity of it. I just got on the House. I just sold.

We had to to. Well, we didn't have to, but I provided alternative quotes to the buyer. And I think it was 2 new insurers entered and DeSantis finally got off his ass and somewhat addressed the insurance problem down here. I I don't think it's a full address, but it's the beginning of one. And it appears as though we might be having insurers enter the market again. I talked to my insurance brokerage. You know, just like retail people, it could be getting better.

And it would be interesting to see, to your point, if people are capitulating at Max Payne and this actually is kind of a good opportunity to buy into the fear cause 'cause. Until then, there has been no indication that insurance is going anywhere but up. In the state of Louisiana you cannot get insurance right now for multi family.

We own 1 legacy deal there that got hit by two named hurricanes within like 18 months, you know had and we actually got forced placed insurance from Fannie Mae because we just could not get it. So I think from a legislative standpoint when California is no better, we have a house up in Lake Tahoe and you know the fear of wildfires, I think nationwide pulled out Allstate and and you want to talk about upside down the government there or the government, you know they

basically said you can only raise rates 3%. So these people are taking huge losses meaning the people, the insurers, they're just backing out. So I think now but we actually in Louisiana this year, you know we're actually starting to see some insurers and it look it's a cycle just like everything, couple of seasons without catastrophic wind claims or fire claims, things like that, they'll pop, you'll see people starting to pop back in.

But our insurance in Louisiana went from $50,000 per year when we bought it seven years ago to $850,000 per year. So if you if you did a six cap on that or a set, I forget what it was like a $13 million in value, we lost just an insurance. Yeah, that's wild. So. We, we've got a legacy. We've got to push the rent. There's. I mean, it's like it's the way the math works, right?

Well, and look, I'm not going to get into politics and rental control, but you you go to markets where, like I've always said, I will take market risk, but I won't take political risk. As soon as, like St. Paul MN said, OK, you can only raise rents, you know, 3% whether it's a new tenant or existing. Well, my insurance just went up 50%, My real estate tax, it just went up 40%.

I'm underwater. And the gap between income and expenses is going like this, where all of a sudden the government's forcing and creating foreclosures and negative debt service coverage covenants and things like that while they're trying to solve an affordable housing crisis or issue. This is, this is when I start thinking like how can I get bearish multifamily.

This is the scenario. I've I've had them because I I worry that if if there's not construction soon, in three to five years, we're going to have such a shortage that it's going to be like on the top of every rent specifically is going to be on the top of a lot of political minds. And then if you start to get into rent control, then I don't know, all bets are off for a little while, although that's when I I would actually consider making like a real bet.

If you start to see values, adjust on that. Yeah, I know governments are trying. And look, we we really focus on the renter by necessity. Like not the renter by choice. The runner by choice is somebody who's like living in the penthouse over here across the street from where we're standing for 13,000 a month.

I'm talking about the blue the kind of Gray collar it's nice product in San Diego that that renter by necessity makes 150,000 a year but it's those folks that don't they they make a little bit too much to get truly affordable housing. You know the with a capital A we're trying to provide that that small A and if you had told me going back you know bill to in three years if we don't know saying we won't.

I think the only reason why folks like ourselves are hesitant is that you can't, we see the data, but it's really hard to prove out and say, hey, in 36 months or 24 months rents are going to start going up five or 10% a year, just trust us, right. Otherwise we'd all be firing up the, you know, tractors again and building like crazy.

But when you look at, hey, we can build in Denver to a 5 1/2 on cost, you know, finance it with 8 1/2 percent construction debt in the takeout loan, you know, let's just say it's 5 1/2. We're pro forma. You know, it's kind of neutral leverage. It's like why don't we just go buy something where we have more upside and rents. Why are we going to take the risk to go put a shovel in the ground and what have you? So I don't have the answer.

By the time it's really evident everybody will be doing it. Again, we do own some A+ plus sites that we're just not moving forward on and they'll never be bad locations. But I'm never going to go do a bad or make a bad investment just for the sake of doing. I think we've proved that over the. Years. Well, I'm going to take something that you said earlier, if cash is king and cash flow is queen, having nice sights is a hell of a Rook, right? I mean it's it's a feather in in

whatever. However I want to say it it's it's a nice way to play offense once the opportunity becomes clear, and it's a nice thing to be able to wait with. Right. And it's in my career. There have been times where I said you can give me the lamp for free and it doesn't change this deal, penciling or not. And there's times where the land does make a big difference, like I mentioned in our San Diego project. But today you can give me the land for free and it doesn't

move the needle. It doesn't make a 5 1/2 go to a 6 1/2 or 6 1/4 where you know you really, really are trying to create value in development. When so just my brain is not picking up exactly what you're saying. So do you? Do you mind explaining why the land doesn't make a huge difference right now? Sure. I'll just give round numbers.

Let's just say that we could build a garden style three story walk up lump stick frame, you know lumber framed asset for $350,000 a unit and let's just say that the land underneath that was $30,000 a unit. So basically it cost us 200 and it's it's 10% of the whole project. It's not going to move the needle 50 or 75 basis points as far as being a creative to the overall development. Yeah, that makes sense. Meaning $270,000 or $300,000 per

unit isn't going to change. Now I mentioned like in Phoenix that asset that we were looking at, you know we were going to buy that for north of 300 when we were under contract and now it'll trade for less than 250 and you can't build it for 250. So you have all this product coming online, but a lot of folks are betting on you know, neutral or negative leverage where they're buying a cap rate less than their debt and that there are very little or low rent growth.

But it's all basis play for the future, which is I guess one way of looking at it. Yeah, it's a way. How do you look at it? So for us, you know in our credit, well we're making mezzanine preferred equity loans from a risk adjusted return. If we have somebody that's putting 30% equity ahead of our loan, let's just say it's 300,000 per unit all in. So our last dollars at 210,000,

their last dollars 300,000. And look, I've never been in my life, I never had to take a property back, never been a loan to own. But if there ever was an issue, I our theory is we'd love to own that project at 210,000 a unit. Now we're getting paid so far and I'm glad you're sitting down South for plus 10 to 12%, right. So we're getting 1718% with a net of let's just say 16. So we're getting equity returns

and debt. So why are we going to go do equity, same returns with less risk and debt. Now again, I think that's going to change here. I think this is a year where people are going to capitulate. We're starting to already see it. And remember, within any market, the first deals you start seeing when the market changed, probably the ones you don't want to do, but we're not far away of seeing the ones you know that we do want to do. Huh. That's interesting. Why? Why? They're the first ones.

I think I know what you're saying, but I'm I'm just curious, why are the first ones the ones you probably don't want to do? You know, like there's an office conversion to multi family in the Arizona market. You know that's just a 30 million over budget on a night. You know, just things like that, just maybe a different like those those were just bad, those are distressed, they aren't stressed, they're distressed. So those are the ones there.

There's an opportunity here in in Denver it's been all over the news and but you know you're going to have to take all the siding off all the windows off. There's mold like out of state developer. It's just I'm not getting anywhere near that there that you couldn't pay me to to do that. And by the way, this reminds me of something that I learned in the GFCI actually think properties can have negative value.

Meaning you could give me AI wouldn't take it and we were looking at a property in Houston and and we could have bought this thing for. I'm going off a memory, let's say it was 20, five, $30,000 a unit. It actually had negative value because it had mold. It had everything that was wrong like if you gave it to me or 'cause like it was worth less than replacement cost. So you so I didn't even want it and I don't know that we're

going to see that again. It just jogged my memory of I never thought that somebody giving me you know 10 acres with multi family on it. I wouldn't take like there's a value for everything. In that case it was actually negative value. Yeah. Well, that's the issue with replacement costs. The natural question is, is it worth replacing, right? Right well not I agree because talking to a friend of mine from a multi family re yesterday here in Denver and he said you know

replacement cost story. I don't know what's what like if it's a high rise the exterior is always going to look good and you can redo the you know, interiors, he said. Older product at stick frame, you know the exteriors can get worn like and and and I haven't really fully digested or agreed with. I I do agree that you know high rising is not really something we do but the replacement cost

is a fair is a fair argument. But for folks like us that need current cash flow or want current cash flow and if it's very, very little, you know when I say very little below say 5%, probably not worth us waiting for two or three years or at least we haven't seen those opportunities yet. Yeah, that's interesting. If I heard you correctly and remember correctly, you said that right now is sort of the

opportunities are in debt. You think that the opportunities for equity are are maybe on the near horizon if I if I asked you to put your fortune teller hat on, how do you think this all plays out? I think you've been talking about it, but I I'd like to hear you like sort of. Specify, I think we'll be active buyers the second-half of this

year. I think we'll probably tie something up in the second quarter, but I think we'll be active buyers and there's just such a, you've seen the charts I'm sure 2024 and all the debt that's coming due. And so because we've got different vehicles which we can provide different whether it's for ourselves or to third parties, there are a lot of loans that are just out of

balance. There are a lot of interest rate caps where people were hoping that the cap costs would come down to re up. There are folks that lenders are saying hey, time's up, we give you enough extensions or pay us down or so whether it's a bridge loan that we can provide, whether it's equity and we're going out you know and buying. I think the opportunities, again, the capitulation is there where folks know crossing their fingers or hoping.

I always say hope's not a strategy, their rates are going to come down. I think the capitulation is there. So the question now is how much more time do I have before my dad comes doing? What can I do to solve that problem? Yeah, interesting. You know one of the things I was chatting with my dad about and maybe maybe it came up when you

and I talked the first time. But one of the interesting sort of dynamics that I've I've been thinking about with multifamily is as people live longer older people that are choosing to move back into multi family. Now some are obviously nursing homes but some aren't ready for that. They don't want to take care of a house anymore. And this is kind of a segment of the population that I have not historically associated with renting that that may be looking

to rent more. Is that are you seeing any of that in what you own? We are actually our, our CIO moved here from San Francisco, lived there for 30 years. He was portfolio manager with a $25 billion fund and he's an empty nest for now. And he rents, he said. One of the things and moving to Denver, I wanted to be able to walk to work and he loves locking and leaving, right? They eat out a decent amount, they cook at home, he said.

The only downside is like when we have, you know, a bigger group of people come over, it's hard to kind of host like we would at our house, but they just love the flexibility. They're one of their kids in Southern California, the other in New York, so they're gone a lot as well. So I think that's actually just been a shift in our culture that it's OK to rent. Yeah, and you don't have to manage a house. Managing a House of pain can be. You aren't. Yeah, you aren't.

Couldn't. Especially when you don't live there, right? And he's, you know, letting friends stay there. Do we rent it out? Do we put some of our stuff in storage? Again another thing from my father-in-law, he said you know nothing in life stays the same, your friends, your family, your

health, your business. And I think that's one of the things that formed that we've done a good job and we have signs around like connecting let's say it's connecting the dots like where's the market going. You know 8-9 years ago we built, I mentioned Google's campus, we did a million square feet of retail. We would do non multi family here only in Colorado, but it was really hard for a guy like myself who's you know more of an entrepreneur and a deal junkie to say OK no more we're only

doing multi family. We're doing the entire capital stack in multi family and turning our entire business around like for for real estate people like myself that like I said are deal junkies. It was like a tree with a lot of limbs but no roots. It's always about the next deal. It's like a I I probably shouldn't use this analogy, so I won't. But you know somebody who's addicted to something, it's like, hey, I'm just going to to ease my pain. I'm going to go do this.

Well for real estate folks. It's like, hey, I'm just going to go to the next deal. We're going to make more money

on the next deal. So one of the hardest things in my careers was turning the whole shit and say I'm going to build a foundation and we're going to stop and and the market timing was OK because as I mentioned cap rates are going down and you know we stopped buying a lot and but now I've built a foundation where in roots in the ground where we could add as many limbs on that tree as we want and it won't fall over.

But I was at the point where if I just kept adding limbs the tree was going to fall over at some point. We just couldn't keep growing without the foundation. I like that. I I I like that a lot. I wrote it down I so. Yeah. I may, I may. My dad often says like look down, where are you? And he he's sort of saying

something similar but different. He's like just pay attention to where your feet are and and execute what's in front of you and maybe slow down a little bit rather than like spreading out the focus. And seeing where life is going, like COVID was a huge shift, right? That again had the chance to move from someone to go to Vail,

Co and they never left. Or they, you know, we look at EU Haul, you know, trucks or just just open your eyes and see where like all people are moving to and and not going back to. And it was pretty easy to see that this wasn't really a transitory change, it was a structural change. The interesting thing and I I may be mistaken but I haven't the Midwestern and Northeastern markets actually been like relatively stronger. Now they probably took a right down. So it's strong off a lower base,

but is that is that accurate it? It it depends on where. So we were in Saginaw, MI. He probably never heard of Saginaw and a lot of people from Michigan go back to Michigan junior college like, but people were leaving there like there's just not a lot of growth but like Kalamazoo with Pfizer with Merck, you know Ann Arbor, like Detroit, you know area.

There were just certain areas or Columbus OH right, where you all of a sudden start getting tech you get biotech in these markets that yeah they're strong and and rents haven't skyrocketed and costs. A friend of mine from Iowa City.

He's a single family home builder and he told me about this house that he built on. He I I said what like you live on 63 acres and I I couldn't believe, you know he said I couldn't build a house for 2 1/2 or $3,000,000 like it's I could build like 100,000 square foot home or you know something huge but just a cost differential. But market like Iowa City, right, the university, the medical.

There's a lot of wealth in Iowa City and Des Moines, you know South in Indiana, you've got you know in Indianapolis and Carmen like there's some great Midwest markets. It's some of these smaller markets that you know, we owned in Jackson, Ms. and and glad we did and glad we sold out of there. But they're just not. I jokingly say to people, I'm like, do you know what's going on in Jackson? I say no. What I said nothing. Absolutely nothing.

Like there's no economic driver to help really grow that market. Now, I'm not saying it's not a nice place to live or or not, but for an apartment owner there's just, it's like apartment stocks getting older and the only thing new that's getting built is capital. Affordable, like light tech type stuff if anything. So they're just not a lot of growth in that market. Not the best place to own an equity asset in, right? I used to have a guy.

I was a trainer at a gym. He was sort of a abusive to me, but I liked it for some reason. I should probably sit on the couch and figure that out. He used to call me Muffin Top and and he'd be like, Top Top. You got to buy in Kalamazoo because Pfizer's going there. Turns out he was right. Right. We own there. Yeah, there you have it. Oh well, sometimes the abusive are right. He was something, anyway.

It's my old joke. If I ever get the urge to exercise, I just set back down the couch and it goes away. I don't know man. I've I've had good. I've had good luck with trainers, but not not on my own. I'm not. I'm not good at self motivating in the gym. You said you had a tryout for the Falcons. Yeah, a long time ago I played at Colorado, played linebacker. I was our fullback for short yardage and goal line. And so yeah, I was built like a

linebacker, not like a fullback. So that was back in 98, our Super Bowl year. Unfortunately, I blew out my neck and know why? Most fullbacks have retired from the NFL because of a neck problem. So that sucks. There we go. Is it still? Playing great experience. We met some great people, met some stuff, great friends, investors. Yeah, it's been great. I've been teaching my kids to respect the full back position.

It's hard to find these. Days when I see him, though, I'm like watch this guy block because my my youngest, all he wants to do is talk about quarterbacks and you know he, but he learns. You know what's helped him a lot is Madden. Oh yeah. Like, they actually understand football. We were watching the playoffs. I was asking them about calling defenses and stuff and like, they get it.

It's kind of cool. So. Yeah, we've got a dozen or so a more at, you know, athletes and not that I'm looking for them, but it's typically the wealthier ones that have the capacity to make the investments. And I I found that athletes like real estate because they can see it and touch it and really understand it versus being in a private equity fund or something that they don't. No, But it was always a joke. You know what? What's the next deal in the locker room that's coming, you

know, being passed around so? Well, better that than than spending it, right? Yeah, well, many, many of stories about people spending it and you know, you're you're one play away from the end of your career. Yeah. And. And especially NFL. And that's not guaranteed money either, right? That's right.

So it's different, interesting. So when you were in college like how did you start, I know you said you got into financing real estate like how, how do you go about building 1,000,000 square foot facility and protecting your own risk, like how do you structure that deal and where do you learn to structure those kind of deals? I assume it was on the debt side mitigating risk, but. When I was in college I was doing landscaping and decks and fences and stuff like that in

the summer. So I was hiring all my football buddies to help me out on the on the labor crew. But there's nothing like real life experience. You know, my wife was at the University of Denver and a master's in real estate and when I was in finance and the professor asked me to come in and talk and my wife's got her, you know, book and trying to write down like do all and I said hey, this is an HP12C. This is all you need. You don't need to memorize just like the Pythagorean theorem or

whatever. You don't need to memorize any of this stuff, but maybe to answer your question to me, experience in the number of transactions you do. So like for me on the real estate finance, the number of transactions was more powerful than the years in the business. It's not about how many years you've been doing something. It's about the number of transactions or investments or loans that you've made and underwrite. Because if it quacks like a duck, it walks like a duck.

It's probably no No2 deals are ever the same, but there's a lot of similarities. And so I've always looked at things more in the sense of like, how do we get in trouble? Not how much money are we going to make? Because I think as soon as folks starts looking at, like, licking their chops and saying, hey, here's how much money we're going to make, the game's over. It's how do we get in trouble.

The last thing you ever want to do in one of the most, one of the things I'm most proud, we've never done a capital call outside of like a fund where you have drawdowns yet. But like where a deal was over budget, like we've never had a development over budget or we had to do a capital call or anything like that. Because again we use lower

leverage. And I would rather take the risk say on a development once we build it and stabilize it on the permanent loan and leverage using more leverage there if we were going to do it then leveraging up on the construction side. So again you get in trouble for two reasons, You you're over leveraging your debt comes due. So it always comes back down to debt.

But just observing a lot of folks, developers, you know my father-in-law was a huge he doesn't know it but a mentor to me in a way and it was his name is Dick Landon I call him the Dickisms. He he has these sayings. Darren, when the ducks quack feed them, It's like when the market's hot sell right, you never get go broke taking a profit, you know, things like that. And so he'd been through it all. He moved down from Canada in 1980 with Pat Bolton, the former owner of the Denver Broncos.

And they were 30 years old, didn't go to high school, he didn't had a $5,000,000 in the bank, a $30 million line of credit from one of the Canadian banks. And they said, hey, pick Denver, Santa Barbara and go work out all of our problems in real estate. And so he helped me because they were Wheeling and dealing in real estate, and then they got in the banking business and the SNL crisis hit and then they took their lumps. And so he learned a lot and just talking to me at the dinner

table. And he lives in Denver with his wife here as well where where my wife Blake grew up for most of her life. And just, you know, just those lessons learned from him just talking like the the Dick ISM. See, he doesn't realize how many of those sayings like stuck with me. I got that cash flows queen from him, right. And to this day, I'm always focused on how much you you got to have cash as well.

And like, I wish there were some developments that we didn't sell, but it also helped me grow my business more. But the cash flow, if there are goals for me, I've always had goals around cash flow, not about cash. Interesting. So on the Google campus or the how like how did you mitigate your risk? Do you subcontract all that out? So we have never been a contractor ourselves. We thought we were.

We were going to entitle more residential land and maybe a hotel, maybe retail, and we got a call from Google. It was like this top secret, you know, it's almost like the US government, right? They don't want you to know. We ended up signing a a long term lease with them. So we did a build a suit for them. So with our contractor we had a what's called a GMPA guaranteed

maximum price. They guarantee a price, they buy out the Subs. And one of the things we do a little different, a lot of folks, developers don't buy out all their subcontracts, they do it over the project. Well, if there's a cost inflation you get stuck. So we always want to buy out 75 to 80% of our subcontract before we break ground. And we actually do the same when we make loans to our developers because we don't want them to be

over budget or get low cost. We also rather than just having a lender contingency, we have a lender contingency, we have an owners contingency and then we have a contractor as a contingent, then we have a joint contingency with our contractor that we can agree upon. So if there's cost savings on time, so one of the reasons again we always want a cash cushion just in case, just just be safe and some people say well there's a drag you you raised you know or have more equity

that's just sitting there. Yeah, but never done it. I'm sure if that same person I said hey, I'm you know doing a capital call because we're over budget would say gosh, I wish you had more contingency or something. So we've always again rather play it safe and but that Google development, I'd do it again. We sold it to Google. There's a whole nother story for another time, but that was an interesting process selling to them. As well the cat makes sense, right?

I mean that's I'd I'd built this house and I'd I'd made I was really worried about inflation and I signed fixed price contracts because I was like look I I'm not I got to know what I'm going to spend like I can't just it's an insurance policy and and then the roofer came back and he didn't procure his stuff and I said, look man I'm not trying to be a Dick but we signed a fixed price contract. That's your business problem, not mine.

Well, and you know how many people my sisters, you know, hired a contractor and you know they over. But I people just aren't. They just don't know. But even on a remodel, because it's like, well, until we open the walls up, we don't know what we're going to find. OK, well, give me a budget and before you go and do the work, I need to sign off on it. Right. A change order. Like if you give folks, you know an open budget, they'll spend it because there is none.

There's no budget. Yeah, well, I heard a story. It's either it's somebody that lives around here, somebody that knows lives around, you know, whatever the boat's name is. Change order. So I like that, yeah. All right, cool, man. Well, is there anything that I haven't asked you that you'd like to to talk about?

And regardless of the answer to that question, if if this is close to the end, let people know where they can find you and how they can contact you and I'll put it in the show notes. Too. Oh, I appreciate. Yeah, we're forumre.com happy to help any way I can with folks as they're going through their journey in real estate. But you know, one of the things that that I was thinking about, what would be one wish I had in commercial real estate or commercial real estate finance today.

And Debbie Jenkins who's at Freddie Mac, I have a decent relationship with her. And every time I see her in DCI, say, Debbie, if there's one thing you guys ever do, please come out with a construction to perm financing program for Freddie Mac. And I would say the same thing

to family. If I had a wish construction Ware that's one way where I think you'd really get more housing built and housing started where where we knew where our our insurance policy just like you said about AGMP you know locking in those prices if I knew you know and life insurance companies do some of that where they can do like a 10

or 12 year construction perm. But if you had the agency backing because it's, you know, let's just face it, we have twice as many lenders and multifamily than we do in commercial real estate just because we have Fannie Mae, Freddie Mac and HUD supported by the US government. So HUD is an arduous process to get through on the construction

side. But if I had one wish for multifamily today, it'd be that Fannie Mae and Freddie Mac could provide 7 plus year construction perm financing because it really it'd provide more lending options to our space and it would provide you know lower cost financing to our space as

well. So that that that's what I would probably leave with is my. Wish you may have said this, and I apologize if my mind drifted while you're talking, but I was thinking like if you had what you're asking for, you could almost have like a yield the worst on your project, right? That's right. You nailed. It yeah, that would be nice then. Then you can sort of pencil things out and know where you

stand. One and look the regulators are hammering the banks for you know reserves and what have you and so they're just out of the market like the big bulge bracket banks are just out. So you have a way for the government to get involved and not make it a negative involvement, a positive involvement to create more housing whether it's the capital A affordable or the little a

affordable. We're providing more multi family housing through these construction programs and hopefully somebody from back east is listening and we can get something going because it really would make a huge dent in providing more housing. Yeah. Well, if they don't, then it's up to the private markets and the pricing is going to be higher. That's right. That's what's happening. Yeah, the golden age of private credit, as they say.

All right, cool. Thank you so much for stopping by. It was a great conversation. It's been nice getting to know you. It was a nice, nice pre call conversation too. So when I'm out in Denver, I'm a hit. You up? I know you're investing with some some local friends here, so congratulations, great group and if you ever have time when you're in Denver, I'd love to get together with you. So thanks for including. Me. Yes. Thank you. Have a good one. Take care. You too. Bye.