Keep talking

I spend an unbelievable amount of time either negotiating myself or quarterbacking other peoples’ negotiations.

This doesn’t mean I’m good at it. In fact, I think I’m probably only an average negotiator, at best.

But it does mean I’ve learned some things.

And the most important of these is: Keep talking.

Fairly often, I find that the other side gets angry and shuts off communication. Often, they’re hoping that the situation will just go away if they bury their heads in the sand.

But those kinds of situations rarely go away. And not talking doesn’t help.

The right thing to do, instead, is to figure out what it would take you to say “yes” to what the other side is asking for. This might prompt you to come up with a whole list of demands, each one intended to take away some aspect of the pain of saying “yes”. That’s fine.

If the other side is serious, they will seek to accommodate you. You may not get exactly what you want, but it’s likely you can come to a satisfactory bargain, one which makes everyone better off than they were before the negotiation started.

But the only way to get there is to be willing to sit down with an open mind and talk.

The difficulty in building a money management business

Had an interesting dinner last night with a couple of guys who work for other people but are thinking about going out on their own to do deals.

Found myself explaining the difficulty inherent in doing so and think it might interest you, my readers.

The money management business is fundamentally amazing at scale. Here’s an extreme example: A good friend of mine used to work at Lone Pine, a hedge fund where something like 15 investment professionals (of whom about 5 were senior) ran $15B or something.

Assuming a standard 2/20 (2% of assets management fee plus 20% of the upside), Lone Pine was taking in something like $300MM / year from the management fee alone. Even if you want to be conservative and assume they were discounting the fee to 1%, you’re still looking at a ridiculously large amount of money flowing to a small handful of money managers.

The problem, though, is how to get started. If you’re a normal human (eg not from a spectacularly wealthy family), it’s pretty likely that you’re going to start out managing a much smaller amount of money… say, $1-2MM pulled together from everyone who ever knew you growing up, etc.

Even if you get your 2% (which is unusual in real estate; it’s usually more like 1%), you’re looking at $20-40k. That’s not nothing, but it’s not enough to live and run the kind of organization you need to succeed.

So, you need to figure out a way to bridge the gap between $0 under management and, say, $50MM (when you’ll have $500k / year coming in, which is enough to run a business and eat).

For us, the bridge is:

  • Fees from the deals themselves (acquisition fee, construction oversight fee, etc. – think of these as payment for the huge amount of work we do on the buildings)
  • Fee for service deals (where we get paid cash fees to oversee deals on behalf of other groups / high net worth people)
  • Brokerage (initially by me and now by our agents)
  • Property management (which we need to do anyway to make our deals successful; might as well do it for others, too)

Over time, I expect the revenue from money management will far outstrip the revenue from these other sources. But, for now, we need the money from these less-scalable businesses to pay the bills (and, by the way, are incredibly thankful and happy to have it!).

Want to get into the money management business yourself? Got to figure out how to build your own bridge.

What I did yesterday

From the “This Ain’t Just Capital Deployment” files:

What did you do at your job yesterday?

Me? Oh, I negotiated and then personally oversaw voluntary move-out by a guy who had been arrested for threatening his neighbors with an ax.

Of course, I brought along two armed guards, plus a crew to help move his stuff.

He turned out to be a pretty reasonable, decent guy.

He lived up to his word and I lived up to mine and I’d like to think we both came away from the deal happy.

You might ask why I did this, rather than having one of my employees do it:

  1. I’m not going to ask an employee to take on physical risk, particularly if I wouldn’t take it on. Sometimes being a leader means putting yourself out in front; and
  2. Getting this done was very important from a deal perspective. And we take that kind of thing EXTREMELY seriously… if we were going to fail at this, it was not going to be because I sent someone else.


Using a tenants-in-common structure for 1031 proceeds

Over the past six months, we at Adaptive have got a crash course in tenants-in-common deals and I think this may open a new avenue for growth in our business.

To understand why, you first need to understand what a TIC deal is: A tenants-in-common situation is one in which multiple owners possess a property simultaneously. In effect, two or more owners put up the money for the acquisition and then have ownership stakes proportionate to their investment, with the running of the building governed by a TIC agreement.

The reason TIC deals are interesting in this phase of the cycle is that high prices are enticing many owners to sell. Unless they plan to exit the real estate business entirely (and pay a ton of capital gains tax), those owners generally opt to do 1031 exchanges.

But the same high prices that are enticing people to sell also make it hard to execute 1031 exchanges, since the properties available to buy are generally expensive.

The only deals that make sense are value-add deals, where you buy a bad property and make it good. But many owners aren’t equipped to do that kind of deal. And the 1031 rules prevent them from investing their sale proceeds in a fund (of the type we have often run in the past), because you only defer the tax by exchanging one property for another (not one property for a membership interest in an LLC).

In order to solve this problem, we have concocted a structure based on a TIC whereby investors can sell their own properties via 1031 and invest alongside us in value-add deals. It’s complicated and therefore only really relevant for investors with, say $2MM+ in sale proceeds to place, but it works.

If you’re an owner (or broker) considering selling a property and wondering where to place the sale proceeds, get in touch.

N.B.: The foregoing is not tax advice. Consult an attorney!