Why we don’t get capital from investment bankers

Had a nice-but-unhelpful call with a real estate investment banker yesterday and thought the conversation would make for a good blog post.

First: What’s a real estate investment banker? That’s a fancy name for a person or company that connects operators (like us!) with debt and equity. Generally, “investment banker” is used to distinguish the players who can (at least theoretically) bring equity to the table from your standard loan broker, who just does debt.

Because we’re always on the look-out for capital partners, I have had a lot of conversations with investment bankers. But they never go anywhere, and here’s why:

  1. We have a spectacular loan broker. The price we pay her is fair. The service is excellent. Any time someone else has quoted a deal for us, their terms have been inferior. And I’m not going to take a risk on someone new, who might fail to execute, unless the terms are WAY better than what we’re seeing. So we don’t need real estate investment bankers to provide us debt.
  2. The equity investment bankers provide is, generally, on standard JV equity terms, something like: 9% preferred return, 80/20 split after return of capital and pref, low fees, and we have to put up 10-20% of the capital. Those economics make no sense for our business model, which involves long-term holds… we’re not going to sit there falling further and further behind the pref, hoping that the rents finally rise so that someday, decades from now, we can own part of the building. No thanks.

It turns out that intermediaries don’t really provide what we want: Investors who think like we do (improving neighborhoods, serious value add, conservative debt, long-term holds, etc.) and put enormous value on relationships (as opposed to “hot money” / transactional / one-off type deals).

And the reason they don’t is because they can’t make a fee from those introductions.

So, we are likely going to keep growing the way we always have: Through word of mouth, introductions from the service providers with whom we work, and readers of this blog.

(Re)tenanting a vacant building

Regular readers know that we’ve renovated and re-tenanted something like 80 buildings over the past ten years.

If you haven’t done this kind of thing before, you have no idea how complicated it is and how much can go wrong.

Over 80 buildings, we have made every kind of mistake you can think of. We’ve had tenants who couldn’t get internet for months, no gas service, parking wars, washers not connected, you name it.

Because we’re not masochists, each time we screw something up, we adjust our process to try to avoid screwing that particular thing up again.

As a result, I don’t think there’s another property management company in Los Angeles that knows as much as we do about taking a vacant building and filling it with tenants, while minimizing the kind of problems that anger tenants.

If you are building a new building or renovating an older one, and you could use some help tenanting your building in a way that minimizes hassle for you and your prospective tenants (while maximizing rents!), get in touch and let’s see if we can help.

Suddenly, everyone cares about insurance

The wild fires currently raging all over California have me (and some of my investors!) thinking about insurance.

In general, the insurance premia Adaptive pays on our buildings can appear high, relative to premia paid by owners.


Most owners do the following: Buy an insurance policy when they first buy their building. Then, each year, renew the policy, eating premium increases which are small in percentage terms. At best, maybe they have their broker re-quote the same policy, to see if she can find a slightly better price.

Sounds fine, right? Wrong.

Say you bought a building in 2010. You paid $1,000,000 for a 4,000 sq ft 4plex. At that time, construction prices might have been $175 / sq ft. So, you bought an insurance policy with a limit of $175 x 4,000 = $700,000. Over time, your insurer slowly raised the premium for that same $700,000 policy and you renewed, because it wasn’t worth the hassle of finding a new policy.

Now it’s 2018, and construction costs are $300 / sq ft, but you still have your $700,000 policy.

What happens if your building burns down? The answer is: You’re in very big trouble, because rebuilding your building will cost ~$1,200,000.

The solution is to review all of your insurance policies annually, and sense-check the limits versus what it would actually cost to rebuild your building, using up-to-date construction costs.

It’s true that your insurance costs will increase quickly (because construction pricing has been rising at a rate faster than inflation). But, particularly in a disaster-prone region like Southern California, somewhat lower NOI is a small price to pay to protect your valuable assets.

Telling our story (again)

I remember reading one time that being the leader of an organization means repeating that organization’s story over and over and over again, to anyone willing to listen.

Lately, I’ve found myself telling all kinds of people what we’re about. So, I figured I’d repeat it here, for those of you willing to listen.


  • Buys older, dilapidated buildings in improving neighborhoods of Los Angeles at fair prices
  • Closes quickly, paying cash and refraining from chipping price or screwing brokers down on their commissions
  • Thoroughly renovates, replacing / upgrading all major building systems, using permits
  • Re-tenants, leasing to anyone who can afford to pay (without regard to race, ethnicity, immigration status, etc.)
  • Refinances, using long-term, fixed rate bank debt to pull out 75-100% of capital invested
  • Distributes the refinance proceeds to investors (usually, roughly 18 months after acquisition of the property)
  • Manages the buildings thereafter, maintaining them in good condition and distributing free cashflow from operations quarterly to the investors
  • Holds forever

This business model is highly unusual in the real estate private equity space, because it does not print very high IRRs, nor result in the sponsor (Adaptive) getting rich quickly.

However, we’ve never been the kind of people who do things because everyone else is doing them. And this model feels right to us. So we’re going to keep doing it, probably for the rest of our lives.

The other LA tech story

Everyone interested in LA’s tech sector has been talking up Silicon Beach for years.

SB is the constellation of tech companies, including SnapChat, Google, Facebook and others which are located on the Westside, mostly in Santa Monica and Playa Vista.

But I think all the attention paid to SB has obscured the most interesting story about employment growth in LA: The expansion of Netflix in Hollywood.

In case you have not been following, over the past few years, Netflix has gone from something like 80 employees in Beverly Hills to renting ~750k sq ft in Hollywood, enough for 3-4k employees.

The largest tech employer in LA is SpaceX at 5k employees. But Netflix is catching up quickly and should surpass SpaceX in the coming years.

All those highly-paid workers need somewhere to live. This is very good news for Hollywood-area landlords.