WS1492: Addressing Pitfalls To Seal Profits | #Highlights

While passive investors may not have direct control over possible risks, they need to understand how operators analyze their deals to prepare for any potential negative outcomes. Also, it is important to bear in mind that the process of real estate deals, from start to close, is littered with tripwires and landmines. In this #Highlights episode, we look back at our conversations with Hans Box and Nicholas Moore.

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Hans highlights what passive investors should look for, including transparency, deal value-add articulation, and scenario analyses. Meanwhile, Nick details the hurdles that can be encountered early on, during financing and negotiations, and also during the closing period. Enjoy the show!

Key Points From This Episode: 

  • Hans’s background, his transition from the corporate world to multifamily, and what he’s up to now.
  • The incredible story of Hans’ first deal, where he got thrown into the deep end.
  • How Hans realized that he could not depend on a W2 as his only source of income.
  • What gave Hans the confidence to ultimately leave his W2 to pursue syndication full-time?
  • Sacrifices Hans made when he gave up his job at the same time his wife went to law school
  • Some of the most important things to consider when vetting a potential sponsor are.
  • The best questions to ask are to gauge an operator’s level of transparency.
  • An introduction to Nick and his career in real estate thus far.
  • Getting an attorney involved to help guide you through the important documents for a deal.
  • The transactional timeline and the common pitfalls that are encountered.
  • Making sure to cover bases during the vital financing period.
  • The closing of the deal; relationships with lenders and finalizing the documents.
  • Preventing pitfalls of post-closing; avoiding bad debt and unnecessary lag time.

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“A good sponsor can turn a bad deal into a good deal and a bad sponsor can buy a great deal and destroy it. I’ve seen it happen.” – Hans Box

“Look for sponsors that are open, transparent, answer your questions, and aren’t offended by your questions.” – Hans Box

“Another important thing with the sponsors is you need to make sure that they can articulate the true value-add component of the deal. If there’s not a value-add component, you shouldn’t be investing in the deal, there always should be a value-add component.” – Hans Box

“When you go and you find interest and you underwrite a deal and you want to make an offer on it, you want to put some terms in the LOI that are not going to be such a surprise once we go to execute the PSA.” – Nicholas Moore

“Ernest money doesn’t go hard till the end of financing. Now, financing will either, historically run concurrent with the inspection period and a lot of times will run beginning on the effective date.” – Nicholas Moore

Links Mentioned:

Hans Box on LinkedIn

Hans Box Email

Old Capital website

WS759: Risk Mitigation For The Passive Investor with Hans Box

Nicholas G. Moore on LinkedIn

Capital Law Group of Georgia

Nicholas Moore Email

WS762: Transactional Pitfalls with Nicholas G. Moore

About Hans Box

Hans Box is a Principal at Box Wilson Equity and a Senior Director at Old Capital Lending, a top provider of commercial capital solutions in the Texas market. His background is in the accounting, business strategy consulting, and real estate industries. He has been directly involved in the acquisition, investment, and management of over $350MM in multifamily and self-storage assets and has asset managed ~3,700 multifamily units and has invested in or had equity in ~4,300 multifamily units and ~2,000 units of self-storage. In his role as Senior Director at Old Capital, he assists commercial real estate investors in finding debt solutions for the acquisition and refinance of their properties. As an avid investor himself, he understands how to look at deals from an investor’s standpoint. Old Capital specializes in loans from $1MM+ in all the major real estate asset types. Box Wilson Equity is a private equity firm specializing in placing equity in cash-flowing real estate. They have invested over $30MM since 2013 into multifamily, self-storage, mobile home parks, and distressed debt.

About Nick Moore

Nick Moore is a commercial real estate and corporate attorney located in Atlanta, GA. Since 2012, Nick has been involved in real estate law in various forms, including acquisitions and refinancings with retail, fast food restaurants, multifamily real estate, and self-storage real estate. Having assisted clients with multi-millions in real estate deals, Nick guides his clients from the inception of the deal to post-close business matters and everything in between. Nick is also a general partner in commercial real estate and has assisted in the formation of private equity funds, limited partnerships, syndications, debt securities, and corporate structure revisions to accomplish his clients’ complex objectives. In 2020, Nick was selected by SuperLawyers as a Georgia Rising Star for the areas of Corporate and Business which is reserved for the top 2.5% of attorneys in the practice area. Nick lives in north metro Atlanta with his wife and son and is expecting his second son in February of 2021. When he’s not taking down deals with his clients, he enjoys hiking, golfing, spending time at his church, and staying active in his faith.

Full Transcript

EPISODE 1492

[INTRODUCTION]

Whitney Sewell (WS): This is your Daily Real Estate Syndication Show and I’m your host, Whitney Sewell. Today we packed a number of shows together to give you some highlights. I know you’re gonna enjoy this show. Thank you for being with us today!

[INTERVIEW]

WS: Our guest is Hans Box. Thanks for being on the show, Hans.

Hans Box (HB): Thanks for having me, Whitney.

WS: Hans is a principal of Box Wilson equity and a senior director at old capital lending, a top mortgage broker in Texas. As a sponsor, he has created 122 private equity funds with his business partner together Box Wilson Equity 30 million dollars into equity placed.

Hans is personally been directly involved in the acquisition, investment and management of over 350 million dollars in multifamily and self-storage assets and has asset managed 3,700 multifamily units and has invested in or had equity in 4,300 multifamily units and 2,000 units of self-storage.

It’s incredible to have you on the show and get to meet you, just talking to you a little bit. Your background just says, put you in a position to be so experienced and have such a wide knowledge base of this business. But I’m going to let you fill that in a little bit for the listeners but welcome to the show, give us a little more about your background and let’s jump in to your superpower.

HB: Sure, quick background, I am a CPA by trade, I went to a school here in Texas and got a Master’s in accounting and did the whole route to the W2 going to g t a job with one of the big four accounting firms at PricewaterhouseCoopers. I was there for a number of years, probably nine or 10 years. And then right after the great recession, I decided to take a risk and get into multifamily. I went from a basic six-figure job salary to not much at all to go partner with another individual in the BFW area to fix his accounting and his payback to me was he’s going to mentor me in multifamily.

At that time, I’d already bought rental homes so I kind of had gotten a flavor of it but this was the huge step into going full-time into real estate. Worked with him for two or three years, got invested in a couple of his deals. Long story short, this is probably where my greatest learning experience ever occurred. In the first few I got involved with him where I put 100,000 of my own money into it which at the time, was basically my net worth. I mean, it was probably a little bit less but not much but I didn’t have much more beyond that.

I cashed out my IRA to do it and got involved with him in that deal and long story short, he’s a good sales guy but he’s not a great operator. And we actually, myself, now, my current business partner but at the time he was just a fellow investor, got voted in by the other investors to basically take over the deal and take control.

WS: Wow.

HB: Yeah. I was green, I was very green. I was literally sitting in the upstairs office of a class C property in Dallas, you know, trying to run the budget and work on getting the thing turned around, we managed to hire a management company that we’ve been pushing for. She helped turn it around and so at the time, we turned it around about a year, a year and a half and when we took it over, we were going to lose money if we sold it. And then when we sold it, we made about a 24% gain which isn’t great when you think about it but considering we were negative equity, it was a good turn for us and we sold it for a record price in the submarket at that time.

Now, that was 37,000 a unit to give you an idea, that deal probably sells for 100 grand a unit right now in Dallas. But it got me started with number one, I met my business partner and we synced really well, we work well together, we’re both analytical, he’s an engineer with Stanford and Northwestern, he’s way smarter than me. But we work together. And it also established a base set of investors that were confident in us after seeing and save their investments.

That’s how we got started in the syndication model because we weren’t really planning the work together after that but then they started asking us, “Hey, you guys going to give another deal?” We’re like, “Yeah, maybe,” and then we started thinking through it and it just kind of took off from there.

WS: Nice, that’s an incredible experience, I’m so thankful that it turned out the way that it did, it could have been so much worse. Wow. It’s incredible, you took that leap and I’m sure you receive some pushback potentially from family or friends saying, “Hans, what are you thinking, you’ve done all this work, all the school, all this time invested into this career, right?” This corporate career and I usually ask people that’s made that transition because I know there are listeners that are wanting to do the same thing.

What gave you the confidence to do that? How did you handle the pushback or maybe some negativity from friends or family?

HB: The reason for it, I know, to answer your question two parts, the reason for it is when I saw the recession hit and I saw individuals and employees getting laid off in other industries in other companies, Price, water, house, actually didn’t lay off anyone, they’re very good about keeping talent aboard and then trying to tread water until – because they don’t want to lose talent, it costs a lot of money to get talent back.

I wasn’t really worried about losing my job but I saw that and I saw the risk that could happen or if this happened again and I didn’t want to depend on a W2. At the time, I was married but no kids and not many obligations, you know? I was living cheaply so I was like you know, if I don’t do this right now, and take this jump, number one, regret it and number two, I might get golden handcuffs in the next five years and not be able to leave just because you couldn’t bring yourself to give up once you get to a certain level at those firms, you can make pretty good money but you’re also working 70 hours a week, right?

I was like, “I got to do it now or I might get stuck.” And so, that was my main reason for doing it and as for pushback, my parents were very supportive, I didn’t get much pushback at all and my wife, was very supportive as well so I have to say I didn’t have to overcome any pushback.

One thing I did have to overcome, she also started law school at the same time and took on debt to do it. At the same time, I gave up my higher-paying job. It was a – we suddenly were living on rice and beans as they would say. I literally was unplugging my plasma TV, it was in my condo to save on electricity, I was doing everything possible to save money. That was probably the hardest part of it for a while.

WS: Wow, that’s incredible. I love hearing stories like that. Because I know it helps encourage the listener as well that’s approaching that decision or working through that, it’s not easy that’s for sure but so worth it when you can make it happen like you have.

I know from your background, I want to get into lending a little bit or the current lending market and situation but on another note, just from your level of experience as a CPA but then also, you’re getting to see so many deals, you’re getting to see so many sponsors, how they underwrite and you know, you’ve become an expert no doubt and underwriting and analyzing sponsors’ deals, you know, as active operator but then also as a passive.

I thought you could just speak to vetting a deal or vetting a sponsor in probably much more detail than a lot of people for that passive investor that’s listening right now.

HB: There’s a lot to vetting these – I’m going to speak multifamily, that’s what we’re speaking but this can really be applied any commercial real estate investment. There are quite a few things and number one you have to understand general terms, like cap rates, what a waterfall is, what a preferred return is, once you get that base knowledge which you can get on the internet in half a day. I think the number one thing you have to do is you need to be able to vet the sponsor.

To me, the jockey as you’d put it, is the most important part of a deal, you know, a good sponsor can turn a bad deal into a good deal and a bad sponsor can buy a great deal and destroy it. I’ve seen it happen, in fact, I was in one obviously. I think vetting the sponsor’s number one and one of the biggest things I look for with a sponsor is transparency, I tend to ask a lot of questions about the deal, just to make sure I understand what their goals are and their strategy is.

The sponsors that I feel most comfortable investing with are the ones that answer my questions fully and don’t try to get around it or our brief and the response. They give me a comprehensive answer and will actually share their proforma with me. You know, I’ll be honest, I’ve had sponsors that I thought were pretty good but they wouldn’t show their proforma so I could really dive into the numbers and see how everything was calculating because they told me it’s proprietary. I’m like, “It’s an Excel spreadsheet for a multifamily deal, there’s nothing proprietary about underwriting for a deal.”

I think your listeners should just look for sponsors that are open, transparent answer your questions, and aren’t offended by your questions because that’s what we do with our – we have quite a few investors that are – that dig in pretty deep to our deals and we answer every question, we jump on the phone if we need to and we make sure that they understand what they’re getting in to.

Another important thing with the sponsors, you need to make sure that they can articulate the true value-add component of the deal. If there’s not a value-add component, you shouldn’t be investing in the deal, there always should be a value-add component, I don’t like the term, ‘yield play.’ There needs to be that margin of safety between what you bought it at and the equity you can force to protect your investment. Always look for a value-add component and have the sponsor clearly articulate that.

But that’s probably the most important thing about vetting a deal, I mean, I can certainly get into the legal stuff, I also can get very detailed into the operating agreements and stuff like that.

[INTERVIEW 2]

WS: Our guest is Nick Moore, thanks for being on the show Nick.

Nick Moore (NM): Thanks for having me, appreciate it.

WS: Nick is a commercial real estate and corporate attorney located in Atlanta Georgia. Having assisted clients with multimillions in real estate deals, Nick guides his clients from the inception of the deal to post-close business matters and everything in between. Nick is also a general partner in commercial real estate and has assisted in the formation of private equity funds, limited partnerships, syndications, debt securities, and corporate structure revisions to accomplish his client’s complex objectives.

In 2020, Nick was selected by super lawyers as a Georgia rising star for the areas of corporate and business which is reserved for the top 2.5% of attorneys in the practice area. When he’s not taking down deals with his clients, he enjoys hiking, golfing, spending time with his church and staying active in his faith.

Nick, welcome to the show, grateful for your time. Knowing somebody like yourself is a must for anyone in our business and I think whether you’re a sponsor or whether you’re just passive investor, you need somebody like yourself on your team. Thank you again for your time, get us started, it’s a little bit of who you are, what you do specifically in commercial real estate, I know we highlighted a little bit, but then we’re going to jump in to just your superpower and take maybe the listener through just that transactional timeline and some pitfalls and things like that to help prevent them.

NM: For sure and thank you for the introduction, I was so close to what I do and you thought I wrote it, and I did. Yeah, absolutely, appreciate it, yeah, I got started in commercial real estate in 2012, working on the McDonald’s deals and then just rising up from there, just started doing the multifamily assets, picked that up, do the closing, all the contract work. I work with the GPs and the LPs as well so when we’re talking syndications, obviously, our GP is a general partnership, those are the guys running the deal, LPs of course are our investors.

Kind of got my feet wet a little bit, there were some contract work for another larger law firm and just picked up the material, really loved the clients. Everyone just gets so excited about income-producing real estate and specifically the multifamily that it was really just contagious. There’s nothing like being a lawyer and having your clients with good spirits. I do some litigation as well and I’ve had some success with that and, you know, it’s a little bit different, it’s adversarial, tensions run high, the clients already think they’re right before they even bring it to you so you have to do everything again to prove them right, while someone’s trying to prove you wrong.

But with the commercial real estate, it’s just so easy to enjoy it and to know that you’re building and that you’re in some form or fashion incidentally providing security to your clients’ families. People are sometimes in it for wealth, some are in it for security for their families, whether it’s passive and using the money that they’ve made in their career and are laying that into a better opportunity. And there is no better opportunity than multifamily real estate. Self-storage and these other income-producing assets and so I service general counsel as well, externally to a quite a number of companies, that gives me the opportunity to go through these contracts, I do on a daily basis.

And then again, my litigation experience, I know how to phrase these things to avoid litigation or to prepare for some contingency that’s going to help you out and something that we wouldn’t have to get into a big dispute about, I can just point to the language and say hey, here’s obviously the intent and that’s just been a tremendous value. Number one for my GPs. Now, on the LP side, I’ve been able to review PPMs, other agreements there and tell them you know, kind of here’s what the group can do, here’s what you can’t do, here’s the rights, here’s how your waterfalls work, et cetera. Just get in and mixing up the deals, you know, like I said, just kind of fall in love with the subject matter. Fast forward here, you know, almost six or seven years while doing this on a daily basis.

WS: No, that’s awesome. I’ve had different LPs or passive investors asked me about should I have an attorney review the PPM or those documents and I’ve had some LPs mention that like they’ve asked an attorney to review it and they won’t, on the LP side. I thought it’s interesting, is there something about that, that the LP needs to know about or why maybe one attorney wouldn’t do that for them versus another one like yourself?

NM: Yeah, of course, that’s a great question and I don’t want to speculate as to what an individual attorney and would apply and I know you weren’t to ask me that but if anybody told you that you shouldn’t consult an attorney, that’s the end of the advice from that individual, hands down, okay? That’s where you go, “Thank you very much.” And then digress to a different topic.

Why they wouldn’t review the PPM is because A, they may not understand it, we’re talking about 150 page there about document that is very content specific, the implications of the language can vary in terms of how do you earn your money, what’s the preferred return look like, what’s the waterfall, what are these fertiles, what’s the success beyond the front end, what’s the divestment fee on the back end? Can I get my units back, these different things that if you don’t work on it on the front end, transactionally, it’s going to look like Greek to review it and try and describe this and then the other thing is charging for that, I think sometimes attorneys actually shy away from work and they find it difficult to determine how to bill it.

What I do for LPs is I give them 90 minutes at a particular rate so I’ll give you an hour and a half and that gives me enough time to go to this PPM comfortably. I’m not scrolling through, you know, of course I know what to look –

WS: I was going to say, you’re familiar enough that you know what to look for, it’s not some other attorney that maybe has a different specialty that this is kind of out of their wheelhouse, you know? It’s like asking the knee surgeon to perform brain surgery, right?

NM: Look at the brain scan, you know, that’s kind of what it is, it’s not so much even the surgery as much as like hey, check out the slide, I’m used to looking at knees, you know? Let me take a look at that, you’re exactly right.

WS: Well, let’s jump into the transactional timeline, I want us to be able to hit that before we run out of time. Go through that timeline and I’d love for you to just highlight some pitfalls and how to prevent them from thinking through that, the transactional timeline of purchasing commercial property.

NM: Yeah, absolutely. Obviously, you want to start with the LOI, right? That’s our letter of intent. When you go and you find interest and you underwrite a deal and you want to make an offer on it, you want to put some terms in the LOI that are not going to be such a surprise once we go to execute the PSA. That’s going to shorten the timeline and executing the PSA so you’re not hey, I have no idea you were going to ask for these things in due diligence or that you wanted this timeliness with the inspection period or due diligence and the financing period or losing or extinction on some of these other things.

My LOI is very comprehensive, have a lot of that in it so they know what to expect. When I go ahead and release the PSA for red lines, there’s very little to red line, okay? The LOI is accepted and it’s signed, the PSA is submitted, the timeline should look like this ideally, okay? Your inspection period is historically about 30 days. I’ve seen a little bit less, I’ve seen a little bit more, sometimes the buyer wants more, sometimes the seller wants less, you just have to negotiate that. But you don’t want the inspection period to start at the effective date of the PSA because that’s really the date of execution.

The inspection period should really begin when you receive all the documents that you’ve requested, right? Because you don’t want to have a 30-day timeline that runs in signature and then 21 days later, you’re still waiting on a T12 to evaluate the expenses on the property or operating statements or insurance loss runs or whatever you need this part of your due diligence.

We typically put in my critical dates checklist the date on which we received all of those documents and then 30 calendar days, and calendar and business days, obviously an important distinction, typically it’s calendar days, 30 calendar days for then, would be the end of due diligence period. Now, I also like to put in a little qualifier there for property approval notice okay? And the property approval note has to be an affirmative document or communication from us to them at their notice, you put the property approval notice and then to let them know hey, we reviewed all the documents, we’re going to proceed.

Now, most often, okay, the seller’s going to want the property be sold as is, so once you provide that property approval notice, you kind of wave your issues with any of the documents that you received in due diligence up until that point. Now, if you have reps in warranties, there are certain things that you can put in there if you know that there may be an issue with the roof, the laundry room, unit 12, you know, these other things you want to put in, they can continue passed inspection. Make sure that they are responsible for some of the things that you addressed in due diligence, let’s say you went and did the – either an appraisal or you win in two other two property and you found some patent defects and things that are noticeably issues, you want to bring those up and make sure that those provide the inspection period and they didn’t merge with the property approval notice.

The reason that’s important is historically, the earnest money that you put down which is give or take, 1% of the purchase price. Those hard, typically, at the end of the inspection period so once I submit that property approval notice, money goes hard, you’re not getting it back, you got to go do your financing, find your lender, get all that and then do your syndication, PPMs, all that jazz, okay? Now, one of the things that we’ve done of late, particularly in the COVID era is try to make the earnest money not go hard until the end of financing because it’s been so difficult to get financing whether through Freddie Mac, Fannie Mae, conventional even, don’t really recommend SPA, high fees so everybody just you know, I’m not going to knock the SPA, it can be useful, but I don’t think it should be option number one, in my experience.

That being said, earnest money doesn’t go hard till the end of financing. Now, financing will either, historically run concurrent with the inspection period and a lot of times, will run beginning on the effective date, okay? But if you want to, you can work it in there because it’s a negotiating point as all these are, okay? You want to put your finance in period of about 60 days from the expiration of the inspection period. That’s going to give you enough time to work with the bank, nobody’s feeling the pressure, you’re not going to lose out on earnest money and you’re not going to have to contribute more money under the extension, because a lot of times, which we’re working to the deal is the option to extend the closing.

Historically, I’ve done a quarter of a percent of the purchase price put into escrow, again, it’s not refundable because at that point, we’ve already moved out of the due diligence period, okay? Now it still can be but that would be put into escrow and apply to other purchase prices later down the road. But that’s the consideration for the extension. Any option is basically a new contract the direct sizing has to be sold by consideration so you have to have a dollar value on that, okay? But you put in there if you know on the front end, kind of what the terms you want in finance and you go ahead and put those down in the PSA and say, hey, we’re looking for something in the 5% interest rate range, we want a 25 year amortization, we want a 10 year note, balloon payment, three years interest only.

And try and put that in there to give yourself that opportunity so hey, if you don’t get it, you can back out of the deal and get your earnest money back. I have fortunately never lost earnest money with a client. Okay? I’ve also in litigation had people bring me issues where they probably should have lost earnest money, I was able to get it back, okay? Just be very careful, you don’t want to wager 1% of three million dollars which is 30 grand on not knowing what’s going on, oversight on certain timelines. The financing contingency is very important. Now, what I do to hedge on costs is I don’t go and file any of the registrations or any of these things until we get enough into the financing period that we’ve obtained the financing from the lender. Then we can start discussing the PPMs and getting your operating agreement and registering these entities that have a fixed cost on them as well.

Those measures together are going to create a safe environment for you to got take your deal down. There is plenty of outs and it’s very easy to point to the language, a lot of times, last point on it, the earnest money is typically held by a third-party escrow. Well, they can’t release that earnest money without consent from the side. I like to hold my clients investor funds because I’m not subject to that full party consent and if something goes south, I don’t want them holding the investors’ bonds and have a derivative action or direct action come against my client. I’ll just go ahead and release that back to the investors or I can at least report to them, hey, I’m counsel on this,  we have your funds, we are working through some issues on the PSA, I’m either going to hold it until we resolve that or I’m just going to go ahead and return it to you and then we can work through the issues on the PSA.

[END OF INTERVIEW]

[OUTRO]

Whitney Sewell: Thank you for being with us again today. I hope that you have learned a lot from the show. Don’t forget to like and subscribe. I hope you’re telling your friends about Real Estate Syndication Show and how they can also build wealth in real estate. You can also go to LifeBridgeCapital.com and start investing today.

[END]

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