Offshoot: The Fident Capital Podcast

Show Notes: Welcome, everyone, to another episode of Offshoot. Today, I have the pleasure of hosting Ben Miller, the Co-founder and CEO of Fundrise, on the podcast. Fundrise is a real estate, credit, and tech crowdfunding platform. It was founded in 2010 and launched in 2012, making it one of the pioneers in the crowdfunding space. Currently, Fundrise owns $7 billion worth of real estate and manages $3.3 billion in equity from over 400,000 investors and 2 million active users. Fundrise’s mission is to simplify and make the investment into alternative asset classes accessible and cost-effective for traditional, non-institutional investors. Ben Miller is a seasoned professional in the field. He comes from a real estate family and describes himself as a “deal junky.” However, he has transitioned from a narrow, real estate-centric, deal-focused perspective to lead a tech company that prioritizes processes, specific segments of the real estate market, and scalability. The distinction between being tech-first and real estate-second, something that many, including myself, may overlook, will change your perspective. Join us as we delve into a wide range of topics, including: * Prioritizing the investor’s interests, a fundamental principle for Fundrise. Later in our conversation, we discuss how noble intentions often fail to overcome incentive structures. * The inherent fragility of individual deals and why building a diversified portfolio is a wiser approach for investors. * Opportunities for institutional investors in the capital markets, such as Yale Endowment, and how they might affect equity inflow into opportunity funds. * Fundrise’s innovative fee structure in their vertical integration of both fund companies and real estate operating firms, with neither entity taking a carry. * The rationale behind evergreen funds, and Ben’s insights on managing duration and leverage risk in the face of macroeconomic changes. * The challenges of transitioning from a deal-focused approach to a fund-centric model, which resulted in a loss of half their investors. * The art of recognizing good deals, as well as the importance of avoiding bad ones. Also, why great deals are rarely handed to you on a silver platter. * The value of developing talent internally, as opposed to hiring externally, and the difficulty in identifying talent before they prove their abilities. * The inevitability of software revolutionizing the real estate industry and Fundrise’s role in this transformation. * How preferred equity is currently linked to multifamily deals and its implications for common equity. * The influence of interest rate changes on the flow of capital into real estate and how this impacts real estate values. * The significance of finding signals in the market and the understanding that what works in practice may not always align with theoretical expectations. The process involves going into the market, learning, and scaling. * The certainty that A.I. will impact real estate, even if the exact mechanisms remain uncertain. * The importance for leaders to refrain from transmitting their negative moods to their teams. * Lastly, the value of determination, perseverance, and fulfilling one’s responsibilities, along with the importance of taking time to recharge. TRANSCRIPT Welcome to Offshoot the Fident Capital podcast with host Kevin Choquette. Offshoot is a curiosity-driven conversation that features a wide range of real estate business professionals. In each episode, we unpack the knowledge, vantage point, and domain expertise of our guests. Then we move beyond the facts and figures and dive into the personal habits and mindset which allow them to be high performers in their respective field. This podcast’s objective is simple, supporting entrepreneurs, fostering relationships, and uncovering meaningful conversations that positively impact business.  Kevin Choquette:  Welcome, everyone, to another episode of Offshoot. Today I have the pleasure of hosting Ben Miller, the co-founder and CEO of Fundrise on the podcast. Fundrise is a real estate credit and tech crowdfunding platform. It was founded in 2010 and launched in 2012, making it one of the pioneers in the crowdfunding space. Currently, Fundrise owns $7 billion worth of real estate and manages 3.3 billion in equity from over 400,000 investors and 2 million active users. Fundrise’s mission is to simplify and make the investment into alternative asset classes accessible and cost-effective for traditional non-institutional investors. Ben Miller is a seasoned professional in the field. He comes from a real estate family and describes himself as a deal junkie. However, he’s transitioned from a narrow real estate-centric deal focus perspective to lead a tech company that prioritize this process, specific segments of the real estate and scalability. This distinction between being tech first and real estate second is something that many including myself, may overlook.  I believe this podcast will change your perspective. There’s a lot in this one. Join us as we delve into a wide range of topics, including prioritizing the investors’ interests, a fundamental principle for Fundrise. Later on in our conversation we’ll discuss how noble intentions often fail to overcome incentive structures, the inherent fragility of individual deals and why building a diversified portfolio is a wiser approach for most investors. Opportunities for institutional investors in the current capital markets such as the Yale Endowment, and how they might affect equity inflow into opportunity funds. Fundrise’s innovative fee structure in their vertical integration of both fund companies and real estate operating firms with neither entity taking a carrier. The rationale behind Evergreen funds and Benz insight on managing duration and leverage risk in the face of macroeconomic changes. The challenges of transitioning from a deal-focused approach to a fund centric model, which resulted in a loss of half of their investors.  The art of recognizing good deals as well as the importance of avoiding bad ones and why great deals are rarely handed to you on a silver platter. The value of developing talent internally as opposed to hiring externally and the difficulty in identifying talent before they prove their abilities. The inevitability of software revolutionizing the real estate industry and Fundrise’s role in this transformation. How preferred equity is currently linked to multifamily deals and its implication for common equity, the influence of interest rate changes on the flow of capital into real estate and how this impacts real estate values.  The significance of finding signal in the marketplace and understanding that what works in practice may not always align with theoretical expectations. The process involves going into the market, learning and scaling. The certainty that AI will impact real estate even if the exact mechanisms remain uncertain. The importance for leaders to refrain from transmitting their negative moods to their teams. And lastly, the value of determination, perseverance, and fulfilling one’s responsibilities along with the importance of taking time to recharge. I hope you enjoy the pod.  Ben, welcome to the podcast. Thanks so much for joining me.  Ben Miller:  Yeah, thanks for having me.  Kevin Choquette:  I think it was Kelly Ren, Ballard Spar that makes this connection possible.  Ben Miller:  Yep. He’s a great lawyer.  Kevin Choquette:  He’s a good dude. I actually haven’t had a lot of legal exposure to him, but skied with him a few times and we have a lot of mutual friends, and he at one point thought it would make sense, so thank you for taking the time. I appreciate.  Ben Miller:  Yeah, my pleasure.  Kevin Choquette:  Look, I’d say Fundrise is a pretty well known enterprise at this point. You guys have been around for 13 years or so, 11 years, I guess. But in your own words, can you just kind of tell me about Fundrise?  Ben Miller:  Yeah, we launched with the mission to democratize investing into real estate. I had a real estate background, and real estate is something that is a big asset class. A lot of people do pretty well in it, but individuals could only really invest like buying a house or something, not the way that professionals do it, which is buying apartment buildings or industrial. And so we sought to democratize it the same way people own stocks and bonds. They should own real estate and other what are called alternatives, and we eventually expanded to alternative credit and venture capital.  Kevin Choquette:  I don’t think it was Kelly, but I’ve certainly heard it along the travels. For any syndicator or person out there raising capital, every investor’s a potential plaintiff. How do you guys think about the risk of… because I believe Fundrise is doing both accredited and non-accredited investors, meaning you can get the real teacher, firefighter, nurse, folks who are just your common working folks, investing in deals that have a risk profile they may or may not understand. How do you guys think about managing the risks of blowback from even 1,000 or 5,000 or $10,000 investor who didn’t realize the risk they’re taking and ends up coming back to the sponsor or the marketplace?  Ben Miller:  Well, so one of our company values is put the investor first. And so I think by doing what’s first and foremost best for the investor, it’s been a good mantra for us, and that most real estate sponsors don’t do that. That’s not really what they’re about. They’re about trying to make as much money as they can. And sometimes the money gets manhandled by the sponsor. So that’s the first thing. And this is a very different value system than real estate, which is just not a customer-centric business. It’s a asset-centric business, transaction-centric. So there’s a lot in the values, there’s a lot in the diversification. People invest in highly diversified strategies rather than… nobody can invest in a single deal. Deals are too risky in my opinion. And so by having very strong control over the whole investment process, I think we’ve been able to manage money for the investor, and that’s been how we should do right by them, to get the outcomes I think that they’re looking for.  Kevin Choquette:  Yeah, look, Ben, you guys have been in the game from the very early days with Obama and the Jobs Act and all of the promise it was there. I think you guys have done a good job of capturing that, but I’ve also witnessed that you’ve pivoted a lot, right? You just talked about deals are too risky, and I think in some of the early… please correct me on all of this, but in some of the early days, I think you guys were doing first deed of trust debt stuff. I know you, I think in the very early days had your own projects and you were doing crowdfunding through that, and then you have definitely transitioned over to investing in fund vehicles, which is what you just mentioned. What’s informed you guys’ trajectory change, the pivots that have been required as you’ve come into the space and learned? Because I think there’s been some pretty significant changes, right?  Ben Miller:  Yeah, we definitely changed and we learned a lot along the way. I conceived of the idea in 2010. And it took me about a year to find an attorney who helped me figure out how to get it done from a regulatory point of view. And so we predate the Jobs Act. We actually possibly helped sort of birth the Jobs Act. Jobs Act comes after what we’re doing. The way we were able to do what we did is we went to the SEC, went in the front door, met with them, “So this is what we want to do.” The SEC is like, “Okay, that sounds interesting.” And we worked with them and they learned a lot from us trying to do it. So when the Jobs Act came, I know it informed a lot of their perspective. They had seen us working on trying to do it.  So that’s from an origin story point of view. Then the Jobs Act amplified what we were doing. And then we used to… I’m a real estate guy originally, so my real estate bias is I have a better understanding of what they are. They’re sort of invisible. Obviously bias is usually invisible to the person who has it. But the real estate person is very deal-centric. Deals are how they think about the world, what motivates people, how they get paid. And so, the initial idea was you raise money for deals. The First three deals were our own real estate deals where we were the sponsor, and then we transitioned to being a lender. I think overall we did 44 separate single deals that we let investors invest into, both accredited and unaccredited. And so over that period, I became more and more disillusioned with single deals and I learned a lot, because I transitioned from being a real estate person or a finance person to becoming slowly but surely a tech or product person.  And that took a long time, that learning process. And I just became more and more worried about one deal going bad. I learned if you do 100 deals, where we did let’s say 44, let’s say 50, you could have one of those deals go bad and people could lose 2% of their money if they were pooled, or 2% of the people could lose all their money if they’re not pooled. And so I thought it was a very brittle structure and back then, which was almost laughable now, in retrospect, I thought in 2014 or ’15 that there was going to be a recession again. So I was scarred from 2008. So I basically spent a lot of time trying to build a platform to be more recession-resilient.  So we departed from individual deals and that was a very contentious decision. There was a lot of the contention internally, people thought that might be wrong or they thought it was wrong. And then we lost a half of our investors. Half of our investors said, “No, no, we want to do deals. We like deals.” So we lost a lot of customers in that process, but I am really glad we did. And we moved to basically being into a fund or pooled strategy, or a diversified investor. And that’s been a giant advantage, especially now.  Kevin Choquette:  And so the business model, as you guys pivot, and I don’t know what it would’ve been on the first iteration where it’s deal-centric, but as you become more of an asset manager fund manager, is your conversation and structure and incentives aligned with the same as any traditional private equity allocator where they’re getting a couple percent on the assets under management and then some sort of a carry after a baseline return to the investors? Or how do you guys think about running that business, getting the oxygen that is revenue?  Ben Miller:  Yeah. Yeah, we went from being really a sponsor to being a private equity fund manager, essentially allowing investors to invest in effectively real estate private equity, and then later private credit and then venture capital. And our model has been take a… regional real estate and our credit is a 1% asset management fee, so half of what is normal in real estate and no carried interest. And so our fee structure is dramatically less than normal real estate, private equity real estate world.  Kevin Choquette:  Yeah, I’m sure they all love that too, huh? Who are these guys doing this?  Ben Miller:  Our investor doesn’t really understand. They look at it. Why are you so much higher than vanguard’s 15 bips? Vanguard is not nothing like what we’re doing, but so the individual customer doesn’t appreciate the difference. And then the real estate industry doesn’t really know. They think of 2 and 20 as normal, but that’s where we were until 2019/20. And then we actually vertically integrated and we took in-house, the real estate part of the business too. And we launched real estate operating platforms where rather than partnering with real estate companies, rather than joint venturing, which we were doing a lot of joint venture equity, we decided to vertically integrate and have our own real estate platforms.  Kevin Choquette:  Right, okay. So then are those operating companies paid? And I don’t mean to get overly-  Ben Miller:  No, it’s fine.  Kevin Choquette:  But I’m a finance guy. I can’t help myself. So the real estate opcos, if you will, are they doing single deals or are they executing on broad strategies across multiple properties? Are there multiple real estate codes? How’s that all look?  Ben Miller:  We formed I think three or four… I’m trying to think how many real estate operating platforms we hired up. We ended up with about 100 people, so we ended up building out a fairly significant real estate operating platform. And each one has… we had a multifamily team, multifamily real estate operating platform team, industrial operating team that basically buys and manages industrial. Then we have a built-for-rent, which is our biggest, and we launched built-for-rent in 2019. And we have a lending platform, and then we have urban development. So we ended up building a fairly sizable real estate operating platform.  And that had sort of, I think two advantages for us. One is it gave us a lot more control over the real estate. And then two, the real estate operator typically gets paid some fees plus a carried interest or a promote of 20%, or you can vary over the hurdle. And we basically took that in-house, kept the fees, we get paid of normal asset management and real estate fees, but no carried interest. So we have no carried interest at the fund level, no carried interest at the real estate level. And so I think we’ve cut the cost of investing in the real estate by a huge, huge, huge amount. More than 50% probably fees. And that I think over time will start to have compounding higher returns than is normal for real estate.  Kevin Choquette:  Well, look at the equivalent of the 121B trailer for your mutual fund and how people will say, “Hey, don’t do mutual funds. Go into the ETFs because over the duration you’re going to lose X, Y, Z.” That’s a basis point conversation. You’re talking about a 20% carry on the fund and then maybe it’s at least a 20% promote to the sponsor. Both of those gone and your fees are below market on the fund company, and probably I’m guessing market on the real estate opcos. A little bit of opportunity there for the investor.  Ben Miller:  Yeah, I mean, most investors don’t know anything about that kind of stuff, and so they don’t see it and understand it yet. But I think we only really got to the scale of it in the last couple of years and then the market turns. So I think it’s not going to be visible and appreciated by the market for a while. Probably half a decade or even 10 years from now, people will look back and be like, “Wait a second, what’s happening here?” But in the near term, fees aren’t what matters. What matters is capital markets, interest rates and cap rates.  Kevin Choquette:  All of which we’ll get into. But then talk to me about what you said just a minute back, which is the tech and product-centric mindset and changing your vantage point away from deal by deal real estate guy into building a platform and a consumable technology product. That seems like a huge shift, but then there’s something underlying that if you are investors. I’m a real estate guy, I’m a deal guy, so I’m going to be all about, okay, what’s the [inaudible 00:18:15] cap on cost? How much leverage are you guys taking? What assumptions are you going into your OpEx and your rent growth? What’s the terminal cap rate? Kind get to like, oh, okay, it seems like a good deal. It sounds like you’re building a product to speak to a different market who doesn’t yet appreciate the fact that you’ve ripped out all of these fees to give them something pretty unique. So how do you think about that tech, that product and that marketing message to be successful on what sounds like a really novel strategy, candidly?  Ben Miller:  Yeah, I mean that was the most difficult part was I had previously had, I don’t know, 12 or some years of experience in real estate and finance, blah, blah, blah. And then I went into tech as… I worked in tech briefly way back, but I was a business analyst. And I had to learn a lot. And actually learning and changing what you’re good at, that’s been the biggest gift really of going into Fundrise has been expanding just my world where I would’ve otherwise been a deal guy. I got to be something different. And that I think has been wonderful. And that was also a very hard learning curve. I tell people it wasn’t the learning that was the hard part. It was the unlearning that was the hardest. A lot of the things in real estate that we take as facts are not true in tech and it’s unintuitive.  So I had to unlearn a lot of things, and that was like you don’t unlearn it at first. You get smacked in the face a lot on the way to finally actually get taught the lessons. And in the tech world, you call it product or product management or product development. That’s mostly what I got decent about. And then digital marketing. And I know a little bit about the tech, but I luckily have good team members that when we get down to the backend builds. But I know I’ve now been doing building fundraising at a scaled level for over a decade, so I know a lot about what it takes to build iOS apps, Android apps and websites and have millions of users and tens of millions of dollars in digital marketing.  So I’ve learned a lot. I know a decent amount at this point, and that’s what gave me the confidence to go into venture capital. Because I feel like I have a pretty good handle on a lot of the key aspects of what it takes to basically build a tech company.  Kevin Choquette:  And we’ll get into… it’s Popularize, right?  Ben Miller:  No, no. That was a concept we came up with way back when that we ended up mothballing. It was-  Kevin Choquette:  Oh, okay. What is the VC platform? Is it also just through Fundrise?  Ben Miller:  It’s through Fundrise. We have the Fundrise Innovation Fund and invest in mid to late stage tech companies. Private tech companies.  Kevin Choquette:  The thing you just admitted to, if you will, some of the hardest learning was the unlearning. Is there anything that you can think of that you particularly needed to be clubbed over the head multiple times to let it sink in?  Ben Miller:  Yes. [inaudible 00:21:44] embarrassing.  Kevin Choquette:  Please share.  Ben Miller:  So all the original deals we did were pretty… I don’t want to say extraordinary real estate deals, but definitely they weren’t garden style apartments in the suburbs. They weren’t boring real estate. They were urban, rejuvenation. This is a different era. So if you go back to the 2010s, it was about urban redevelopment and you were investing and buying these really cool buildings in Bushwick or LA Arts District, or H Street and breathing new life into them. There was architecture, and there was city involvement. I mean, we did a project where there was a tiff, and there was a grant from the city, Rahm Emanuel who was mayor of Chicago at the time, was involved. It was a really complicated project.  We just did all these really jewel box execution real estate deals. I mean, one of the ones that we did was the World Trade Center bond offering. Three World Trade Center, and we did just really special real estate deals, because I thought that’s what mattered because a real estate guy originally. Turns out this is not what matters, total waste of time. Big mistake. It may have taken me literally eight years to unlearn that. I just couldn’t believe how little people who weren’t in real estate cared about the real estate.  Kevin Choquette:  That’s fascinating. I can appreciate that. You’re like, “Wait, my target market doesn’t care that we have beautiful architecture. Only I do.”  Ben Miller:  And then if I do, that’s bad. You shouldn’t do what you want to do, basically. You become a servant to the customer, maybe nicely a steward, but mostly a servant. And whatever you want is irrelevant. It’s irrelevant. And real estate people have a lot… I mean everybody has ego, but real estate people like to do big deals with shiny pictures and shiny names and just none of that stuff matters to our customer. And those things end up getting overvalued by real estate people, because that’s just how real estate people think.  Kevin Choquette:  I’m going to bounce back to the architecture that you laid out for me on the real estate co. taking no carry and having market fees. The fund co. taking no carry and having market fees. And if I marry that with what I think I’m hearing you say is like, “Hey, maybe we should do something that people understand and resonates with them, and in a structure where I don’t have to pay a promote to the fund. And I don’t have to pay a promote to the developer.” Maybe you’ve got a competitive advantage in, call it B2R, just by virtue of the fact that you don’t have to pay all of those historically normal fees to the people at the deal structure, and you can instead pass that through to the investor. Does that show up as a competitive advantage when you go to actually execute in the local markets?  Ben Miller:  I think so. And B2R is so new that it’s actually… I mean this is maybe always true, but what’s mattered most over the last 36 months is the macro. 2020, it was all macro, it was all pandemic. 2021, it was all macro. It was all stimulus. 2022, it was all macro, it was all interest rates. 2023, it’s still interest rates and everything else is so secondary to that. It’s like the tactical alpha you have at the fund level or fee structure, deal level. It just gets swamped. I learned this in 2008, and it’s just like, here it is again. The micro gets swamped by the tsunami that is the macro.  Kevin Choquette:  Well, I was trying to go to macro later, but let’s go there. It’s worth stating it’s 10-10. October 10th, 2023. So Ukraine and Russia, Hamas just went… nuclear is not the right word, but made a big move against Israel. There’s now what appears to be a full-blown war unfolding. There we’re projected to hit 50 trillion of debt up from 26 trillion now by 2030. COVID, we put $9 trillion into the system. Money supplies up what, 29% since then? Inflation at least 9% for a good while, and we’ve still got like $17 trillion of cash in the banks down maybe 700 billion from the peak, but still probably 3 trillion above excess.  Loans aren’t repaying, your best lender is your existing lender. There’s a ton of uncertainty that’s slowing down. All the transactions and bid ask spreads are prevalent. The 10-year, what up 100 basis points from a year ago, up 400 basis points from three years ago. And prime is up what, 500 basis points in 18 months? And oh yeah, we’ve got a couple banks that have failed. So the backdrop is anything but rosy. So what are you guys doing, seeing, thinking about the macro picture in today’s world?  Ben Miller:  Yeah, I mean, I’ve been preaching recession for a long time, and people didn’t believe me. Still don’t believe me. Generally people are still not at consensus. It’s mostly a consensus there won’t be a recession. I think there will be. And it’s going to go from bad to worse. And the backdrop you’re describing mostly hasn’t caused that much pain in the real economy yet, but it will and eventually always does. And so for us, I tell the team, “You have to be able to-”   Ben Miller:  I tell the team, you have to be able to play offense and defense. A great team is a well-rounded team and so part of our business, part of what we’re doing for our investors and on day-to-day is just playing defense. We were lucky because we didn’t have preferred hurdles to hit our 20% incentive profit participation. So our average leverage is 50%. So 50% leverage, we own, I don’t know, 20,000 residential units in the Sunbelt and industrial. We’re positioned well for what I think is coming, which is going to be more of the down and worse. And it’s going to be ugly, it’s going to get way uglier before it gets better.  And the real estate industry, including myself, we kept trying to kick the can, hope it would get better, and it’s just gotten worse and it seems like it’s starting to get… Only in the last few weeks where you’re starting to really see capitulation from the markets. And the long end of the curve is starting to spike and investors are starting to realize that the higher for longer is going to… There’s no escape from it, essentially.  And so, it’s going to be bad. And I always tell people, “Yeah, it’s part of the game.” Things go up, things go down, things go up again. So we’re about to go through a tough time internationally.  Kevin Choquette:  Well, and I know Fundrise, as you just explained, has gone away from deal by deal, but I’ll bet you there’s guys like me that haven’t figured that out so you guys are still inundated with deal flow. Some of the anecdotal stuff that I’ve seen, and I’m putting this out just as perhaps canary in a coal mine and let’s see what you may see in terms of the impending distress or pending distress.  And this goes back to early 2023. There was a group that, and don’t hold me to exact numbers here, but they bought a multifamily value add asset in Houston and got $45 million of debt on it, floating rate debt. And they hit their business plan on time, on budget in terms of just doing a value add renovation to all the units and pushing rents, which effectively doubled the NOI. And they had a $20 million cash in refinance once they came out the other side. And I think that particular group was actually able to pull it off, but there’s a lot of guys out there on floating rate debt that assumed they were going to perm out, let’s just call it a four and half percent rate or maybe even lower, today they’re looking at six and three quarters, six and a half.  And the only way that works is if you were, like you just mentioned on your deals, at 50% leverage going in. And as you and I both know, for the developer who’s deal focused, who’s looking to hit his promote, they tend to play with fire, crank up the leverage to what they think is reasonable. But with 500 basis points shifts in the Fed funds rate, what people think is reasonable has changed quickly. There’s construction loans out there right now, private debt construction loans that are at 12% because they were 700 over when silver was effectively zero.  Ben Miller:  Yeah, it’s really going to be ugly. We were 50% leverage, plus we had a lot of cash. I think it was early 2022 when I started to sounding the alarm. And at that point, we had 30% cash. 30% liquid or liquid including maybe public REITs and stuff. And I wish I was a hundred percent cash.  Most funds, most investors don’t hold that much liquidity. And so, even with 50% leverage or around that, we still had to do some pay downs or we still had to pay a couple of our lenders down by 5 million here, 5 million there. Because it’s like, the debt surface coverage ratios don’t cover when you have your floating rate debt is 200 over 550, 750. [inaudible 00:32:38] 1.2 DSCR, 1.2 coverage, and so you end up having to cover at a 9 or 10. Most sponsors can’t do that.  And so, it’s everybody, basically almost everybody is now just playing the hold them game, just hold it, hold it, hold it, hold it. And what we’re going to start seeing, we’re seeing it some, we’re going to start seeing people not able to. Once that starts happening, that’s going to start a repricing. I don’t know. The action, we don’t really know if there’s going to be a global problem. [inaudible 00:33:28] the thing about macro is that it’s all connected. And things that don’t seem connected can matter.  If you go back to the last time, ’08, you had a European debt crisis, all in the peripheral countries, and that almost caused a serious problem. You can only imagine those countries have a worse problem than they used to have. That could come back and affect US capital markets. China seems to be in a recession. So there’s just so many factors out there that are negative. And yet stock market’s still close to all time highs. I think it seems like there’s trouble to come. And when there’s trouble, best thing you can do, really reality is you can buy, but mostly you need to be prepared for it.  Kevin Choquette:  So your offensive moves now is just get liquid?  Ben Miller:  Yeah, staying liquid, getting liquid and we’re buying a little bit on the edges. We have a couple industrial deals closing end of the year. We have some bill for rent we’re still buying. We’re still buying. I think so far this year, I bet you we’ve bought $400 million of real estate so far this year, I would say. And we’ve done a couple hundred million dollars of lending. So $600 million dollars out the door. That’s probably more offense than most players out there. You wish you could buy the whole world.  Kevin Choquette:  Anything specific that you guys are seeing? I get that’s the rest of what you’re saying at the macro, in terms of the move in the indices and floating rate borrowers and a nine and a half debt yield, 10 debt yield. And the refinance not being feasible, and so you will see capitulation. And when you see capitulation, there’ll be new comps that trend downward and that can set off a negative feedback loop where valuations are dropping, which tests new covenants, which force more liquidations, which sets new covenants. I get all that. Specific deals, have you seen anything that you think’s a really good anecdote for what’s on the horizon?  Ben Miller:  We’ve been doing a lot of lending into that, so people who need cash in [inaudible 00:36:13].  Kevin Choquette:  Perfect.  Ben Miller:  We’ve done, I don’t know how many deals this year. I want to say that-  Kevin Choquette:  Bridge to bridge stuff?  Ben Miller:  Well, mostly pref. Somebody has, [inaudible 00:36:21] trying to think of deals we’ve done, they have a bank loan and they basically need 20% resizing, [inaudible 00:36:31] pay down, whatever you want to call it. Or just there’s a hole, a gap in their capital stack.  So we’ve done, I’m going to say, I don’t know if it’s six or 10 of those deals. And where it’s really good sponsor, really good deal. And there’s a capital need, we fill it, we filled it, and we’ve done that. And that’s actually where we started in 2012, ’13, ’14 is this pref. And I love, it’s always multifamily pref, so we just do residential multifamily B2R, pref, in that gap. And it’s like sponsors who come to us who we know. Say, “We’ve never done pref before.” And they tell us, they mark up the term sheet. I’m like, “Uh-huh. Well, let me know if you have somebody else who will do that.” 60 days later they come back to us, they’re like, “Okay, I did not…” The sponsor thinks pref is equity with a cap return. And pref these days is like a mezzanine loan. A lot of sponsors aren’t used to pref.  Kevin Choquette:  And are you saying, making the distinction there in terms of your rights to cure and take control of the asset?  Ben Miller:  Mm-hmm. Control, rights to step in, rights to pay down, rights to basically protect your interest because the sponsor… I have a pretty skeptical view of sponsors, essentially. Most sponsors will do what they can get away with. And so, I always start with a sponsor assuming they’re going to do the worst thing they can do. And then if they don’t, I’m pleasantly surprised.  Kevin Choquette:  Yeah. So there’s two things that come up there. One, when you get into that position, and I’ll stipulate that you’re attaching it, maybe 80% of the historic basis, and maybe it’s a 14 or so coupon, maybe all accrual, some current pay and some accrual. Feel free to sharpen those up where I might be off, but what’s left for the common equity? Is it basically converting into a hope note?  Ben Miller:  Yeah, so typically, actually, these days you’re attaching lower, I would say around 70. Because the senior lender basically needs to get to around 50. So maybe they’re 55 or 50 or 45, and we’re 20%, so we’re going to 65 or 70 or 72 maybe. And our yield on cost, gosh, where would it be? I would say it was in the low sixes before, like a few months ago, when I thought that values were in the mid fives and we were in the low sixes. And now values are probably closer to six maybe. Depends on what we mean by that. So I don’t know exactly. Now I think pref would be really hard to do. It’s just everything is priced. The recent spike in long end of the curve is a killer. A real deal-  Kevin Choquette:  Well, okay, let’s stay with the first scenario and then I’ll start asking you about the long end of the curve and the relationship between cap rates and interest rates because it’s clear you’re conversant in that. But say you attached at 72 and the common equity’s behind you and you’re in, let’s just say a 14. And then they’re paying their bank, if they got perm, what? They’re 200 over the tenure, at whatever time they locked.  Ben Miller:  Yeah.  Kevin Choquette:  If they’re floating, they’re maybe 300 over SOFR, so it’s still kind of expensive down on the bottom. If you guys run that proforma out and go, “Okay, we’re going to liquidate.” It’s a three-year deal or five year deal, co-terminus with the senior, and you go, “Great, let’s look at the proforma terminal value, pay out the sales commissions and closing costs, pay out the debt, pay us and our accruals.” What’s left for the GP and his partners? Is there anything-  Ben Miller:  Yeah. It’s funny though, so that pref structure you’re describing, that situation, we’ve done 87 pref checks into multifamily over the last 10 years. And a lot of them, the pro forma said, “The sponsor is going to lose half their equity. Sponsor is going to lose a lot of money.” And of course, every single time, the sponsor didn’t.  Kevin Choquette:  Right.  Ben Miller:  And sometimes the sponsor made out like a bandit and we were just getting our 12 or something. So now, on paper, a sponsor is going to lose some of their principle. And how much they lose is really going to depend on where cap rates are in three years.  Kevin Choquette:  You’ve actually got it showing a loss of principle, not even just no return, but they might actually come up a bit short on getting there.  Ben Miller:  Yeah.  Kevin Choquette:  Yeah.  Ben Miller:  That’s [inaudible 00:42:05] our underwriting assumes that. And it’s easy for us to underwrite that. And then typically, in the past, where we’ve had deals where there’s been distress, the sponsor usually shows up and says, “Can I have more time?” And our funds are evergreen funds. We’re not closed-end funds, we don’t take [inaudible 00:42:25] interest, so we don’t have to turn the money. So normally, they would just say, “Yeah, if you’re going to pay us at 14, you have all the time in the world.” As long as we’re in the money, we’re okay with going longer. And then usually with a sponsor, I have this, personally I believe, you have time on your side in real estate, you’ll be okay.  Kevin Choquette:  I agree.  Ben Miller:  And if time’s not on your side, you’re going to get hosed. It’s really rare time works out for you if you have short on time. So my personal belief is we’re not going into super high interest rate environment three years from now. I think that’s not likely. I think we’ll probably roll over within the next few years to a moderate interest rate environment. So cap rates will be, like a five and a half will seem like a fine cap rate. I don’t think we’re going to a world where cap rates are six and a half the long term. If we are, man, most of the real estate industry is going to see, I don’t know.  Kevin Choquette:  Bloodbath.  Ben Miller:  Just do the math. There’s, let’s say $20 trillion of commercial real estate, including multifamily. And at six and a half caps, that means that that’s $10 trillion in losses, something like that. Like half, 50% losses, maybe more. Because if residential is six and a half, office is like double that. Right?  Kevin Choquette:  [inaudible 00:44:08].  Ben Miller:  Office goes to zero, office equity goes to zero, and half the… It’s just $10 trillion in losses in real estate, and that’s just real estate. I don’t don’t know how much you’re in the private equity world and levered loan industry and go down the list. There’s lots of corporate debt, and so you’re talking about such a huge amount of losses in the system. That just drives a recession and that recession will drive down interest rates again. That’s why I just don’t believe in the narrative that we’re going to be in this environment that interest rates stay, the Treasury stay at five in the long term. That’s just, to me, country’s in such a recession at that point because the federal debt and corporate debt, just country is not growing.  Kevin Choquette:  It can’t carry it. It can’t carry it.  Ben Miller:  Yeah, it can’t carry it. Just there’s a down-  Kevin Choquette:  You’re putting up like 12% of GDP to just do debt service.  Ben Miller:  Yeah. And so, that’s a downturn, a recession. And then people say, “Well, that’s stagflation.” Then we have stagflation. And I don’t think so because I don’t think the government’s going to print any more money. I think you can’t have stagflation if the government stops printing money. And then the question is, ” [inaudible 00:45:28] they start printing money again?” And that’s where it’s possible, but I don’t think so.  Kevin Choquette:  Yeah. We’ll go back to the cap rate conversation, and look, I’m no economist and I’m certainly no expert, and if I’ve learned anything from, call it just before 2020 until now, it’s that I really don’t know much. I, for sure, didn’t see Covid spiking residential home values. I, for sure, didn’t see the low mortgage rates actually supporting high home values currently, even in an environment where rates are seven and a half, 8% and you still see limited supply and relatively stable home prices.  But Peter Linneman’s going to be on Willy Walker’s webinar tomorrow and I pretty much watch that one every time it comes out. And he’s got a paper, that I think dates back to 2020, around the correlations between treasuries and cap rates. And just like a 0.68. And his thing is like, look, there’s a lot of things that correlate that loosely and it’s really not that telling.  And the thing that he puts forward as potentially more telling is the relationship between commercial mortgage flows and the growth in GDP. And if commercial mortgage flows are exceeding the rate of growth, it’s likely the change in commercial mortgage flows versus the change in GDP, then you’re going to see cap rate compression. And the alternative, which clearly we are entering a cycle where commercial mortgage flows are declining, is also true, when the flows of commercial mortgage are lesser than the GDP growth, then you’ll see cap rate expansion.  For him, it’s all about flow of funds. And you are on the side of the story where you’re like, “Look, I’m low levered, I’m investing for value, I’m investing for duration.” Sure, you’d love to go out and snap up the six and a half cap. But you’ve got, if we think inflation isn’t yet dead, you’ve got an asset that’s indexed to inflation. You’ve got all the benefits of your interest write-offs and depreciation. And you basically got a bond that if you actually held it for 30 years and watched your two or 3% rent growth, and then came out the other side and said, “Okay, how did this bond due relative to my 30-year US Treasury at 4.6%?” Which the comparison everybody wants to make is that there’s got to be a spread between treasuries and cap rates to justify for the risk premium.  It’s kind of a long-winded thing here, but I’m not sure I buy it. I think that the market’s pretty intelligent and pretty capable of going, “I’m going to buy this because I know in five years, A, replacement cost is going to be way higher. B, my rents are going to be way higher. C, I expect rates are going to revert back down and I’m going to be able to improve my free flow cash.” And the market’s pretty rational.  I place a reasonable amount of equity. And right now, we’re doing two JV equity raises for multifamily development, which you can imagine is difficult. But I’m getting a ton of these guys who are like, “Hey, if the 10 year’s at four eight, you need to be at a six eight cap on costs.” And I can just tell you categorically, there are no six eight cap on costs new developments in Southern California. Unless somebody’s basically paying you for the land and you’re getting your labor and materials at some substantial discount, because maybe you’re vertically integrated or something like that. I don’t know, that’s a bit of a rant, but what are your thoughts around the relationship between cost of debt and cap rates? Do you think it’s linear like some people do?  Ben Miller:  Yes.  Kevin Choquette:  Okay, interesting.  Ben Miller:  I think Linneman is selling what the industry wants to buy and the industry’s in denial.  Kevin Choquette:  I love it.  Ben Miller:  When he describes, also a separate thing, which is, I’m trying to remember the economist, Minsky or something, who talks about flow of funds. But essentially, more debt causes prices to go up and it’s a feedback loop and [inaudible 00:49:52] causes it to go down. That’s a separate problem and related and both are happening right now.  But yeah, if treasury’s at five, nobody’s buying real estate at less than five, and they’re probably wanting it to be at least six. I don’t know in a world if it’s seven, but it’s going to have huge effects on real estate pricing. And anybody who’s saying otherwise, I don’t know exactly why they would think that. It would make no sense.  So we can talk about the math of that, but the flow of funds is only part of the story. It’s a huge part of the story. But the flow of funds is downstream of interest rates. It’s a result of higher interest rates or interest rate changes.  Kevin Choquette:  Yes. That’s a hundred percent accurate. As the rates change, so do the flows. That’s why everybody got these massive cash out refinances after Covid, right? The treasury’s at like 0.3. “Oh, okay. Let’s go get a 40-year fixed rate loan from HUD.” “Oh, look, it’s 118% of costs. Okay, cool. We’ll take that.” Yeah.  Ben Miller:  Yeah. I think the real estate industry is not a good place to look because they’re so biased by their position. So it’s like they’re basically selling their book or talking their book. And I think it’s more likely that for some period, there are no such things as a six and a half or seven cap rate. In almost anywhere in America, that’s not a real thing. With the institutional investors saying that, what they’re really saying is, “I’m not going to do deals, but I’m not going to admit it.”  Kevin Choquette:  That’s right. Thank you. That is exactly it, and that takes a while to figure out. Speaking of being beat over the head enough times to figure out what’s going on. For me, it’s been people give you all kinds of reasons that your deal’s no good, and it’s really not that, they’re just not trading right now.  Ben Miller:  Yeah. And the gist, to be sympathetic to them because I have a little bit understand their [inaudible 00:52:16] too, is that they don’t want to admit it either. If they told their entire team, whatever, take a big shop that’s got hundreds of investment professionals, told them, “We’re not doing deals for two years,” that team would start to lose their mind, they would start freaking out. Everybody’s actually better off pretending, even though it’s not true.  On management, this is something I have, we have almost 300 team members at Fundrise and they hate being told bad news. They hate it. They really would rather me to just tell them everything great is great, great, great, great, great. Because whenever you tell them bad news, they want you then to tell them the conclusion.  Kevin Choquette:  Well, then how’s it go?  Ben Miller:  And what does it mean for me? And you’re like, “Nobody knows what’s going to happen.” We’re going to go through a period of serious turbulence and people want to know the conclusion. And you can’t give them the conclusion and they just get upset. And in a crisis, you’re much better off carrying on, carrying forward than fretting about it.  Kevin Choquette:  That’s interesting. You’re putting a lot on the table and I’m trying to cherry-pick from the things that I think will fit the best. 300 people. I was actually looking for that before, trying to figure out how many people are on the team. And you sort of talked about tech and product fit, and probably to a certain extent, understanding what some of my friends would call product market fit.  You’re also a self-confessed real estate guy, deal guy, right? You’re doing all of these esoteric jewel-box deals and realizing all of that might not work. But in the real estate world, as we’re currently discussing, there are cycles and there are times when you might not transact. There’s a time for risking capital and leaning in, and there’s a time for protecting capital. And those cycles are very natural, everybody has the same data. Everybody’s flying their own individual plane with the same instruments in all the planes, right? “Oh, let’s go now.” That’s why you get these overcorrections and all of that.  But in a real estate business, but for the largest institutions that might be public or really have battleship war chests, a team of 300 people would be insane. I read up a bit on your father’s business. I’m betting he never came anywhere near or currently has nothing near 300 people. How do you think about scale and overhead and managing human resource in a marketplace that inevitably ebbs and flows? Even for you guys, I’m sure that flow of funds in and out has a cyclical effect and it’s a pretty big monster to feed every month. I don’t know what a payroll of 300 people would look like, but it’s rather large.  Ben Miller:  Yeah, we just have enough assets that we’re close to breakeven. But this was something I learned or unlearned going from becoming a real estate person to a tech or product person, was real estate people are not operators, they’re transaction or deal people. So-  Ben Miller:  …they’re transaction or deal people. So a typical real estate operator, even if you’re at a Starwood, I mean you basically do deals. You might do three deals a year. You might do two deals a year. You might do five deals a year, but you’re going to do some number of deals and you’ll have a deal team. And a deal team will have a few people on it, three maybe. Maybe you have some service providers internally who know about construction or capital markets, but it’s a relatively small number of people who are the deal managers or project managers. And then there’s a few support people in the organization that handle leasing or HR or finance. And so it’s typically a 3 to 12 person shop. It’s a small organization. And the way real estate people scale is it’s more or less the same number of people. And instead of doing a 5 million deal, they do a 20 million deal and then they do a 50 million deal and then they do a hundred million deal and you’re Starwood and you want to be doing 500 million deals.  And so it’s the exact same matrix or paradigm with just a bigger denominator. And that’s how real estate people scale. And I saw that as flawed for a bunch of reasons. I mean, it’s fine for them, but it’s not a good fit for us. And if you look at companies that make stuff, whether you’re Intel or some other normal company that’s public, they’re operating businesses and they have a factory and their people on the factory floor moving things along. And so that’s a really different kind of management and real estate people aren’t, typically, they’re not good at that and they’re heavily biased away from it. Because what happens when you have scale with a tech company or any kind of company is you have to focus on process and the process becomes the most important thing. And the real estate guy will always sacrifice process for the deal. They will throw process out the window and design the deal bespoke or custom toolbox or whatever it is, it’s going to be deal driven. It’s not going to be process driven. That’s completely crazy to a real estate person.  And so they’re bad at operating things and management. It’s just both by temperament and by training and then ultimately by how they prioritize their decision making. So that’s a big difference and I had to learn that and people are process oriented. And then the kind of real estate we ended up doing as we scaled was real estate where process mattered more. That’s why we have multifamily and build for rent. Those are more process oriented, efficient, operating businesses rather than big office buildings or any kind of big complex deal is not going to be process driven. But if your invitation homes which, and you own whatever, a hundred thousand homes, that’s a process driven business. Hotels are a process driven business. And so it’s a very different kind of organization. And so that’s the kind of real estate we buy and that’s kind of real estate platform we built. And that’s just one sort of more important point is that software is good at process.  So if you want to say, oh, our main competitive advantage is we have ability to build software, then you want to go where that is useful. And it’s useful in things like single family homes, multifamily, things like that, and how much you’ve been inside the guts of a single family home operator, but they have a hundred times more software than a multifamily operator who basically doesn’t have almost any, and not that those single family platforms have very good software in the software world. It’s a joke compared to what Google’s or those type of companies have built. But you have to have it. It’s a process-driven investment class.  Kevin Choquette:  And so your whole thing here is by focusing on a scalable process driven product and strategy and knowing that you are not going to abandon the strategy and the scale in favor of that boutiquey downtown LA Arts district city council member on your side, you’ve been able to secure the revenue, refine the process, have enough repeatable process, understand the structure that the 300 people, it doesn’t prove to be an impediment, it’s actually an essential feature of being successful on the strategy,  Ben Miller:  Right, so that requires us to say no to deals, which for the first eight years of our business or even longer, we had a hard time doing, because you want to stick to your knitting. And then we have been building software inside the real estate. That’s another reason why we vertically integrated is that the real estate industry just doesn’t know anything about software, almost nothing. And so if we want to build software that replaces people in the process, we have to do that by vertical integrating. You can’t have, if I go to my JV partners that I still have from deals that we did 2017 and they say like, hey, you know the way you do this thing? Do it differently. They’re like, no, go away. But I think software, software is eating the world, it’s going to eat real estate. I’m hoping to be the alligator. I want to be part of the consumption chain that eats up a lot of the inefficiencies that exist in the business.  Kevin Choquette:  Well, that’s interesting. Hang on. So now I’m hearing what you were saying before in a completely different way, right? No, I’m not taking a 20% carry, no, I’m not taking a promote on my real estate opco and my fees are market over there, and they’re one half of what they are on the fund management side. Hey everybody, come on in because we’re focused on a few strategies that we’ve developed repeatable process for. We’ve got a competent team who knows how to do that. And oh, by the way, I’ve got a competitive advantage right out of the gate to get you at least a market level return by virtue of the fact that I’ve blown out all these fees and as I scale, I’m going to just eat the whole thing.  Ben Miller:  That’s the tech playbook. That’s how if you go look at Tesla, that’s what they did. Tesla, Netflix did that. They sort of get their foothold into a new industry and then they go eat the whole thing up with software and that’s how you do it. I’m not doing anything new, but that’s what we’re doing. People don’t see that, they’re obsessed, the real estate people just see all the deals we’re doing. They just think about the deals.  Kevin Choquette:  By the way, that would be me. I am the guy you keep talking about just sort of way more of a real estate mindset. I’m aware of all of the process stuff and we use software just a little for, Asana for our deal processes and Salesforce for managing CRMs and placement efforts and things like that. But nothing like what you’re talking about. So talk to me about saying no, right? You were saying, okay, you stand up a platform Fundrise, everybody’s like, wow, these guys are great. And I can only imagine you just get overrun with a million different transaction opportunities. I’m sure that still happens to this day. What has it taken to develop the skill to just narrow the focus and know how much of this stuff that comes your way is just distraction?  Ben Miller:  Well, it’s changed so much. You’re talking about almost the whole cycle we just went through right from 2011 to now, and so it varied. I mean, where we ended up in the last couple of years was like, we’re going to go out and buy what we want. Don’t bring us transactions, it’s wasting our time. Nobody brings you a good transaction. That’s not how it works.  Kevin Choquette:  I love that. Do you follow the real estate philosopher, the guy out of New York?  Ben Miller:  Yeah, I know him. Yeah, he’s funny.  Kevin Choquette:  He’s super funny. He’s written a couple pieces in his newsletter. You are never going to find another good deal. It’s not going to happen that way. You’re going to make deals, you’re going to create them, right? You’re not going to go on Costar and be like, oh, look, there’s a good deal. Or go on LoopNet, there’s a good deal. Or to your point, just have somebody call you up and say, Hey, I’ve got a really good deal. I’m probably less jaded on that front because I’m that guy who calls you. But the point is well made. Finding the people. How are you doing that? How do you find eight, nine and ten out of the one to ten scale on your team, 300 people? Ideally you want a world-class team, you have world-class people. What’s your thought process around avoiding the twos, threes and fours, maybe weeding out the sixes and sevens over time and ending up with a team of eight, nine, and ten high performers?  Ben Miller:  I mean, the way it is turned out, I had a lot of theories and ended up with a conclusion is that we hired over, probably over the last 10 plus years, we’ve hired 600 people and there’s only 300 people left. And then of the 300 people there are, it’s the Pareto principle. There’s 80/20 and there’s 20%, that 60 people who are just the most productive. And then of the 60 people, there’s another 12 who are like 10x again. And so that Pareto principle is a real, or the 80/20, is a real fact. They call it power law in venture capital. But there’s a bell curve.  And what I’ve found is that those 12 people or those 60 people, I didn’t know, I was not good at predicting who they were going to be. Some of the people who I thought were going to be great ended up not being good, and people who I didn’t even notice ended up being world-class. So it’s like ultimately I’ve come to a conclusion that it’s only by doing, only by execution that you really can know and that the good talkers, the salespeople, that doesn’t mean they’re going to be good at anything else.  Kevin Choquette:  That’s expensive, isn’t it? Bringing somebody on, going through the enculturation process, the training process, getting them familiar with the team, building out systems for them, putting them, onboarding them onto all the systems and then going, okay, now let’s see what you can do.  Ben Miller:  Yeah, I mean definitely we got better at it. I was really bad. I mean, I was thinking back of how many, it was much worse hit ratio than it is now, but I also come to the conclusion it’s much better growing people than trying to go buy people. So the people who are the best people here are people who really grew up. There’s people here who started when they were 22 and they’re 33 and they’re just superheroes now. And they were like kids. So growing is, especially because the way we are is so different than the real estate industry. People show up here from real estate shops and they’re just obsessed with the deal. I’m like, don’t tell me about the deal. I already know the deal. It’s a big waste of time because they’re all the same.  Kevin Choquette:  That’s right. It’s just a deal.  Ben Miller:  Yeah. I mean we’ve looked at, and we have database with full performer, like thousands of deals, like thousands, and you can look at a deal and know it’s a good deal in a hot second. I’m like, it doesn’t take that much. I try to change the deal. I’m like, just get rid of the bad deals. You don’t know what the good deal is. You’ve done probably a lot of deals. The deal that killed it wasn’t always the deal you thought was going to kill it.  Kevin Choquette:  That’s right.  Ben Miller:  And so your job is to not do bad deals and then good deals are driven by, it’s almost like you get a free option, like a call.  Kevin Choquette:  Totally.  Ben Miller:  And you can exit the call to your advantage. All of a sudden the deal is just pricing like crazy. You’re like, okay, I’m selling, but otherwise you can just hang out. And so it’s killing the bad deals. But everybody in the real estate industry is obsessed with trying to pick deals and there is no such thing. Not at scale. There’s no such things picking good deals. It’s only eliminating bad deals.  Kevin Choquette:  And so part of that ties back into the macro, which is when the macros all screwed up, there really isn’t a good deal unless the returns are just exceptional because the water logged, if you will, best word I can come up with right now, nature of the underpinnings of the deal deal are so oppressive to returns that it’s kind of like, yeah, you’re not going to tell your team you’re not doing anything for two years. But avoiding bad deals in that time period is yeah, it’s like borrowings. It’s super low leverage. Values are uncertain. Cap rates are high. The likelihood that this is a bad deal, pretty high. Why don’t we just avoid that one?  Ben Miller:  I think I know what you’re saying, but I might actually be saying slightly different, which is the bad deals were 2021, not now.  Kevin Choquette:  You think there’s some good deals to be had?  Ben Miller:  On a pure macro, right? You’re like, any deal you do now is at a 30% discount to what you would’ve done in 2021. Maybe 50% discount, but a big discount. And if you just get rid of the bad deals, sure they may get worse, but it’s pretty good. And in 2021, you could get rid of the bad deals, but you’re still going to have lost a lot of money or 2022 pick, whatever, it shifted. I would say late 2021 is when it peaked. So the macros, not to state the obvious, but you sell when it’s high and you buy when it’s low and now it’s low. But as you’re seeing, there’s nobody buying, there’s no institutional money. All the smart money, they’re supposed to be so smart. And I raise money from individuals and those, there aren’t as intelligent and sophisticated as the big money. And I watched the big money all lost. They all invested like crazy in 2021 and they’re not investing now. So I don’t believe they’re smart. That’s just the story they have to tell to raise their LP gap.  Kevin Choquette:  Yeah. Yeah, that’s interesting. But on the 30% discount, are you seeing that And look, I’m very San Diego and West Coast centric in my worldview just by virtue of where I spend my time. But we just saw four three cap rate go out probably six weeks ago and they bought t

Show Notes: Welcome to Episode 17 of Offshoot with Sarah Kruer Jager. Sarah came into her family business, not by design, but via circumstance.  Since joining the firm, she’s become an absolute powerhouse in the commercial real estate industry and an epic role model for those aspiring to get into the juiciest part of the apartment business. Sarah’s team of 14 stems from a decades-long family partnership, and punches way above its weight. In this open conversation she portrays a lot of the attributes that feed her success and Monarch Group’s continued progress. Listen in as she covers: * The family adversity that brought her into the business and navigating that bittersweet time. * Monarch’s mandate to get every deal right while building assets to own them long term. * Creating alignment in their team through a lean and mean culture along with financial incentives. * Staying in your niche and avoiding style drift. * How tumultuous times in real estate often bring the best deals. * The importance of investment conviction when uncertainty is high. * Avoiding a merchant building reality by: * Putting real skin in the game. * Working on complex sites to secure a great basis * Keeping time on your side. * The importance of great relationships and teams. * Getting out there, taking risk, and “showing up” to learn and grow. * The importance of taking care of yourself so that you can take care of others. TRANSCRIPT Announcer: Welcome to Offshoot, the Fident Capital podcast with host Kevin Choquette. Offshoot is a curiosity-driven conversation that features a wide range of real estate business professionals. In each episode, we unpack the knowledge, vantage point, and domain expertise of our guests. Then, we move beyond the facts and figures and dive into the personal habits and mindset which allow them to be high performers in their respective field. This podcast’s objective is simple: supporting entrepreneurs, fostering relationships, and uncovering meaningful conversations that positively impact business. Kevin Choquette: Welcome to Episode 16 of Offshoot with Sarah Kruer Jager. Sarah’s coming to our family business not by design, but through circumstance. Since joining the firm, she’s become an absolute powerhouse in the commercial real estate industry and an epic role model for those aspiring to get into the juiciest part of the apartment business. Sarah’s team of 14 stems from a decades-long family partnership and it punches way above its weight. In this open conversation, she portrays a lot of the attributes that feed her success and the Monarch Group’s continued progress. Listen in as she covers the family adversity that brought her into the business and navigating that bittersweet time; Monarch’s mandate to get every deal right, while building assets to own them long-term; creating alignment in their team through a lean and mean culture, along with financial incentives; staying in your niche and avoiding style drift, and how tumultuous times in real estate often bring the best deals, and the importance of conviction when that uncertainty is high; avoiding a merchant building reality by putting skin in the game, working on complex sites to secure a great land basis, and keeping time on your side; the importance of great relationships in teams and getting out there, taking risk and showing up to learn and grow; and finally, the importance of taking care of yourself so that you can take care of others. I hope you enjoy the podcast. Welcome, everyone, to another episode of Offshoot. Today we’ve got my friend, a longtime professional acquaintance, Sarah Kruer Jager, a partner of Monarch Group, on the pod. Monarch Group is a private real estate investment and development firm based in San Diego that’s focused on entitlement, development, and acquisition of institutional quality apartment communities in the Western US. The founding partners’ aggregate entitlement development and direct property investment track record encompasses over 19,000 residential units. Sarah joined Monarch in 2005 as a founding member of the Monarch Private Equity Funds. She works closely with the founding partners to set the strategic direction and overall day-to-day business activities for all of Monarch’s wholly owned and joint venture investments. In that capacity, she leads the acquisition, pre-development, finance, asset management and disposition functions, as well as manages relationships with Monarch’s community and capital partners. During her tenure at Monarch, Sarah has acquired, developed, and sold over a billion dollars in real estate investments including over 7,800 residential units. Prior to Monarch, Sarah worked at UBS Investment Bank in Chicago in the Mergers & Acquisitions and Diversified Industrials Group. Sarah graduated from the University of Michigan School of Business with a Bachelor of Business Administration and received her MBA from Wharton School with a major in finance. Notably, Sarah’s time at the University of Michigan was courtesy of a four-year full tuition athletic scholarship for the Division I Varsity Women’s Golf Team. That fact, which I’d never known, really helps me understand why I’ve been completely bludgeoned to death a few times I’ve been on the golf course with her. Sarah, welcome to the podcast. Sarah Kruer Jager: Thank you, Kevin, for having me. I guess there’s no mercy on the golf course. Kevin Choquette: It’s the classic thing where the golfers are really quiet about their skills, “Oh, yeah, I play a little bit.” But, thank you for doing this. Thank you for taking the time. I appreciate it. Sarah Kruer Jager: It’s great. No, it’s an honor to be with you. I feel like you and I do this every time we talk anyways, just kind of BSing about everything going on in the world and views. So, I guess we’re making it official now here. Kevin Choquette: There you go. Recorded for posterity. So, to start, could you just tell me a bit about Monarch Group in your own words? I know I gave the sort of elevator bit, but how do you think of Monarch? Sarah Kruer Jager: You covered quite a bit of it. I guess what I would add to that, we’re obviously a local San Diego-based, multi-generation, local business. You talked about what we do, we’re apartment developers. I guess what I would add, a couple things, I think most important off the bat, I was born and raised in San Diego. My partners have been here together, building apartments for over 50 years. This is our hometown, and we care a tremendous amount about this community or invested in it in a lot of different ways beyond just work. I think, as a part of that and a part of the passion and how much we love our business and what we get to do day-to-day, we’re really committed to hopefully being a part of the housing solution, because God knows there are a lot of things we got to do to continue to build a lot more housing and a lot of other things that go along with that, that I’m sure we’ll talk about. But I guess that’s what I would add. We’re a family business. We love what we do. Love working, again, with government, public sector, private sector to be a good partner. And hopefully, again, delivering some much needed housing solutions being a part of that. Kevin Choquette: Very good. The last guest I had on, he is just starting an investment management company. It’s called T2. From the outset, he’s been articulating that it’s a kind of multi-generational investment, which I find surprising given that I think they’re only six or seven years into the venture. I wonder, when the founders got this going, did they have that kind of idea, that it was going to be multi-generational? Sarah Kruer Jager: You know, I don’t know. It’s a good question for them. The way Monarch started was really coming out of… I think so many businesses, big and small, start when times are pretty awful in the world. My dad Pat, my uncle Tim, who’d been building apartments together since the late ’60s. My dad ended up in San Diego through the Navy after Vietnam, didn’t finish college, came out here through the Navy and started building apartments. My uncle kind of came out and followed him. And actually, another one of their brothers came out. Kind of family business, again, since late ’60s, early ’70s. And fast-forward, they formed Monarch in ’96, ’97 coming out of the Gulf War recession, which was pretty awful, and formed Monarch with Rod Stone and his son Ryan, who had just come back from Atlanta. Again, pretty crummy time to be doing things. Very different world, Kevin, than where we are today. Our business obviously has become very institutional over the last couple of decades. Back when they started Monarch, not that long ago, going out and finding pieces of dirt for 20,000 a unit in San Diego, people thought they were crazy. And this was in really nice parts of town. A lot of the institutional capital, et cetera, wasn’t there the way we have it today. So, they’ve seen a lot of cycles, been through a lot of things, but for Monarch, again, coming out of Gulf War recession, fast-forward. So, it started actually, it started as a multi-generation business with Rod and his son Ryan in a lot of ways. I think maybe that back of the mind, but I think at the end of the day for them, and we can talk about how I ended up here, because it was in a very roundabout way. It was not intentioned, like I guess everything in life. But I think it’s the icing on the cake, if you will, that the family has kind of stayed together and we’ve got an amazing team that obviously goes well beyond that. But it’s an amazing thing to get to do what you love every day with the people you love. And that’s a combination of family and non-family. Kevin Choquette: Absolutely. When Pat and Tim started building apartments, I just want to understand, is there a distinction between building as in general contracting or were they developers at that point as well? Sarah Kruer Jager: They were developers early on. When my uncle Tim came back, he’d finished school at University of Michigan and also gotten his master’s in architecture. So, he was kind of an architect by background, really became a builder himself. We’ve always had kind of an affiliated GC entity, fully vertically integrated. But they started out as developers, going out, raising the capital, taking all the development risk in a very different time in terms of how deals were capitalized and amount of equity and so forth that was needed. But out of the gates, they were always developers. Kevin Choquette: That’s great. I didn’t realize you guys were yet another Navy person who’d decided not to leave San Diego. There’s just a couple of them around. Well, look, you mentioned it, your day-to-day. My perspective is, you’re basically running the place, but I obviously don’t walk the halls of Monarch, so I don’t really know that. But what does your day-to-day look like? Sarah Kruer Jager: Right now there’s five key partners. So, I run the business day-to-day, but with all of them. And we all bring very different perspective to the table, and we’ve all worked together now for God, I don’t know, 18, 19 years at least that I’ve been there, and if not longer. So, there’s a collegiality, there’s an amazing culture. Everything is very blunt and I think sometimes it’s kind of messy, but that’s how we are lean and mean and nimble, and hopefully you’re making the right decisions as we decide how we allocate our capital, evaluating risk, et cetera. And then, as we move through the lifecycle of the deal, I spend a lot of my time, I guess from a day-to-day, yes, kind of running the business and everything from sourcing and capitalizing the deals that we ultimately do, taking them through, putting the team together, running them through the acquisition, the pre-development, the entitlement phase, working with the community, working with our capital partners all the way up the capital stack, and really sort of ultimately hopefully teeing them up successfully to hand them over to our construction team. Probably a little bit less active through construction, but we are still very, very hands-on. And nine times out of 10 we are the affiliated GC. So, very active in that. And then, I guess I kind of jump back in and get more active again post-construction. So, asset management, we used to have a property management firm that’s maybe the one piece in terms of the vertical integration that we no longer have, but we’ve had really good success partnering with best in class property management companies, whether that’s an institutional partner that has a management platform or a third party that we’ve done a lot of business with. But again, still being a very active owner day-to-day on the asset management, overseeing the property management piece and all the other things that come with operations and permanent financing, setting those projects up for the long haul after we get through all the crazy, crazy on the entitlement and development. Kevin Choquette: I think you and I would’ve talked about this before, but for years I’ve had this vantage point that developers are, for the most part underpaid. And I know that’s not necessarily a popular opinion in the broader population, but for the risks that are taken on and the kind of complexity that you just detailed from inception to acquisition, entitlement, right-sizing your capital stack, putting together your team of consultants, finding the right property managers, doing the capitalization, doing the capitalization on refinance, managing all of the expected, unexpected, and even the not expected, there’s a ton of risk. But in all of the attributes that you just went through, which part of it is today proving to be the hardest to navigate? What’s the part that is holding back Monarch Group the most? Sarah Kruer Jager: There’s a lot to break down there, Kevin. Let me answer your question, but then I want to come back to kind of put it into context for folks that are listening, because you and I talk about this all the time, the developer as an entrepreneur and what that really looks like and framing that. And maybe I’ll start there and then I’ll answer your question, but exactly what you said, right? This business today is incredibly capital intensive. Land is not cheap. Costs continue to rise, obviously you’ve got to go get debt, you’ve got to put a lot of equity into projects. And in terms of framing this, our sweet spot as a company is doing, call it three to five, what I’d call institutional size quality deals at any given time. So, call it sweet spot, 250-ish to 300 units, ground-up development. And so, on each one of those projects, as you alluded to, we got to go out, buy a piece of land or get some time through long option to take it through whatever that entitlement period looks like, that will cost on a project of that size in terms of, and there’s a lot of different costs, but the vast majority of it’s getting those plans done, getting the construction drawings done and teeing the project up. And that can cost a couple million dollars, easily. And we haven’t even talked about the time component and some of the things that can happen to slow you down there, but that’s a couple million dollars out-of-pocket off the bat, above and beyond whatever that land cost is, which could be in the potentially tens of millions, depending on the structure. So, before we’ve even put shovels in the ground, we’ve got to navigate, and this comes back to a lot of things, that particular site, the zoning, how quickly you can move in California, which is where we’re focused. But you’re easily out-of-pocket, best case, a couple million dollars before you have generated any return, even put a shovel in the ground. And then once you get past that, put a shovel in the ground, which is a nice milestone. And what you were saying a second ago, now you’re putting your construction financing in place, you’re putting a lot more equity into the deal. You may be taking the land down at that point. But on these projects again that are roughly, call it 250 units, that’s kind of north of 100 million, probably, easily, all-in based on where land costs and development costs are today. And so, at that point you’ve got what could be $60 or $70 million at least of debt, and depending on the world and all kinds of other factors, we talk a lot obviously in our business about guarantees, completion guarantees, potentially repayment guarantees. So, imagine literally signing your… and these are not things we like to do, but we’ve done historically on a limited basis. But I think for folks who haven’t done that, it’s imagine if you were going out to buy a home, basically signing on the dotted line so that down the road, God forbid you couldn’t make your mortgage payment, the lender could basically come back after you to repay that personally. So, not something we like to do and obviously a bad word in our business, but to your point, there are all types of risks, both capital structure, the deal itself. And then I think the biggest thing that’s probably often overlooked, so again, now you’ve got millions of dollars, and in our case as a private company, we’re utilizing our capital and our balance sheet and that’s our money. So, we cannot make mistakes. We’re very much aligned, I guess is another way to put it. But I think what also gets overlooked, we’ve got the deal itself, the team, I think all of this, at the end of the day, like any business, starts and ends with the team, and that’s us. We may have a capital partner, we’ve obviously got a partner on the debt side, we’ve got a whole team around us that we’ve built, the design team, the consulting team, and I think that’s where it starts and ends. But you also look at all the things, Kevin, that we don’t control in the macro economy. And there are lots of things. You may have the best deal, the best team, and the world can change. We’re obviously living it right now and have been over the past 12 or so months. Things can change very quickly. And so, I think we spend a lot of time, again, the team, that matters tremendously, but making sure that as the deal structure itself, because again, we’re cherry-picking a couple deals. We’re not a huge volume shop. We’ve got to get every deal right. It’s our money, we’re tying it up for the long haul. And so, as we talk more about this on the risk side, but there’s so many things that I think, unless you are in our business day-to-day, there’s so many things that we do not control. So, you can execute and do all these things right, and you may hit the cycle at the wrong time. You may have a capital structure where you’ve got to be out of a construction loan today where the world is. And so, again, there are just so many things that we do not control in this business that can really come back to hit you really hard, again, if you’re not, and this is much easier said than done, but really setting deals up for the long haul in terms of how they’re structured, as well as having a lot of time and money, kind of solves all problems at the end of the day. Kevin Choquette: And so, in all of that, going back to the original thing, and apologies for giving you such a massive thing to swing at, is there one element of the myriad of challenges that come to the developer that you guys feel is the most impeding of your forward progress at the moment? Sarah Kruer Jager: I’d say, today, it’s quite an interesting time. The last decade plus, if you were in our business, it was very hard to really screw things up. You had free capital, free money, it was hard to do things wrong. None of us have a crystal ball, but I think today experience matters, having that capital, having that balance sheet, taking a long view, maybe being a little contrarian. I think the experience of having been through cycles and having conviction and belief in the markets and what you’re doing, looking through and past this is really important. It’s hard, especially when it’s your money. But I think today in terms of I guess what you’re asking me, what’s slowing us down or giving us some pause, I just think from a macro standpoint, and none of us ever have a crystal ball, but it’s really, really important, especially times like this, to have a view in terms of where we believe the cycle is going, where we are, and obviously how that’s going to impact any type of investment opportunity we’re looking at. Today, and this is the benefit of having partners who’ve been doing this, Kevin, for over 50 years. We’re all constantly learning, never seen it all, but it’s sure nice to lean over to Rod who’s, by the way, a lot of folks in our business basically haven’t been in this business to see rising interest rates, and to lean over to Rod, who’s kind of lived through the ’70s and 18% plus interest rates, and as we’re kind of thinking about things. But I think right now it’s just hard as we sit around and talk about some of this and talk to a lot of people in our business far, far smarter, it’s very hard to have a view on where this is all going. It’s very unclear. By the way, even if you do, we’re probably wrong a lot of the time. It’s like the good old proformas, Kevin, that we grind on. If there’s one guarantee, we’ll be off in every element two, three, four, five years from now. So, I think that’s hard, just having a sense of where we’re headed. It’s very, very unclear. And then from a macro standpoint, and I think a lot of our business doing a lot of entitlement work, doing a lot of public, private, working with government, I think the regulatory environment, making sure that in the markets that we operate, this is more regulatory kind of policy, but that we’ve got obviously this massive housing crisis that we’re dealing with. But just being a part of that, being a part of that conversation as an industry, but making sure that the pendulum doesn’t swing too far one way or the other on certain things, that could have a real impact in our business like that is probably another one where we spend a lot of time. Kevin Choquette: Perfect. Sarah Kruer Jager: And actually, I’ll throw in one more thing, sorry, I’ll throw in one more thing because this is just a wacky time. Construction financing, and talk a lot more about the why, but I think it’s going to be really, really hard. It doesn’t matter who you are, big company, small company, huge balance sheet, whatever, great deal, great sponsorship, everything kind of right up the fairway. I think it’s going to be very, very challenging for the next couple of years to get construction financing on any one deal, let alone if you’re a bigger shop, five or 10 deals. And that’s not a good thing for a lot of reasons, but especially here, as we look in our backyard, we’re obviously facing a massive housing crisis and digging out of a big hole and you don’t have to look back much further than GFC and how housing production dropped off. Again, this is going to be a bit different, but I think as we look at the environment and what’s just starting to happen, I don’t even know that we’re in the first inning of this thing with what needs to work through the banks on the commercial side. And we’re going to see some losses in multi as rates have reset, but I think it’s going to be very, very hard to get construction financing over the next couple of years. And as a result, we’re going to see a very material potentially dip in production, which is not a good thing. Kevin Choquette: You’re putting a ton on the table here, which I love and it’s exactly how I knew this would go, but you’ve already sort of given more than sufficient evidence that you’ve got mastery over this. But right at the beginning you said, “I never really planned to be here.” So, how the heck did you end up at Monarch? And we’ll come back to the macro and managing the political construct and all of that. Sarah Kruer Jager: Very bittersweet, Kevin. I grew up in San Diego, was incredibly fortunate to get a scholarship to go to University of Michigan, got to study business undergrad and play golf. And honest to God, I thought… Remember back to when you were 18, 19 years old, obviously worldview is pretty narrow. You kind of know what you know, but there are all kinds of things that you don’t know yet, even though you think you do. And I got to Michigan and I met who’s my husband, this was, God, how long ago now? 20 something years ago, 22, 23 years ago. But I met my husband Jason there, which changed my life, I guess for a lot of reasons. Michigan, that whole opportunity to get out of San Diego, whole new kind of life experience beyond just school. Golf, by the way, is obviously an individual sport and I would argue a very, very selfish sport. And to take that into a team environment was something that I carry with me to this day from a leadership and team standpoint that gets, I think, in a good way, just sort of drilled into your head at Michigan. The team, the team, the team. But anyway, so I get to Michigan, I met my husband there and he was in grad school, finished before I did. I think when I got to college, all that I knew was golf and I thought I would play professional golf and that’s kind of where my mind was. And that changed as I saw that there was this whole other world out there of things to do, and that golf could be beneficial. I could still play for the rest of my life and it could come in handy in business. And so, just a lot of things changed kind of over that time. But I followed Jason to Chicago after I graduated and worked, as you mentioned earlier, doing investment banking out of college at UBS, and amazing experience. I don’t know that I thought I would do it forever, but it was a way to pack many, many years of work into a few years and just learn the nuts and bolts of how you value things. In this case it was companies, but very applicable to real estate and lots of other things. And I think from that experience, I was super fortunate. I don’t know, we could talk about all this stuff all day long, Kevin, but I’ve been very lucky in life that it’s not the company, the name on the door, it’s the people that you always come back to. And I worked for an amazing group of guys who, stayed in touch with to this day, who taught me a hell of a lot. And part of that, after I got there, my older brother, JP, passed away very suddenly of a brain aneurysm. It’s kind of whatever, it’s one of the worst things you could ever imagine outside of being a parent and losing a child. And so, I came back to San Diego, obviously was with family and it changed everything. I ended up staying at UBS about another year. But that, Kevin just, it changed everything, just in terms of life perspective. My brother was in his early 30s at that time, gosh, I was 22. And through that, and again, very bittersweet, but that was really it, just wanting to be closer to home, closer to family. And around that same time, so this was kind of ’04, ’05, the market was red hot, the guys at Monarch had built quite a portfolio of apartments forming the company like we talked about, coming out of the Gulf War recession. And were basically selling everything to condo converters and trying to figure out, love the business, what do we do next? So, there was this incredible business opportunity as well, but again, very kind of bittersweet and a lot of it was driven by JP passing away. Kevin Choquette: That’s horrible. I hadn’t heard that story. Sorry about that. Sarah Kruer Jager: Again, I don’t know a better way to put it into words, but that’s what brought us back. So, obviously think about him every day and there’s a lot of good things that came out of that, but I don’t think I would’ve been back here otherwise. Kevin Choquette: Yeah, it brought you back home and it got you in the family business and I guess… well, you’ve mentioned it several times, the team. And I believe there’s about 14 people at Monarch, in the hallways, in the office, driving the business. And then you mentioned you guys are either a lead or affiliate GC to sort of control or heavily influence the vertical construction. So, you’ve got guys out in the field as well. Through all of the cycles, going back to what you just said with Rod and kind of hyperinflationary times with high interest rates and the inevitability of this whole marketplace, looking at data at the same time and making decisions in unison, individual decisions in unison that basically create these cycles. There’s inevitably difficult times and really good times, and scale in the face of that kind of macro phenomena is sometimes difficult to reconcile with. Do you stay small, do you scale up? How have you guys thought about weathering cycles and the size of the team to be built to endure and to be able to capitalize on opportunity when it shows up? Sarah Kruer Jager: That’s a really good question, Kevin. There’s obviously, and you see this every day, we both do, there are a ton of different ways to set up companies and to be successful. For us, I think what we’ve figured out, and there’re probably a million different things we’re not good at. I can tell you a lot that I’m not good at, but we’ve kind of found a mousetrap and talk a little bit about how we’re set up, that has worked really well for us and we’ve stuck to that. We’ve been really, really disciplined about staying in apartments in Southern California, the couple things that we know inside and out and live and breathe every day and not… And this was again, just our comfort zone and where we felt was our sweet spot, staying small. You mentioned we’ve got about 14 people. I bet you every single one of those, outside of our associate, who’s now been with us for a couple of years and hopefully will be with us for the next 20, we’ve all worked together for 20, 25, 30, even more in some cases, years. And really, again, back to the family business where everybody aligned has skin in the game. And for us, that’s worked. So, again, our sweet spot, staying in the markets and the product type that we know really well, know the politics, know how to work with government, all those relationships being very important, wood frame construction, that is all that we do. We haven’t gone concrete Type 1, so in a lot of respects have kind of stuck with what we know. And from a size standpoint, we like being able to, again, if we’re doing, call it those three to five institutional quality deals at any given time. And those Kevin, could be at different stages. So, we could have one deal that’s literally finishing construction right now. We could have another that we’re starting that could take a couple years before we put a shovel in the ground. We could have a few more things in the pipeline. So, they’re all kind of at different stages, but that’s kind of our sweet spot. It allows us to just have, I guess the most optionality or flexibility so we can put our balance sheet to work in those deals, we can bring in partners and we do that more on a one-off basis tied to each deal, but it lets us set up just for us what we believe is the best structure and not getting too far over our skis. And that comes in a lot of shapes and sizes, but in terms of not getting over our skis in terms of risk and capital, not getting over our skis in terms of all the stuff that happens on the construction side. And then I think just from a people and a time standpoint, making sure that it allows us to be incredibly hands-on, all of the partners. Again, we all love this business. We’ve got a whole team, but we are incredibly hands-on too, all the way around. And so, when you’ve got a few deals like that, you can be intimately involved every step of the way. And I think that plays out through the whole life cycle of the deal. But I think one of the things we’ve found and we’re really proud of is, every single project that we do, because we are so hands-on every step of the way, I think it really shows up in the quality. And we’re looking at these things as long-term owners. And I think that’s another huge piece of this, Kevin. So, as the business has become a lot more capital intensive, much more institutional, it’s maybe a little bit rare to see companies like us who, we’re really trying to set up each one of these projects so that we can own them for the long haul. And times may change, it’s not like we fall in love with the real estate. We may still sell some things from time to time, but in each one of these projects, it’s a tremendous amount, especially in California, to get all the way through finding a great project, taking it all the way through the entitlements, all the risk that comes with that that we talked about in construction, getting them leased up. We kind of get there and you want to reap the rewards of all these things that you put a lot of time and effort and obviously take a lot of risk to kind of get to the other side. So, we’re trying to set things up in a way that allows us to really hopefully pick our timing, but to be longer term owners. Kevin Choquette: Before we move into that, because the whole capitalization and capital stack and building to own versus merchant buildings is something I think we can unpack. You had just mentioned creating alignment. I have a friend who’s part of a wealth management shop up in Seattle, and one of his mantras is, “Tell me how you’re paid and I’ll tell you how you behave.” And it proves to be true over the long-term. In the near term, it may not, but over the long-term it does. How do you guys create alignment in the team? I’m not looking for obviously keys to the kingdom or anything that’s proprietary, but do you have any thoughts about how to get people aligned with long cycle deals? I would imagine from A to Z, you can be, well, let’s assume that it’s an asset that you stabilize and sell. You could still be five to seven years from inception to sale. Sarah Kruer Jager: No, and that’s what’s crazy, Kevin. We’re literally finishing a project right now, I was telling my son, who’s eight, that we all started working on when he was, and this is how I remember it, but when I was nine and a half months pregnant with him. It’s crazy. Totally crazy. No, but I think to your question, I guess I’d come at it two different ways. The first is just from the, and this is more maybe the soft, the qualitative piece, the culture of our company, which I think starts and ends with what Rod and Ryan and my dad and Tim created and hopefully kind of carrying through. When you’ve got a shop of 14 people, we’re lean and mean, everybody’s wearing a lot of hats. Everybody is pulling their weight. But I hope we’ve created a culture, and this is kind of the leadership piece at the end of the day, where I think you see, and this has certainly kind of come through to me and why we love this business, there’s a real authenticity from the top down. We love this business. We’re incredibly passionate, Rod, et cetera, he could be doing other things. He loves this business, inside and out. Every day is a new day, a new challenge. You’re always constantly learning, being challenged. So, I think just capturing that in the culture, and there’s just this, I was just going to try and boil it down, this authenticity of leadership and really having a passion and just being, we’re incredibly relentless, Kevin. We’re nice, but we’re incredibly relentless. So, I think that piece of it, and then you take that and you combine that with, I think what you were getting at, which is not complicated, everybody’s got to… sort of working on the deals that have a piece of the action and there’s alignment. And in the case of the partners, we’ve got real material skin in the game. So, not only are we, I think, hopefully there’s a lot of alignment within the company itself, but when we’re working with other partners in whatever shape that may come, there’s an incredible alignment there in that partnership as well and all these deals because of that. Kevin Choquette: Yep. Look, it’s worth saying, it’s June, 2023. So, let’s go back to the conversation on the macro and what we were saying, “Hey, what’s difficult about the current timeframe? What’s the biggest impediment to possibly moving forward?” And your comments were like, “Hey, it’s kind of hard to have a really strong conviction to a particular viewpoint, given how much uncertainty is in the marketplace.” So, for priming the pump here, we just did the debt ceiling, projections are that US debt hits like 50 trillion by 2030, and we’re at like 26 trillion now. We all know COVID put $9 trillion into the system. I guess 29% of the money supply showed up since 2020. I guess maybe some of that’s coming back with the quantitative tightening, but maybe inflation peaked around 9%. There’s still $17 trillion of cash at the banks, just excess. Well, not necessarily, three and a half trillion more than trend lines still sitting out there. The bank deposits are down. But I did a little research down like 500 billion, which in the scope of 17 trillion isn’t huge, but the loans aren’t repaying because refinances are difficult and costly and it’s better to stay with the debt you have. That’s slowing production. We’ve got what, three banks that have failed. So, everybody’s looking for deposits if they want to have a banking relationship with you or extend you a loan. The 10-year Treasury was 2.5% a year ago. Now it’s like 3.75, but was up to 4% just recently. And Prime a year ago was 3.5, and I think today we’re at 8.25. To say it’s a difficult time is a bit of an understatement. What’s interesting though is, there’s not the kind of distress that we all saw in The Great Recession where it was clear we’re moving to risk-off, and looking at that paper was probably better than looking at the asset. And I don’t know that we’re going to see that kind of thing now, but knowing the direction to go, and you made a comment on construction debt and the scarcity there, but what are your thoughts on the macro? Where are we going from here? Where are cap rates going? What kind of construction’s happening? What’s going to happen with the office? What’s going to happen with… There’s a million things we can go from here, but… Sarah Kruer Jager: Yeah, there’s a lot there. Kevin, I don’t know anyone, I don’t know about you, who 12 months ago, back to how you teed this up, would’ve said, “Hey, fast-forward 12 months, we’re going to have… SOFR’s going to be north of five, Fed will have moved rates 500 plus basis points.” You kind of look back, the pace of that change has been pretty damn rapid. Kevin Choquette: Very. Sarah Kruer Jager: It’s obviously caught our entire economy off-guard, let alone our industry. So, in terms of where we go from here, again, and this is the humility, I think what our business instills in us, because none of us have that crystal ball. We got to have views, we got to make decisions, we got to look at all this. But again, I think this is, I was talking to Rod about this the other day. In terms of the different points and the cycles that we’ve experienced, and I think you got to go back way before this too and really look at history. There’s a lot to this. You learn some lessons, even though it’s always a little bit different. This one’s pretty damn hard to… it’s complicated and hard to see a forest through the trees and to analyze. But I guess my personal view, I think the Fed is very committed to staying the course and that it’s going to be sticky, and they’re walking obviously a very big tightrope here. I don’t know if we see stagflation, but I think in terms of how we’re looking at things, I think rates will remain somewhat elevated for the next little while, whatever that is, the next couple of years as the Fed really taps down on inflation. And that may really hurt in some places, but my sense is, they’re going to stay committed to this, even if we do dip into recession. But in terms of what that means for our business, I think we’re still, Kevin, and this is what’s unique maybe to our business, things take time, as these cycles play out and evolve. We would expect, I think you talked about the banks and what’s happening on the office side. If you talk to anybody, that’s not an area that we know well, we’ve done some entitlement of office, but I think that’s a very, very hard place to be. And if you talk, there are a lot of very, very smart office owners, investors, developers. I just think it’s hard to say what that market and what that industry looks like over the next two to three years as it evolves post-COVID. And so, I think with that, what you alluded to, I don’t even know that we’re in the first inning of what’s coming there with all these loans that are maturing, that it’s just this perfect storm of obviously massive interest rate movement that’s happened very quickly, debt that’s got to be taken out over the next couple of years. And you can see all that, and the wall of maturities, vacancy way down. We’re already starting to see pretty large buildings and very big owners handing back the keys in big cities throughout the country. And as you know too, all this takes time. Go back to the micro, there’s an office building in downtown, whatever it may be, or suburban, whatever it might be, that may get kicked over to special servicing, that this stuff takes months and months and months to kind of work its way through the system to the other side. And while that’s happening… And that’s just the banks, you’ve also got major institutions who have exposure and may not be marketing to market on a daily basis, but they’re doing that. They lag a little bit, maybe 60, 90 days to the market. And so, all that’s going to take time as well. And I guess zooming back up to the macro, but until those institutions, whether it be bank or an institutional investor realize those losses and kind of rightsize their books, there’s not going to be a lot of lending capacity in the system, and equity, right? Kevin Choquette: They’re going to reserve for those losses and put a bunch of resource on them and try to minimize their exposure. Sarah Kruer Jager: Exactly. Exactly. And to your point on that, and back to, I guess our world and where we’re focused on the construction side and the production, if you’re a bank, that’s, again, as you said Kevin, you’ve got a pretty good view looking forward on your balance sheet of where those losses may be over the next two to three years. This isn’t just tomorrow, but this is looking forward over the next couple of years. You’re reserving capital. You may not be lending on the construction side at all because of the capital that you got to allocate there. You know this better than I do, but to go out and get any given construction loan today, just conventional, there are different ways to go about this, but that’s now, at least from a bank, that’s obviously lower loan to cost, loan to value and probably 8.5% money, give or take. Even if you’ve got a willing lender, there’s still liquidity there, but it’s very hard to make those deals pencil, based on where land costs are and construction costs. Kevin Choquette: Yeah, let’s drill into this though. So, let’s go 18 months ago. Let’s say we’ve got our 200-unit projects and we’re full speed ahead. I’ll use your example. We maybe already own the land, or maybe we just have it under contracts. We’re now $2 million into it to get to permit-ready. And 18 months ago, we would’ve borrowed, let’s just say tight spreads, kind of frothier market, I don’t know, SOFR 250, SOFR 275, right? And SOFR was 0.5. So, you’re talking about getting 3.5% money. And if you size to the takeout, which at that time would’ve been, let’s just say 4%, maybe even sub-4%, you probably could have got LTC, let’s just take a swag at it, maybe 75% LTC can get taken out by the then in-place perm debt. And so, your return on equity looks great, your cap on costs as a function of capitalized interest, lower capitalized interest looks more attractive. And now you come to today, all your underwriting is completely out the window. So, SOFR’s at 5.5 or 5.2, whatever it’s at today, and you’re probably instead of SOFR 250 you’re probably SOFR 275 to SOFR 350. So, exactly what you said, now you’re at 8.5 and you might be sizing your perm to a 5.5% rate, which means 60% LTC’s probably going to be pushing it. And more to your point, the banks are just going to be like, “Well, look, if we want to put out money, let’s take the most attractive risk-adjusted returns and we’ll offer you 50 or maybe 55.” That’s a completely different investment profile for the equity. And yet, if we’re talking about San Diego, for example, you’re still in a supply-constrained market. You still, well, we could talk about costs later. I think that’s enough. Do you move forward? Do you move forward when the world changes that much on you? And it’s like, “Right, so we thought we were going to put in 25 points of equity, instead we’re going to put in 45 points of equity.” Do you still hold on the overall investment thesis or how do you… Sarah Kruer Jager: Yeah, what you just described, maybe it’s more than a triple whammy, right? You had between spread and your base rate two and a half, three times has gone up significantly, which you could have never forecast, especially this quickly. And that not only affects your cost of capital, but now your leverage is a lot lower on top of it. It’s quite something. Honestly, Kevin, I come back to, you got to look at this from more of a macro, but always come back to the deal itself at the micro level, it’s very much going to be a case-by-case basis. And that’s what we’re seeing play out now, is this all, again, we’re not even in the first inning of this thing, right? This is going to take time. But you’re on the front lines of this, you talk to folks on the equity side who are doing a lot of the capital raising to the extent developers have time, time is your friend obviously, and having capital. So, kicking these things out, trying to, if you can’t start today, can you start a year or two from now and buy some time? Whatever that looks like. That’s easier said than done, especially if you own a piece of land and there’s a carry cost associated with that. But again, even in San Diego, by the way, that’s one of the best performing apartment markets in the country right now. So, the fundamentals look great, as you said across the board, just given that a lot of these, and we’re talking over big institutional deals require institutional capital, require a very large construction loan. And if you are sitting today, ready to put a shovel in the ground, it means you started that deal a couple of years ago before the world dramatically changed. And so, all those things you alluded to, that’s how you were underwriting it. And so, is your capital partner still there? The bank financing is going to be very different. We’re kind of in triage right now, but again, because of that, I don’t know that a lot of these projects get off the ground right now, and I wish there was an easier way to say this, but it’s very much, I think it’s a case-by-case basis. There are a lot of great institutions, again, who’ve partnered with us and a lot of our peers in the industry who, you may have, and this is what’s crazy, Kevin, but you may have a great deal at Main & Main in San Diego or wherever that market is that still underwrites in this new world. But that equity partner, for example, may be dealing with all that stuff we just talked about. They may have redemption cues, depending on how they’re set up and if they’ve got a fund. They may have office exposure. They may have lots of other reasons that have nothing to do with that particular sponsor, that relationship, that deal, that you got to go back to the drawing board. Kevin Choquette: Well, there’s another quality there too. And this maybe can be our segue over to the conversation of institutional, but a lot of times when back in the day, I think you guys had some exposure to, actually, it doesn’t matter, let’s just say an institutional investment bank. You’ve already made the distinction earlier about our money, and the institutions, unless you’re talking about a family office or something very close to that, you’re talking to a professional who’s building their career and has, in my opinion, a lot more downside in making a call to make this kind of an investment. Let’s just stay with the example I outlined. And they say, “Yeah, let’s go. Let’s take the 45 points of equity alongside Monarch Group. I think it’s a good time to do do it.” There’s a lot of exposure for them to do that now, when there’s uncertainty on cap rates, the levered returns are not as attractive. I think that’s another reason this becomes difficult. They’re not as convicted as somebody writing their own check because it’s not their money. They’re really worried about, at the end of the day, getting fired. Sarah Kruer Jager: Yeah. There’s a lot you could go there, but you look at where the world is, all the uncertainty. I was just talking to somebody about this more kind of anecdotal, but I think this is kind of right along the lines of what you’re saying. LA, that market, very volatile right now. You’ve got Measure ULA that passed and kind of went into effect a few months ago. So, there’s some regulatory stuff still coming out of COVID. A lot of things happening there, but you’re seeing, and again, this is very handful of deals because we’re not seeing a lot of transaction volume given that we’re kind of at this crazy crossroads right now. But if you’re that guy or that gal at that institution, that asset manager or project manager who’s making… that deal person who’s going to investment committees, sort of putting their neck on the chopping block at a time like this, LA right now, there’ve been some deals that traded a year or two ago that folks thought were great trades. And it’s kind that catching a falling knife, that I’m just making up a number, that may have traded at 150, now it’s 130 and maybe it’s going to be 110. And these are on core deals, by the way, this isn’t even on the development side. So, if you’re that person in that institutional shop, is now the time to be sort of putting your neck out for something like that? It’s maybe easier, and maybe it’s the right thing too, to do nothing. Sometimes it’s better to do nothing for a little while. And so, I think you’re seeing that play out. Kevin Choquette: I think that’s exactly what’s going to happen. Let’s do nothing because there’s just too much uncertainty, which only further cascades into what you were saying, which is, there may be a macro pullback on all the stuff on the front end of the pipeline, the development side of the business. Do you guys have a view on cap rates right now in terms of… Obviously, there’s upward pressure when your perm rates are up 5.5, but we also have inflation, and if you think being in hard assets is a good place to be in an inflationary environment, then what does that do to cap rates? Sarah Kruer Jager: I think the context matters, right? Do you need to sell right now? Are you selling in this environment? Again, I think just talking to a lot of folks who are kind of on the front lines of this and very market-specific, especially as we’re seeing more supply in certain markets versus others, I think maybe we see a little more divergence, but there’s no question that if you’ve got to go out and sell a class A multifamily deal today in a primary market, Jesus, rates may have moved 75 or more basis points from where they were a year ago. I’m sorry, cap rates. And so, values, given all this stuff, Kevin, you walked through in terms of the debt, et cetera, et cetera. But values are down arguably kind of 15 to 25%. And that really, again, depends very much market-by-market. I’d say though, the outlier, we’ve seen this a little bit, but again, there’s just not a lot of deal activity because if you don’t have to sell, you’re not going to. But for those A++ location deals that are just irreplaceable in great markets, there was one that traded not too long ago here in San Diego. You’re still seeing sub-four cap rates, but that’s very much an outlier. I think if you’re looking at stuff today, just to say in our backyard here in San Diego and you had to sell, you’re probably looking north of 4.5 to 4.75 cap. But that’s the real question. Do you have to sell? Kevin Choquette: Yep, totally. Let’s talk about institutional, and in this business, I think you and I would agree that term’s thrown around pretty loosely and with a lot of different implications. You just brought it up in terms of institutional equity partners. To me, I kind of see it as two things. One, it’s a certain style of products and management, be that on the capital side or on the asset side. And two, it’s associated with longer-lived entities with a robust enough infrastructure that it can kind of hold, refine and distribute knowledge, usually for a competitive advantage. I think of a Goldman Sachs or something. If you get on that platform, there’s enough information in it that it’s got a feedback loop that’s improving its competitiveness on the regular. With that, I see you guys as an institutional shop. I wonder how that word lands for you and what’s it mean to Monarch? I guess even more importantly, would you agree? Sarah Kruer Jager: I don’t know. I don’t know, Kevin, that’s an interesting one. I guess we’ve been super, super lucky, fortunate to have incredible, call it “institutional equity partners,” and on the debt side as well. And again, I just keep coming back to it because it is our whole business, is relationships and people. And so, whether it be a Goldman Sachs or other partners we’ve worked with, who are a lot bigger than us and have obviously much larger balance sheets, tremendous experience. Again, we’re seeing things, I guess what we bring to the table, where there’s this great sort of marriage and partnership, we’re obviously very focused within a few geographic markets in our backyard here in Southern California on multi. And what’s great about a lot of these is, you teed up these institutional partners who have obviously a much bigger platform, a lot more breadth across CRE, across different funds, different products, et cetera. There’s a wonderful wealth of knowledge there that we get to tap into and more of that kind macro perspective. But I don’t know, I guess maybe we fall somewhere in between, but it comes back to these partnerships that we have with those bigger institutions. And maybe that’s why you would describe us a little bit that way. But we’ve just, again, been very lucky to have repeat business with a handful of partners who, again, are much, much bigger than us, and so much of this, obviously this business, very, very cyclical. You go through the ups and downs. We’re kind of in one of those right now and we’ve certainly been there before and we’ve had incredible partners, again, much bigger than us, who had lots of other things going on, who could have… we were the little fly on the wall if you will, but hung in there with us and came out the other end, obviously very, very successful. It’s just kind of back to those long-term relationships. So, I guess some of that makes sense, but- Kevin Choquette: Well, I’ll go a slightly different direction. If I were to define you guys as a scrappy, smaller development company, where that might typically lead to problems, is that the managers, principals, however you want to label it, and it’s not typically, but I’ll just say I’ve seen this happen. You might be enamored with hotel or you might do a large master plan land entitlement deal on a couple hundred acres, or you might try to do an adaptive reuse of office to apartment. And sort of echoing what you said, your own mousetrap, SoCal, multifamily, wood, the right size for us, the right number of investments, the right size of team so we can remain hands-on. That to me, is what makes Monarch feel institutional. The rigor that you guys bring by just staying in that single lane over and over and over. Nobody’s telling you to do that, right? A lot of entrepreneurs chase shiny stuff like, “Hey, that looks interesting, let’s go do that.” I don’t know. Any thoughts on that? Sarah Kruer Jager: Don’t get me wrong, Kevin, you know my partners too. We love to do deals, but the fact that it is our capital, we are taking a lot of risk, just inherently in the business that we’re in, it’s forced us to be very, very disciplined and very, very picky. And so, if that equates to, I guess when you say institution, there’s an institutional knowledge for sure that, again, I’m lucky I get to tap into, that goes, Rod’s been doing this well over 50, and they told me to stop counting at 50 years, but a long, long time. So, if you want to call that knowledge, that real experience, which is again, having been through a lot of cycles, been through a lot of ups and downs, learned a hell of a lot of lessons and come out the other end time and time again, but taking nothing for granted in terms of going forward. Sure, I guess we’ll take it, but there’s a partnership there with those institutions and I think why it works so well, maybe we bring a similar mindset based on that discipline and based on kind of who we are and our setup and our culture, but we couldn’t do a lot of the things we do without those bigger partners. And so, where we’ve kind of found a sweet spot with that and these relationships, yes, these are much bigger companies in terms of dollars and people and all the stuff you would look at on the surface, but there’s still, in terms of the people that are there, that have been at those companies for a long time, there is still, I would say a very similar kind of scrappiness and sort of entrepreneurial bent, if you will, to the folks that we’ve had a lot of success working with. Kevin Choquette: That’s cool. There’s an alignment in terms of your thinking over how to run the business. Sarah Kruer Jager: Mm-hmm. Kevin Choquette: I’m going to go back to merchant building and your mention that Monarch is trying to build to own. So, this is an evergreen conversation in my role in the business. Guys will say, “Hey, we really want to build this to own it for the long-term. How do we do that?” I was actually having the conversation yesterday, and a much smaller deal, but we’ll just keep the conversation in terms of points of leverage. They have an attractive cap on costs, so they may be able to get say, 70% LTC, and then they’re like, “Yeah, but we just want to refi everything out so we can get all our equity back and hold the asset and go do another one.” And then, of course we go back to the conversation we just had, which is perm loans are 5.5%, you’re not going to get all your equity out. And then they pretty quickly come to the conclusion, “Well, let’s see, if I sat and just clipped my portion of the cash returns, it’s probably akin to seven or nine years of cashflow if I were to just sell the asset at stabilization.” And so, they sell, they pay their cap gains tax and then they do it again, and all of a sudden you’re a merchant builder as opposed to somebody that’s able to build, stabilize, and own assets for the long-term. I know you guys have been successful in doing that, and I think in doing it in ways that are, you’re not reinventing the wheel by any stretch, but they may be a little atypical for guys who find themselves in the situation I just described and kind of don’t really have any other choice than to build, stabilize, and sell, and then do it again. So, I just wonder how Monarch thinks about structuring your capital and it’s not the right thing to sort of call it redemption rights, but being able to find partners that allow you to participate in a meaningful way in the long-term ownership, as opposed to getting shoved to the back of the bus and having this sort of synthetic drive to just ringing the cash register to exercise the waterfall to actually get paid. How are you guys navigating all that? Sarah Kruer Jager: Kevin, you teed it up really well, and you see this every day, right? It’s really hard to do. 20, 30 years ago you might be able to go out and get some crazy amount of leverage, put very little equity into a deal, obviously land costs, hard costs, et cetera were not anywhere near what they are today. So, it was a different model. Obviously today, much more capital-intensive business to build any one of these 250, again, institutional quality size deals, very, very expensive. It’s hard to do, for a lot of reasons. I don’t even know where to start. For us, I think maybe where you left off there at the end, it comes back to, again, if you’re able to put, you got to have a balance sheet behind it, and some of this is, we’re only doing a few things. We’re not trying to do 100, but basically putting real meaningful skin in the game because this all comes down to control and how you make decisions. So, again, we may be 100% of the deal. That simplifies things quite a bit because it’s our partnership kind of calling the shots. Where we’ve got institutional partners, historically, we’ve put a lot of skin in the game as well so that we’re kind of side-by-side. Again, the less you put in, the less… all the things you alluded to, the less decision-making controls and rights you’re going to have on all those major decisions. So that’s, I think a big part of how we’ve been able to do it, but it’s really hard in practice because again, every single one of these deals needs a lot of capital. So, I think the sweet spot for us or how we’ve gotten there, it takes a few things to line up, but it starts with having the balance sheet and the capital, going out and finding these deals. And this is maybe just our DNA, and again, there are a lot of ways to do this, but we want to go find something that we can get into early. It may be really messy. That could be a greenfield, brownfield site, could be environmentally-related, could be entitlement-related, but public, private, whatever that looks like, it can come in a bunch of different shapes and sizes. But where there’s a lot of work that’s got to be done, that just kind of narrows the universe of competition. And if we can get in there early through relationships that we’ve had for a long, long time and work through all that, get time to potentially take the land down, that helps to get to that goal of owning long-term. And then, I’d say another big part of that is just having a great, if you boil it all down, it’s having a really, really good land basis. Kevin Choquette: Well, that’s exactly what I was going to say when you said complexity, getting into those deals early that are complex and working through all of that may equate to having an attractive land basis because what you could sell isn’t what you bought. Sarah Kruer Jager: Yeah. I would combine that great land basis with time. So, having the ability to be patient, having time in terms of how that deal is set up, and then again, time and money solve a lot of problems. So, having that capital there, ready to go. And it’s funny, as we look back, whatever, I kind of look back over a long period of time, and this isn’t always, it sort of works out this way, but I think the most successful deals that we’ve done, when you look back, have always been actually in kind of times where we are right now, where it’s very, very hard to see the forest through the trees, very, very hard to have conviction and a view on where things are headed from a macro standpoint. There’s just lot of stuff flying around, a lot of risk and very, very hard to get things off the ground. But some of those projects that were literally next to impossible, that folks told you you were crazy or whatever, it just seems like this contrarian, being a little countercyclical, doing things and being a little more active for the right reasons, when everybody else is frankly licking their wounds or maybe doing nothing, have turned out to be some of the better deals. But it’s pretty scary to hit the gas and go and put that capital to work and take all the risk we talked about when there aren’t a lot of folks around you doing the same thing. Kevin Choquette: And as one of the other guests I had on the show said, “Vintage matters.” What you’re talking about is, we may be entering another year or two where it’s a good vintage, right? Sarah Kruer Jager: Yeah, it could be. There’s obviously a lot of unknowns, but the one, and it’s the only good pie

Show Notes: Welcome to Episode 16 of Offshoot with Kristian Peterson. Kristian is a seasoned commercial real estate entrepreneur with over 20 years of experience in the institutional investment space. As a managing partner at Catalyst allocating joint venture equity into real estate development deals, and raising capital for the fund, he has a refined sense of what it means to be an impact investor. Catalyst pursues market equity returns while creating measurable impact within their investment communities.  These dual mandates co-exist, and one does not dilute the other. Kristian’s expertise comes blasting through in our conversation. Listen in as he covers: * Being intentional about investing and making an investment. * The polarizing response that impact investing gets from the marketplace and the community. * His description of the generational challenges that have come to the real estate industry since 2019 in terms of Covid, supply chains, inflation, high interest rates, higher op. ex., and soon enough, higher property taxes. * The value of a good local development partner when allocating joint venture equity into development deals. * How Catalyst’s impact scorecard allows them to objectively quantify social impact independently from financial analysis. * How Catalyst has successfully formulated and closed a fund with two classes of investors, one class that accepts a lower return in exchange for social impact, and another class that is market rate. * And finally, Kristian’s mindset as a fiduciary in both the short and long term. TRANSCRIPT Announcer:                           Welcome to Offshoot: The Fident Capital Podcast with host Kevin Choquette. Offshoot is a curiosity driven conversation that features a wide range of real estate business professionals. In each episode, we unpack the knowledge, vantage point, and domain expertise of our guests. Then we move beyond the facts and figures and dive into the personal habits and mindset which allow them to be high performers in their respective field. This podcast objective is simple, supporting entrepreneurs, fostering relationships, and uncovering meaningful conversations that positively impact business. Kevin Choquette:             Welcome to episode 17 of Offshoot with Kristian Peterson. Kristian is a seasoned commercial real estate entrepreneur with over 20 years of experience in the institutional investment space as a managing partner at Catalyst, allocating joint venture equity into the real estate development deals and raising capital for the fund has refined sense of what it means to be an impact investor. Catalyst pursues market equity returns while creating measurable impact within their investment communities. These dual mandates coexist and one does not dilute the other. Kristian’s expertise comes blasting through in our conversation. Listen in as he covers being intentional about investing and making an investment. The polarizing response that impact investing gets from the marketplace and the community. His description of the generational challenges that have come to the real estate industry since 2019 in terms of COVID, supply chains, inflation, higher interest rates, higher opex, and soon enough higher property taxes. The value of a good local development partner when allocating joint venture equity into development deals and how Catalyst Impact Scorecard allows them to objectively quantify social impact independently from their financial analysis. How Catalyst has successfully formulated and closed a fund with two classes of investors, one class that accepts a lower return in exchange for social impact and another class that’s market rate. And finally, Kristian’s mindset as a fiduciary in both the short and long term. I hope you enjoy the podcast. Hello, everyone. Thank you for tuning into another episode of Offshoot. Today Kristian Peterson, a managing partner at Catalyst Opportunity Funds is joining us. I’ve known Kristian for just a short period of time through introduction of a mutual friend Peter Kleinberg. However, in much the same way a five-year-old can ascertain musical virtuosity as easily as a PhD in music. It didn’t take long to realize that Kristian’s incredibly sharp and capable. He’s also thoughtful about the impact his professional actions have on the broader community. And you need look no further than Catalyst, a double bottom line investment firm to see evidence of this. Kristian has a rich background in commercial real estate that spans over 20 years. Just before Catalyst he spent 11 years at Fortress as a senior vice president working on private equity and credit funds. While there, he led several investment initiatives including securitization of over a billion dollars in middle market commercial real estate mortgages and the management of over 3.5 billion in assets. Before joining Fortress, Kristian worked as a director of consulting for a sustainability advisory firm providing original best practices and decision support to portfolio managers at global real estate companies. He also worked as an advisor within a private real estate syndication firm, underwriting over $2 billion of commercial real estate acquisitions, assembling a due diligence team and developing their processes to evaluate acquisition and development opportunities. Kristian holds a BS from BYU and an MS in real estate from MIT. He also has some pretty unique credentials on blockchain and sustainability. Outside of the professional, Kristian is a skier, which he gets to do from his home in Sundance, Utah, and an avid outdoorsman. He’s also a freak of an aerobic athlete. He was recently telling me of his resting pulse of 65 and an OSAT of 85 while he was hanging out at the 17,000-foot base camp of Everest. That’s 100% not normal as there’s literally 50% as oxygen up there. Translation, don’t think you’re going to keep up with him on a bike ride. Kristian, welcome to Offshoot. Kristian Peterson.:           Yeah, thanks, Kevin. And I’d reciprocate some of the positive things you said about me having skied with you a time or two. You are a force to be reckoned with yourself on the mountain as well as you know your way around mountain bike trails, so I’m not sure I’d go head-to-head with you, but I appreciate the generous [inaudible 00:05:01]- Kevin Choquette:             Maybe on the downhill that’s true, but I know you’d smoke me on the up. Kristian Peterson.:           Maybe so. We’ll have to put that to test this summer. Kevin Choquette:             There you go. Well, hey, to get us started, can you just tell me about Catalyst and maybe what does a double bottom line investment firm or an impact investor do? Kristian Peterson.:           Yeah, no, I’d love to share a little bit about our organization and what we do is we do feel like we are unique within the marketplace and in offering double bottom line investing without having any compromise or trade off in the return profile that we seek. And as you mentioned, my path to get here brought me through the private equity world and through Fortress Investment Group where I had a great career and learned a significant amount of commercial real estate, really across the entire capital stack, whether it was debt and structuring and organizing, debt security offerings through CLOs or whether I was working on the equity book. Just had an array of experiences there. And Catalyst came to me somewhat in a traditional Utah kind of a way. At the time I was living in Dallas working for Fortress and was out here. As you mentioned, I’m an avid skier and was on one of my ski vacations out here with a friend of mine who is a large developer in the Salt Lake region. And we were having a bluebird Alta day with some fresh powder and he looks at me on the chairlift and says, “Hey, have you ever thought of moving back to Utah?” And I thought, what a day to ask me, fresh snow on a clear day at Alta. Of course, the only answer is yes. And just as life evolves and the way things happen, it was maybe a day or two later where I got a text message from him and he was wanting to connect me with one of my current partners, Jim Sorenson and my other partner Jeremy Keele, who just so happened to have been launching a real estate fund and neither one of them had really come from a fund management background. And so very fortuitous that the three of us got connected and started Catalyst. Now we’re about hitting our fourth year mark at the end of this month. Catalyst, our tagline is we’re a transformative real estate investment firm that focuses on superior returns and measurable impact. And we believe that those don’t need to be mutually exclusive. It’s been an interesting journey to get us here. And how do you thread, and we’ll get into it a little bit later, but how do you thread what measurable impact is and what does that look like in the context of a real estate project? One thing that I probably never accounted for in my journey here when we had formed an organization around capital doing good is just how polarizing even the idea of doing good with capital is and how it has become over the last several years. I think from a political perspective that we’ve gotten to the place in our own democracy where even the doing good and impact investing can be a polarizing topic. Kevin Choquette:             What does that look like? How do you mean? I just want to jolt down on that, do you get negative reactions from people who hear that you’re seeking returns and having impact? Kristian Peterson.:           Yeah, we do. And I think there’s a lot of misconceptions in the marketplace around what it means to be an impact investor and it is distinctly different from what we probably hear more of in the news media around ESG investing or environmental social and governance investing. And they are related in some ways and distinctly different in others. And I think it’s really the ESG element of it that has become so political and polarized over the last several years really both from the right and the left. And there is a, I think a misconception in the marketplace that when you’re investing for good, that trade-off has to be made for your other fiduciary responsibilities of generating market rate returns. And Catalyst really set out on a mission to prove to the marketplace that it doesn’t have to be an either or. And in fact, often it’s an and, and there is a virtuous cycle of when you are investing intentionally, there can be additionality that’s added to your return. And it’s not always in the negative in the way that I think the news media tries to paint it. Kevin Choquette:             So, on the, let’s just say diehard capitalist side, maybe there’s an orientation that your value proposition is being diluted by including this social impact component. And then on the naysayer side, let’s just call them the anti-capitalist, they just are completely skeptical about it and think you’re, if you will, greenwashing the whole thing. Kristian Peterson.:           Yeah. You nailed it. Those are the two opposing views that we often find ourselves in the cross-hair of. And I’d like to say obviously from a biased fund manager perspective, but over the last four years I think we have proven out that it isn’t an either or and you can be a capitalist while doing good. And certainly my partner Jim Sorenson over his career has made that his mantra and has really spoken not only nationally but all over the world on this concept of impact investing and how there is and how there is not a trade-off with return. Kevin Choquette:             What about the opportunity set? I would imagine it has to change, the things that you guys would look at as an unfettered, if you will, opportunity fund would include, let’s just say the entire universe of real estate. Well, you probably would fence it in and get into certain product types and geographies, but you’re putting another layer over it. So, how does that change the opportunity set for you guys? Kristian Peterson.:           Yeah, and it’s a really good question that I think we have to grapple with as we look at new funds and new fund strategies that we put out there. And it really centers around the idea of what is doing good. And I think you could make an argument and you hear arguments made, and I’m not going to attack anybody’s viewpoint on what is doing good, but on the one side of the scale, you could take the most liberal view and say building a hotel is an impactful project because you’re creating jobs all across the economic sector, whether it’s service jobs or professional jobs, and therefore it’s an economic development for that community. And that certainly is a viewpoint that somebody can take. We tend to be more programmatic about how we define what good is. And we do this through a proprietary impact scorecard that we’ve developed that really categorically puts to a quantitative scale where we see an impact being made within a traditional commercial real estate project. And those categories that we have really fall into five key areas, we look at things like housing affordability and we’ll take a project and as we do a financial underwriting, we’ll do an impact underwriting. And one of the metrics we might look at there is how many units of this particular project are delivering to the missing middle or the workforce housing, which is somebody who’s earning somewhere between 60 and a hundred percent of the area median income. We’ll look at in a second category revitalization. What is this project doing for a distressed neighborhood? Is it bringing in new economic development? And is that economic development being done in an inclusive way including the community that it’s being built in? We look at access to services and these are things that I think most of us listening to the podcast probably take advantage of in our own daily lives, but in a lot of our communities across the country, things such as access to healthy food options through grocery stores or medical services by having a urgent care clinic in the community. These are things we’ll refer to as food deserts or medical deserts. And there are large swaths of our population where have been underserved in these very basic necessities that I think many of us take for granted. And then we’ll look at things like environmental sustainability. Every project we do, we try to hold to the highest degree of environmental sustainability that we can, whether it’s through water conservation or energy conservation. And then the fifth category that sort of overlays on everything is diversity and inclusion. And I think as many of us know, and I think is well understood by those both inside and outside the industry. The commercial real estate sector is not very diverse whether you’re looking at people of color or women owned owned firms. And so we try to address that and everything that we do, and I think we take a lot of pride in the projects that we’ve done to date. Over 60% of our partners come from a diverse background. And when we take that whole scope of those five key areas, we translate that into what we call our impact scorecard and we score a project in each one of those and there’s baseline impact profiles that we need to achieve in order for us to move forward for that second bottom line piece of it. So, it has to make sense from a market rate perspective on a return profile and then it has to make sense from an underwriting on an impact profile as well. Kevin Choquette:             And you guys, you’ve had considerable success. I think you’ve shared with me in the past the size of fund one, and I think you’re rounding out fund two, this message that you just shared is a little bit nuanced and I can imagine speaking to LP investors who might be handing over discretion to you guys that, well, let me ask it this way, how is that message received? Kristian Peterson.:           I think that message has been received very well. We champion ourselves as, or we think of ourselves as champions of this message of being more intentional about the investments that we’re making and for our particular firm doing that within the context of real estate. And we really have two investor classes if you want to think about them that way. One is a group of investors that probably weights the impact nature of the projects that we’re doing. And so they’re investing with us because we are developing in communities of color because we are bringing services into underserved areas. And then we’ve got a group of investors that may be a little bit more agnostic towards the impact investing but are investing because they like the markets that we’re in and they like the return profile that the project is generating and their preference for the impact may be secondary to what it is on the return. And this is really, I think an outcome of the balance that we’ve always been trying to strike at Catalyst that we are a market rate non-concessionary fund that is trying to deliver an impact. And I think it might help to paint just to put a little bit more context and definition around it to paint a picture of what one of these projects looks like that we think is a good showpiece for that. Kevin Choquette:             Yeah, that’d be great. Kristian Peterson.:           So, one of our first investments in the fund one, and we closed out fund out at around 250 million and really did the bulk of that raise in the middle of the pandemic while sitting in our attics, which was an interesting place to launch a new fund working from home. But one of the first investments that we made out of that fund was in a project in Tacoma, Washington with a female led development firm. And she had really spent the last several years and had track record of delivering workforce housing in that 80% of AMI range without having to take any LIHTC or other federal government subsidy. And through her efforts, she was able to obtain a TIF from the state of Washington that helped abate some of the real estate taxes over a period of time in exchange for delivering it for the state of Washington. The requirement is 20% of those units at 80% of AMI. And put this project in a distressed community in the hilltop neighborhood of Tacoma. And at delivery we were actually able to lease those units at about 70% of AMI and had about 160 units. Because of the acute need for housing meeting that level of income demographic, the first month alone, we received over and executed over 80 leases and had 50 move-ins and were able to basically fully lease that building within about a two and a half month period. So, it really proved out to us, if you go back to those five pillars of impact that we were addressing a housing need in the greater Seattle area. And then on the ground floor space, and this is where I think what we bring is a new way of thinking to a very traditional model of commercial real estate instead of building a business center that would likely never get used or lightly get used at best, is we held back about 3000 feet of ground floor space for community services. And we went and approached the city of Tacoma who had a co-op grocer that was looking for space in the neighborhood. This is in one of those food deserts that I identified earlier where people living in this neighborhood historically had no access to healthy food. So, we leased about half of the space to them. And then the other half of the space, we were approached by a credit union based out of the Seattle area with a strong credit rating behind them that came to us and said, there’s things such as financial deserts, just like we have food deserts and medical deserts where there’s a significant portion of our population that doesn’t have bank accounts, that has never had a debit card, that has low financial literacy. And so they signed a long-term credit lease at two times what our underwritten rent was in the project to bring in banking services to a community that had been underbanked. And so we look at that against those five pillars, we were able to address most of those through housing affordability, bringing access to services, doing it through a diverse sponsor and doing it in a historically under invested in distressed neighborhood. And we’ve had tremendous success in doing that. And that’s pretty emblematic of the projects that we look and that we have done in our portfolio. Kevin Choquette:             And so is that, I’m listening to what you’re saying and I don’t remember what the old phrase was for the banks and banking where they would, is it redline a neighborhood? Kristian Peterson.:           Redlining. Yeah, yeah, redlining. Kevin Choquette:             So, we would say, I’m just going to say 92101 because downtown San Diego. Yeah, look, we’re not making any residential mortgage loans in 92101, which in your sort of comments of food deserts and financial deserts, the reason that was outlawed is because it was a reinforcing behavior. As soon as the capital was pulled out of that market, it imploded. I’m wondering if what you’re explaining is this radical idea or at the same time also incredibly obvious, there hasn’t been anything perhaps brought into markets like this. You guys come with a new source of capital and surprise, surprise, the market responds. It just seems like it’s not obvious because there are parts of towns and even towns in their totality that capital steers away from. I just wonder what your comments might be on that. Because it strikes me as both very progressive and insightful and you’re a bit of a renegade to do it. And then at the same time when you explain the result, it seems perhaps a little bit obvious that you would get that kind of a result of 80 units a month or on 150 unit project. I mean, okay, then nothing’s been delivered and how long, of course there’s pent-up demand. Kristian Peterson.:           Yeah, I do think what you see across our urban fabric nationally is a byproduct of redlining. And in addition to that, we find this particularly in areas in the southeast of where infrastructure was used as its own form of redlining where freeways were intentionally put through on a north-south access through Nashville and in an effort to basically create physical barrier from historically African-American neighborhoods from the white neighborhoods on the other side, downtown adjacency. And we’ve encountered this a lot, whether we’re doing this in Nashville, whether we’re doing it in Winston-Salem to some degree this happened in even places in the north like Minneapolis. And I think there is a little bit of shift in mindset when you go into neighborhoods like this. And I’d be probably remiss to say that it wasn’t easy going in the first time into a neighborhood like this, but I’ll share another example, which is in Minneapolis and neighborhood there called the Seward neighborhood, which is historically has been an immigrant neighborhood. It’s currently dominated by a Somali population. And we had an opportunity in our fund one to look at a project that had been in the planning and development phase for several years and they had put together some tax increment financing. They had gotten some grants from the state and the county and had put together a capital stack and were short on the majority of the equity and they had a hard time sourcing the equity. And they came to us and said, “Hey, would you look at this project?” And so we went out there, this was a neighborhood that had not seen a market rate development in over 40 years. And it’s hard to contextualize that in almost four decades in almost an entire generation, you had not had a new project built that wasn’t done under section eight housing. And we had to get comfortable that in that neighborhood there were community members who would stay in the neighborhood or who might move into the neighborhood if there were quality housing there. And this particular neighborhood was one stop away on the light rail from downtown Minneapolis. We liked that it was adjacent to the Hiawatha trail. It had a lot of good fundamental real estate characteristics, but for sitting in a neighborhood that had been underdeveloped and underinvested in. And we did our diligence and we take everything through a rigorous institutional due diligence process, which comes from my team’s collective experience at places like Fortress or Goldman or CIM. And we came to the conclusion that we could get comfortable with the potential renter base there. So, again, we built about 140 units in this neighborhood and we leased that project up in about four months at really no compromise and actually at a higher rent than what we had originally underwritten and did this in the middle of November in Minneapolis, which is not a ideal time to be delivering a new project. And what was really, I think helped prove out our thesis is over 50% of our resident population are Somali, and these are Somali families who had no quality housing in the neighborhood and as they moved up the income scale and could afford better housing, what would traditionally happen is they would leave the neighborhood and basically leave the neighborhood and in a lower socioeconomic way. And we were able to retain them in the neighborhood, retain those families who wanted to stay and live in the community that they were in. And I think that really helped us understand that you really have to do your due diligence and there is a renter base, and I think a lot of traditional private capital groups that may not be the project for them because they may not get comfortable with or maybe wanting to do the legwork to really understand where those renters are going to come from. Kevin Choquette:             And what does that legwork look like? I mean how do you start with, hey, nobody’s done anything for 40 years in here and maybe we should do our homework and see if there’s a good investment here? I mean, it’d be pretty easy. Well, look, I’ll tell you my experience of capital is with very few exceptions, well, I don’t want to overstate this. There is oftentimes a reluctance to do the hard work of thinking about something that’s not what has been done before. So, how do you approach something like that and go, right, so how are we going to figure out if there’s an opportunity here? Kristian Peterson.:           Yeah, and I think this comes back to our DNA of being community investors as part of our tagline is there has to be, you’ve got to have a good strong local sponsor. And from Catalyst perspective, we’re LP capital providing equity to local developers and ground up development of primarily workforce housing and in some cases addressing some of those service holes that we talked about. So, it really starts with us by having an underwriteable sponsor. And these are groups that traditionally have track record, they’re well regarded in their community. We did another project in North Minneapolis, which I think had a very similar dynamic to South Minneapolis where we’re one of the first projects in that neighborhood in several decades. And our sponsor in that neighborhood is a pillar of the community in that neighborhood. And he understands what the needs are of that community. He understands where the demand’s going to come from. We look for additional capital that’s been going into the neighborhood, whether that’s through a nearby hospital system, maybe that hospital system’s undergoing an expansion. There has to be a demand driver just like any other fundamental real estate underwriting that you would do. So, it’s having a good sponsor, it’s understanding the demand dynamics in the neighborhood. And then I think the third and maybe equally or more critical piece is just engagement in that community. And so when you have a good sponsor, they’re fully engaged in the community that they’re in. And we have a project that we just wrote a term sheet on in the Winston-Salem market. I like this example, is a best in class developer who’s really engaged with the community. And so in this particular project, in order to help understand the needs and the demand, and this is in one of those traditionally redline districts where the freeway bifurcated the traditional African American neighborhood. And here we have a diverse sponsor who’s built a coalition with the local health system in the Winston-Salem area who’s gone out to about a half a dozen other local groups to really understand where their needs were for housing. And these are groups like the school district or the community health hospital that’s adjacent or the fire and police. And that’s really core to what we’re delivering in that workforce housing. And he’s built out a model that basically shows this pent-up demand by understanding the needs of this various group. And that’s one way where we can look at one of these neighborhoods and before we go into it, really understand is the demand going to be there? And I think as we’ve proven out in several of our projects now that this model does work and it does require maybe a new way of thinking as a capital provider, but we see these communities that have been underinvested and you can make money in those communities. You just have to be smart about how you do it. Kevin Choquette:             Yeah, I love it. To be honest, I didn’t realize there was so much texture to what you guys do. I mean, we’ve had some conversations around it, but you’re definitely explaining with more rigor how nuanced the opportunity set it is and how you go about finding it, underwriting and securing it. If we go to just today in the business, what’s happening with you guys and what are you seeing? What challenges are you facing? Kristian Peterson.:           Yeah, I’ve jokingly deemed this era of commercial real estate that we’re in as we’re living through the seven plagues right now. And I start that with the pandemic displacement that we had and the pandemic displacement of residential tenants, of commercial tenants and is really my plague number one, which fed into, and I think everybody’s going to be licking their own wounds on many of these points, but fed into the supply chain issues. And we started this fund six months before the pandemic had hit and had to- Kevin Choquette:             Perfect timing. Kristian Peterson.:           As I mentioned earlier. Yeah, great. Yeah, don’t follow my career in timing, because I came out of graduate school in 2008 or 2009, launched my first fund and six months before the pandemic came out of my undergraduate basically in the 01 dot com crisis. So, anytime I make a major life move within my career should be an early indicator for the rest of the industry to watch out. And this one was unique and whether it was the pandemic displacement or supply chain issues that were a result of that, leading into the third plague of high inflation that we’ve all been dealing with now for years and now entering this phase of higher interest rates, the fourth wave coming at us, the fifth one being higher opex expenses, particularly across our multifamily assets and acutely within insurance, which is really part of this feedback loop that we’ve been living in because we had supply chain issues and higher costs, now we’ve got higher insurance because the insurance companies have to underwrite higher replacement costs and maybe they’re seeing additional risk because of some of the things that we’ve experienced in the last several years. And I think we’re entering a phase now in a sixth plague and this one will has a lag effect to it. And that’s that I anticipate seeing significantly higher real estate taxes, whether that’s driven by some of the significant increase that we’ve had in rents in some of our markets and multifamily projects or one that I think that doesn’t get talked about within our urban core that we’re watching very closely. And as you leave, as the office sector largely pulls back from downtown, you’re going to lose a significant of your tax base in a lot of these urban cores. And that tax hole has got to be plugged by something. And I think what that something is, is probably the multi-family that’s come in, in the last several years and this kind of regentrification of downtowns. And so I don’t know that we’re fully out of this feedback loop and I don’t know what the seventh plague is. I’m sure there’s something out there and it’s required us to be innovative. Launching a business in 2019 and having to live through this. These are issues that are generational issues. And I think anybody who’s been in the business the last four or five years have been having to deal with generational issues and succession and it’s required us to be constantly innovating. And I think our second fund is really a byproduct and an example of how we’re trying to innovate and to remain not only true to our mission of delivering market rate, double bottom line returns through impact investing, but also having to maintain that market return profile. And so maybe if I have just a minute, if I could explain what we’re doing in our second fund. Kevin Choquette:             Yeah, absolutely. Kristian Peterson.:           Because it addresses your question about how we’ve had to innovate. So, going back to the beginning of the podcast, one of the five pillars of addressing social impact that I think we have almost permeating throughout our entire book is really this idea of workforce housing. And anybody in the housing sector, I think it’s well understood that the federal government has had a decades long program now within LIHTC or Low Income Housing Tax Credit that has been inefficient in terms of its tax efficiency in delivering housing to the population that’s making between 60 to call it 80% of the area median income. And it’s never enough. And so I don’t want to pretend that it’s a sufficient amount of housing, but there is a delivery mechanism there for that income demographic. And I think we’re all well aware that market rate housing to the income population that’s making a hundred to 120% of our immediate income has its own efficient delivery method. That’s I think what general multifamily housing development will do, but there’s this cumulative housing gap that according to the last study done by the National Association of Realtors in 2021 was that 5.5 million housing units short across the country. And that because of these pressures that we’ve had from higher costs higher now borrowing costs and has slowed down the delivery and has priced many people out of housing, that housing gap now has grown to about 6.8 million. And when you look at who is that group of 6.8 million that doesn’t have housing, the bulk of that group is this income demographic between 80 and 120% of AMI. And that particular segment of the population is really the backbone of our community. That’s the police officers and the teachers and the nurses. And while there are very good housing preservation funds out there that basically buy class B product and maintain that within the overall housing supply, there really has not been many innovative approaches to creating new housing for that income demographic and really addressing the supply shortage. And what we’ve done is we’ve looked at that problem and through most of the call it 20 deals development projects that we have going right now are addressing some form of that housing. But as the pressures of borrowing and as the pressures of higher cost and construction materials have really put pressures on the model of delivering in that 80 to 120% even with having some public subsidy, whether it was a TIF or abatement or other programs. And so when we’ve had to address this problem, we looked at it, we said there’s, there’s still work to be done on the equity side. And so when we went back to our investor base, we found that we really had two different classes of investors. We had, as I mentioned earlier, a class of investors that was driven more by the impact profile of the project but still needed to make positive return. And then we have the class of investor, which is your traditional real estate investor that wanted to see a market rate return profile. And so when we took the problem of delivery of workforce housing and the pressures and we looked at our own portfolio and our own investor profile, we came back to the drawing board and said if we created a fund structure that basically blended down the overall cost of capital that’s needed for these projects in order to unlock more of that project in an affordable price point, that we could do that through a fund structure. And so we’ve, in our second fund offering, we have two classes of investors, a class A investor, which is a traditional market rate investor and a class B investor, which is a lower yielding, generally more institutional investor that will take a reduced spread relative to the market in order to deliver those workforce housing units. And when we run this through our fund structure, we are now able without any compromise of return to our class A investor and without any compromise of return to our developer partners, but taking that return difference between the A and the B class and putting that back into making these projects more affordable, that we have a structure now where we can take most traditional market rate projects and create 50% plus of those units being at an 80% AMI. And that’s really the focus of our second fund is focusing on that supply delivery of workforce housing and doing it through capital stack innovation at the fund manager level. Kevin Choquette:             At the asset level or the pro forma associated with the asset, does that translate into accepting a lower cap on cost or a lower spread between the pro forma terminal cap rate and your cap on cost? Kristian Peterson.:           Terminal cap rate remains unchanged. Most of these rents will probably get marked to market, but by bifurcating out the return profile from the project level down to the class A and class B, there’s no impact on the class A return. The overall IRR of the project is blended down lower, but when you split that blend down between our A and our B, the class A investor is still getting what they would expect in a target multi-family return from any other, the Class B investor is basically absorbing the difference of that return in order to enhance the affordability of the project. And we have now field tested this on projects and have built a core investor base around this, and it was really listening to what the needs of our investors were and taking the needs of those investors and applying that to projects to solve a problem while still maintaining an underwriteable able deal. And it was a journey to get there, but we think that this really could unlock a lot of opportunity in building workforce housing and because we are headquartered here in the Intermountain West and much of this housing affordability has probably disproportionately hit many of these communities in the Intermountain West and west coast. A lot of the focus of our fund capital will be in delivering these 80% of AMI projects within the Intermountain West and west coast region. Kevin Choquette:             I love it. It’s super innovative. I haven’t heard anybody trying to do it, but my world is sort of asset level. You’re running the fund, so let’s go with the geographic thing. You had mentioned previously where there’s a freeway separating the good part of town from the bad part of town. We got two 100 unit projects that are identical and for the sake of making this simple, the rents are the same, useful fiction. One of them is targeting, say 80% of the units, or sorry, some large percentage to be 80% AMI. The other one is market rate. Actually it’s even better to say the same. They’re both doing the same rents and they’re both say building to a 575 cap on cost. If Catalyst comes over to the mission-driven side of the freeway and brings this structure, is it probable, possible, even relevant that instead of both of them having to build to that 575 cap on cost that the mission-driven one might be able to underwrite to a 55 because the cost of the equity capital is marginally less and therefore either you could drop rents or you could absorb more construction costs in pursuit of putting products into that marketplace in order to get deals done? Am I thinking about it the the right way at the asset level? Kristian Peterson.:           You are you thinking of it contextually in the right way and there are, as you know on the finance side of the business that you’re on, is there are favorable debt financing available when you are addressing that level of affordability and whether it’s through regional banks, we have one here in Salt Lake that at that level of affordability will give us more favorable DSCR coverage in exchange for delivering that affordability. They’ll also give us slightly higher proceeds, maybe relative to a quote on a market rate deal. It’s made us more attractive to Fannie and Freddie. It prioritizes us in 221(d)(4) HUD applications. And so we think that not only is there benefit and potentially some lower cost of capital on the equity side, but we’re also seeing some more favorable terms on the debt capital side, which allows us to be equally competitive. We also think it’s a much stickier renter pool. We think there’s knock on effects and lease up velocity. We’ve seen this across our portfolio, the example that I gave in the greater Seattle area of the velocity we had. I think we had a good product in a good location, but I also think a lot of that velocity was driven by just this absolute dearth of available product within that AMI price point. So, when you factor in both the economic direct benefits and maybe some of these indirect knock-on effects, we think it’s a very defensible thesis to have. Kevin Choquette:             Yeah, it’s fascinating. I want to be mindful of your time. We discussed that at the outset here and I want to transition towards a little bit of the personal stuff. I love everything you’ve been sharing. What has been your experience of starting Catalyst? You’ve talked to it, but what are some of the takeaways, some of the things you might share for the listener just in terms of if you had known maybe I wouldn’t have done this or things to avoid or any of that. Kristian Peterson.:           I think in the business that we’re in is being fiduciaries and we take that very seriously. And in terms of the way we approach and manage the business. I like to think of myself as a short term optimist and a long-term pessimist. So, I need to be conservative in my views in the long-term and maybe how things are going to turn out, but in the short term, I need to be optimistic. And we’ve had plenty of challenges thrown our way as I mentioned launching in the pandemic and it was daunting to have left a fairly good position at a large institution like I was at and to six months later be in the middle of our capital raise. I don’t know that we had raised maybe 25 million when the pandemic hit and there was a moment where a decision had to be made and that was we were either going to press on and know that we were going to be successful and do whatever it took to get there, or we could have said timing wasn’t right and we’re going to fold and go our different way. And I think our thesis, I think our mission resonated. I think it resonated even louder during the pandemic when a lot of these issues about disproportionate health effects of COVID was having in these underserved communities that didn’t have access to services core to the mission that we have or the housing shortage that I think we were all experiencing coming out of the pandemic. And by really sticking true to our thesis and being a daily optimist got us through some very challenging times and a very challenging environment to be an entrepreneur. And we’re still faced with that today. Our second fund, we’re having good success, we’re going to have our first close in the next 60 days because I think our housing mission resonates and I think our innovation and our capital stack that we’re doing at the fund level resonates and it addresses a problem that didn’t go away just because we’re faced with these other macroeconomic challenges. And so having started this business in 2019 and having all these challenges thrown at us, I think has made us a better organization because we’ve really had to innovate. We’ve really had to take these on with a positive attitude. Kevin Choquette:             Well, you’ve articulated a lot of objective data-driven processes to assess what you were explaining as impact. I’m curious if you reflect back on it sounds like there was a moment or maybe several where it was like, hey, is this the right time, right place, or should we just hang this up? What was the blend of data-driven analytics that supported the decision to stick it out versus emotion and grit? Kristian Peterson.:           Yeah, I mean I think just as an entrepreneur problem identification and then finding solutions for that problem. And I think the one data point that keeps coming back to us is, and I probably will come back to the housing pillar, because that’s really where the focus of our current fund is, is this housing shortage isn’t going to go away. And I think it’s one of the largest generational challenges that we’re going to be faced with is our socioeconomic split in such a way that our rich are getting richer and the poor are getting poorer and the middle class is continuing to get squeezed. And so long as we have a product that’s addressing that problem, whether it was through our first fund, which took advantage of the opportunity zone legislation, whether it’s the second fund that is innovating in a way within our own fund structure, when you’ve got a solution to a problem, which we believe that we have, I think that’s really the drive that keeps us in the business. And I think it’s resonating with the capital markets and I think that’s a good indicator that what we have is what the market needs at this time. Kevin Choquette:             Yeah, that makes sense. Look, continuing on the personal side, my question to you, I mean we’ve rescheduled this probably three or four times, because you guys are going 60 miles an hour plus sounds like long days and very, very driven organization. I also know you’ve got three kids and a wife, the little league extracurricular activities that percolate with that. Just on the personal level, how do you wrap your arms around those competing mandates? You’ve clearly got the professional pretty well dialed and you’ve got a high level domain expertise that may or may not cross over to the home life, but it seems like from my perspective, you do a pretty good job, but I wonder how you think about your personal life and this which clearly could just consume you. Kristian Peterson.:           Yeah, yeah, it’s a good question. I think one that many of us probably struggle with, and I try to distill it down to its simplest solution where I think it’s carried me through whether it was demanding positions before Catalyst or starting a business in the environment that we’re in. And I think it boils down to just being present, being at home for those little league games for your spouse when they need it, being present at the business, when the business needs it. And it’s always out there. It’s a 24-hour job when you’re a small business owner. But the thing that I think has remained consistent in a true north for me is always be present and that that’s easier said than done at times, but it does sometimes mean making some trade-offs. And those trade-offs generally I think come in personal time. And so I may leave work early so I can be present at my son’s baseball game and that trade off may mean that I’m having to work later that night. And that’s how I’ve managed that. And I think it’s equal on the work front as well is you need to be there. And as you get older and mature in your career, I think you get better at doing the triage of where you’re most valuable and when. And that’s how I try to balance all those different areas of my life. Kevin Choquette:             What about, if you will, the end of the day notion, how do you kick up your feet, find relief and recharge, as Kobe says, sharpen the saw? Kristian Peterson.:           Yeah, and for me, and I think this is personality driven, but for some people I think kicking up your feet is the recharge for me, it’s generally being outside and that is going to entail a level of activity. So, my recharge is tearing down a mountain on a pair of skis or out trail running or on a bike. And I think maybe it’s a fortunate personal characteristic that my recharge and exercise can align so they’re not competing with each other. But recharge for me, I’m not one that sits well on a beach with a drink in hand. Kevin Choquette:             Totally. I just have a question, because you guys are Salt Lake and Salt Lake is clearly a major MSA, but it also has all of those lifestyle amenities that you’re alluding to. Just curious, is the home base of Salt Lake a net negative, net positive or a non-factor when you’re out in the capital markets talking to people? Kristian Peterson.:           By and large, it’s been a net positive factor and there’s a couple of reasons for that, but Salt Lake has been by virtually every economic indicator, whether it be unemployment or GDP growth or diversity of the economy. There’s many accolades I think for the metro area that has made it an attractive place and we were out doing our initial fundraising. We do have a good footprint and a significant footprint here in Salt Lake within our fund that has been by and large a positive factor. There are not a lot of institutional capital managers in the Intermountain West region and so groups that are looking for exposure in a market like Salt Lake or Boise or any of these other high growth Intermountain West communities, there are vehicles, but there’s not a lot of vehicles for them to get access to that. And I think it’s been a significant part of our success. Kevin Choquette:             That’s cool. We’re coming up on time, so I think I’ll just give you the mic. Anything you want to share with the audience, be they the entrepreneur, the developer, the guy who’s trying to get capital formation underway and maybe is a first time fund manager or maybe somebody who’s just right in the middle of a hard asset and or hard fund that’s turning sideways because of interest rates. I don’t know any sort of last thoughts. And certainly if you want to leave any digital, any sort of contact points for Catalyst, obviously Google will probably cover that, but I’ll give you the floor and then we can wrap it up. Kristian Peterson.:           Yeah, I would say to anyone out there, we’ve talked about the macroeconomic challenges that we’ve had, we’ve had challenges at the asset level. It’s just part of being in the commercial real estate business. It’s been part of my career for the last 25 years. And whether they’re asset level, macroeconomic level, we’re always trying to problem solve. And I think what’s helped me over the course of my career, and particularly as we’ve been starting Catalyst is it’s easy to panic and now is not the time to panic and generally is never the time to panic. There are solutions to most problems and I think if you go into it with the understanding that you’re going to have challenges and those challenges are going to need to be solved, whether it was like we talked about a few minutes ago, the pandemic, it would’ve been easy and probably a rational decision to have stopped our fundraising efforts and said, let’s go do something else. Or as costs were going out of control on many of our projects. I think we could have panicked or we’re having an issue with one of our office buildings now where we’ve lost major tenants. But I think maintaining a level head is going to serve anybody well, particularly in the times that we are in now. And that’s easier said than done, but having done this now for a number of years, level heads generally prevail. The sun does shine tomorrow, although it doesn’t always feel like it and just remain true to your principles and I think you’ll find yourself that most of these problems will work out in the long run. Kevin Choquette:             Yeah, good advice. Kristian, thank you very much for taking the time to speak with me. I appreciate it. Listeners, thanks for listening through the entire pod. My crew always tells me to remind you, if you can put a review up on whatever your platform is, that’s always welcome and thanks again, Kristian. Much appreciated. Kristian Peterson.:           Thank you.

Show Notes: Welcome to the latest episode of Offshoot with Jeff Brown. In today’s episode, we’re chatting with Jeff about his entrepreneurial journey and the lessons he’s learned along the way. Jeff’s story began in 2011 when he joined forces with his friend John Southard to pursue a single deal. Little did they know that their initial success would lead to multiple deals and the birth of their company, T2 Capital Management. Since then, Jeff and his team of 14 talented individuals have invested over $1.5B in various markets, property types, and investment strategies. In the conversation, Jeff shares his insights on various topics related to entrepreneurship. He emphasizes the importance of grounding your business, expectations, and actions in reality, always hiring high-capacity and high-caliber people, and collaborating with the industry to navigate through uncertain times. Jeff also talks about the significance of capturing scale when entering a new market, securing concurrence from debt and equity partners, aligning strong convictions with a defensible strategy, and being aligned with a “why” that goes above and beyond putting dollars on the table. Furthermore, Jeff emphasizes that there are no shortcuts to success, and that while systems and processes can create efficiency, there’s simply no substitute for the grind. He also highlights that their business strategy is for “right now” and is subject to change. Listen to Jeff’s entrepreneurial journey as either an aspiring entrepreneur or a seasoned veteran and you’re sure to find some nuggets of wisdom. TRANSCRIPT Announcer:                Welcome to Offshoot, the Fident Capital Podcast with host Kevin Choquette. Offshoot is a curiosity-driven conversation that features a wide range of real estate business professionals. In each episode, we unpack the knowledge, vantage point, and domain expertise of our guests. Then we move beyond the facts and figures and dive into the personal habits and mindset which allow them to be high performers in their respective field. This podcast’s objective is simple, supporting entrepreneurs fostering relationships, and uncovering meaningful conversations that positively impact business. Kevin Choquette:             Welcome to episode 15 of Offshoot with Jeff Brown. Jeff partnered with his friend John Southard in 2011 to do just a single deal, which led to doing two or three more until they depleted their personal investment capital. From there, the idea of T2 capital management was born. Since 2011, they’ve gone into multiple markets, property types, and investment strategies, and the mid-size team of 14 people Jeff’s built have deployed over 1.5 billion into both debt and equity investments.  Jeff is quite thoughtful, and has a lot to say here. Listen in as he covers grounding your business, your expectations and your actions in reality, always hiring for high capacity and high caliber people, using industry collaboration as a navigational tool in uncertain moments or uncertain times, resolving to capture scale anytime you choose to enter a new market. The value of securing concurrence from both debt and equity partners, the power of aligning strong convictions with a defensible strategy, being more than the work you do or your ability to bring home dollars, and being aligned with your why. There are no shortcuts. Systems and process create efficiency, but there’s simply no substitute for the grind. Knowing that your business strategy is for right now and subject to change. Doing the work to fix impaired relationships. I hope you enjoy the pod. Welcome, everyone, to another episode of Offshoot. Today I’ve got Jeff Brown, co-founder, CEO, and co-CIO of T2 Capital Management joining me. Jeff and his partner John Southard started T2 in 2011. Since then, as a middle market fund manager and operator, T2 has deployed over 1.5 billion across the entire capital stack, and among virtually all property types. The firm’s niche is swiftly executing value add and opportunistic investments where they can deploy anywhere from $2 to $50 million. With their discretionary funds, T2 actively pursues lending and direct ownership opportunities, which are often complex and time sensitive. Jeff’s team has significant vertical integration with engineering, construction, leasing and property management skills in-house. The company’s most recent investments have primarily consisted of multifamily and student housing properties within the southeastern US. As CEO, Jeff works on corporate growth initiatives, investment strategies, and providing operational oversight. As CIO, he oversees the origination, underwriting, and day-to-day management of T2’s investments. Jeff began his career in real estate in the mid 1990s working for a national consumer finance company that was acquired by Wells Fargo. That was followed by tenure at a Michigan-based family office, which also functioned as a hedge fund of funds. Jeff’s a native Texan but received his MBA from the University of Chicago Booth School of Business, and his bachelor’s degree from Wheaton College, both in the great state of Illinois where Jeff currently lives and where T2 bases its operations. Fun fact, while at Wheaton College, Jeff was captain and starting quarterback for Wheaton’s first appearance in the NCAA playoffs. In that season, he passed for 30 touchdowns and 3,247 yards, which if compared to last season’s NFL production places him just under Russell Wilson in terms of yardage, and tied with Gino Smith for TDs. That’s not bad company. Jeff, welcome to offshoot. Jeff Brown:                         Thank you, Kevin. Really appreciate that. It’s been a long time since I’ve thought about those stats, but thank you for the context. Kevin Choquette:             Yeah. Hey, it’s always good to have a sports celebrity on the show. To get us started, if you could, I know I gave you a little bit of an intro there on T2, but in your words, what’s T2 all about, and what’s happening in the business right now? What are you guys seeing in terms of opportunity and challenge? Jeff Brown:                         Yeah, incredible times. Here we sit mid-April 2023. We’re a month removed from three major bank failures, not just in the United States but globally, with Credit Suisse, Silicon Valley Bank and Signature Bank out in New York. I think three months ago, I don’t know that anybody saw that sort of scale of bank failure coming, but here it is upon us, and we’re all dealing with it. At T2, we’re not much different than a lot of other folks, just kind of trying to make sense of what’s going on in the market and people’s, namely lenders’ and investors’, reactions to these bank failures and the spike in interest rates and elevated construction costs, while also looking at it from an opportunistic standpoint. There are a lot of dislocations happening, some forced sales from existing property owners that we’re trying to pay attention to. Really get in the weeds a little bit, for the longest time we have been very active. We’ve got a very active bridge lending fund. We’ve got a very active opportunistic fund that really specializes in ground up construction and growth markets around the country, particularly in the southeast. We’ve transitioned a bit from originating debt and doing the ground up construction, to buying debt in the secondary market. And then conversely on our equity side, buying properties that are already existing and just have some sort of balance sheet distress at this point in time, a distressed seller, whatever the case may be. Just different times, and trying to be adaptable as we are as a small company. Kevin Choquette:             Look, I know you also wear two hats. You’re both CEO and CIO. Just in terms of, I mean in your words, a bit of a turbulent time, what do those two hats look like? What’s got the CEO mandate, and where are you focused as CIO? Because I know you’re both an asset manager with an existing portfolio, you guys have done $1.5 billion of business since inception, and you’re also charged with navigating turbulent times. How does that show up for you in terms of wearing those two hats? Jeff Brown:                         It’s a really good question. They are distinctly different hats, and I thoroughly enjoy both of them. On the CEO side, because of the turbulence that’s out there and the distress that’s out there, and frankly a lot of the headlines in the press that we all see and read, there is a fair amount of, we say a lot around here, just getting grounded in reality. What’s true? What can we act upon? Where can we invest? As opposed to what are major problems that we need to put all hands on deck for? This is not March of 2020, and it’s not September of ’07, either. We’re, from a CEO perspective, trying to put a bit of a more opportunistic, let’s be on offense sort of mentality and instilling that across the company. From a CIO perspective, it’s similar, I suppose. But again, we’re not trying to be a Pollyanna about it either. There are issues that come with this rise in interest rates when SOFFA rises from five basis points to the four and a half-ish percent that it is today. That is huge, and has material impacts on people’s cash flows and properties. We just witnessed, I think it was yesterday even, maybe earlier this week, a large 3000 plus unit apartment portfolio in Houston get turned back over to the lender, and even the lender couldn’t recover a hundred percent of their capital. That’s the kind of stuff that’s happening today for properties that were likely bought at the height of the market, were capitalized with some floating rate debt. You’ve got this conundrum of rising rates and fall … I’m sorry, and rising cap rates as well. Some distress that’s emerging out there. Nobody’s immune from it, and so trying to make sure we have a firm hand on the steering wheel from an asset management perspective. Not just protect our value and protect our assets, manage the heck out of them from what we can control. But the macroeconomics that we cannot control, we do our best to navigate that and just acknowledge that we don’t want to sell some things right now when it might be time to sell them per our fund life. Thankfully, we’ve got to be patient and wait this out a little bit, and then we’ll see where things shake out in the next few months. It is very different perspectives, but some similarities between a CEO and what a co-CIO role looks like. Kevin Choquette:             Yeah, and look, I’ll let everybody in on a bit of a little secret here. Jeff and I did this once before. I’ll blame the technology. It might be just more blaming myself for not operating the technology properly. This is kind of a 2.0 on the recording. But we spoke last time, Jeff, a fair bit about industry collaboration, and that idea of getting grounded in reality. It sounds like you spend a fair bit of time with an ear to the ground talking to other professionals, other people who are active participants in the marketplace, and that that is a material component of, if you will, navigating uncertain times. Do you have any comments on that? Jeff Brown:                         You’re spot on, Kevin, and I appreciate you bringing that up. One of the things that we talked about in our prior conversation is just the blessing and the complexities that come with being an entrepreneur, even. It’s not just wearing a CIO/CEO sort of hat among other things in this business, but HR and other sorts of components to running a company that can make or break you in the long run. As an entrepreneur, it can be a little lonely sometimes, especially when you’re starting out. I put a high bar on having trusted confidants that maybe have been there and done that. Others that are going through the same thing right now, maybe starting their own company or in the real estate space as an entrepreneur. There is a fair amount of time of not just comparing notes, trying to apply best practices across industries, but getting grounded in reality. What we’ve talked a lot about among these confidants is just doing sanity checks, making sure what we’re seeing, what we’re hearing, what we’re adhering to, maybe some investment thesis that we’re considering, that we’re not out in left field. Or if we are, at least we know it. So that sort of, again, grounded in reality, note comparison with other trusted confidants who are going through similar experiences or have gone through similar experiences in the past is invaluable to me. Kevin Choquette:             And look, you brought it up as far as it can be a little lonely out on the front, or getting going on your own. How is it that you actually found your way into T2? I mean, I think you’ve got a pretty significant team, and we’ll get into the different verticals with the debt portfolio and the equity shop. But how did you get here? How did you get from collegiate ball into being a CEO of pretty substantial real estate company? Jeff Brown:                         You’re kind. I graduated from Wheaton College here in Wheaton, Illinois in the mid 1990s, and went to work for a family office out in Michigan. A fair amount of the family holdings for the office that I worked for was in real estate. We were a small shop at the time, so as a really young recent college graduate, I was an analyst, a grunt if you will, frankly doing a lot of work on the asset management side for this real estate portfolio. The portfolio consisted of a wide variety of properties. It was some standard triple net leased properties, but it was also ski resorts out west. Cut my teeth on a wide variety of property types, looking at each property. Defining success for each property was different, as well. I had this incredible exposure at a really young age to real estate, grew enamored with it, and that really propelled my career. I went from there to work with a small commercial real estate debt shop. Worked there for eight or nine years. We had multiple offices throughout the Midwest. Really got hamstrung in the great financial crisis in ’07, ’08. At that same time I was getting my MBA at the University of Chicago. Again, back to this entrepreneurial thing and wanting to do sanity checks and understand what’s going on, did a kind of that with a couple of my professors at Chicago. They were the ones that really turned me onto the private equity industry. I had this great ambitious idea to start a private equity real estate firm, but of course a material component to starting that is capital. Thankfully I have a really good friend, John Southard, who’s still my business partner today. John had a big liquidity event. He and I started doing real estate deals on a one-off basis. I’ll never forget his quote to me in, I think it was in 2009, it might’ve been 2010. He said, “Hey, listen, I need real estate like I need a hole in my head, but I trust you. I like you. Let’s do one deal together, see how it goes.” Well, one deal turned into two, turned into four, and so on from there.  Eventually the two of us who were providing our own capital for these deals, we ran out of money, or ran up against our budget. John had the idea of, “Hey, this seems really scalable. Why don’t we just build a business off of it?” That really spawned T2 and emboldened me, frankly, to take that step as an entrepreneur. As of January of 2011, T2 was activated after a long process of, again, cutting my teeth on a lot of different real estate projects around the country, various projects, various property types, and then having the encouragement from a very trusted friend to step out and start a company. Kevin Choquette:             Let me first see if it’s the case that, as you dipped your toe in the water, what kind of vision existed for what you were doing, if anything? When you first said, “Hey, let’s go do a deal,” was that step one of something that you expected to build? Or was that kind of just a beta, “Let’s see what we got”? Jeff Brown:                         There was certainly a beta aspect to it. I’ll be the first to tell you I did not … I might have had the thought in the back of my head, but I didn’t have the full conviction that this is going to lead to the formation of a company doing billions of dollars in transaction activity. I’d be a fool to tell you that was anywhere within the realm of possibilities at that time. So very, very grateful for John. When we were doing our deals where the two of us were just capitalizing every deal, that was in that 2000 … Yes, 2010 time period in which capital was extraordinarily scarce. The story will be told as if we were shooting fish in a barrel, we could pick and choose our deals. My coming out of the finance world led us to a lot of buying debt in the secondary market. It led us to originating a few loans where we could really dictate our own terms. We just had some really strong, early success that led to the formation of T2, but it was with the wind at our back because capital was so sparse at that time. Kevin Choquette:             Yeah, perfect. Well, I love that you’re sort of admitting like, “Yeah, I’m not sure there was a lot of vision,” when you started. But as you started to say, “Okay, hey, we could probably build a scalable platform,” how did that vision … I guess two part question. How solid was it, part one? Part two, how does it compare to the reality that you find yourself in 12 years later with a team and a couple different products and strategies that you’re executing? Jeff Brown:                         Sure. I tell you, and you hear this a lot in the big industries, I think Google might have a mantra of don’t be afraid to break things. There is, just from my vantage point, so much trial and error that goes into building a business. For us, when we first got started, again coming out of the finance side of things, the core competence and the expertise was in lending. We rolled out our first fund, we started T2, rolled out our first fund, brought in outside capital for the first time. And because our expertise was in lending, understandably we found ourselves back to buying loans in the secondary market. Maybe originated a few loans here and there at extraordinary terms and economic returns, but quickly found ourselves soliciting feedback from clients, “What do you like? What do you not like?” After a period of time, got enough feedback that said, “Hey, love what you guys are doing, the returns are great.”  At this time, fast forward 2011, ’12, the market’s starting to turn a little bit. Capital’s getting more competitive. It’s a more populated kind of a crowded field. The feedback was, “Love what you guys are doing, but you guys are making loans and generating these recurring coupons and whatnot is great. I’m more interested in swinging for the fences a little bit. I want a big IRR, I want a big multiple on my investment.” Versus others who said, “Boy, I love what you guys are doing, please don’t deviate from this.” And so it led to a new strategy. We really started with a debt strategy, and it morphed into a distinction between starting a debt fund and then having a very distinct opportunistic fund and branching out from there on the equity side. Just really segregating, again, how do you define success for a different strategy or set expectations with investors? Setting expectations on the debt side with recurring, in our case, quarterly income, a little bit of a premium. Sometimes we’re able to buy notes at a discount, so there’s a little bit of a return that goes into these debt pieces that go beyond just the income component. But people like the steady performance of quarterly distributions. Conversely, there’s a lot of people out there that say, “Hey, the quarterly distributions are fine, but I don’t need the income, so let’s go do a big development project. Let’s go do some opportunistic acquisition or big rehab job in which income is just not part of the equation, necessarily. We’re trying to buy it low, sell high, and generate a big return in that process.” Really, again, not to belabor this, but just being distinctly different with what the strategies are, how you define success, being clear and communicating that to investors, all birthed from a lot of trial and error and soliciting feedback from investors. Kevin Choquette:             Yeah, listening to the market and sort of providing what they’re looking for. From inception it sounds like, “Let’s do a deal, five deals, six deals,” and then you start with the debt fund, which I think you guys call it your strategic real estate income fund. Jeff Brown:                         That’s right. Kevin Choquette:             As I understand it from reviewing your website, did 24 loans last year with over $225 million in origination. It’s become a fairly significant platform. Before we start talking about the more opportunistic strategy, what are you guys looking for there? What markets are you lending in? What types of loans are you doing? Is it construction, is it bridge? Is it land loans? Do you have full discretion? Are you leveraged internally? What’s that business look like for you guys? Jeff Brown:                         Yeah, you’re right with the name, the strategic real estate income fund. That is our longest … It’s an open-ended fund. It was started in 2014. We’re about to come upon our nine year anniversary of the fund. I’m sitting here in Chicago. We just signed a lease a couple weeks ago to open an office in Nashville, Tennessee. That’s largely because our focus for not just our debt fund but our opportunistic funds and all that we do really is focused on growth markets, which lead us in our case down southeast. We’re very active in markets like Nashville, Knoxville, Orlando, Atlanta, Huntsville, Alabama, trying to get it to a hold down in Texas, in the Carolinas, et cetera. That geographic concentration leads us to opening an office down in Nashville. But it is a very deliberate geographic concentration, just because that is where the population growth, the job growth, the relaxed tax burdens, et cetera, lead to greater demand, lead to the need for greater housing. That’s a great space, great geography for us to be. The debt fund is very concentrated. We try to concentrate our efforts very distinctly in the southeast region of the US. Kevin Choquette:             And then as far as loan product, are you guys doing- Jeff Brown:                         I’m sorry. Kevin Choquette:             … just primarily bridge loans? Are you doing construction loans, do you guys do land loans, kind of loan sizes? Are you doing retail, office multi? What’s the strike zone? If I’m talking to you as a capital advisor, which is my day job, what kind of product is it fit for the fund? Jeff Brown:                         The debt fund is also our biggest box, if you will, as far as what we look for. Certainly there’s geographic targets that I just alluded to, but we have full discretion over the capital. It’s cash on our balance sheet. We constantly take investor commitments and deploy that capital. It’s all bridge lending for us. We say it’s three years an end on the term side. That can lead to a fair amount of construction lending. It’s also a fair amount of even pre-development, site acquisition lending. Folks looking to take advantage of a short fuse. Maybe a seller has to sell and really wants to sell quickly. Conventional lenders may not be a able to accommodate that short fuse. We can, so we jump in those situations. We’re not afraid of messy situations, partner buyouts, litigation liens, et cetera. We’ve been there and done that. It’s not to say that we can do them all, but if we can wrap our arms around it, understand it, kind of box the risk in, we’re not afraid of messy situations. Three years an end, all kinds of property types are considered. We do try to be specific with our geography. We lend anywhere from $2 to, biggest loan we’ve done historically is $60 million. Even pushing that a little bit with some new opportunities coming our way. And like I said, we’re very active and originators, which is consistent with what we’ve done historically, but are getting more and more opportunities on the opportunity to buy debt from other lenders that are looking to raise some liquidity in the market. Kevin Choquette:             When you’re buying debt, does that stay in the debt portfolio? Or do you do that opportunistically where you might have a basis and a value add play that puts it on that side of the ledger, if you will? Jeff Brown:                         Great question, and it is something that we wrestle with. It’s very dependent on the situation. The vast majority of debt that we buy we do keep in the debt fund, but there are enough messy situations where maybe foreclosure has been filed, it does appear imminent that the lender is going to take title to the property. It’s those types of situations that we would consider more strongly for opportunity equity funds. Kevin Choquette:             Probably if there’s sort of a tangible business plan to be run, as opposed to picking something up on an attractive basis, right? Jeff Brown:                         Exactly. Kevin Choquette:             If you guys are going to execute the business, it goes on the equity portfolio. Jeff Brown:                         You got it. Right on. Kevin Choquette:             Okay, cool. Well let’s switch to that side so people can understand that part of the business. On the equity side, are you co-GP, are you GP, are you LP? How are you putting dollars into deals? Jeff Brown:                         It’s funny, going back to one of your earlier questions, Kevin, in the evolution of T2 when we got started in 2011, really a lender expertise and listening to the market, getting feedback and then kind of segregating strategies. We’ve got a dedicated debt fund, dedicated equity fund. When we first started in the equity space, it was as an LP. We tried to find really good operators that were expert in their space, in their field, had a pretty tight business plan or expertise, and then latched onto them from an LP side. Just speaking frankly, in the mid to late 2000 had a couple of episodes in which being that passive capital partner wasn’t working very well. We could clearly observe some deviations in business plan or a material slowdown in construction, and it just didn’t seem like there was the urgency necessary from our sponsor’s perspective to address the situation. Got frustrated, exercised whatever rights we needed to and saw a project through, but that really lit a fire under us to transition from LP capital to sponsoring GP. As we sit today, and really as has been the case since 2018 and ’19, we solely buy or develop properties at this point as sole GP or co-GP. There are still a few partners with whom we co-GP deals and seek to work collaboratively to get things done together. But it has been a transition. We’ve staffed up, we’ve got a couple of general contractors on staff, a civil engineer, property manager. We don’t self-perform in anything, not to get into the weeds too much, but we don’t self-perform on any of those aspects of a project. I take great solace in having that expertise in-house so that we really can be fantastic asset managers, watch every penny, make sure schedules, budgets are strictly adhered to, are involved in the conversation, or if there are any deviations, change orders, whatever may come, and make sure that we’re equipped to jump in and take over to the extent that it becomes necessary. That has been a bit of an evolution here at T2. Kevin Choquette:             Okay. Is there a fund or two funds on that? What does that side of the business look like? Jeff Brown:                         We’ve done one dedicated GP fund, and we’re rolling out our second here in the latter half of this year is the plan. Our prior funds were a little bit more LP-centric. We started to dabble in the GP, co-GP side like I said in maybe 2017, ’18, but really went all in on the GP side of the ledger three or four years ago now. Kevin Choquette:             Okay. I understand it’s, as you said, sort of the opportunistic stuff in the growth markets of the Southeast, and it sounds like that could be both. Well actually, why don’t you tell me, but I do understand you guys will do some development as well as adaptive reuse. What kind of strategies are you executing there? Jeff Brown:                         Sure. For us, contra to our debt fund, which like I said is a really deliberately big box, all property types, really all geographies. We like to focus in the Southeast, very sensitive to stories, et cetera. Our equity funds are much more tightly focused, and that is we’re very focused Southeast, all the markets that I mentioned earlier. And then on as far as the property type goes, we call them needs-based real estate. Really what it boils down to is all housing related. Our core competence and what we develop and look to acquire are class A multifamily on the development side. We buy workforce housing, we buy and develop student housing, and then we do a little bit of for sale condominium product as well. I should say, I’m leaving this out unfortunately, but a single family home build to rent is a growing portion of our portfolio. But all in this space of residential living needs-based real estate in the southeastern US. Kevin Choquette:             Okay. I know you’re in a bunch of different markets, and I think if I go too far back you would tell me, well, that’s before you had narrowed perhaps some of your geographic focus. How do you guys think about penetrating specific markets? You had just mentioned Knoxville, Nashville, Orlando, Huntsville. How do you guys think about, “Okay, if we’re going to go into this market, then the following”? Just in terms of it takes a while to learn a market, to figure out where pricing is, to figure out where rents are, to understand who your team’s going to be. Maybe on the property management side, the general contracting side, I just wonder how you guys go, “Okay, let’s go after this market,” and then what has to happen? Jeff Brown:                         Yeah, you’re spot on, Kevin. It’s easy to identify. It’s not terribly easy, but easy enough to identify markets on paper that makes sense. It’s a different ball game to get into a market and be effective on executing a business plan on the real estate side. For us it does start, if you think of it as a funnel, really high level, some target markets, where is their population growth, job growth, corporate expansions are taking place? Generally the companies with a lower tax base, great schools. There’s all kinds of filters that we run things through to identify markets that we want to be in. After that, once we do find a market, we’ve got folks on staff here that are doing nothing but, call them business development or origination folks, be it on the equity side or the debt side, that then go into those markets and it’s time to make inroads. Thankfully at T2 we’ve got well over a thousand different investors from all around the country. When we do identify a market, say Orlando for example, we’ve got a few already very solid contacts in Orlando that might know that perspective, be an attorney or accountant or even real estate folks, that might be a real timely introduction. We just try to make inroads from there. It doesn’t happen overnight. It often takes years to really build a sufficient rapport, build some credibility in the real estate market in a given city, and then to really have a presence down there. But once we do get into a market, identify a site, the goal is to go there in scale. These target markets that we have, I could count on two hands. We’re not trying to go into a market, do one project, Lord willing go through a big liquidity event, sell it, and be done. If we really like a market, we want to go in at scale, do multiple projects, get to know the city real well, get ingratiated with the community and with the market as a whole. And then oftentimes we find that deals find us at that point in time. That’s certainly the case. A market that you’re familiar with is Kissimmee, Florida, right there where Disney is. That started in 2019, identifying a hotel property for conversion to multifamily. Once we started that project, started to have some early success, it wasn’t long thereafter that other hoteliers or certainly other brokers, but other third party professionals down there in the Kissimmee market were reaching out to us saying, “Hey, I saw or I see what you’re doing at this one property. I’ve got a client, or I know somebody, or I am that person that’s looking to sell a comparable property and would love it if somebody would contemplate what you guys are doing over there.” That rapport goes a long way toward developing deal flow, and something that we’re very mindful of and grateful for at the end of the day. Kevin Choquette:             Look, my awareness of T2 and you individually is through Cloudstreet. I am an LP investor on that, I think it was your second hotel to multi conversion down there. Obviously on that deal you went out and secured LP equity. Does the GP fund and that strategic orientation to be GPs on the equity platform, do you always accompany that with a third party LP, or how do you guys structure capital for the top part of the capital stack above the debt? Jeff Brown:                         Yeah, for our GP fund it is just as you described, Kevin. We come in, the fund is the GP that’s sponsor in the deal, and we’re raising not only debt for a given project, assuming that we do want debt, but also LP capital to come alongside us. There’s a couple different real positives to that that I see, the major one being the concurrence that’s involved. It’s back to seeking feedback from the market, doing sanity checks and making sure that we’re not completely out in left field. I do value the fact that we’ve identified a market, we’ve identified a property, we’ve got a business plan, we have pro formas, we have all the spreadsheets you can imagine to effectively present and underwrite something. But now to go to the capital markets in the debt space, to go to the LP field and test the waters for a given project is really valuable to me. I like the concurrence that comes with having two sets of investment groups, lender and LP, looking at each deal of ours, ultimately signing off and going forward with us. I think that’s a concurrence I really value. Kevin Choquette:             Understood. Kind of a check your own underwriting, right? Jeff Brown:                         That’s right. Kevin Choquette:             Yeah. I want to go back. You mentioned at least on the equity side having staffed up a bit. In particular, you mentioned having a couple GCs who can serve as an effective owner’s rep, and maybe in a downside scenario step in and take over some things if things are kind of falling apart. What do these two strategies, the debt portfolio versus the equity portfolio, look like from a headcount perspective? How many people have you got on each of these? Jeff Brown:                         Short answer is growing. As we sit today, we have 15 employees at T2. Just hired somebody last week, actually have another offer letter going out today. We are historically … Let me get some exact numbers for you. I think in 2021 we were 11 people strong, and all of us were for the most part generalists. There were a couple specialists on the debt side, on the equity side development, whatever the case is. But for the most part we were generalists. All of us have a really good … I’m biased of course, but a really good handle on the real estate market as a whole. They can transition really quickly from talking debt to talking equity, talking development, talking rehab, whatever the case may be. As we’ve grown, particularly in the last couple years, we’ve started to focus a little bit more on building teams dedicated to the debt strategy or to the development strategy. Still have a fair amount of generalists which are invaluable and help us to get a great purview of what’s going on in the market. I’m really grateful for us as lenders are able to talk about deals and whatnot, and that translates really well to how we’re able to perceive what a equity or development deal might look like. That sort of purview across the landscape is really invaluable. As we sit now, 15 people, really four on the debt side, about an equal amount on the equity side, and then the rest of us being generalists that navigate between the two. The intent, particularly with the opening of our Nashville office later this year, is to grow both the debt and the equity team, really build a robust asset management platform, and continue to do what we’re doing as best we can. Kevin Choquette:             Look, we’re all of us in this industry subject to cycles. They happen. We’re all driving by the same data, and we all sort of pull on the yoke of the airplane the same time the same way. Because of that, we overshoot and we undershoot. How do you think about building a team with some scale and the fixed operational overhead that comes along with that, when it’s sort of juxtaposed against the inevitability of cycles? How do you guys resolve the potential conflict between those two? Jeff Brown:                         Yeah, such a good question, Kevin. It is something that I wrestle with a lot. It’s funny, looking back after 12 years now, I do kick myself a bit for being probably too conservative, too careful not to hire people when we should have. We were growing, we were young, still figuring stuff out, still getting a lot of feedback from the market as we’re trying to figure out what strategies to build upon going forward, and missed some opportunities frankly to hire some really good, skilled people that would fit in really well culturally here. Now we’re trying to overcome that. We feel very good, very highly convicted about the strategies that we have in place, what we’re executing on, even in this turbulent market that we’re in. Trying to take a bit of a counter approach. Where layoffs are the topic du jour in the press and across the tech sector and whatnot, we’re building, we’re staffing up. It’s not to say that we’re staffing up indiscriminately, that’s far from the truth. But we are staffing up with ambitions of growing our platform, and probably making up for some lost ground over the past few years as I was too conservative to hire people. Very, very mindful of not overstaffing. Understand that again, we can’t control macroeconomic variables. Inevitably there will come time where there’s just not the right time to be doing development. Arguably that’s the case right now, even. It’s just really hard to make numbers work. But what I don’t want to do is be confronted with layoffs. We’re going to maintain a strong balance sheet, we’re going to maintain a great culture that people want to be at and show up to work every day, and be proactive about not overstaffing. But it is a delicate balance. That’s a interesting point that you touch on, there. Kevin Choquette:             The other thing you mentioned that just sparks curiosity for me is getting to a point where it’s clear to you that having specialists is an intelligent move. I wonder what has transitioned for you that you would go from having a team of athletes who can all potentially fill in different roles across the entire value chain to, say, “I just need a javelin thrower,” and you go out and you hire that sort of specialist. What was the catalyst, and what do you expect to get from putting a more narrowly defined expertise into the team? Jeff Brown:                         Yeah, I think it comes with scale, to be honest with you. When we’re young and growing and still trying to figure out how big do we want to be, where do you want to be when you grow up sort of thing. I think having that nimble athlete type person that you’re describing is invaluable. You got to be able to wear multiple hats, you got to be able to see things from different perspectives. But as you scale and as you build conviction around a business thesis or an investment thesis, whatever the case is, and you can see how success is realized. In the debt space, having really quality underwriters, and I mean even folks to help on the loan closings, just to coordinate loan closings, to service the loan post-closing, to provide invoices, all those things that might seem a little bit trite or too specialized when you’re still building a business become really important down the road. Again, I say it’s with scaling because with scale becomes a broader audience of, in our case it’s investors and it’s borrowers on the debt side. There’s a level of sophistication that comes to the table. Especially in a market like today, our debt fund is really countercyclical, and so we’re as active today as we’ve ever been despite the chill in the lending market that exists right now more broadly. Our folks that are really adept at underwriting, the folks that have lived through distress in the past and have stories to tell, have anecdotes to share and apply to how we structure or underwrite or service something today, I think becomes more and more valuable. Certainly I would say it is valuable, but then the market would tell you just from a perception standpoint it’s more valuable. Thus, the very institutional borrower that may not have borrowed from us historically takes a little more comfort in borrowing from us knowing that we have that sort of skillset in-house, and ready to service and help them to get from A to B on the bridge lending side. Kevin Choquette:             Yeah, I love it. And look, in my business we have conversations just kind of around cognitive load. How much diversity of thought and spectrum of, I’ll just say the caseload, can any one person address successfully before simply there’s just too much, right? You’re switch tasking too frequently across too much bandwidth, and it dilutes you. When I hear you talk about this specialist, to just give them a lane that’s narrowly defined where they can be exceptional, I don’t know, it sounds like a really good fit. Jeff Brown:                         That certainly resonates with me, Kevin. I would tell you our best hires, every single one of our employees are incredible hires, but there’s just this … I find this consistently with my friends, and then even at T2, there’s a general reticence to hire somebody because you don’t want to let go of a given task. You either really enjoy it, you’re really good at it, or in your mind it’s just that important. However, when you do find that right person that you can ultimately entrust to carry that weight, the load like you’re describing, and you watch that in action, it’s an unbelievable just sense of satisfaction that comes with, “My goodness, look at us grow. Now that I have more bandwidth, I can think more clearly. I need to do these other things.” Particularly as a CEO or a CIO and somebody in that sort of role, there’s enough on your plate already to do stuff and have to do it quickly or to do it in the wee hours of the night or early in the morning simply because there’s no other time in your day. It’s very, very satisfying to see in action where you’ve hired somebody for a skill, they do it really well, and they’ve removed that from your plate. I can’t echo what you said enough. Kevin Choquette:             Yeah, I mean the visual that comes up for me, and I’m probably hamstrung by speaking in analogy too much, but you started this fire and you were running out into the woods and getting every stick and making sure that thing kept burning and burning and burning, and it’s gotten bigger and it’s gotten bigger. All of a sudden you can step back and there are other people putting the wood on there for you, and all of the sudden you have a business that’s considerably bigger than you. I don’t think we can call you … You’re probably on the bubble between a small and a medium business, but it resonates deeply with me where you can step back and actually see that there’s a business that has a going concern value proposition that is no longer necessarily requiring you to put the wood on every single day. Jeff Brown:                         Yep. Couldn’t agree more. That ultimately driving value for the company is just an ancillary benefit as well. It’s just learning to let go is a really key component, I think, of a lot of leaders and entrepreneurs. Kevin Choquette:             Agreed. Slightly different tech here. What do you think is the one thing that’s most holding T2 back right now? Wave your magic wand, remove that constraint, and what is the constraint? Jeff Brown:                         Yeah, that’s a great question. Honestly, I’d have to think about that. There’s certainly a lot that does preoccupy my time. I’m very grateful. I’ll give you a real life anecdote again here. I sit in Chicago, this is where our headquarters, if you will, is, that 12, 13 of us reside every day. Being in Chicago and being swept up in all that’s going on in the Chicago market, in Illinois as a whole, has been hard. We’re certainly not immune to that. Like I said, we’ve repositioned our focus to be in growth markets, which have led us to the Southeast. For the longest time that was true, and I struggled to pull the trigger on opening an office down south. And frankly a lot of us even talk about moving. Not pulling the trigger on moving, but I’m very grateful to have identified an office in Nashville. We’re going to dress that up and it’s going to be really nice when we open up later this summer. But I think that that has been a hindrance for a while, is to be in a market that we live in, yet not be really active and investing in that market, despite the fact that our deepest, best relationships emanate from this Chicago market as well. That has been something that preoccupies a fair amount of my time. Beyond that, really it’s just being well-informed and taking it a day at a time, knowing full well the market is … An adjective we keep using here is turbulent. It’s very, very fluid. And just being smart and wise and nimble to take action when we need to take action, and to step back when we need to step back. That sort of discipline is imperative every day, but especially magnified in times like this. Kevin Choquette:             Look, just speaking to your success and that idea of stepping back right. Early on, I suspect everything’s on the line, that deal one, that deal two, that deal number four, they have to work out. You alluded to a little bit of adversity when you were backing LPs, and so you probably skinned your knee a little bit here and there in the journey. Clearly at this point it doesn’t seem like there’s a lack of opportunity flow that’s coming to T2. I wonder how things have changed for you. The visual I’ve heard explained in the beginning of your career, you’re putting messages in the little glass bottle from your desert island and sending them out, and you’re just hoping for one or two to come back. Later in your career, there’s just all these bottles with messages washing up on the shore, which is where I envision you guys. How are you managing that kind of condition, as it seems like you guys are transitional kind of hockey stick point in the evolution of T2? Jeff Brown:                         Sure, yeah. I appreciate that, and I tell you it’s another real learning moment, learning period of time to skin your knee, like you said. There are a lot of scars on these knees from doing things wrong, and having regrets and wishing I could go back in time. But you can’t, obviously. You got to get up on your feet, you got to brush yourself off and go forward and learn from past mistakes is the approach that we take. Thankfully we’re still standing here, despite those scars and despite those skinned knees. I think, while super grateful for these proverbial bottles coming on the shore and the inbound inquiries that we get to provide financing or to buy a property or to consider developing here or there or anywhere, super appreciative of those invitations and those requests. I think the greatest discipline that comes, a lot of it for me anyway, born from the pain of not doing things as well as we could have in the past is the discipline of saying no. It’s hard, and some people don’t take it particularly well, but it’s best for you and the team in the long run. Again, super grateful for what we’ve got today, and it is a flood of inquiries coming our way as the capital markets are largely just really tepid, if not really chilled right now. But trying to be disciplined to say, “Hey, just because they’re knocking on our door just because it’s in the right market, just because it is that person or something like that doesn’t mean it’s an automatic yes. There’s a scrutiny that we all have to go through. There’s a collaboration, there’s a concurrence that needs to take place that we’re all comfortable with before we give a firm green light to something.” That discipline to put an opportunity through its process, build consensus, and then proceed with a fully informed decision, yes or no, is a great discipline that we try to adhere to here. Kevin Choquette:             The people that you just mentioned who sometimes don’t like to hear no, are those partners, investors, employees, clients, maybe all of the above? I’m curious where that shows up. Jeff Brown:                         Yeah, it does cross the gamut. On our debt lending side, of course borrowers don’t like to be told no. I will say we do try to start on the lending side with, start with yes and then have to defend it. But no is the conclusion that we come to like 98% of the time. We do try to start with an optimistic perspective and cite the merits of a deal before really poring through things to cite some weaknesses. Borrowers of course don’t like to be told no. Certainly there are employees, many of whom just speaking frankly might have some compensation on the line if we do or don’t do a deal don’t want to be told no. Kevin Choquette:             Production [inaudible 00:54:09]. Jeff Brown:                         I find the real rockstar employees are those that can, as hard as it is, if not impossible to be objective about something, they’re even keeled and they get it. We’re trying to do things for the greater good of T2, of our investors, and try to trying paint a multi-generational picture here for a sustainable company. Not just trying to do a deal so that we survive today and tomorrow, but in two years, boy, we’re facing the music and on death’s door at that point in time. It’s a rare employee that can get to that phase, but I know that we have them here at T2 that can maintain a bigger picture in mind. But it is hard. It’s not terribly hard, but it’s hard to hear no for a lot of people. Kevin Choquette:             Is multi-generational part of the culture that you alluded to before? Jeff Brown:                         That is, and it gets into some of these business and these investment thesis that we’re so bullish and convicted on. We’ve talked at length about the debt fund, it’s perpetual, it’s coming up on its nine year anniversary. I’m thrilled with where we are, what we’ve done and where we’re going. Our opportunistic GP fund in which we raised the LP capital and seek lenders for each deal has tremendous legs. We’ve done extraordinarily well on the GP side of the ledger. We’re just coming out of the chutes with a workforce housing dedicated open-ended fund that could very conceivably be a public REIT someday. But the notion is to build a business to scale it. It’s like what you alluded to earlier, Kevin, you got to do these first one, two, three, four deals really well and provide a springboard to doing additional deals down the road. I wish I could tell you I still feel a little bit like Chicken Little. We’re still dealing with deals one, two, three, and four where we just try to box in as much risk as we possibly can see and underwrite and generate great returns, and know full well that it’s a self-fulfilling cycle. If you do well now, chances are the snowball builds and you’re going to do have at least an opportunity to do really well down the road as well. Yeah, but building something generationally on those three legs of a stool is the plan at this point. Kevin Choquette:             Success definitely begets success. You guys have shown to be very effective at raising capital, which right at the very beginning of it you said, “Well look, the first step if I’m going to run a real estate private equity firm is I’ve got to be able to get capital.” What has been your approach? What has been your mindset to raising capital? What sort of pitfalls or tips or tricks? I mean, it is not an easy thing to get a thousand people to say, “I like Jeff Brown, I like T2, here’s $25,000, here’s $250,000, here’s $2.5 million.” I’m sure you have them all across the spectrum. What’s working, what doesn’t work? What would you put out there for the other real estate entrepreneurs, whether they’re creating discretionary funds or they’re just looking for their first LP on their first project? Jeff Brown:                         Sure. I do think it’s that, too. Like everything else, it is a bit of a learning curve. It has been a learning curve for us. There is an unquestionable need to be trustworthy, and part of that manifests itself with … It’s easy to report the wins, it’s easy to report the big gains and whatnot. It’s not so easy to report when things are not going according to pro forma, or even losses and whatnot. I’m always mindful of trying to be proactive about communicating everything clearly and plainly, trying to drain emotion out of the picture and report objectively. Lots of phone calls, certainly lots of emails and whatnot, but just being communicative, being trustworthy. Adhering to a strategy. If you know told me that this is what the fund is targeting is going to do, then stick with that, don’t have some style drift that’s suddenly comes into the picture and cloud investor’s perception of whether or not you’re trustworthy at the end of the day. It’s a lot of those kind of foundational sort of components. It’s really hard to replace success. Success in the terms of economic returns and financial returns. I have found, and I think we have found collectively at T2, if you can be trustworthy, do what you say you’re going to do, be communicative, and then deliver results. That’s really what it boils down to at the end of the day, and I’m confident that any other fund manager would tell you the same thing. Kevin Choquette:             Because I have the benefit of a previous conversation with you, you had also mentioned just doing the work. If you want to touch on that, I don’t want to put words in your mouth, but you had mentioned the early mornings and all of that. Jeff Brown:                         I think part of it is being an entrepreneur, part of it is CEO, and really trying to do as best you can for as many people as you can. Getting into my day a little bit, I’m an early riser. I like to be at the office really early. I like to get calibrated for the day and get to work, like you said. The days of nine to five are long gone, and have been for a long time for virtually everybody. But there’s a handful of us that show up early that really get after it. Our office is very intentionally open and collaborative, so a lot of talking and sharing going on. But it’s well before sunrise, and sometimes working late at night after the kids are in bed as well, just to make sure you’re staying on top of things. Again, staying communicative and making sure people are in the know. It’s not to say that it’s overbearing by any means, it just comes with the turf and it’s part of when you have aspirations of building something generationally, that’s just what what’s required, at least from my vantage point. That’s what we’re trying to do here, and I’ve got a great, incredible team of people that share that vision and share that work ethic as well. I feel very fortunate. Kevin Choquette:             Yeah, that’s fantastic. Look, thanks for sharing so much on the business side. Let’s move over to the personal. What about the end of the day? What makes you feel relief? How do you kick up your feet and unplug, and what’s the juice outside of business for you? Jeff Brown:                         Yeah, thanks for asking. I’m grateful to share. I’m married for 26 years. I have five incredible kids. Part of the beauty of being an entrepreneur and part of what I try to foster here at T2 is the understanding that none of us are defined by what we do at work, or in my humble opinion, shouldn’t be defined by what we do at work. No doubt it is a meaningful component to what a lot of us do. But at the end of the day, I want people to have adequate time with their family, with their spouse, with their kids. We talk all the time about … Just yesterday, as a matter of fact, one of my kids is a golfer, he said, “Dad, the weather’s pretty nice out. I think I’d like to golf today.” I’m like, “That’s great, buddy.” And he asked me, “Would you like to caddy for me?” Are you kidding me? That freedom to go caddy for my son who wants to go golf. I encourage the same of our staff here. Again, I understand the importance of work and there are no shortcuts. Work is a grind, and you got to build systems and processes that are as efficient as possible. But at the end of the day, a lot of it boils down to grit and tenacity and creativity and figuring out better ways to do things. But certain personal things, be it family, faith, travel, unplugging, all of it is just part of who we are, and I think what a lot of us need to do, and I want to encourage that to provide more of a holistic perspective for all of us, at least here at T2 and hopefully more. Kevin Choquette:             Look, clearly you guys have been successful. I mean to go from, “Hey John, let’s do a deal. Let’s do two. Let’s do three,” to, “We’ve put out several hundred billion, or sorry, $1.5 billion over the past 10, 12 years.” What in your mind does it take to be successful in this business? Jeff Brown:                         That’s a great question. This is part of what I wrestle with with our advisory board, is how do you define success? I tell you, there’s just such a piece about, again, and conviction about what we’re doing. Our business strategy is right now. Albeit balanced with I won’t be the guy that works a hundred hours a week. My kids won’t let me. But I’ll take it to the max. We know what we need to do. For us that raise discretionary funds, it starts with really a fund thesis and setting expectations for prospective investors. Our goals are always to meet or exceed those expectations, whatever that means. We’ll work as long as possible, as hard as possible. Like I shared earlier, we might fall short. There’s some stuff that is just out of our control. We want to be forthright. I’ve always said in any sort of conflict, you want to understand the issue, own your part of it, and then do whatever possible that you can do to amend a broken relationship. We;re about meeting or exceeding expectations, setting clear expectations on the front end, meeting or exceeding those over the long haul. And if something does fall short, owning it and trying to make it right. We’re having a lot of fun here at T2. I’d be remiss not to share that. I don’t take other people’s words and just throw those out there, I get affirmed by that a lot. That’s really, really meaningful to get the token emails or texts or even words that people share with me about the fun and fulfillment that they find here. I don’t take that lightly, and intend to build on that for the long haul. Kevin Choquette:             Look, set your strategy, set your thesis and expectations, and then do the work. If you find yourself stubbing your toe and kind of in a bruised relationship. But go to the other side. We probably all know plenty of successful people. Anything pop to mind if I ask you, “What’s the most common mistake you see successful people make?” Jeff Brown:                         Huh. Again, every person’s so different. I do spend a fair amount of time … I love reading about the titans in business that are out there. Probably the names that you’re thinking of are the very names I’m thinking of. I tell you what I do see over and over again is they reach this pinnacle status. They are widely revered around the country. They have incredible amounts of wealth. But it is back, to me, it’s things like how is their family? Are they truly happy or joyous at home? And that’s where, I guess, I can get way too philosophical about this, but I do think about a big picture and a holistic picture of yes, it is awesome that so-and-so built this company and sold it for X billions of dollars and they now own this many houses and drive this car, this boat, or whatever the case is. But how are their kids? Do they have fun with all those toys? Do they have a peace about them internally, that are they truly satisfied? I’m certainly not going to be any sort of type or anything like that, but I do, and in my own very, very small way, want to balance worldly business success with success at home, and among my friends and whatnot as well. I just try to be big picture oriented, and know full well that things can change on a moment’s notice and be grateful for what we’ve got. Every day is a gift. Kevin Choquette:             Yeah. And it’s also losing … Well, actually that’s an interesting topic. It may be the case that those titans’ objective was simply to win and the scorecard is money, in which case hey, more power to you. But what I’m hearing you say is if your why is something other than that, then how are you feeling when all you end up with is money. Trying to have the why in alignment with your professional pursuits. Jeff Brown:                         That’s a great way of putting it. I’ve heard that before and I obviously didn’t articulate it, but making sure you’re answering your why and managing each day accordingly is a big part of what I try to do. Kevin Choquette:             Look, you’ve alluded to it a couple times in the conversation in terms of your outlook and beliefs. On the daily routine side of things, for myself personally, I just try to get my head in the game and align to what I’m up to as a person. If I can start my day that way, I feel like I have a better chance of staying on track to the end of the day. If I can string a bunch of those together, I might be a better person and have a sort of better trajectory. How about yourself on any daily routines you might have to kind of excel in your own way, if there is anything? Jeff Brown:                         Sure. I’ll tell you again, some of these titans that we all think of certainly share publicly what their day looks like. I’ve tried to glean and learn from a few of those. My day personally is I’m an early riser. My best thinking typically happens quickly after I wake up, so I’m generally at the office pretty early after a time of just calibrating, thanking God that I woke up and that I have this special day of life and getting in the office and getting to work, setting the table. There’s a few other early morning warriors that join me at the office, so it’s pretty fun, the two or three of us that are generally here each morning before the sunrise. Yeah, it’s hard work throughout the morning. I generally take my lunch to read and to catch up. I love stuff like the Wall Street Journal, some industry periodicals that come out. Just again, staying grounded and checking in at home, that kind of thing. Finishing the day, it’s not uncommon for me to be out by four-ish or something like that to get to one of my kids’ events. I try to be proactive about exercising each day. It’s in the afternoon when my brain is starting to turn to mush. Family dinners are important. It certainly doesn’t happen every night, but all of us being around the table as much as we can as meaningful. It’s not uncommon for me to kind of plug back in. As an entrepreneur, you’re always plugged in the phone, if you wanted to, it will keep you fully tethered. But really

BALANCING LAW, COSMETICS, AND SKI MOUNTAINS. Show Notes: Welcome to Episode 14 of Offshoot with Howard Katkov, CEO and co-owner of Red Mountain Resort in Rossland, British Columbia. Howard has started and successfully operated seven different companies and has pulled a steady paycheck from them 45 consecutive years. He loves the game of businesses and building successful ventures from vision to execution with the support of strong teams.  In this pod we talk a bit about all aspects of Howard’s background and spend the right amount of time on the ski mountain and the ski industry, something many of our listeners share enthusiasm for.  Two of my key takeaways are that you don’t always have the luxury of confidence in your decision making, and yet, you need to lead.  The other is that you need to truly understand the risks associated with your real estate deal, especially in terms of the time required to properly do the job and accepting a mismatch between the deal and the timelines of your investors is a recipe for trouble.  Patient money and autonomy matter; secure it up front or pay later. Listen in as Howard covers other areas, including: * Being a rule breaker, not a rule maker. * Balancing the interests of capital and community while being a steward of both. * The fact that pound for pound, there’s no better ski location in North America than Red Mountain Resort. * Building teams, as a partner, and less of a conventional, top-down boss.  * Removing inter-departmental communication walls. * Choosing investors carefully. * Empowering younger team members to influence the direction of the company when they reflect the sentiment and sensibilities of your target market. * Possessing active humility to listen and observe which nourishes your understanding. * Looking back to learn instead of looking back with regret. TRANSCRIPT Announcer: Welcome to Offshoot, the Fident Capital Podcast with host Kevin Choquette. Offshoot is a curiosity driven conversation that features a wide range of real estate business professionals. In each episode, we unpack the knowledge, vantage point, and domain expertise of our guests. Then we move beyond the facts and figures and dive into the personal habits and mindset which allow them to be high performers in their respective field. This podcast objective is simple, supporting entrepreneurs fostering relationships, and uncovering meaningful conversations that positively impact business. Kevin Choquette: Welcome to episode 14 of Offshoot, with Howard Katkov, CEO and co-owner of Red Mountain Resort in Rossland, British Columbia. Howard has started and successfully run seven different companies, and pulled a steady paycheck from them for more than 45 years straight. He loves the game of business and building successful ventures from vision through execution, with the support of a strong team. In this pod, we talk a good bit about all aspects of Howard’s background and spend a fair bit of time on the ski mountain and the ski industry. Two of my key takeaways are that you don’t always have the luxury of confidence in your decision making and yet you need to lead. The other, you need to truly understand the risks associated with your real estate deal, especially in terms of the time required to properly do the job. And that accepting a mismatch between the deal and the timeline of your investors is a recipe for trouble. Patient money and autonomy matter. Secure it upfront, or pay later. Listen further in as Howard covers other areas, including being a rule breaker, not a rule maker. Balancing the interest of capital and community, while being a steward of both. The fact that pound for pound, there’s no better ski location in North America than Red Mountain Resort. Building teams as a partner and less of a conventional top-down boss. Removing inter-department communication walls, picking your investors carefully, letting younger team members influence the direction of the company when they reflect the sentiment and sensibilities of the target market, having humility and listening and observing to fill in your understanding, and never looking back with regret. Instead, looking back to learn. I hope you enjoy the pod. Welcome everyone to another episode of Offshoot, the place where my wanderings through the world of real estate finance allow me to engage remarkable people in freeform conversations on a range of business and personal topics. Today we’ve got, as the Aussies would say it, an absolute legend. Howard Katkov is the CEO and owner of Red Mountain Lodge in Rossland, British Columbia. Based upon his long and winding career, Howard strikes me as an entrepreneur in love with creation, business and adventure. In his early career, he started a law practice, which remains active to this day. Then a successful San Diego residential development company that delivered over 3000 homes and took San Diego’s number four spot in only five years. He then started the cosmetics company Jane, selling it to Estee Lauder just a few short years later. From Estee Lauder, he took a CEO role for a tech company. And then in 2004, he and his partners acquired Red Mountain Lodge. To put it mildly, Howard has tons of experience. He’s a former member of the state bar of California. He secured his undergrad at the University of Nevada at Reno and JD from Cal Western School of Law. He’s also blessed to be the father of four, grandfather of two, and has another grandbaby on the way. I met Howard quite recently through a mutual San Diego friend on the occasion of a property specific capital raise for new condos at the base of Red. After just a couple conversations with Howard and the CFO, it became clear that a visit to Red was in order. That trip pretty much blew my mind, as in these places still exist? Visiting Red’s like going to Alta or Snowbird, when there was only one or two brand new accommodations at the base, and few enough skiers to make the development of that kind of real estate hold some material risk. It’s like going back 70 years to the way ski mountains existed before they began shifting to resorts, catering to all sorts of people, even those that don’t ski. I loved it. Beyond the mountain and the community, which were generously unpacked by a drive to the summit and an early mountain bike tour, both led by Howard, I was really intrigued by Howard and his story. I’ll restrain myself from giving you the short version and the absolute nuggets contained therein, because I’ve got Howard on the line. Howard, welcome to Offshoot. Howard Katkov: Thank you Kevin. It’s nice to be here. Kevin Choquette: Yeah, look, I know you’ve got an incredibly rich background, and if there’s any risk here, it’s probably trying to cover too much in a single conversation. But as they say, every journey begins with a single step, and this one candidly, I think is more about the journey than any particular destination. So to start, could you just give me a bit of background on yourself and Red Mountain Resort? Howard Katkov: Well, background on myself. I was born in Southern California in 1950. Grew up in Palos Verdes in Corona del Mar and discovered surfing in the sixties when it was really an outcast sport, not mainstream aspirational sport. And that was quite a deviation academically until I started to focus on getting my app together as an adult, when I turned 18. And I ended up in the mountains in University of Nevada Reno and fell in love with the mountains at that time. Started skiing and just appreciating what the alpine meant to me, to my soul. And ended up in San Diego in law school, just as a happenstance. I was scheduled to go to University of Virginia but fell in love with a girl in a small town in Nevada, and ended up moving to San Diego. And I graduated law school, but that relationship didn’t succeed. Fortunately, I’ve now been married 44 years with the same woman, Tracy, with three sons and one daughter. Two grandsons, and another granddaughter on the way. I have been working consistently since 1976. What I mean by that is, I haven’t had a month that has gone by without a paycheck. Not necessarily proud of that, but I have been pretty focused on being an entrepreneur in some very diverse and unrelated categories. Kevin Choquette: Yeah, in … No, go ahead. Go ahead. Howard Katkov: So if you want to start from where I am today, in 2000, actually in 1995 when I owned a cosmetic company, I had some reps from the Southeast that would have an annual ski trip to Vail, Colorado. In 1995, the first time I showed up there, I met a guy named Jack Carey who was six foot seven, weighed 165 pounds, and had a white ZZ Top beard. And he was our quote, ski instructor. He had lived in Telluride, Colorado for the last, at that time, 33 years. Ran the movie theater in Telluride. Lived actually, behind the movie theater. Chopped wood for movie stars in the summer. And he was a quintessential dirtbag skier. And he had told me, this is from 1995 to 2000, about Red Mountain. He was from New Hampshire and his line was “Howard, you got to go to Red Mountain. It’s the greatest ski resort in North America.” And for five years we skied together. He was our quote, teacher. But he was really my powder buddy. He and I both are first chair guys, and we got to become close friends. So finally in February of 2000, I came back from this annual trip and told my wife, “We’re going to go to this place called Rossland. I came back on a Sunday, we flew up there on a Friday. I went online and saw a woman that looked like a nice person named Artis Erquad, said, “I’m looking for real estate.” Trounced around the town that day and it was raining, and I didn’t even ski. And looked at a lot of old houses and I said, “Is there anything else up here?” And she goes, “Well, there is this 18 lot subdivision that the guy went bankrupt on years ago, but it’s got sewer, water, street lights, all the utilities.” And I went, “Well that’s interesting.” So I went and saw these lots that were just in the center of this town, and bought three lots sight unseen and drove home. Looked at my wife as we were driving back the next day and went, “Well, that was random.” And we started building a house that September. So I went up there principally and entirely to build a retirement home for my family, because skiing was embedded in our way of life. And that was the beginning of Red Mountain. Kevin Choquette: And then as I understand it, something happened there. At that point it was community owned, right? The mountain was? Howard Katkov: No. So the mountain is the third oldest ski resort in North America, the oldest in Western Canada. So it started in anywhere between December, 1947 and February of 1948. That’s slightly debatable. But it certainly is the third. And it was owned by the community until 1986. Kevin Choquette: Okay. Howard Katkov: And in 1986 a group of six guys bought it. Local people, except one bond guy out of Toronto. And while I was framing the house, someone said, “Did you hear the ski resort’s in a bit of trouble?” And I did not know very many people at the time. One of the six owners had died, one of them was on dialysis, and they were just getting old. So I put together a group and had a couple shots at it. The first shot, we weren’t successful. Someone from back East had it under contract but then fell out. And I finally put it under contract in September of 2003. And my first career as a real estate lawyer for eight years was an real estate entitlement lawyer. So my partner and I then flipped. We actually amended the official community plan in September of ’03, and closed escrow in June of 2004. And we changed the entitlement from 400 units to almost 1400 units and then closed. Kevin Choquette: Okay. So what’s happening for you guys now? I mean that’s obviously a long ways back and you’ve been at it since ’04. Howard Katkov: Long time. I’ve passed my retirement age at least three times, if you talk to my wife. We have had, I mean just 18 years in a nutshell, the first three years of our ownership was the time, crazy real estate times. The Boomers were buying real estate all over. Second home real estate at golf courses and ski resorts. And we enjoyed the wave of that. And I built a 67 unit project in 2006 and ’07. We sold land to developers. Actually, coming out of the gate, our first three years were way over our proforma, and things were good. And then 2008 showed up, and we had actually completed our 67 unit project. We closed enough units to pay off our bank, and we all know about 2008, and ’09, and ’10 and ’11. So what I learned in my real estate, 10 years of real estate development in San Diego was, debt is a killer. And if you’re over-leveraged and the economy changes, and guaranteed if you’re into real estate, you’re going to have an experience of a down cycle at least once, twice, three or four times. In my case, I think this is my fourth time seeing a down cycle. So I made sure we had low leverage in this construction loan, had high pre-sales, and we endured the recession. And coming out in 2013, I opened up a mountain … We have five peaks, so we are the ninth largest ski resort in North America. We’re 3,850 acres of skiable terrain. And in 2013, we opened up one of our five mountains called Grey Mountain, which is a thousand acres. So it’s the size of Mount Baker with one single chairlift, skiing 360 degrees. And that was the largest ski resort expansion of an existing ski resort in over 45 years, at the time. And that was a big deal, that put us on the map. And we started to see visitation increase pretty significantly. And from 2013 on through kind of ’18, ’19, we were focused more on our operating company, as opposed to real estate. Because real estate hadn’t really come back in any great volume. I did do a 73 lot subdivision that right now, is about 75% sold out, and some beautiful homes. But we hadn’t really put our toe in the water for another significant piece of housing, large housing, until this last year. So our focus has been building our brand, building our awareness. We’re an eclectic mountain in terms of visitation. We have 40% of our ski visitation is US and international and that continues to grow. And with just the consolidation of ski resorts through Vail Resorts in Alterra Mountain Company, it has changed the landscape pretty significantly, in relation to the ski experience, i.e. crowds and lack of services to handle these crowds. Our resort is becoming even more noted for still an incredibly great ski experience, from the moment you drive up, to the moment you leave. Kevin Choquette: And you guys just started the newest real estate project there. It’s what? A hundred units? Howard Katkov: 102 units. So in December of 2020, I had this idea that it was time to build another significant project. And the way I do real estate development, in terms of minimizing your risk, which is my focus now. There’s always risk in real estate development, but you can minimize it. So my formula is that I raise enough money to take a project to market, which includes all design development, all sales and marketing, and all the other associated things to get through legal, to have the ability to put a project for sale in Canada, which is different than in the United States. Kevin Choquette: To be able to do pre-sales, right? Take hard deposits and all of that? Howard Katkov: Correct. Kevin Choquette: Yeah. Howard Katkov: Correct. But that requires full design development. Because when you take pre-sales, you have 50% design development of your working drawings, so a consumer knows what they’re getting. And you cannot change the documents that describe those more than, call it 5%, or they would have a right to rescind their contract. So you have to be quite complete, in order to go out to the market. And what I had been noticing obviously, is how expensive real estate was in major ski resorts. $1,500 a foot, 2000 a foot, $1,200 a foot. But in locations that certainly aren’t ski in, ski out anymore. And if they are, they’re just extraordinarily expensive, pricing out most people, the average person. And so watching what was happening in urban areas, particularly Vancouver, Toronto, San Francisco, and New York, small units, studios, lofts that are averaging 500 square feet. So I had the idea of taking this loft concept to our resort, at a location at the base that was 37 steps, 50 steps to the chairlift. So incredible location. And we went to market in February 10th of 2022. And we sold 70% of those within the first three weeks. We’re now at 80%. And we broke ground on June 24th of 2022, and will be completed in the fall of 2024. And in terms of the risk profile … Back to my formula, so to speak, is I raised a million and a half dollars to get us to market, and get pre-sales that are sufficient enough to satisfy a construction loan. And that was 70% of the construction loan. So this is a 46 million project, it’s a 30 million construction loan. So we actually needed 29 million dollars of pre-sales. So we got those pre-sales within those first three weeks. We’re now at 35 million in pre-sales, so we’re significantly higher. So that was kind of risk point number one. If we would’ve failed in that, then that investor, we had three years to kind of hit that goal. If not, his investment was secured by that piece of property. So his risk was not extreme. Then the next point was, we got our construction loan and we had the pre-sales, and off we are. We have two more winters to sell 22 units in. I have no doubt that we’ll do that. Since September we’ve sold 10 more units. And the average price point Canadian was 354,000 a unit. The average square footage was 444 square feet. The largest units were 700 square feet. We had lofts that were 600 square feet. Quite a … go ahead. Kevin Choquette: Well I imagine it depends on your perspective, in terms of either that’s incredible value, getting in for 354 Canadian, which I think it’s roughly .75, if you want to translate that to US dollars. Or maybe if you’re a long-term Rossland local, they think you’re crazy, and getting these prices that they can’t believe. How does that all shake out, in terms of the dialogue around the price point? And obviously the market has voted, you’re 80% sold. Howard Katkov: Well, it’s interesting. The people of Rossland were shocked that we’d go out there with such a large project. It’s the largest condominium project ever built in the Southeast [inaudible 00:21:04] for sale. It’s probably one of the largest, I don’t know how many hundred unit plus condominium projects have gone to the market in any top 10 ski resort in the last 10 years, frankly. Principally because they don’t have the land to do it at this kind of location. I mean at Squaw Valley, they had a building that they tore down, kind of in that lower parking lot, to build something. So I have two people, one who runs events for me, and one who runs high performance rental, that are buying lofts on the top for their own personal home. We probably have 10 or 12 sales from local people. I sold a unit last Saturday for a thousand dollars a square foot. And we’re now, it validates the quality, the location, and the value proposition at an epic ski resort, now coupled with a pretty incredible real estate value. In the US side, I have 25% US visitors typically, 15% international. Our US buyer profile is now 60% US buyers for this project. Kevin Choquette: Oh, that’s interesting. Howard Katkov: So the opening price for a US buyer for our smallest lower floor studio was 263,000 US. It’s just not possible to find that anywhere in a top 10 ski resort in North America. Kevin Choquette: Yeah. So right now, I mean obviously you just launched the 102 unit project. What’s next? What are the challenges you guys are navigating? What’s on the horizon? And feel free by the way, to talk about the mountain. Because I think, well I know that a bunch of the listeners, for whatever reason, also are skiers. Maybe there’s a high correlation between real estate and skiing? But I think what you guys have is remarkable, in terms of place. And I don’t want that to be lost here and just getting overly business. But what’s next on the horizon? And how do you think about managing the resource that is Red, be it investor capital, land, community, the skier experience. It’s a very dynamic environment that you’re navigating. Howard Katkov: It is. There’s a lot of pressure on economic growth and maintaining the history, the heritage, and the ski experience that is second to none. So if you just want to talk ski experience, I showed up in 2000. I have skied two ski resorts for one day each since 2000. There is not a better ski resort, pound for pound, in North America. And I’ve had people who have skied the world. Fisk racers, Olympians, big mountain snowboarders and skiers. And after a powder day with us, their quote was, “That was the best powder day I’ve ever had at a ski resort in my life.” I can’t tell you how many times people have told me that. So we started as a ski town. USA Today has ranked this the number one ski town two years in a row, the last two years. We have New York Times put us in the top 40 places to visit in the world, ski or otherwise. We were number eight in I think 2015. Skiing in this resort is like going to a park with your kids and just hooking up with people and having a day with no anxiety, knowing that on a good powder day you can show up at noon and ski 20,000 feet in a few hours, untracked, the first day. And it’s because we are so large, and because of the topography. So we’re 3000 feet vertical. We have five mountains, three of which are 360 degrees of skiing all the way around. So we have been ranked number one tree skiing in Canada for pretty much every year. We tell people skiing at Red, it’s like cat skiing or heli skiing without the cat. Kevin Choquette: The cat or the heli. Yeah. Howard Katkov: Yeah. So I mean that piece, and then the community piece. This community has been around for 130 something years. It’s an old mining town, not unlike so many. Park City and parts of the Sierras. But the community is extremely proud of this mountain, and extremely proud to show any visitor the mountain. So on a powder day with a lift line, there’s no anxiety. We’ll typically pass out cocoa if the blasting is continuing, avalanche control. And people are happy, because they know, once they get on the mountain, they’ll be baked by one o’clock. And so the relationship that we have with our customer, that is the people who live in this resort, in this community of Rossland, is incredible. You can go there as a single woman or man, and I promise you, by the end of the week you will be with someone, at their house, and/or having dinner with them, guaranteed. It just happens time, and time, and time again, because people are engaging. And you know, at a major resort on a powder day, that could turn 30,000 visits in that day, it is not mellow. Kevin Choquette: No. Howard Katkov: And there are lift lines, it’s expensive, and it’s just not relaxed, not relaxing. So I have no issue with those places. They’re my partners. I’m a Ikon member. But I’m just saying, you juxtapose that kind of big urban experience to what we have, you’ll never be the same once you come here. Kevin Choquette: Well, and so how do you … Howard Katkov: Maintain that? Kevin Choquette: Yes. Because I grew up in Durango, and even back in the eighties there was two bumper stickers that I recall. Last person to leave Durango, turn the lights out. And call someplace paradise and kiss it goodbye. Right now, fast forward 40 years, Durango is still a lovely community. And yes, it’s changed a lot. And there are things that I’m sure those who wish change never happened, have disappointment over. But how do you have that kind of playpen, if you will, in terms of the natural resources, and the pressure on it. And then be a for-profit enterprise, with an eye to preserving the culture and being a good steward of the community. And I mean yeah, there’s other ways to play this game with really large buckets of capital and just go large. And it doesn’t seem that’s the way you guys have approached this. Howard Katkov: So it’s a balance. First of all, I grew up as a dirtbag skier, and deep down I still am. And so selfishly, we all want to maintain what we all love about Red Mountain. And what I’ve proven in the last, over 18 years now, is that you can do it. I call it developing assets, or creature comforts. But I call it creature comforts under the radar. And so you have to start with a vision. And the vision is, that you need to be economically sustainable, obviously. But what I’m proving, is that you can be economically sustainable, yet not disenfranchise your community, or leave, or drift away from your core values, that are so important to you as an individual, and as a fiduciary, as the CEO of this place. In other words, I have fiduciary duties to my investors clearly as we all do. But I also have fiduciary duties to this community that I have adopted, because of my own choice, and the choice of the people that work for me. Kevin Choquette: So how’s that show up? Howard Katkov: We’re all the same. Kevin Choquette: I pull up with a, well either an offer to buy it, buy the whole thing from you. Or, a hundred million of equity ready to deploy, because there’s enough economics that could support that kind of investment. I hear what you’re saying and I think it’s admirable, and I think it’s a really difficult balance. But how do you respond when things come forward, which I’m sure they do? Howard Katkov: Yeah, I’ve had a couple that have come forward. One case in particular, where the individual who is interested in just the operating company. So just to give you some context, we have still buildable real estate and a retail value of 900 units and about 1.3 billion left to build, comprising 22 different projects, most of which are at the base, are in the mountains. So incredible real estate. But a lot of people aren’t real estate developers. So I’ve had people approach us for the operating company, the ski ops. Kevin Choquette: Mm-hmm. Howard Katkov: And one guy in particular mentioned me, “What do you think about taking down the day lodge? ‘Cause it’s got this old center core?” And I said to him, “That’s a good way to be struck down by lightning, and/or have the town hate you for the rest of your life.” So that person just didn’t make it. And on a price that was not that far away. So how do you protect it? Let’s say someone comes in to buy the ski co. We would put covenants in there that the ski lockers in the rafter lodge, they cannot be taken down. Protecting that. But once we sell, and there will be a point where we will sell, there is an element of risk. Once you lose control, you lose control. You don’t control pricing, you don’t control what they develop. But just on the real estate side, we have 90 pages of design criteria that controls what can and cannot be built, that is now part of the city’s zoning. And that will protect at least that piece on the real estate side. For instance, you can’t build a condominium at the base without underground parking. Because ultimately, our master plan is, there’s probably 5, 600 units left to be built down there, plus another hotel. It will be a complete pedestrian community with maybe 200 parking places for the summer activities, with all parking put across the highway. So someone can’t come in there and just bulldoze that concept. That’s part of the official community plan. That’s part of our zoning. In terms of the ski op piece, I’m not going to tell you that down the road someone might have a different idea of how to manage this business. But I think we have certain things in place that will at least protect some of it. You can’t protect it all when you sell. Kevin Choquette: Yeah. Howard Katkov: But I didn’t come here to basically stretch myself across the freeway for the rest of my life, protecting the ski resort. But I certainly have spent a lot of years and a lot of energy doing the best that I can, and my team can. And I think we’ve done it. The community loves us. The city, our relationship with the city on the real estate side, we have never lost one zoning request, development permit, change the zone. We’re a hundred percent in 19 years. Kevin Choquette: And do you think all of your experience previous to this, going through the legal background, the home building, and even into the sale of a cosmetics company to a public, I believe Estee Lauder’s public? Does all of that inform the day-to-day? I mean, but obviously it does. But I guess the question is, how do you navigate all of that varied terrain, right? I mean you’ve done a lot of different things over the years. Howard Katkov: So I’m a mutt. I’m a collection of mutually exclusive businesses. Law practice, real estate development, cosmetics, digital marketing, concierge services, furniture company, ski resort. Some of which were grossing well over a hundred million dollars a year. So I’ve run some big businesses, I’ve had a thousand people working for me. Each time I’ve started a business, I’ve had no background. So my advice to all of your listeners, don’t be afraid of that. Just head down, learn your category, make quality decisions, and surround yourself with people that are as smart as you, and be a good listener. And so for me today, how do I maneuver it? I’ve been working since 1976, so 24, 34, 44, 46 years. And I still learn all the time. I learn from people who work for me. I learn from reading and witnessing what’s happening in our world, what’s happening in this category. I’m always a student, and I never think I know everything. But the way, I have confidence that I’m a good CEO for this resort. And that confidence did not happen the first two, three years. I mean truly in my personal life, I didn’t feel confident about my decisions, until after I was 50, and I sold my cosmetic company to Estee Lauder when I was 47. So it took me 25 years to really feel secure in my decision making process. Because when you’re the CEO, and I’ve been a CEO my entire life, you have the ultimate and final decision making authority. And that comes with responsibility, and it also comes with listening to your team, and consensus discussions. But there are times where I make decisions still. Quite a few, that I say with all due respect, we’re going this way. And so the ski resort business is, it’s not complex like the cosmetic business, I will tell you that. Some of the worst things about this industry is, things that are out of your control. Snow. You can do everything right, as you know, and have a poor December just because Mother Nature didn’t show up. And it impacts your PnL dramatically. Those things are hard for me to take, because I tend to like to control my world. But in terms of the operating company, I still run sales and marketing for this resort. I have brilliant young people who report to me, but I still look at the copy of everything that comes out. And I still run all the revenue department of this operating company. And the real estate side is, it’s stressful just because as you know, I mean this is your business as well. You know what developers have to go through. But it’s not, I have a lot of confidence in real estate development, because I’ve done it for a long time, since 1984. Kevin Choquette: Well I also think that you, based on what you just said in terms of risk mitigants and managing downside variants, I mean it usually is the case that people who’ve lived through a severe cycle or two know how to keep a reasonable chip stack on the table, and not shove it all in. I think that’s a big part of your success. But I want to go back to what you just said, about this idea of pre-50, maybe not having the kind of confidence in your decision-making that you do now. In all of those years, and/or scenarios that would’ve predated that change, what then did you do? If you didn’t have the confidence, and yet you were running a 3000 home development company, or running a law practice, or driving a VC backed cosmetics company, how were you navigating it, with the condition that maybe you didn’t have complete confidence in your decisions? Howard Katkov: Well I kept that to myself. Kevin Choquette: Yeah, sure. But you still had to make the decisions, right? You still had the- Howard Katkov: I made the decisions. Leaders have to lead and they lead by example, and my team knows it. Nobody works harder than I do. Nobody gets up earlier than I do. They go to bed a lot later than I do. But a leader has to be out there with confidence, because I can tell you, just being a CEO my whole life, if I just burped the wrong way, my team was, “Oh, what’s wrong? Okay, what’s going on here? Something’s wrong with Howard, he didn’t smile today.” So you have to, on the front end, however you feel that day, and particularly if it’s not a good day, you cannot express that to your team, ever. And I never do. I mean, if the shit has hit the fan, excuse me, and it’s something we obviously have to talk about, we talk about those things., but I can never show weakness, in terms of my confidence in our ability to take a challenge. That’s just my philosophy. So in those pre-50 years I would do things that some people would say I was crazy. Like for instance, starting a cosmetic company when there was no need for a new cosmetic company. But I saw a void in … so that was 1993, where Christie Brinkley was 40-some years old, and the spokesperson for CoverGirl, and that was the only really strong teen brand out there. And I said, “I think there’s an opportunity to start a new brand in mass market.” So did I have a hundred percent confidence in that decision? No. I went to probably 20 VCs who said no. And then I went to a final one who had just financed … oh, I can’t think of the airline. JetBlue and a few others out of Silicon Valley. And they said, “We love this idea.” So you never have a hundred percent surety when you start doing anything. Buying a ski resort, I had zero background in that. But I felt that … I mean, that one was a more disjointed decision actually. That was never on my wishlist. Kevin Choquette: Right. It just happened. But on this topic here, my brother’s in the military and I’m pretty sure he and I have had the discussion around courage, and that courage isn’t a lack of fear. Courage is fear with the conviction to be in action. Howard Katkov: Exactly. I love being in the game. I love my dad. My dad taught me something, be a rule breaker, not a rule maker. I like disrupting categories, because I’ve learned, I got really interested in marketing in San Diego where I recognized that all these Boomers, myself were all starting to have kids. And no one was really capitalizing on the move-up market, and I did that. And I did it with a voice that resonated. And that’s how we got so successful so quickly, in that real estate company. And same thing with cosmetics. I recognized a void and created a unique voice. I think our tagline was, everything great about being a girl. Another one that was quite edgy is, you got a mouth learn to use it. You saw my campaign that for this winter for Red Mountain, welcome to the good life. Kevin Choquette: Yeah, it’s brilliant. Howard Katkov: So I mean, I like being in the game. And frankly, I’m not so sure how I’m going to function when I’m finally out of the game, which I know is inevitable. So I think that the courage piece, there’s courage, and there’s also huge responsibility. And the huge responsibility, it weighs heavy on me. Money that I bring in from people, it’s a huge responsibility. Decisions that I make with regard to this community, it’s a huge responsibility and I don’t take it lightly. So back to your question is, what happened at 50? I think my track record was starting to speak for itself when I said, “Hey you know what? I think my judgments are pretty good.” And I’ve had my kicked a few times too. It’s not like it’s been a Cinderella story, especially in real estate. When the cycles go 2000, well 2019, or actually 1990. 1989 was an amazing year, 1990 not so good. But I learned how to extract myself from bad situations as well. Which is also something that is intense, but it’s part of your skillset you need to have, which is how to get out of trouble, and how to manage risk. Now I’m mature enough now, to know how to manage my risk going in. Because when you’re 40 years old, when I was 40 years old, I had a lot of exuberance and confidence. And I think I had this statement once when we were, I think a hundred million outstanding in real estate loans in 1989, saying we borrowed so much, I mean obviously no one’s going to ever go after us, ’cause we can’t pay that back. Well, that was stupid, at the time. So those things, those don’t resonate with me anymore, through maturity. Now it’s married, you’re married, you have four kids, you have grandkids, you’re in the fourth quarter of your life, manage your risk. And manage your risk for your investors as well. I mean, I look at my investors just as if they were … my responsibility to them is the same as it would be to my family. And I think people appreciate that. Yet they still go in fully cognizant of the fact that, especially in real estate, things can change dramatically. Kevin Choquette: There’s so many things I can jump on here, but I’ll try to keep us moving in a general direction. Just listening to you talk, I’m scribbling down all these notes that I want to open up further. But I hear what you just said. Treating an investor, or thinking of an investor as somebody that’s akin to family, how does that show up for you? Because they’re always to me, in an imperfect capital formation, you end up with these synthetic tensions that are a result of the contractual agreement, that make it so what might be good for you, and what might be good for your investors, versus what’s good for the project in the marketplace are not the same thing. And it’s because there’s been some written word and expectation around timelines and return profiles. And then you have something like what the Fed’s doing, worth mentioning. It’s November 4th, 2022 and I think the prime rate now is 4%, which is up several hundred points from the beginning of the year. How does the idea of treating an investor like family show up in a real world instance, so that you don’t have to maybe face those same sorts of foreseeable tensions? Howard Katkov: Well the foreseeable events are beyond anyone’s control. So the first thing you do is you start out with a group that fully understands what they’re getting into. That you don’t just talk about the upside, you talk about all the things that can happen. And so they know going in that they could lose all their money. But I never have capital calls in my partnership, so they have exposure that’s limited. So the first thing is, that they understand the pluses and the minuses. The second piece is, that I have to maintain control over situations that go south, and have a document that supports me. And therefore, these investors have to trust me implicitly, to think that I’m going to do the right thing. Because it’s going to be decision making that is beyond their influence, and/or contribution. They’re trusting the GP, me. And the third piece is that I communicate with, I usually have a small group of investors. Even in the Red Mountain we have 22 total. But four have 85% of the money, one has 80% of that. And this was a guy I didn’t know at all 18 years ago and he’s one of my dearest friends now, trusts me implicitly. But he also understands that sometimes things happen and you have to make tough decisions. So you better pick your investors carefully, because things can go south and you’ll have to make decisions that can ultimately impact them. And I’ll give you an example. I had a project that I think the IRR was almost 50 at the time. And the recession hit and I had paid the bank back, and I still had 25 or 30 units. And I went to my group and I said, “I’m taking this, I’m cutting the retail in half. Because I think we’re going to be in this thing for a long time.” They agreed. They didn’t have a choice, but they knew I was going to do it, and I sold those units out in three weeks. They ended up getting back 75% of their investment and a tax loss that got their money back a hundred percent. And I did that quickly, because I’d been around a long time with trust. So I at least have the power to do those things. And I didn’t disenfranchise any of them. I had a situation with a group, where at the time and where people were getting preps. 9, 10, 11% preps. And then a partnership with a 17 million dollars accrued prep in it. And I went back to this group and said, “Look, I can’t go forward with this accrued prep, and you have to waive it.” But because of my personal relationship, they waived the past prep and waived any future prep. That allowed me to raise future capital. Kevin Choquette: Well, so look, you’re talking about something really- Howard Katkov: My investors become, they’re not just money, see you later. They tend to get engaged with the project, and I allocate time for these investors. And it’s not overwhelming, but when there are things that have to be discussed, I make sure that they’re not surprised, even though they don’t have the vote. So I mean, I don’t know if that makes sense to you? Kevin Choquette: No, it makes perfect sense. Howard Katkov: Or if I even answered that question? Kevin Choquette: Yeah, it makes perfect sense. So Howard, you’re talking about raising a very specific type of capital, which I would call friends of family money, or country club money. Which isn’t to suggest that it’s unsophisticated, but that it is different than institutional capital, where quote/unquote professionals have gone out, raised a bucket of capital. They have a mandate under a certain time, certain to produce returns. Their whole value prop to that investor base is that they’re better than the competitive set in delivering attractive risk adjusted returns. I think you know the money that I’m talking about quite well also. But how do you overlay what you’re doing with other types of capital, call it institutional capital or otherwise, that won’t allow you the kind of autonomy that you were just … and patience it sounds like. There’s some autonomy, and there’s some patience. What money won’t you take? Howard Katkov: I won’t take money that has very sharp teeth. Kevin Choquette: Yeah. Howard Katkov: So I’ve had venture capital, Silicon Valley money, that had obviously mandates in their funds and returns. And my investors in Jane Cosmetics, the second group which was institutional venture capital, they were in this deal 20 months. So they had a four and a half X in 20 months, they were pretty happy. Although when I got the offer from Estee Lauder, they told me, “If we’ve only been in this thing 20 months, they usually have a four year horizon.” But I felt this was really a good offer and convinced them to take it. And actually, had to give them another million of return to get it done. But today I have a completely different mindset about raising money and how to treat those investors. And you’re right, that I can’t go to a fund that is trying to get 20 IRRs, and in short periods of time that have a lot of involvement in my business. And there’s nothing wrong with those guys, it just doesn’t fit my profile. But on a real estate project, it does fit my profile. If an investor came up to me institutional and said, “Look, I’d like to take a run with this. Put up the seed capital and if you hit those bogies, I’m in.” I have no problem with that. Kevin Choquette: On a single deal? Let’s go build the next phase of development at the base? Howard Katkov: Correct. On a single due deal. But in like a ski resort, I mean put it in context. Roger Penske was one of the major investors of Deer Valley and he was in that deal 48 years. And he obviously was patient capital. My main investor is patient capital, because we’re growing the value proposition. It’s taken a long time. I can’t tell you that I ever thought I’d be in this 18 years when we bought this. The longest time I was ever in a deal was cosmetics and that was 10, but even though I sold it after four, not even. But I worked for Estee Lauder for three years. So this one is an anomaly for me, and it’s also an anomaly in terms of what it is. It’s not just a business, it’s a business that’s joined at the hip with the community, that I value, and respect and honor. And it’s probably not the easiest thing to manage, because sometimes you make decisions that skew towards that community, that other people would just say whatever. And that’s just not who it is and who I am. Kevin Choquette: Do you view the, I’ll say mismatch between the business case that is Red Mountain Resort? By the way, I said Red Mountain Lodge before, Red Mountain Resort. In terms of it’s a slow boil, right? It’s a patient approach that you, as the head of that business, are executing. Do you view the capital mismatch as opportunity, or impediment? Not being able to go get the high IRR, high active management style from that kind of capital? Howard Katkov: Well it depends. I mean this real estate project, the IRR is 46%, The Crescent. That’s a good IRR. Kevin Choquette: Yeah, that’s a great IRR. Howard Katkov: The ski op company, it certainly has been a slow boil. But it’s taken us, we’ve stayed patient and steady with our vision and we haven’t deviated. In the two thousands, in 2006, ’07, when the capital was just flowing into the ski resorts, we were criticized at, “Why don’t you have more of this? Why don’t you have more high speeds? Why don’t you have X, Y, and Zed?” Then today as we sit here, they’re all built out. We all understand how the experience at some of these resorts that have populations of 3 to 5 million within, or 20 million for that matter, within five hours, six hour, seven hour drive. And our international airports. It’s really taxing the infrastructure and consequently impacting the ski experience. Not to mention the expense of it. What we have now is, we are now current hip and cool, and surprising people like yourself. And therefore, the consequences, or the impact is, for instance, our real estate value. Our real estate holdings have quadrupled on appraised value. Not on all of our properties, just anecdotally if you take a couple of them and extrapolate them out, by over 4X. So our patience, and not only is it increased in value, but it’s increased in demand. That communities like this, and resorts joined at the hip to communities like Rossland are becoming extremely attractive. Kevin Choquette: Mm-hmm. So- Howard Katkov: And therefore- Kevin Choquette: Go ahead. Howard Katkov: And therefore today we are very relevant, very current, and not as a company that is behind the times, but a company that is ahead of the curve. Kevin Choquette: Yeah, I see that. You talked about it early on, that you guys have become a partner with Ikon. And my view of the that whole, I’ll just say transaction, where you buy your 24 hour fitness membership and you’ve got unlimited access, or slightly restricted access, to a massive web of ski resorts, definitely strikes me as the best of times, the worst of times. The value prop for the buyer is insane. You can spend $900 and you can go ski whatever it is, 17 different mountains, depending on which of these you pick. But we all know the downsides, and the Instagram lift lines that are three hours long at the base of Vail, and all that sort of stuff. How do you view this phenomenon? How do you parse good from bad? And how do you guys reconcile hopping on the bandwagon and getting in the Ikon? Howard Katkov: I chose carefully. I did a campaign called Fight the Man, Own the Mountain. That was the first crowdfunding of a ski resort ever in the United States and Canada, and the first cross-border crowdfunding ever. We did it about four years ago. And two weeks before I launched Vail Resorts had bought Whistler. And I did it as kind of a fluke. it’s too long of a story how I got into it. But it became very successful. We raised several million dollars and ended up having 820 non-voting investors who own our resort and couldn’t be happier. And the average investment was 3,500 bucks. So I was kind of the anti-Vail through that campaign. When Alterra showed up, it was clear that this world was going through a paradigm shift with these passes. And to your point, it’s too good of a deal for the consumer. And I now had Revelstoke, which is four hours from us, became an Ikon partner. Big three became an Ikon partner. And I know today we have the capacity to bring in some more visitors. And I felt that I had to choose one and not to be left out. Because I’m confident that notwithstanding an increase in visitation … and it’s ironic, I mean the year we signed up with Ikon, the border closed. And with Covid and the pandemic. So we haven’t even had a chance to actually see the benefits too much. This year we will. But I’m confident it’s not going to interfere with our ski experience, and actually provide a lot of joy to these Ikon members who are going to come to Red Mountain and say, “Wow.” So it’s going to build our awareness, but we still have the capacity to handle all of the pressure points that interfere with the ski experience, starting with parking, then the lift lines, the pricing. I mean our lift ticket today, the ninth largest ski resort, US dollars, is a hundred bucks. And we have two other mountains that I can put chairlifts on, in case our quote, lift lines become a problem. Kevin Choquette: And are you guys unlimited Ikon? Or do you have a seven day thing? I think Deer Valley is- Howard Katkov: Yeah, we have seven days. Kevin Choquette: Okay cool. Howard Katkov: And they’re good. There’s some good resorts there. The management is good. And for us, this will be the first year that we’ll really see what Ikon’s all about, because the border’s now completely open, and you don’t have to do anything to show up. But I just felt that I couldn’t be left out anymore. And since then now, Panorama, which is within our region, Schweitzer, which is three hours from us, is now an Ikon member. Obviously Crystal Mountain in Seattle, Mount Bachelor. And so we’re with some good other resorts, and it makes it a good, being on the Powder Highway that we are, we actually say we’re the first stop on the Powder Highway. I think that it makes sense, and I’m not worried at all about how it’s going to interfere with our experience. Kevin Choquette: No, I get it. I think it’s an astute decision. Howard Katkov: No, it’s a good business decision. It was. And this is where I can make those decisions with confidence. Kevin Choquette: Yeah, right. And you got to evolve. The market’s changing. Howard Katkov: The market has changed, that you and I know, dramatically. Kevin Choquette: Yeah. So I’m going to go back to one other thing you mentioned, and then we’ll kind of try to hit a little bit of, not that this hasn’t been personal thus far, but a couple personal things, and I won’t keep you from the balance of your day. But you did say, head down, learn your space, listen and build quality teams, in terms of how you can have the guts to just move into a new space. You’ve got a small, high powered team at Red. The story I’ve told on this show a few times in the past is, I was listening to an MIT tech guy, and somebody asked him if he was afraid of the competing widget. And he almost immediately replied, “I’m not afraid of any technology. I’m afraid of competing teams, and who’s on that team.” I wonder if you could open up a little bit more about your view of teams, your current teams, the teams you’ve built in the past? Kind of what keeps you staying small in that core group that you have as advisors and lieutenants? Howard Katkov: Yeah. So because I’ve done so many diverse businesses, my teams have obviously been different. My real estate company in San Diego, we had I think, 4 or 500 people in that company, because we did our own concrete and framing marketing. But my core team was probably 20. My core team at cosmetics, we had I think 900 people, and that core team was also probably 20. Red Mountain, the core team in real estate is four. That’s really the total team, four people direct, that are on this almost 50 million project. My core team and my operating company at Red, I mean I had a manager’s meeting yesterday, a kickoff meeting for this season. There are 44 people, 44 managers. When we’re fully open, we have 350 people employed. I’d say my core team on the ski op side is less than 10, that I engage with. And I don’t choose size for control. Size evolves based on the business. But I do believe that a smaller more intimate group, notwithstanding the size of your business, is easier to manage, especially someone like me that is hands-on. I don’t micromanage, but I’m very detail oriented. I believe in staff meetings on all my departments on a regular basis, with written agendas that people own. I’ve done that for at least 30 years. And so therefore if you have a team that is manageable, it becomes more intimate, and it’s better for those team members. Because my philosophy in team management, is team participation, consensus, discussion, disagreements, advocacy, open. I tell people that you’re all my partners. I’m not your boss, but I have the last word if it’s needed. And I’ve always liked having the last call. I’ve only been in this role, and therefore it’s pretty much my DNA to be the boss, although I don’t act like a boss. And here’s the other thing that I would say that I’ve always had. I’m very accessible. I mean, I have people at any level of this ski resort that reach out to me with my phone number, and/or email, to talk to me about something. And I’m not going over anybody else. They know that it’s okay to call me. A lifty, somebody that works in ops, they have an issue. So my philosophy also is, I don’t have walls between departments. That my communication flows between departments, and my authority flows through departments. But I am very light on authority, and very heavy on discussion, open discussion. Because I’m 30 years older than the average employee of our company now. And youth is, it’s my head of my marketing sales is 35. I can just go through all these departments. I mean, we are … Women, I probably have more women in director roles than any ski resort in North America. Top 10, I challenge anyone. I love working with women. They’re sensitive, they’re not so macho. But I nurture open discussion and give people the sense that they can talk, or ask, or contribute anything they want, and feel that they’re going to be listened to. That they can contribute and be part of it. And therefore, because of how, as I get older, and the voice of the world is younger, I have to make sure that I’m letting those people do a lot of these kind of strategic decisions that they believe reflect the demographic that we are speaking to. Kevin Choquette: That’s cool. I’m going to shift over a little bit here, to daily routines. I know one of them, because we’ve both been out on the bicycle together. Fitness and staying active I know, is part of your daily. My personal view is, if I can tee up some sort of routine that allows me to get my head, and perhaps my heart in the right spot for the day, if I do that on a regular basis then have a better chance of the idea, win the day, win it all. Not necessarily that a win is in fact the lens, but I find a lot of utility in trying to have a morning routine, a daily routine. I wonder if anything like that is a part of your day to day? Howard Katkov: I mean, physical exercise for me is really like a drug. I was a competitive swimmer from eight years old through high school. I became a runner for 20 years. I’ve been on a road bike now, a mountain bike, for 30 years. I can’t go three days without working out or I won’t be productive. It’s just so essential to a balance. And it can be, we have a new puppy, walking a dog for two or three miles. But I try to ride a bike three to four days a week, make eight hours a week. Walk the dog, do yoga. I lift a few weights, nothing to brag about. I’m more a cardio guy than anything, but I still love to ski. But I think physical exercise is, it’s just so essential for my personal wellbeing. And as you get older you have to be careful, because your body just does not heal the way it would do years ago. But yeah. And the people, it’s interesting, the people that I’m closest to have that same mindset, that if you don’t work out physically, which contributes to you mentally, then it’s very hard to be effective. That’s in my case, in the job that I have, or any job that I’ve ever had. Kevin Choquette: Yeah, I couldn’t agree more. I’ve told some friends of mine that if you could actually sell the health repercussions of being … Everything you just mentioned by the way, with the exception of yoga, is a cardio pursuit. And the payoff for getting into that state on a regular basis, if somebody figures out that pill, it’s going to be better than the results they’re getting out of Botox, and Viagra, and all the other sort of designer things out there. Howard Katkov: Exactly. And in the mountains, and you know it, you’re in them. The Alpine, I mean we have a Sprinter van, and when I turned 65, which was seven years ago, we bought it on a fluke. My kids said, “That will last two months.” Well we put 55,000 miles on it. We’ve been to Canada nine times. It’s a place where we can get into the mountains, even if it’s two or three nights. And just as they say, what’s it, forest cleansing, or forest bathing the Japanese say. Kevin Choquette: There you go. Howard Katkov: Well, I fully believe in that. And what I love about Rossland is, it’s not just a skiing, there’s trailheads everywhere. We throw on snowshoes and go into the forest on a full storm day with our dog and our friends. And I mean, it’s so good for your head. It’s just so essential for life, and life goes by quick. And those things for me, are the things that I enjoy most. It’s not buying a new car, or … it’s physical activities in natural settings with people that you love. That is, to me, the greatest enjoyment. Kevin Choquette: I get that a hundred percent. Well look, you’ve shared some, any sort of potentially closing thought here on message to entrepreneurs who might be … I love what you said by the way. Yeah, once I got into my fifties I found a level of confidence that had been previously less abundant. Which is to say that the entrepreneurial journey, beginning, middle, end, is fraught with all sorts of challenges. So whether you’re talking to somebody who might be starting out, or somebody mid-career, or even the guys who are near the end of it, but still fighting the good fight, any thoughts that or wisdom you might share to that crew? Because that is a large part of who I think is listening to the show here. Howard Katkov: Well, I would say that never look back. I look back to learn, I never look back and regret. And follow your heart. I mean, if you have this desire to be an entrepreneur in whatever category. And it’s not for everybody. My daughter’s about ready to start a new agency, advertising and marketing. She’s 30, she’s my baby. And I am giving her some mentoring. And what I say is, “Expect it to be challenging. Make sure your life, the complexity of your life can handle the challenge of starting a company.” But for me, I’ve never worked for anybody. I have started seven companies. And there’s, for me personally, just personally, there’s nothing greater than to start with an idea, and start bringing together people that are like-minded. And building something that works, and that provides a product, and an experience, and a price, and a value and all those things. That it is just fantastic. And the failure rate is high. So it’s like swinging against 102 mile an hour fastball. It’s hard to hit. And the way you minimize the risk, is do your homework. Don’t take shortcuts, don’t trust your gut. Bounce it off a lot of people. Because I’ve always said that you can get drunk on your own Kool-Aid, but not have a clue where you are. And so my advice is, on to be an entrepreneur, make sure you have good partners. Make sure you have enough money to at least get you to a point where you think you have something. Because if you’re just chasing money from the beginning and you can’t focus on the idea, then you’re diluting your efforts, and you’re going to minimize your opportunity for success. And pick those partners and make sure they understand the support that’s needed financially to give you that shot. And then work your ass off. Kevin Choquette: Indeed. So Red Mountain Lodge, anybody, you guys can Google it. Howard, I don’t know if you want to- Howard Katkov: Red Mountain Resort. Kevin Choquette: I keep doing it the wrong way. I’m sorry. I was trying to do it the right way there too. Red Mountain Resort. Thank you. Howard Katkov: redresort.com. Kevin Choquette: There you go. Howard Katkov: Is our url. Kevin Choquette: That is exactly what I was going to ask you. And if you want to leave any other contact information, or digital trail markers behind, I’ll hand it over to you for that kind of a comment. Howard Katkov: Yeah, I mean, when you asked me once about giving back, I mean I’m always willing to talk to someone about advice. I’m still very busy running two companies really. And that someday, if I ever slow down, I do want to give back, in the form of helping young entrepreneurs manage the mine fields that are out there. But yeah, it’s been enjoyable. Hopefully you’ve happy with this? Kevin Choquette: Yeah, absolutely. Howard, thank you so much for taking the time. I really appreciate it. I know you’re super busy and you’ve got a upcoming season opening, and I’m sure there’s a lot of logistics on just the operating company on that side. So thank you and- Howard Katkov: You’re welcome. Kevin Choquette: Thanks to the listeners for carrying along with us, and yeah. Howard Katkov: You’re welcome.