Working Capital The Real Estate Podcast
How Risky is Real Estate with Lance Pederson|EP54
May 19, 2021
In This Episode
Lance Pederson has worked in the middle-market real estate space for more than 13 years and has helped over 180 entrepreneurs architect pooled investment funds. He is the Founder and Managing Partner of Verivest, an end-to-end real estate investment platform designed to bring transparency to middle-market investing. He’s also a principal of Fairway America, a private equity real estate equity in Portland, Oregon. Lastly, Lance is the host of the ‘The Real Estate Risk Report,’ podcast, featuring conversations with real estate sponsors around the topic of risk mitigation
In this episode we talked about:
- Lance`s background
- The transition from hard money lending to private equity real estate
- The structure of the company
- Role of the operator in a deal
- Fund model
- Verivest, how do they help companies?
- Operators: control, validation, trust
- Personality types of investors and team members
- Risk mitigation
- Track record
- Catch-up mechanism in private equity
- The process of sponsorship investment
Jesse (0s): Welcome to the working capital real estate podcast. My name is Jesper galley. And on this show, we discuss all things real estate with investors and experts in a variety of industries that impact real estate. Whether you’re looking at your first investment or raising your first fund, join me and let’s build that portfolio one square foot at a time.
Lance (23s): All right, ladies and gentlemen, welcome to working capital the real estate podcast. My name’s Jess for galley and my guest today is gentlemen named Lance Peterson. Lance is the founder, founder and managing partner of Vera vest on end to end real estate investment platform designed to bring transparency to middle market investing. He’s also a principal of fairway America, which is a private equity real estate company in Portland, Oregon. He’s lastly, host of the podcast, the real estate risk report, featuring conversations with real estate sponsors around the topic of risk mitigation, Lance, how’s it going?
It’s going great, man. Thanks for having me, Jesse. Yeah, right on. Well, we were just talking before the show still kind of in the thick of it right now. End of Q1, 2021 to timestamp it. You’re in Portland. How are things going on down there? Yeah, it’s going great, man. I mean, we’re, we’re spraying a sprung, so it’s nice to get some nice weather and seems like, you know, people are out and about a little bit more than they were before. So, you know, hopeful here that, that things will start returning to normal. But you know, for me, it’s been the, we’ve always had a nationwide client base spec that I was speaking with real estate investors up in Canada, the other, the other day.
So, so even, even some Canadian, so most of my interactions are with people who aren’t in Portland. So I guess it’s it hasn’t been too too bad for me, but yeah, well, fingers crossed on that. It looks like we’re heading in the right direction and yeah, we’ll hopefully that’s the way we’re going. So thanks for coming on. I wanted to have you on, because I just see that there’s a very unique perspective that you take with your company and approach to real estate. Before we dive into all that we usually like to ask our guests, you know, how they fell in love with real estate, how that, how your first exposure was to the asset class.
And maybe you could give a little bit of a background about yourself. Yeah, sure. No thanks. And so for me, it sort of fell into it a bit in, in 2008, I, I ended up hooking up with Matt Burke, who is the founder of fairway America. And he, it was a commercial hard money lender in the Pacific Northwest, you know, mainly commercial use, you know, only average LTV, you know, 55 LTV.
So I didn’t really know much about the business at all when I, when I started working here, but Matt and I were, were good buddies and involved in entrepreneurs organization together. And I, I had sold the it services company that I built up, which I started when I was 20 years old and sold them when I was, you know, 27 and started working with Matt and just looking for more of a, something more intellectual, I guess, or just that would be more interesting and Hetty. And so that’s kind of how I got into it.
And then, you know, for us being lenders, you know, all the talk is all about, you know, valuation, you know, what’s the value and you know, when you’re lending money, you gotta make sure that, you know, that you get the V right. So you really dig into things. And, and then in 2012, we, we decided to, you know, we really hung on through the financial crisis, our portfolio, you know, held up, but we made sort of the mistake of, we took on a senior credit facility in 2008. Like we closed the deal like a week before Lehman brothers crashed.
And the, the lender we, we did the line with just got crushed. I mean, like all the borrowers outside of ourselves, like everyone else just got slaughtered. And so they, they didn’t renew the line in 2011. At that time, the markets were still pretty well frozen, especially with that kind of stuff with specialty finance, it was just hard to get financing like that. So we couldn’t renew the line and couldn’t find anybody willing to, to refinance. And so we had to wind it down. And at that point we’re like, you know, being a lender is tough because the upsides kept and you know, money’s fungible and you’re basically, you know, I mean, it, it just, it ends up being, you lose out on deals because, you know, you think the value is not as high as the next guy, and he’s always willing to borrow more and advance more.
And so we’re like, I mean, we already underwriting like their equity deals. We might as well become equity investors. And so that’s when we decided to launch really what was our sort of the private equity real estate platform was just, okay, let’s take all of our knowledge about managing funds and, you know, underwriting loans. And we still obviously do some lending to this day, but like, let’s go find guys that have got interesting strategies around the country and let’s allocate capital to them, right. And let’s, let’s build good relationships and leverage what we’re good at. And so we started doing that and we’d launched an advisory practice where we help people architect their investment vehicles.
Right. Cause it’s proper structures. I mean, as we just had learned, right. That, that even if your underlying assets are great, if your, if your structure capital structure isn’t right, you know, it can cause big problems or it might not be marketable in the, in the marketplace. And so we started consulting with guys and since that time we’ve, we’ve done, I think we’ve been engaged over 180 times to help, you know, architect blind pool funds and still do quite a bit of that. And so it’s just been one thing leading to another, but our North star has always been like,
Speaker 2 (5m 44s): W how can we help, you know,
Lance (5m 46s): Create a flood of capital into the market? Like how, how can we help the good guys, those who are worthy of, you know, being good stewards of capital, get access to that capital, whether it’s, you know, us it from, you know, our investor base and then allocating into them, but just trying to help move the industry forward. And, you know, that’s following that North star has led us to do all sorts of different things, but the, the administration back office platform started the accidental part of it was we learned quickly that wow operators, even if they’re really good at what they do, aren’t very good at administration and accounting and those sorts of things.
And so in order to just make it suitable so that we could do our reporting at the fund level, we ended up, you know, offering that as a service. So we took our internal department and made it an external facing division and said, okay, we’re now business, like, you know, Amazon style. And then that ended up just going nuts. So we spun it off in 2017 and that’s sort of when, you know, that was always kind of, you know, my background was in sort of outsourcing, it was an it rather than accounting. And, but we just took what I knew and, and ran with it.
And that’s, what’s now known as Vera vest. So we really have the two companies one’s an investor. And then Vera vests, you know, is really a service provider to the industry, just trying to, you know, I call it and removing friction, right. Just want to remove friction from the, from the process
Jesse (7m 15s): Right on. So if I have that, right, you go from hard money lending you’re in the lending world. You move over to investing yourself with, with some, some team members and then realize that there’s a missing link here. That operators are basically the administration, the business aspect, there’s that missing link. And almost to make it easier for yourselves as the private equity company, you outsource, you basically created that as a service. Is that right? Yeah. That’s right, right on. So how do you go from, from the hard money lending?
How did, how did that transition happen for then, you know, to get into the private equity side? Because I find that private equity real estate is still kind of a mystery to people in real estate and externally.
Lance (8m 0s): Yeah. That’s a great question. I think what, what ended up happening is that when we, in 2008, when we were approaching, like how we could better capitalize, you know, the, the debt side, we, we ended up spending a lot of time with securities counselors, right? So we ended up really getting a PhD in, you know, all things, you know, sec related and the investment act of 1940. And I mean, you name it.
We, because we were always trying to figure out, you know, how all these things fit together. And, and so I think for us, that was sort of a core competence of ours. Like we really, we really understood what all the securities laws were and what you could do and what you couldn’t do. And so it really, the transition was actually pretty easy for us. And because Matt’s background is really underwriting, you know, mainly, you know, it was commercial real estate loans, right? So bridge loans and whatever. I mean, it’s sort of, it makes it a bit easier because he’s always looking at like, well, how are we going to, you know, we don’t want the property back, you know, but if we’d have to, we’ll take it and just, you know, how do we, how do we underwrite the loan in a way, and how does the business work and, you know, all those sorts of things.
So I think for us, it was a bit easier then to kind of get into that because that’s a lot of what I think trips people up is that, and then you take sort of, I was just good with like the accounting and understanding, you know, gap and a cruel. And, you know, you, you kind of add all that up and it’s like, that’s what it takes to sort of make the leap. And that’s what I spend a lot of my time doing now and have been. So then when you’re teaching people how to do it, you, as, you know, like you just get, the more you teach something, the better you get at it. So at this point for me, it’s just, that’s what I spend all day long doing is teaching what amount to real estate guys who were really good at kicking dirt and identifying properties and negotiating, you know, purchases and things and teach them, you know, really teach them the, the capital management side of the business, like, okay, like these things matter and they make a difference.
And, you know, and when you want to offer it to some, you know, like equity investment, you need to understand how these things work, or you get one, you can get yourself in a lot of trouble, as we know, like if you violate the rules. And so, you know, I think that’s how we, we sort of, you know, made the leap. And then from there, it’s just a matter of, I mean, we still believe it to this day. It’s like, it’s about finding the right operators. That’s what I preach all along is if you find people that have differentiated strategies who have conviction in a really good at what they do, they know the markets they operate in.
I mean, that’s really, that’s what it’s all about. So you find them and let them do what they do best, you know, and then you bring capital, you know, to play and put it to work and match it up and take off the administration. And so you start moving those things. You’d let people do what they do best, which is to create an add value based on whatever their strategy is. So,
Jesse (10m 53s): So when you, when you talk about just cause you hear, you hear the terms, general partners, sponsor, you know, fundraiser, you hear operator all these terms in terms of what you’re talking about. When you talk about an operator, generally speaking, what are you talking about there? So to me,
Lance (11m 9s): The operators is the one who’s sourcing the deals and negotiating the, you know, the purchase and more than likely it’s going to be the asset manager and the one who’s going to execute the business plan,
Jesse (11m 23s): Kind of the boots on the ground level.
Lance (11m 26s): Yeah. Like it’s the real estate guys, right? Like it’s, it’s the people who are in order to be even an operator is just sort of also could be the, the private lender or the one who’s originating the loans and they’re servicing the loans. And it’s just, it’s, who’s the one that’s adding value. It’s making, that’s figuring out what, what the investment is, you know, getting the deal done and then, you know, executing it and making sure that you get a successful outcome or whatever that outcome was sort of the operator, someone to me, like I consider ourselves on the fairway side more of, I think we’re allocators, right?
Because we, we look to bring capital in and to allocate it into operators. Right. Look for people who know what they’re doing and say, Hey, you know, and it’s just added additional rigor to it. Right. It’s just, it’s just making sure that all those things are in place and keeping them honest and I guess, and, and, you know, and adding value. And like I said, these other ways, like the capital market side, which is often the stuff where some operators, it’s just, that’s not their strength.
Jesse (12m 31s): Yeah. And the reason I ask is because the way I always thought about it is, you know, we’ve had people on the show that talk about, you know, the person that ends up either finding the deal or signing on the loan. And sometimes those people are different, but yeah, usually, especially in the mid market or even the smaller deals, usually that is the real estate guy or gal or the one that’s kind of putting the deal together, created the PowerPoint, the executive summary, whatever, just because I feel, and we’ve talked about it on the show before, and I’m sure you have on your show as well over the last few years, especially since the, the great financial recession was that you saw a lot of these models coming out where the person that you were talking to is almost one or two or three times removed from the actual operations.
And it wasn’t clear who exactly was running the deal. And, you know, that could be a fun to funds model or something more complex. Have you noticed that over, you know, in your experience over the last few years and what, what’s your take on that?
Lance (13m 28s): No, I’ve noticed the big time. Right. I, I think that when we started doing that in 2012 people thought we were kind of crazy. It, it just mean it was there. Like, it’s not like it was like, we didn’t invent it or it, I mean, it was always happening, but yeah, I see a ton of it. I kind of call it like micro, private equity, real estate. Right. So it, it just be because, because they, I mean the analogy I use, right. It’s like, it’s kinda like if you had to, if you had to own a fuel refinery in order to own a trucking company, like if you want to have a trucking company, but you have to have a fuel refinery to do it, like that’s no one would own a trucking company, but, but in, in real estate, like the real estate part is hard enough on its face, but you have to bring equity capital, you know, you need equity.
And so it’s a different thing. And so it, and I mean, I was just on Twitter earlier, you know, like real estate sweater. And they were sort of showing like, you know, GP 1.0 is like when friends and family and whatever, low overhead, you know, it’s where your recurring revenues exceed your cost or whatever. And then GP 2.0 is like recurring revenue is less than your recurring expenses equals bad. Right? So like, as you scale, there’s this like dip where it’s just, there’s so much stuff you need to do to grow and scale the operation that, that you just, it doesn’t even match.
And then getting through because all of, most of your compensation is all backend loaded. So, you know, it’s like the acquisition fees you earn or the origination fees or whatever, like they barely keep the lights on asset management fee, like barely covers the costs. So I think it makes a lot of sense, but now you’re seeing that, that like, that this, you know, separating them and it just works out better. Right? Like, so obviously I’m a huge proponent of it. That’s why we have a whole outfit. I mean, bare vest really is just a, you know, I’m trying to make everything turn key.
If it’s administrative or compliance oriented or accounting or whatever, I just feel like much like Amazon with AWS did in the early two thousands, it was like, you wanted to do a high-tech startup in 2001, even. And this was when I was sort of in the tech side. Right? Like the capital costs. I mean, you had, you had to raise all sorts of money just to buy like gear hardware, network equipment. Yeah. It was crazy. I mean, I loved it cause I was selling them that stuff and I was setting it up. It was awesome. But, but then all of a sudden Amazon comes out and you got the cloud and you could basically start, you could start a startup in a coffee shop, like, boom, you got a laptop and internet connection and you tilt up, you know, you’ve got all the computing power in the world.
So I think that’s what we’re seeing, right. Is that the old stodgy, big real estate, private equity shops, you know, they’re never going to go away, but what’s happened is you see all of these guys, like the acquisitions guy or whatever, like they’re spinning off because now they don’t need as much. And if there’s all these allocators of capital out there who are building related ships and educating end user investors, you know, they build those relationships, maintain those. And then if they can allocate capital, you know, from a vehicle into the syndication or the fund or whatever that the operator is running.
I mean, that makes a lot of sense. Now we’ve got sort of separation of duties. And so yeah, I see it then I’m, I’m bullish on it. I think that, I think that it’s good. I think that every right, the industry right now is sort of trying to find its way with some of this stuff. And that’s where you’re hearing, you know, GP LP. Some people it’s like, you know, they’re claiming to have like 10,000 doors, but it really means that they, yeah, they made, they made like 20, 50 grand. I mean, stuff like that is it’s. If I get another 20 year old that tells me he’s got a 400 million AUM, I mean, it’s possible, but it’s just like, I’m like, wait, what do you do?
So that stuff for me, that’s, you know, with what we do at Vera vest is that stuff drives me crazy, man. So that’s why like we have the whole track record verification thing now because well, once again, to me, it’s, it’s dangerous zone. And I think, you know, I laugh at it and it’s, you know, it’s, it’s kind of funny, but at the same time, it’s, it’s misrepresentation. And the last time I checked, like the sec and FINRA, you know, like they’re not big fans of misrepresentation. And, and what you see in the industry is a lot of misrepresentation because, you know, everyone’s trying to flex and make it look like they’re bigger than they are.
And you know, that’s dangerous zone stuff. So hopefully we can clean some of that stuff up without having the regulator step in and you know, it and increase the regulation
Jesse (18m 4s): Well, even with, with larger operators, so to speak like even, and capital, I’m pretty sure they’re not using five Oh six C. I’m pretty sure they have the most th the one that gives you the most carte blanche to market and even their representations are under scrutiny. And obviously it’s a totally different world at, at his level, but I, you know, you see it a lot in the industry. And it’s funny, you said that you’re kind of around during the tech boom in Oh one. It reminds me of, I’m not sure if you remember a book by Thomas Friedman, the world is flat.
And it was a lot of, this was just the, the stock that we build up and the fiber optics and how India and China got more connected. Like you were saying, like, you could just be connect to a cloud, which 20 years before that was going to be impossible for, for companies. So, you know, how let’s, let’s move to very, very fast in terms of how you actually help companies with that. So let’s talk about, you know, you have somebody that is, is looking at on operator and trying to vet them and trying to figure out, you know, what the track record is.
Should I be investing with them? What’s the process? How do you guys go about that?
Lance (19m 12s): Yeah, I mean, so yeah, the way, the way it works is it’s actually, you know, it’s actually pretty simple. I mean, so here’s like, here’s what we hope happens a lot, right? Is that, you know, passive investor he’s worth 10 million bucks. You know, he bumps into some operator, you know, online that he found calls them up. They send over the marketing material. There’s some table in there that represents the track record that basically says we’ve done $500 million of transactions.
These are all those transactions. Right? So the investor says to this guy says, Hey, great. You know, I’m sure you guys did all these great things. And it looks like you’ve got it all figured out, but I’d be a heck of a lot more comfortable if you just went over to their vest and basically, you know, applied to, to become a member of them and have them verify a track record. So when he shows up, then we say, well, listen, step one is you and the principles of the firm need to pass a background check. Right. And you can have personal business bankruptcies. You can’t have any felony criminal convictions.
You can’t have any regulatory sanctions. I mean, basic stuff like the bar is not too simplistic. It’s pretty reasonable, really reasonable. Right. Okay. So great. You’ve got clean backgrounds. That’s good. And then it becomes, okay, we’re going to run you through a mock due diligence, just like this investor is doing. So give us your track record, give us your stuff. Right. And then you can, you know, you saying you got $500 million of stuff that you’ve bought, right. Multi-faith value, add multifamily, whatever. Then we’re going to basically request the closing statements for all those transactions.
Right. And we’re going to go dig in and we’re going to figure out, can we try? Angulate what you’re you did? And can we, can we verify that you actually were in control of those assets? Right. So we don’t get all hung up on like, okay. Two of you came together and you did this, like, that’s fine. Like collectively it’s 500 million, but ultimately we need to know that at least one of you that you are just some LP in some deal. Right. But like, you actually were a principle to the transaction. So, so we do that. And then we put it up on their profile and, you know, give them the checks and sometimes old deals and like the deals they did in 2008, we just can’t, we can’t triangulate it.
We can’t can’t corroborate it. Right. Like, okay. It happens. And then from there, I think the big thing that we offer that we heard from investors is that there is they’re, they’re afraid to invest initially, of course, but I think most of their fear comes after they’ve invested is that they’re terrified that, that, that what they invested in isn’t even real, or it’s some Ponzi scheme or, you know, they just don’t know because they don’t know what’s going on. And, and so we offer a monitoring service where we basically will, the, the operator, the sponsor, the deal will send us the, you know, financial statements, bank statements, bank, rack, and GL detail for the property or project or the fund on a quarterly basis.
And we’re going to basically go through, look at the operating agreement and make sure that their fee was calculated correctly, you know, property management fees, just making sure that all the money went, where it was supposed to go, and that they’re basically follow the rules of the road. Right. And then we will report on their profile, like, yep. Check this. It’s good. Check this it’s good. So that way investors know like, okay, you know, it, I don’t know, once again, it could be the worst deal in the world. So it might, it might not, they might not be able to execute their business plan, but we’re at least saying, you know, they’re not crux, you know, the claims they made are legitimate.
They’ve been verified and you know, that all the money’s going where it should go, because at the end of the day, you know, like to generate a 10 IRR or 12 or 15 IRR, that means you’re taking some risks. I mean, that means that there’s a good chance that it might not work out the way that you hoped it would
Jesse (22m 49s): Like, we’re not, we’re not walking buildings and knocking on bricks because, because the returns are 3%. We, you know, and, and that’s, I mean, part of the limited partnership aspect is the fact that, you know, the big part as, as you know, as a lot of listeners know, is that you can lose everything you put in, but the, but the upside is that’s it. And it sounds like it’s not an upside, but it really is when you’re not somebody that’s actually signing the loan. But to that point, like, yeah, I think that there’s definitely a, a number of amazing allocators and operators out there, but they, the first time you raise capital, I think any person has had this experience or any person I’ve talked to it’s astonishing.
Once you actually get that first wire transfer the feeling, at least for a good operator to be like, Holy shit, somebody trusts me this much. I don’t want to screw this up. And there’s an aspect of responsibility, obviously, legally, but if you’re a good operator, just generally that there’s aspect there. But I think it’s, it’s a good point in terms of you saying that you want these people to sign up with you because you know, if you’re in New York and you’re investing in some deal in California, it’s, it’s not something that you can necessarily, especially right now, just fly out there and actually see the buildings.
So in terms of the deals that you come to, I can, I can only imagine there’s a number of these companies that are just like, ah, that’s too much of a headache, like to actually go through that whole process. How do you handle that?
Lance (24m 14s): I’d say good luck to you. Yeah. I mean, I, I guess that’s the beauty of it, right? Is that what I found? You know, we’re in the early days we launched it in July sort of soft launch that we publicly launched the directory component of it in February at this point, I’m basically saying, listen, if you hear what I said, and it resonates with you, then I love to have you be a part of what we’re doing. Right. Because, but if I, if, if you want me to talk you into what I just said, being a good idea, I’m not interested in wasting my time.
Right. Because like, what I’m saying is it’s, it’s just, and what I found is that a lot of operators, a lot of guys out there, they, they, they, they are committed to doing the right thing when no one’s looking and they carry themselves that way. And like you said, they feel the weight of like responsibility when the first wire comes in and they, and they carry that with them. But let’s be honest, man. Like not everyone does that. That is not how everyone approaches this thing and the trouble for the end user, passive investors.
That’s really hard to tell the difference between the two on its face. Okay. In fact, I think many of the guys know that, okay. Not to pile on Cardone. Right. But I mean like usually when they’re really, really slick, good marketers, you know, that means they’re also really, really good capital raisers. And sometimes it means they’re not real, very good operators. Right. And so the other guys, I call it the other day. I used the terms like revenge of the nerds. Right. And it’s a bit of like revenge of the nerds. Cause the guys who aren’t so good at marketing, and aren’t really good at like beating their chest and getting the word out there.
They’re the ones who get overlooked and it pisses them off to no end. And there’s been no way for them to validate themselves. Right. Publicly. So when they hear what I’m doing, they’re like, dude, this is the greatest thing since freaking slice bread. So at this juncture, I’m basically like anyone who says, it’s the greatest thing since sliced bread. I’m like, that’s great. Jump on board. Let’s get going. You know, and this is sort of that movement, you know, if you want to debate with me and argue about why it sucks, like I don’t care if you think it sucks. Like I’m used to, I’m an entrepreneur man.
Everyone tells every good idea I’ve ever had. They told me it was a dumb idea. I think that’s any entrepreneur. You, you get used to that. Like, so I don’t really care.
Jesse (26m 24s): You think you might be onto something when you hear that. Yeah, exactly.
Lance (26m 26s): If you, if everyone said, they thought it was awesome and it was so great, I’d be a little nervous, but it’s just on the other side though, the investor side, it’s amazing. They’re just like, I mean, they are like, this is what I needed. Why didn’t this exist before? And so for me, that’s where these days I spend most of time just out talking to that side of the house, even that’s why the allocators of capital raisers and the end user you Joe dentist, like those are the people. And if I spend more of my time talking to those people, you know, it’ll all work out because when the word gets out, it becomes something that, you know, investors demand and expect.
And, and that’s good for our industry, you know, ultimately,
Jesse (27m 5s): Yeah. It kind of hearkens back to just like the personality types in general, people in business, whether it’s, you know, you’re a driver you’re results oriented as opposed to analytical and R it’s it’s. I think there’s definitely an area for a company like yours, because just thinking about raising capital in general, it’s so multifaceted the, the approach of the let’s call it, the general partner raising the capital is, you know, it’s the guy like me is it’s a guy that’s, you know, a broker by day has been in sales. We, you know, our language is talking to people and talking about real estate specifically, if that’s the area that we enjoy, it might be financials.
But then there’s the other aspect of it. Like you’re talking about, you call it the revenge of the nerds. I I’ll use your words, not mine, but you have that person that’s so detail oriented and it’s such a crucial member of your team, but if they don’t have the, the other piece or you don’t have that person, it’s very hard to get deals done.
Lance (27m 58s): Yeah. Yeah, exactly. It’s just, it’s, you know, I, I never, that was never, I didn’t know that that part would happen. Right. It’s it’s and that’s something like all good things is that I just, I just listen to people. Right. So, and, and really for me, I mean, we were, we were just a fundamental, I mean, for all intents and purposes, that’s all we were doing. Right. And so of course at our core, it was like, it’s our job to make sure that things are being done accurately. And according to what the GP and the LP, you know, LPs have agreed to.
But what I mean for me, what happened was that I started getting all these phone calls from investors of our clients saying, Hey, give me your client list. You know? Well, why like, they’re like, well, because like, I just, I’m invested in like two guys that are clients of yours. And I love the idea that there’s some oversight here. Right. That that’s sort of like, so I’m assuming you’ve got other guys that I might be interested investing with. And when I, that kept happening over and over again, and I kept digging and going like, Whoa, timeout, there’s something here. Right. And then that’s what they all said. They said, listen, I know there’s more stuff.
There’s more than just crowd street or Realty mogul. Right. Like there’s other, but I don’t know how to find them. So that’s my problem. I don’t know where to find them. And then they’re like, and then just start asking questions, you could wave a magic wand. What would you, what would you, what do you wish you could do? And it was over and over again. I wish I could run background checks. I’m terrified that I’m invested in a Ponzi scheme. And I have no idea how in the hell to, to validate these claims that these guys are making, like, how do I know, how can I figure out if they’ve actually done a billion dollars worth of transactions?
They’re like, it just, it just seems overwhelming. So if you could do that, that would be awesome. So I’m like, well, shit, we can do that. Like I can do that. We do that from where we stand. And, and so, you know, that’s sort of how it works. Just listen, and then they can happen. It’s not easy, but, you know, to give them what they asked for. Right.
Jesse (29m 53s): So just to change gears here a little bit about your background, when it comes to risk mitigation, it seems like that’s a part of your, a big part of your philosophy when it comes to real estate. Maybe you could talk a little bit about that and what, what you mean by that
Lance (30m 7s): Mitigation. Yeah. You know, it’s so funny. Cause when I first got into this business, I was sort of like taken aback by the fact that in the PPM, you know, page three, starting to tell me, it’s kind of like these drug commercials, right on like, you know, risk of death, risk of death, risk of death, you know, the basically like you’re selling me something, but telling me simultaneously, I’m probably going to die if I take. So when I read the first PPM and the second one, I’m like, Oh my gosh, like they’re basically telling me every single way that you know, I’m going to, you know, get my ass handed to me if I invest in this thing.
And so initially my thought was like, that’s a dumb idea. You need to move this stuff to the end of the PPM or whatever. But
Jesse (30m 47s): For those that don’t know, we talk about a million times, but at the private placement memorandum, basically a, this is how you can get screwed up, screwed over a document.
Lance (30m 56s): Yeah, that’s right. So, so of course then when you’re helping people, architect funds and you know, all those sorts of things, you start to realize how far a field most guys want to get and how far they want to push the envelope. And then you realize like, Oh, it makes perfect sense. Each one of these sections is legitimate. Every little clause that is made. And so for me, I guess that what happened to me was that I realized that that is the important stuff, right? Like you do, when you’re evaluating, you need to say what can go wrong? And you know, now we all know like now the pandemic happened.
It’s like, well, if I underwrote all the deals to a pandemic, I never do a deal. Okay. I get it. Right. But, but once again, how many damn, you know, Hollywood movies and TV shows where there about pandemics that basically, I mean like that theme was always coming up. So it seems like, well, if Hollywood keeps writing scripts and shows and recycling the same thing, like that must mean that it could happen. Boom. It happens to us. So for me, that’s how I look at it when I train passive investors or even when we architect the fund, I’m like, you have to think of it that way. Right. Like I know we want it.
Like operators are geared to the upside. Like, because like I’m going to crush this thing. Like this is a sweetheart deal. Right. But when you’re looking from a passive side, you’ve got to look at all the downside risks. So you got to say, well, that could happen. And that could happen. And that could happen. And that could happen. Right. So for me, when I think of risk mitigation, then it’s just to say, well, that’s how I can, as an LP, determine how much of a risk premium or a discount I need to give like, Oh, you guys have only been doing this for two years. Then that means that, well, the risk is higher because the experience isn’t there, which means you did well better be compensating me for that risk.
Meaning yeah. You do need to make it a 10 pref instead of an eight prep, because those are the, that’s the way that you can say, well, protect your downside by increasing the preferred return because there is more risk, but to sit there and try to tell me that there’s not more risk when I was the guy that’s done it for 30 years and you’ve done it for three years. Yeah. Right. Like, okay. There is a difference. And so I, as the investor should be compensated for your lack of expense.
Jesse (32m 57s): Yeah. Right, right. It’s a, it’s a really, it’s funny, you mentioned that because we were, we were talking with somebody recently that we were kind of having this debate about the preferred return, just, you know, use easy figures here. You know, one deal was a 7% preferred return with a 70, 30 split on profits. And then the other one was an 11% or 12% with a 50 50. And we were trying to figure out from a risk standpoint, what deal you would prefer to be in when you have an unexp inexperienced operator, like, do you, what do you recommend for when somebody comes to you or you’re doing deals at your company in terms of risk mitigation, for that exact example, you have somebody that does not have a long track record.
Lance (33m 38s): Yeah. So, yeah. So when it comes to like the guys with not a very likely track record, I’m, I’m a big proponent in it’s it’s give up more like protect the investors downside. Yeah. Right. Because that, so in that case, the higher pref with, you know, with a bigger split above it, you know, so trying to teach them to think like, cause sometimes the optics aren’t as good. Right. Because I mean, it goes both ways. It can go both ways because on one hand you see 50, 50. Right. So I mean, the thing with 50 50, it’s the universal fairness number.
So there ha has this other magic effect on people’s minds where it seems like it’s fair, but the people have been in the business long enough and they’ve seen enough deals. They feel like 50 50 is greedy. Like, come on, dude, 50, 50, seriously. You know? But I’m like, yeah, but 50 50 over what? Right. So it’s just like, if all things being equal, like, meaning the deal is the same, it’s the same operator going to do the deal or, you know, two different operators doing the same deal. One with more experience, one with less then. Yeah. I just feel like I could sell that if I’m an experienced, this is what I try to train them to do is to say own it.
Man. Say, I’m willing to give you 12 because I recognize that our track record just not as long, but if I’m able to get you to 12 right. Then, then let’s split now there’s, there’s counterarguments to that because then it says, well, you might end up being, getting more aggressive and pushing it. So you it’s, unfortunately you have to assess all the variables to say, could they even do that? Right? Like given the strategy or whatever they’re trying to do, could they try to get, I mean, I don’t, I don’t know. I mean, there’s just limits, it’s called the market.
Right? Like the market is not going to let you do whatever the hell you want to do. The market’s going to say, no, you can’t just increase rents $400 or it just won’t work. Right.
Jesse (35m 25s): So how do you, how do you approach it? It’s, it’s interesting. Like it’s like on that piece there, you know, I, I assume you’re talking about a, a pure pref, not, not one where, where the, the deal sponsor is getting their allocation of the pref. Pro-rata like a true pref. Basically the investors got to hit that threshold. Then the GP participates. Is that right?
Lance (35m 47s): Well, yeah. I mean, yeah. Usually for, I needed once again for like inexperienced people, I’m going to say, I mean, people that don’t have as much of a track record, it’s just saying, well, give them the prep, you know, with no ketchup. Right. Like, yeah. I mean, it’s kind of weird. I mean obviously like the whole private equity leveraged buyout side as much more like everything you read in here, it has some kind of catch-up right. So it’s, it’s, there’s a catch-up so you really just need to look at the percentage, but in the real estate world, for whatever reason, you see more of just preferred returns and then splits above it, which w once again, it’s bad optics because, because they, because in the problem is that, you know, less sophisticated investors don’t appreciate the difference.
Yeah. And you know, and that’s a problem. That’s a problem. Cause they’re going, what, 70, 30 over an eight I’m going like, there’s no ketchup dude. Like yeah. Actually pretty good. Well, even,
Jesse (36m 39s): You know, having a catch-up mechanism or even at the very least like a lot of the deals that we’ve seen is where at the very least, if, if the GP is investing, say a 7% or 10% into the deal that they’re going to get, they’re going to, they’re going to both share arm and arm Perry pass through with the, with the pref return. But at their pro-rata, you know, at their 10% of the deal, then after that, you know, there’s going to be a profit split, but I’m always, I’m always interested in how different people are structuring different deals, because, you know, with the lack of ex experience, you would think first return of capital to the investors, then, you know, make sure that they’re, you know, they’re getting the return and then splitting after that, it seems like that would be kind of an ideal starting point.
But it’s a good point. I don’t, I think that, you know, when you’re first starting out, it’s a big distinction and it’s probably not appreciated.
Lance (37m 32s): Yeah. That is the hard part. Right. Is that in the space that I deal in is that it’s, you’re usually not dealing with institutional capital partner counterparties, right. I mean, if you do, they’re going to rip your face off and fees and you know, you basically worked for them anyway. So I mean, this is usually like high net worth individuals or, you know, and it’s going to run the gamut of how sophisticated they are and what they understand and what they don’t understand. And, and that’s why I just think that there’s so much of it is education. Right. It’s just trying, I mean, first and foremost, just helping educate your investor base around what the differences are and what these things mean.
And because some of that language does the catch-up language, they read it and more often than not will confuse them. Yeah. Right. Like
Jesse (38m 16s): A, like it did all of us the first time we re read
Lance (38m 18s): It, totally like the math, you always screw it up. And you’re like, well, how did that calculation work? And vitamin plus one, if people screw it up, you know, so there’s just, it is, it’s it it’s complicated stuff. I mean, it’s not, there’s no, there’s no question about it. It can get, it can get complicated. And, but I think that in all cases, for me, it’s just, it’s about, it’s the spirit of how you did what you did and why you did what you did and you as the operator or the alkyd or whatever, or the deal sponsor is. And it’s just understanding why you did it and being prepared to defend it.
Right. Don’t, don’t, don’t like if you feel like even early on, and that’s what I mean, if, if, if you have to, if your act fee has to be higher because you got to feed yourself or whatever, it’s like, you know, sometimes you just have to set it up and you have to just, you know, even if you know, they’re going to shine, the spotlight shine, have the shine on the thing that you’re ready to defend, shine it with them. That’s exactly right. Like, you’re right. I got a two and a half or 3% acquisition fee and you’re right. That is higher than a lot of guys, but you know what for where we’re at right now in the business, I’m willing to give up more to you on the deal and you’re right.
But I need to feed myself, like we need to invest in this stuff. And so we need more upfront and I get it, but we’ve, we’ve, it’s, it’s, I’m not being greedy. I’m basically trading this for this. Yeah. And, and once again, if you’re not comfortable saying that, then you can’t put it in there. So, I mean, it doesn’t matter how comfortable I am as I coach them on it. I’m like, if you can’t sell it, I can sell any way I want to, because I do this all day long, but you gotta be able to sell it and have conviction if you do, most people will be like, okay, fair enough.
Jesse (39m 59s): Yeah, no, that’s great. So Lance, the last tactical question on that, when, when you recommend whether, you know, you’re dealing with the operator and you’re kind of preparing them or vetting them for, for the limited partner or the other way around, you’re talking to the LP, do you have a preference or a suggestion that you give in terms of how this sponsor invests in the deal, whether they invest as a GP or they invest in their personal capacity or through a company as an LP, how do you approach that?
Lance (40m 29s): Yeah, I mean, I do. So I think that similarly, it, it depends obviously what their financial situation is, but in most cases I say, listen, one way or another, it’s a hell of a lot easier for you and everybody. If, if you somehow co-invest in at least 10% of the equity, I mean, like I get it, it can be a high bar, but it means start there. And then if, and now that means that where that money could come from, it might mean that you need to find a money partner, one of your better investors and, and cut a deal with them some way somehow to be on your side of the table to bring that money in.
Cause once again, whether it was your money or not, it’s still a signal to those LPs that, well, I don’t really care how you came about the money or how you got it, but the fact that you pulled it off and you convince someone to come in on that side is telling right now, I’m not saying once again to be dishonest about how much of it is yours personally, but then when it comes to you, I mean, once again, every principle of the GP, it just comes to what is a meaningful amount to you? Meaning like, what is the amount that if you lost it, it would hurt right.
A lot. And you, you, you try to put in as much as you can, you know, but it really needs to be dependent upon that. And when someone, you know, cause investors, our favorite question, the skin in the game question, it’s just be ready for it. When it comes, you can then articulate. Here’s what we did. We felt like it was important for us to have at least five, seven, 10, what, I don’t care what the number is. Just if that’s what you feel conviction about own it. And this is what we did. And this is where it came from. And I’ve got daddy Warbucks who put in this and Joe put in this because Joe happens to come from his silver spoon, the kids rich and, you know, whatever and good for him.
I came from the trailer park and I didn’t have anything. And I, you know, this is where I’m at. Like, see to me, that’s, it’s the honesty and the thoughtfulness as to how you arrived at it is everything right. But, you know, so I think that that’s how I approach it. And it just comes down to that. Like, if you believe in, if someone still tells you pound sand, that’s a weak skin in the game, or you don’t have enough. Co-invest it’s like, then they’re probably not a good fit. Just move on. Who cares? So
Jesse (42m 42s): That if in that example, Sates you, myself and Joe, we are the three, three guys that make up the GP, where are we saying the 10% allocation as a whole and the GP and then each one invests as an LP? Or are you saying as a GP, you know, Cohen, you know, whatever it is, 10, 15, 5%.
Lance (43m 1s): Yeah. I mean, I think more often than not, it ends up being maybe a combination of all. I think the cleanest way, if you could pull it off, right. Would be to just have it where the GP entity is, the one who is, you know, has invested as an LP to the tune of 10%. Yeah. But that’s like a different unit, but I mean, a lot of times you see like, cause what it might be is that one of them, you had a self-directed account or whatever. So you basically ended up investing, you know, 45,000 in his whatever. And you know, and I think that’s, I mean, like some of this stuff, I think it’s more of like the spirit of why you did it or how you did it more than like the form of like exactly it, you know, it’s just, I guess that’s my whole point is like you got to peel back and say, why did, why does it matter to people?
What matters to people is just, they want to know that you you’re in it like that. They want you to use some sort of like, you got financial commitment. And that’s what I mean, I would say to them, if they’re going to make a big deal about it, like, man, I went to this guy and you know what I gave up, you want to give up the daddy Warbucks to get him to put that in there. Right? Like, you know what I want to know? You don’t want to know and it’s more than I wanted to get his ass. Right. So, and I’ve, we’ve been there. So like a lot of the stuff that I talk about, like we’ve did ourselves, right? This is a story we want to tell.
This is what would make us feel good about what we’re doing. And I know we don’t have to do it, but we’re going to do it. And we’re going to give up something because we wanted demonstrate that we’re committed to what we’re doing
Jesse (44m 29s): Right on. All right, Lance, we got four. We ask every guest, that’s kind of a rapid fire thing. If you’re, if you’re ready to go, I can fire those out to you. And then we can talk about where we’re guests or sorry. Listeners can find you.
Speaker 4 (44m 41s): Sure. What’s
Jesse (44m 43s): Something, you know, now in your career that you wish you knew at the beginning,
Speaker 4 (44m 53s): The importance of people management like that,
Jesse (44m 58s): Some of the resources, books, podcasts that you’re you’re into right now that you’d like to share with listeners.
Speaker 4 (45m 8s): Yeah. I th
Lance (45m 11s): I guess I’ll, I’ll go to like my, my favorite book because of the pandemic. I just haven’t been like reading books as much as I used to, but my favorite book is persuasion by Robert Cialdini. Oh, nice. And so I, you know, sometimes people overlook that one, but I, I, and he’s, rereleasing it here like a new version in a month or two. So I give the plug for persuasion by Robert Cialdini.
Speaker 4 (45m 34s): That’s great
Jesse (45m 36s): Terms of mentorship, views, thoughts, suggestions.
Lance (45m 40s): Yeah. I mean, the thing that really propelled me was, was becoming a member of entrepreneurs, organization, EO, it’s a global worldwide organization. So I mean, I’m, I’m a proponent of it. However, you can get it. That’s how I got it. But yeah, it’s, it’s, it’s huge man, to get to chance to learn from people who’ve already been there, done that. And I mean, I wouldn’t be where I am with having not done that.
Jesse (46m 5s): And it’s not all about real estate first car make and model
Lance (46m 9s): First car make and model was a, it was a rear wheel drive Nissan hard body truck. Alright. Nick shift five five-speed yeah. I love it.
Jesse (46m 22s): Back in the back. I’m assuming it was, it was the eighties or nineties the year. Yeah,
Lance (46m 26s): Yeah, yeah, yeah. It was a, it was an 89, I think, 88 or 89.
Jesse (46m 32s): It’s it reminds me of like, just where did re where did stick shift trucks disappear to somewhere in the mid or late nineties? They just disappeared. Yeah.
Lance (46m 40s): Yeah, exactly. Yeah. A lot, a lot of fun to that. A lot of fun to drive the rear wheel drives, especially with the manual transmission. So right.
Jesse (46m 48s): Lance, where can listeners find you aside from a, a, an easy Google search of your name?
Lance (46m 55s): Yeah. So the real estate risk report.com that’s, that’s where my podcasts started personal stuff. And then Vera vest.com is a good place to go. And then I do a lot on like LinkedIn. So, you know, that’s sort of type in my name on LinkedIn and got all sorts of good stuff, but that’s, that’s where you can find me.
Jesse (47m 16s): My guest today has been Lance Peterson, Lance. Thanks for being part of working capital.
Lance (47m 21s): Yeah, my pleasure, man. Thanks so much, Jesse.
Jesse (47m 31s): Thank you so much for listening to working capital the real estate podcast. I’m your host, Jesse for galley. If you liked the episode, head on to iTunes and leave us a five star review and share on social media, it really helps us out. If you have any questions, feel free to reach out to me on Instagram, Jesse for galley, F R a G a L E, have a good one. Take care.