admin

Implementing the EOS System

The Entrepreneurial Operation System (EOS) is a set of tools allowing businesses to mature into a healthier enterprise from building traction and outlining a shared vision.

We are implementing the Entrepreneurial Operation System (EOS) to enable our business to grow into stronger enterprise from building traction and outlining a shared vision

Our strategic plan 1,3 and 5 years for both of our companies are with the framework in a single page that is called the Vision Traction Organizer (VTO).

When Leverage Does More Harm Than Good

We are increasingly looking at value property investments on an all-cash or very low loan-to-value basis in focusing on small to medium sized value-add apartment and commercial properties in the $2-25M million range.

The mortgage rates in this size range are automatically higher because it is less cost-efficient/effective for mortgage lenders to make these loans because they take the same amount of work and cost. Further, in the case of apartments, the lowest rate loans are determined based on in-place cash flow when a property is stabilized.

But what loan options are there for value-add properties with little to no income in place? The only loan options here are very high rate bridges that put a time clock on completing the value-add plan. This effectively adds risk and costs to your plan during a time period when execution is a lot uncertain.

The opportunity today is to assemble a nimble, but strong, pool of capital to target near-term property dislocation and rates environment and sell/refinance into medium-term strength. If you can capitalize near-term dislocations and refinance them into medium-term strength, it behooves capital to stay in and ride compounded rent appreciation over the long-term horizon (5-10 years+).

Value-Add Deals in LA are Pricing in More Risk

We’re currently seeing lower returns for value-add opportunities, where we would be needing to take more risk, in comparison to higher returns for stabilized properties. This is due to there being so much demand for creating value in apartments in Los Angeles.

Properties are getting priced to lower returns than finished, fully occupied and fully leased properties are. We just came across this in securing a high value-add property next door to a brand new property. Both of them were up for sale. We did the financial analysis for both and concluded that the completed, stabilized property had a higher return at a lower risk, compared to the value-add property.

By the time you would have spent all of the money on renovation costs, the value-add property became the same price as the brand new building next door, which is already generating a higher return, for lower risk.

This is the dislocation right now in LA apartment investing.

Broker Engagement for Leasing Vacancy

How to get brokers engaged with your empty commercial spaces:

  1. Depending on the size of the space and your ability to get people inside, host at your property several times a week. Have food from one of the nearby restaurants or coffee shops delivered and invite tenant rep brokers to walk through the space, in groups of no more than three.
  2. As you walk them through the space, provide them with the information of the building, the street and the growth drivers based on what is happening in the neighborhood. Explain to them the different ways the space can be used, whether it’s office, retail, or combining office and retail in a mixed-use capacity.
  3. Remind them of the incentives available if they were to bring in tenants and lastly, let them know your timings. Be clear with them about the timeline for when you need a lease signed and when you need the rent to start coming in.

The above steps will help you to build out a pipeline of tenants coming in to tour the space, by reducing friction and helping them to get their tenant knowledgeable.

Helping Landlords to Lease Smaller Commercial Spaces

For landlords having a hard time leasing smaller commercial spaces as part of their larger properties here are a couple of things we recommend:

  1. Create your own internal leasing flyer with more information about the building – including floor plans, photos and links to video tours – and ways to position it for different types of tenants. This can be provided as a supplement to your listing broker’s information.
  2. Send this to the tenant rep brokerage community using LoopNet.com.
  3. Host tenant rep brokers one-on-ones with event lunches and showings of the space so when their tenants are ready to come online, they can then show them the space. Focus on teams of brokers who have both senior and younger brokers and create incentives in the form of broker bonuses for them to lease the space.

All of the above aims to get brokers and target clients as informed as possible to engage further once the tenant is ready to plan their return to office.

Advantages of Private vs Institutional Investing in Real Estate

One of the value propositions to private investors who we work with is that we’ve worked with institutional investors. We have the experience and processes to work on large-scale projects to bring into small-scale projects.

Everything from acting as a fiduciary, running efficient management, doing very-high level accounting, strategic asset and property management and leasing. Everything is driven by value-creation, but brought down to a smaller and medium-sized scale for private investors.

Tax implications – Institutional investors are usually tax-free because they are pension funds and don’t get taxed. Private investors do have tax implications and so what we push forward is what we call ‘Risk-Adjusted Returns After Tax’ (RAAT). Meaning we are not only delivering high property investment returns but we are also able to take advantage of the different tax strategies that are specifically available for real estate including: costs aggregation, depreciation, as well as bonus depreciation, opportunity zone investing and cash-out re-financing.

Alignment – The reason why I like to invest with private investors is the ability to have more alignment to do more for the investor, more for the asset, and more for the community. With a pension fund managed by another entity, an investor receives their return on investment in their e-trade account. I like to be able to provide the flow of energy in the form of sending the investor their return on their investment, visibly as a cheque in the mail.

Flexibility – You can also structure more flexibility with private investors to align on the property business plan. This allows you to add value in multiple phases and to hold the property longer. In comparison, with institutional investors you are typically stuck to a 3-5 year business plan. They need to get in and out. This leaves a lot of meat on the bone in terms of what you can do to the property, as well as leaving the community hanging a lot of times.

A Recent LA Story

During 1st Shelter-in-place order – A bookstore / fortune teller leased space and opened its first store at our building on Windward Ave in Venice Beach. For them it was a momentous opportunity to experiment their business in physical space, practice protocols to safely service customers and “create positive energy during difficult times” as they put it. They also stayed open during the LA Riots.

During this 2nd Shelter-in-place order – A high-end ceramics/porcelain company just leased space to open its first physical location with a similar mandate. They invested their own money to bolster the storefront and are excited to be open every day.

Take-aways – As the lifeblood of LA, small businesses demonstrate resiliency and resolve to generally do the right thing for their customers and the community at large, regardless of political (mis)management. Straying from this would put them out of business by market forces – ie negative online reviews etc.

Moreover, this is a great time for landlords to flush-out current and prospective tenants and see how they react in times of uncertainty and structure agreements accordingly. I continue to bet on LA for these reasons.

How Collaboration with Neighbors can save Retail Brick and Mortar

Normally in commercial real estate districts, especially in high street retail, there are multiple owners on a street competing for tenants.

Covid has stripped down our competitive nature, at least temporarily, and opened a dialogue about how we can help each other get to the other side of the recovery. Reaching out to your neighbors and offering to help can uncover new solutions to meet mutual objectives.

With our Venice building, I’ve gotten to know almost every single one of the 12 or so surrounding owners on the street. We’ve shared tenant leads with one another and we’ve spoken openly about how to keep each other’s spaces leased and activated. In retail districts, the street really benefits collaboration between owners to drive foot traffic. People want to live where things are happening. If one building becomes vacant this can soon snowball and impact everybody.

This triggered the Alfresco dining program, which is the city of LAs program for outdoor dining, where we now have a plaza of amazing food places and coffee shops all happening just a stone’s throw from the beach.

You will not be at a disadvantage from speaking to your neighbors right now about ways to collaborate during these times. One plus one could equal three.

Protecting Investors as Steward of Capital

As an emerging investment manager going into Q1 2020, we were in the process of building and scaling our assets under management or “AUM” with our next investment. This was a very unique event-driven opportunity where we had the opportunity to pre-lease a large vacant building to a blue chip office tenant in conjunction with buying it.

We opted not to move forward with a $95M acquisition/redevelopment that was scheduled to close in April 2020. This protected our investors from a steep, near-term decline in value despite having worked on this project for over 6 months and having incurred over $200,000 in pursuit costs.

As stewards of capital to our investors, and with complete respect and transparency to the Seller and their broker’s need to preserve the property value, hitting the pause button and stepping aside was the right thing to do…as painful as it was.

As fiduciaries to our investors, it boils down to protecting and preserving investors at all costs, even if that means it comes out of your own pocket as the sponsor.

COVID has Accelerated the Rationalization of Space Use

The pandemic has triggered a broad rationalization of how space is used for each property type. This is going to be a slow iterative process, not a quick solution. However, there are trends and ways to create flexibility within spaces to service this process of rationalization.

Since Amazon purchased Whole Foods in 2017, retail has been evolving to complement online purchase activity as well as the demand for experiential spaces leading up to 2020. As a result of the pandemic, retail’s evolution has been put through the equivalent of a meat grinder such as the number of space tenants require, their uses of the space, lease structure, and the necessary alignment with the retailer’s business model. There is still too much mall retail space that is ripe for conversion to housing.

Office space has been accelerated too. The question remains, what is the net demand for office space and how is that space going to be laid out? We believe the ultimate answer is “omniwork” created through a hub and spoke model, where employees have the flexibility to work from anywhere as well as coming into the office. This provides flexibility to employers to accommodate individual employee migration patterns driven by affordability and taxes, COVID prevention preferences and household formation. This will have different implications for different-sized businesses that require different footprints of space.