JF1035: Managing $100,000,000 and Raising Money in a BIG Way!

 

Joe Fairless: Best Ever listeners, welcome to the best real estate investing advice ever show. I'm Joe Fairless and this is the world's longest-running daily real estate investing podcast. We only talk about the best advice ever, we don't get into any fluff.

With us today - John Azar. How are you doing, my friend?

John Azar: Good, man. How are you?

Joe Fairless: I'm doing well, nice to have you on the show. A little bit about John - he co-manages the company's newly-launched $100M private equity fund, so we've got a lot to talk about. He's the executive vice-president and managing member of MACC Venture Partners, which is a private equity commercial real estate firm. Based in Charlotte, North Carolina. With that being said, John, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

John Azar: Sure. My background is mostly investments, financer-heavy [unintelligible 00:03:08.26] wealth management, commercial banking as well as institutional investment products. I had a real estate startup company, a real estate development consulting company that started back in 2003-2004, right after I left Morgan Stanley and did some consulting for large-scale mixed-case developments in New York, Philadelphia, Miami area.

Then obviously when the market took a dive in 2007-2008 my projects dried up and I had to look for a day job again. At the same time my brother was launching a new company here in Charlotte, which is the commercial firm that we have today. We grew it to a certain extent in the next few years and then in 2012-2013 he got more involved in the [unintelligible 00:03:51.05] and by 2015-2016 we launched a new private equity pursuit, and we just launched a new 100-million-dollar fund.

Joe Fairless: You've been busy.

John Azar: We have. That company was for the most part a multifamily owner operator. We buy and upgrade apartment complexes essentially across the South-East.

Joe Fairless: I want to focus our conversation on that, but just to tie up some questions on your background... You were consulting for large mixed-case development projects in the North-East - what were they paying you to talk to them about?

John Azar: Our role with the company that I was with was essentially investment bankers for these large scale developments. We would essentially package the deal in a nice little package with a ribbon on it and get paid a fee, and kind of walk away from it. We didn't really necessarily take equity in any of the deals; we just made sure the buyers and the sellers are in the same place, the financing is there, the alternate financing if it was there, we would arrange the feasibility studies and any kind of introductions to local municipality, maybe if the Federal Government was involved... If there's any [unintelligible 00:05:01.19] or contamination issues that needed federal involvement we'd kind of look into that as well.

Most projects typically took about a year, a year and a half to come to fruition, just because it's a long cycle. We're talking about large-scale projects. Most of them are projects that are ranging between 50-250 million dollars.

Joe Fairless: So you would work with the operators and they identified the opportunity, you then go find them the money and help take it to the finish line?

John Azar: No, sometimes we would identify the opportunities for them as well. They would just tell us "We're interested in this city."

Joe Fairless: "They" meaning the money people?

John Azar: "They" meaning the developers or the money people.

Joe Fairless: Okay.

John Azar: We would work with developers, we would work with money people, we would work with pretty much anybody that had an interest in getting a large-scale real estate project off the ground. Most of the time it was usually developers who would come to us and say "We're interested in possibly doing a residential project in Boston. What do you think is out there that could be worth pursuing?" From there, we would sort of go and look for something.

We had a hotel conversion project in New York City that went from a condo project to a hotel project... That was an example.

Joe Fairless: What hotel?

John Azar: It was an old hotel and it had shut down; it was no longer operational, but I turned it into a mixed-case residential, higher-end residential. That would be one sample of a project.

Other projects could be just raw land... The two or three projects that kind of died out in 2007 were on the waterfront in East Boston, in Charlestown. They were large, old Navy Yard projects that had a lot of contamination issues, that were gonna be set to be converted to large-scale mixed-case or residential developments. Then 2007 hit and any money for decontamination or stuff like that dried up completely.

Joe Fairless: And how long -- just on that waterfront project, how long had you been working on it before you no longer were working on it and had to shut down?

John Azar: We worked on it for over a year, a year-and-a-half.

Joe Fairless: For a Best Ever listener who perhaps has a taste of that - maybe not the full spectrum, but maybe they've been working on a project for 6-8 months and then it disappears, what would you say to them for how to deal with that?

John Azar: Look, you're gonna have failures... That's just part of the game. You're gonna work on projects that you're gonna put your heart and soul into and it's not gonna come through. That doesn't mean it wasn't a good project, it doesn't mean that you were a failure, it just means that the project and the timing just wasn't right, for some reason, and the stars didn't align. The project could maybe work in five years later, or three years later, or maybe three years earlier... But for whatever reason it just didn't work.

Just dust yourself off and just keep moving, that's the only choice that you have.

Joe Fairless: Now let's talk about the 100 million dollar fund that you all have recently launched. What is your specific role with the fund?

John Azar: Most of what I do is I work with our investors and equity participants, equity partners. I help structure the capital -- the capital structure, the capital fundraising portion of it... Anything that involves the capital and the financing end of it, that's typically sort of my domain. My brother, who is the principal and CEO of the firm as well, he handles a lot of the acquisitions and asset sourcing and the underwriting when it comes to some of the assets that we do. So he's out shopping for stuff to buy and I'm out shopping for money.

Joe Fairless: Yeah, it makes sense. That is a very similar structure for how my business partner and I have it set up. I am sure, just like with us, your responsibilities overlap, but those are your primary focuses, right?

John Azar: Exactly.

Joe Fairless: I get it.

John Azar: I'm responsible for the money, he's responsible for the assets.

Joe Fairless: Right, I get it. So 100 million bucks - how long did it take to raise that amount of money? We're still raising, and it's gonna be an institutional-grade fund, which means that we will mostly be after institutional investors, that are mostly gonna be the pension funds, the endowments of the world, as opposed to the accredited investors - which we still have.

How historically we've operated and bought our properties is through individual syndication, which is sort of the model that most people in our industry have, and we still have that. We did not get away from the individual syndication model, so we're gonna have a fund that will buy assets [unintelligible 00:09:30.27] maintain an individual syndication model, which is gonna be open for our normal investors, our regular sort of day-to-day accredited investors, high-net-worth investors that have been with us for the past ten years plus.

These are investors that are usually typically investing anywhere between 100k and up to 500k on a project with us. And they're usually good for two or three projects per year. They're not necessarily our target for the 100 million dollar fund. They can certainly participate in the 100 million dollar fund, but the minimums are much higher for our fund; there's typically a one million dollar minimum for individual investors and 15 million dollars for institutional investors.

Joe Fairless: So your experience with how your career started is really gonna play a big role in this; you started in wealth management, and you're in the North-East where a lot of the money is... Are you working on those connections to get the 100 million dollars closed out?

John Azar: You work all of your connections all the time.

Joe Fairless: [laughs]

John Azar: You have your connections that you worked with in the past, you create new connections... I love meeting people. To me, this is a people business. I love meeting new people; I've made a lot of great friends and a lot of new connections here in North Carolina, and I continue to expand my network on a day-to-day basis. Every now and then I'm lucky enough to make a few new friends along the way, which is fantastic.

Joe Fairless: The goal is 100 million - what have you got right now committed?

John Azar: Right now we have about five million because we just got started.

Joe Fairless: You just launched it.

John Azar: Yeah, we literally just launched it a couple weeks ago. The ink is still drying on some of the docs that just got finished.

Joe Fairless: So how does that work with a fund? With the five million that's committed, do they transfer the money into an account, since it's a fund?

John Azar: We don't have to take all the money; we do capital commitments, and what that means is that you sign a capital commitment letter or capital commitment documents and essentially put a portion of the money down, and the rest of it is due upon capital calls. That's how you sort of use the money - you use the money via a capital calls structure.

As soon as we hit certain milestones or certain hurdle rates, then we do a capital call. Let's say our first milestone for this month is 20 million dollars. As soon as we hit 20 million dollars, then we do a capital call and start buying assets. We don't have to wait until the whole 100 million is in.

Joe Fairless: Okay.

John Azar: It might take us a year, a year and a half to raise the hundred million, or even two years. We have up to two years to raise 100 million. It might take us the full two years, or we might be lucky enough to finish it in the next 10-12 months.

Joe Fairless: You might finish it after this interview goes live. [laughs]

John Azar: That would be fantastic. That would be music to my ears. [laughter]

Joe Fairless: With the initial portion of the money down, what percentage is that of their overall commitment?

John Azar: It's 5 million, so that 5%.

Joe Fairless: No, you said you do capital commitment letters, and a portion of their money is down. What percent does someone have to put down?

John Azar: Typically 20%.

Joe Fairless: And that doesn't generate an interest until you actually buy something, so you reach the 20 million dollar threshold?

John Azar: That's right, it generates an interest. We put it in an interest-bearing segregated account, so it's almost like an escrow account. It's the same interest as that of any escrow account. You're talking about market rates of next to nothing on escrow accounts these days... But once you actually pull the trigger and start buying projects, no, they're not earning anything.

Joe Fairless: Why 100 million? Why not 105, or 85 million, or 125 million? How did you come up with that number? Besides that it sounds good.

John Azar: [laughs] Yeah, it does sound good. Funds are sort of an interesting creature... You've gotta do certain numbers, and it's almost psychological. If you're not gonna do 100 million, you should do 50 million. If you're not gonna do 50 million, you should probably do 25 or 20 million, or something like that. Once you hit certain thresholds, you should just move on to the next thresholds, because otherwise you're putting just as much money and effort into raising 15 million as you are raising 100 million. Once you start getting into that range between 50 and 100 million, you might as well go for the 100 million... To raise 75 or 80 or 85 million is gonna take you just as much effort, just as much being on the road, just as many meetings as raising 100 million, so why would you cut yourself short and raise 85 million, as opposed to 100 million?

Joe Fairless: And why do a fund versus do individual investments like I image you all have been doing?

John Azar: Well, like I said, we still have the individual investments. The fund really is going to allow us to have ready-to-deploy capital for projects that we can pull the trigger on pretty quickly and deploy capital quickly. It really gives us sort of a competitive advantage on some of the smaller deals, rather than the larger deals.

On the larger deals we have a lot of institutional partners that we deal with that we feel pretty confident that we can pull the trigger on and we can always participate in. Larger deals meaning [unintelligible 00:14:17.11] deals that will require anywhere between 10-20 million dollars in equity raises. Smaller deals are below that 8 million, 7 million threshold.

There's a tricky sort of delta which is between the 2 million, 1 million and 6 million, where it's a really tough place to do between 2 million and 6, 7, 8 million, because it's not quite big enough for institutional guys to participate in, a little bit sometimes too big for the smaller guys to participate in... Because you can easily raise 3 million dollars from regular individual investors, but when you hit that 8 million or 3-7 million, it gets to be that no man's land kind of parameter where you have to either do a combination of smaller investors and an institutional investor, or you have to find a specialty institutional investor where they're willing to do a 5 to 6-7 million dollar investment with us.

So it's a little bit more tricky and it takes a little bit more time, so having the fund will really give us a lot more flexibility and will allows us to be more nimble executing on deals.

Joe Fairless: From an advantage standpoint for you all, what are the ways that you make money on the fund versus a typical syndication?

John Azar: On the fund we make a little less money, that's for sure. We make more money on syndications that we do on the fund, but the fund allows us to expand our bandwidth a lot quicker, obviously... 100 million dollars in an equity fund will buy us close to - if we're doing 75% leverage, 25% equity, you're talking about close to 400 million dollars worth of assets to add to our portfolio. You can scale pretty quickly with those parameters, as opposed to individual syndication, which is onesie-twosie, you have to go out there and...

And the other thing that the fund will allow us to do is we can go out and buy a portfolio of assets, as opposed to just one asset at a time and syndicate it one at a time. If we see a portfolio of two or three different assets -- four different assets that have maybe an aggregated number of 1,100-1,200 units, we can utilize the fund to pull the trigger on something like that much easier than we can if we have to syndicate that.

Joe Fairless: I know you've been asked this before - what's your answer to someone saying, "John, this is the hottest time right now to sell. It's a seller's market, why are you doing a 100 million dollar fund to buy?"

John Azar: Because we are in the top of the market. We're gonna start seeing a contraction soon. We have already started seeing a contraction in the marketplace in some larger cities. Rents and class A products have already started taking a hit in some larger cities like New York, Boston, L.A. We've already started hearing whispers on the street that the contraction already started in the A class in certain metropolitan areas... So it's really only a matter of time before this hits the rest of the street.

Right now there's still a glut of buyers and a glut of sellers because of that exact reason. They know the rollercoaster's at the top and it's getting ready to get down a little bit. I'm not saying we're looking at a cliff scenario per se, but even a small contraction is gonna leave plenty of room for more buyers than sellers, which is a great place for us. That's what we want.

We feel that this is the right time to be in the market. We're not quite at the back of the truck scenario with buying, but we feel like in the next 6-12 months there's gonna be some really great deals coming out in the market.

Joe Fairless: And there will be really great deals coming on the market because they will be forced to sell because of the contraction, or because they're trying to sell to get out ahead of it?

John Azar: The ones that are trying to sell ahead of it are selling now. These are the people that are in the market now, trying to sell. If you have a project that you're trying to sell, any broker that you talk to, any commercial broker that you talk to will tell you "This is the time right now to put it on the market."

Joe Fairless: Of course they'll tell you that.

John Azar: Of course they [unintelligible 00:18:02.22] [laughter] But in all honesty, this is the time to put it on the market, because we've already started seeing interest rates rise and we've already started seeing -- cap rates and interest rates are not quite matched up to each other yet; cap rates are still pretty low, and interest rates are just starting to creep up after the election. We've already seen 70, 80, 90 basis points upsurge in interest rates since the election until now.

I think once you start seeing an equalization of interest rates and cap rates, meaning the growth in cap rates or the expansion in the cap rates is gonna match what the expansion in the interest rates are, that's when you're gonna start seeing more buyers and less sellers in the marketplace -- or actually, maybe the opposite: more sellers and less buyers.

Joe Fairless: John, what's your best real estate investing advice ever?

John Azar: [laughs] My best real estate advice is, like I say with anything as far as investing is concerned - don't worry about timing the market per se; it's your time in the markets. You've gotta put your time in, you've gotta always be on the lookout to buy or sell. Don't worry so much about whether you're gonna hit it exactly right, because you're never gonna hit it exactly right. Nobody has a crystal ball.

If you're in the market, if you're playing the game, if you're doing deals on a regular basis, you're gonna hit it right when the time comes for you to hit it right. So don't worry so much about timing the market. A lot of people I talk to in [unintelligible 00:19:22.20] all worry about how they're gonna time the market... I'm like, "Just be in the market! Be playing an active role somehow." You don't have to buy... I'm not saying "Buy all the time."

We took a backseat on buying, in all honesty, back in November, and we just started buying now. We stopped buying from November, December, January, February and we just pulled the trigger on some projects just in the past month. For a firm like us, which we're about 5,000 units size, for us to stop buying for four months was not an easy decision. Four months is a long time to stop buying, [unintelligible 00:19:54.03] to get out of the market, but it's okay because we had a lot of other projects going on, we had some refi projects... So you're always doing things and always looking in the market, your eyes, your hands are in the market some way or another, and that's really what the key and what my advice is: just be in the market somehow - doing deals, looking at deals, looking at the projects... And don't worry so much about timing the market.

Joe Fairless: I like it. That makes things really simple. If and when I repeat that quote, I will attribute it to you, I promise.

John Azar: [laughs] Well, thank you.

Joe Fairless: Are you ready for the Best Ever Lightning Round?

John Azar: Sure, I love it!

Joe Fairless: Alright, let's do it. First, a quick word from our Best Ever partners.

Break: [00:20:36.11] to [00:21:27.13]

Joe Fairless: What's the best ever book you've read?

John Azar: Freakonomics.

Joe Fairless: Did you say "Freakonomics"?

John Azar: Freakonomics, yeah.

Joe Fairless: Cool. I was just reading Tim Ferriss' Tools Of Titans, and one of the authors of Freakonomics was profiled in that book, and I was just reading some quotes that he said on the podcast.

John Azar: Yeah, it's a very entertaining book and it just kind of sticks to you.

Joe Fairless: Best ever deal you've done?

John Azar: Best ever deal I've done is pulling the trigger on joining my brother and expanding this company.

Joe Fairless: What's a mistake you've made on a deal?

John Azar: I expected less of myself and settling for less than what I'm owed.

Joe Fairless: Can you elaborate?

John Azar: I was involved in a deal and we were doing mixed-case development consulting; we kind of got pushed around a little bit on what we were going to be paid. At the time I was younger and probably a lot more green than I am today... And even though we brought tremendous value to the deal, I thought that -- it was one of those things where you think you're just kind of lucky to be at the table and you'll kind of take what they'll give you, and that's the wrong attitude, because don't ever underestimate what value you bring and don't undercut your own value. [unintelligible 00:22:32.07] with that deal and we got paid a lot less than what we should have done.

Joe Fairless: What's the best ever way you like to give back.

John Azar: I give back in a lot of different ways. I love mentoring, I love working with younger folks -- and "younger" I mean sometimes a lot younger. I'm involved in a couple of different mentoring organizations for high schoolers and young adults. When I was in Massachusetts I was involved in an organization called [unintelligible 00:22:54.19] which mentored young adults that are between 18 and 24, and kind of helping them on a career track.

I was involved in an organization called NFTE (Network For Teaching Entrepreneurship). It's more targeted for high school kids. I love working with Habitat For Humanity; we have teams here every now and then. A couple times a year here in the company we line up a couple of habitat projects that we work on... Various other community projects I'm involved in, but mostly mentoring and coaching jazzes me up a lot.

Joe Fairless: Where can the Best Ever listeners get in touch with you or your firm?

John Azar: They can e-mail me, they can find me on Twitter, they can find me via our website... My e-mail is John@maccvp.com. They can go our website, maccvp.com. I'm on LinkedIn as well under Jalal John Azar. I'm in plain sight.

Joe Fairless: You're everywhere. [laughs]

John Azar: I'm everywhere.

Joe Fairless: Well John, thank you for being on the show... Thanks for talking about the 100 million dollar fund. I enjoyed learning about the advantages of doing a fund, compared to an individual syndication. You mentioned a couple things - one is the fund allows you to buy faster so you can scale more quickly, and two is you have the flexibility to buy a portfolio of assets.

Then also just your overall thoughts on why you're doing a fund now, because as I said earlier, I imagine you get that question a lot... And the best ever advice, where you said you want to make sure that you don't worry about timing the market, but rather it's about your time in the market. That doesn't necessarily mean you're always buying, but you're actively involved in the market in some capacity, and you gave the perfect example of your group that has about 5,000 units and had a hiatus for five or six months, and is now back at it.

Thanks for being on the show. I hope you have a best ever day, and we'll talk to you soon.

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