February 9, 2018

JF1255: Started In The Stock Market At 7 Years Old - Has Now Completed over $5 Billion In Real Estate Projects with Ian Formigle

As the title says, Ian started investing at 7 years old in the stock market. Now He oversees Investments for the funding platform CrowdStreet. Now with over $5 billion of value in projects completed, Ian is here today to tell us some higher level investing strategies and things to look out for. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

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Ian Formigle Real Estate Background:

-Vice President of Investments at CrowdStreet

-Commercial real estate professional and serial entrepreneur with over 20 years experience in real estate

-His experience includes private equity, startups and equity options trading

-At CrowdStreet, he oversees the  Marketplace, an online commercial real estate investment platform

-He has has completed over 160 offerings totaling over $5 billion in project value  

-Say hi to him at https://www.crowdstreet.com/

-Based in Portland, Oregon

-Best Ever Book: Mystery of Capital

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Joe Fairless: Best Ever listeners, how are you doing? 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 of that fluffy stuff. With us today, Ian Formigle. How are you doing, Ian?

Ian Formigle: Doing great, thanks for having me on the program, Joe.

Joe Fairless: My pleasure, nice to have you on the show. A little bit about Ian – he is the vice-president of investments at Crowdstreet. He’s a commercial real estate professional and serial entrepreneur with over 20 years experience in real estate at Crowdstreet. He oversees the marketplace, an online commercial real estate investment platform, and he’s completed over 160 offerings, totaling over five billion dollars in project value. Based in Portland, Oregon… With that being said, Ian, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Ian Formigle: Absolutely. I think just to kick things off, the interesting little factoid about my past is that investing across all kind of different asset classes has always been in my background; I literally think it’s a part of my DNA. I started investing in the stock market at the age of seven, which I think is actually earlier than the age of Warren Buffet… He started investing at 11.

Joe Fairless: Is that even legal? [laughs]

Ian Formigle: So my little story was I saw my dad investing in stocks, I got interested in it, he taught me how to do it, and then I started buying my first shares of utility stocks back in the end of the 1970’s going into 1980. As soon as I got my first dividend checks in the mail, which at the time were about 40 cents per quarter, I was completely blown away… Basically getting money in the mail for what felt like doing nothing. I think I still have those stocks certificates from those first purchases.

On to my career, post-college I began my career as a financial derivatives trader. Some early success on the trading floor is what got me into the commercial real estate business. I came out of a real estate family, so therefore like a lot of investors, I started in real estate by acquiring, managing, renovating, and ultimately selling single-family homes. In my case, this was in California. I did that for a period of about three years. Luckily, a cashflow model that got me into that business in 2002, got me out of it by 2005.

It was at the point when I was liquidating assets in California in 2005, trying to figure out where to place the money next on 1031 exchanges, I did some analysis and determined that I should go into multifamily investing and that I should do it in Birmingham, Alabama. It was at this point where I had some friends and family money approach me, and it led me to becoming a multifamily syndicator, so I proceeded to do that from about 2005 to 2010, and I was acquiring at that time a garden-style class C and class D deals in Alabama, Texas, Oklahoma and Kentucky.

So it was really in 2010, when I was not actively syndicating at the time, like a lot of other people in the industry, really just managing the portfolio, these B and C deals that were hanging in there and doing okay, that I was invited to join a Portland, Oregon based commercial real estate private equity group (it was called SKB). They were emerging from their own hiatus during the downturn, and that turned out to be a fantastic pivot in experience for me, because it’s really where I learned how to do true institutional quality private equity deals. So I joined that group, I ultimately served as a senior member of the acquisitions team, and we did about 500 million dollars of deals over the ensuing four years. We partnered with numerous industry household names.

It was in 2014, after researching this new space of online commercial real estate crowdfunding for about the first half of that year, that I became convinced that this movement was real and it had the opportunity to disrupt capital markets. So it was around the summer of ’14 (early summer), two co-founders of the company Crowdstreet approached me and pitched me on joining them to be effectively their CIO, as they were getting a platform live and started having a couple deals, and now they needed somebody with private equity experience who’s kind of been there and done it, and who could understand deals.

I viewed that really as a once in a career opportunity to join a fledgling startup that was getting VC traction, and be kind of an original co-executive, so I jumped in, and about four years later, like you said, we’ve now actually done over 170 deals, it is over five billion dollars of total cap of what we’ve put on the marketplace, and we’re now currently raising about 25 million dollars a month from investors nationwide, that want access to online institutional quality commercial real estate investment deal flow. It’s just been an amazing ride thus far, and we just continue to charge ahead, quarter by quarter.

Joe Fairless: What specifically are your responsibilities now?

Ian Formigle: My responsibilities are to oversee the marketplace. I oversee all the deal flow that comes into the marketplace and kind of have a final say over what goes up or does not go up on the marketplace, and I currently sit over all the investors, so the investor relations team works with me; we connect with all the investors across the nation, and I work with the IR team to build and cultivate that investor base. That is really one half of what is Crowdstreet.

The way we describe it is Crowdstreet is one platform with two solutions. On the investor side, we are now the nation’s leading direct-to-investor online commercial real estate investment marketplace. As I described, that’s the side that I oversee.

Then on the other side, we are now an industry-leading software provider to commercial real estate firms across the country. We license the same technology that powers the Crowdstreet marketplace to now over 100 commercial real estate companies, to manage their own investor bases and do their own deal flows, so in essence, what I would say, is run their own marketplaces through their websites.

What we really found is that it’s this combination of a vibrant online investment marketplace, and now in an industry-leading software solution that’s our key differentiator. So I would say that Crowdstreet has competitors, it can beat a competitor on one side or the other, but no one can really claim to be a competitor in both, and I think that’s kind of the key value proposition that resonates with all the investors and all the companies out there that license our software or join the marketplace.

Joe Fairless: Let’s talk about the first half of what Crowdstreet is, and that is the marketplace where investors can passively invest in the deals, and you said your two primary responsibilities are from a high-level flow and investors. With the deal flow, you help decide and ultimately decide “Does or doesn’t a deal go up?” What was the last deal that didn’t go up? Obviously, I’m not looking for names or anything, but picture it please in your head and then describe it to us, and what was the issue with it.

Ian Formigle: When it comes to evaluating deal flow — and again, I will fully caveat all of this to say I’m one guy, in one location, just with one opinion, and we could be completely wrong. But we’ve done some deals over the years and we’ve looked at a lot of deals since we’ve been at Crowdstreet, and we will look at, for example — overall, we have a three-step process when it comes to evaluating sponsors. First, we start with them – who they are, what they’re doing, where they’ve been doing it, how long they’ve been doing it, all that kind of stuff. Then they’ll give us an application, we’ll be able to conduct background checks, so we’ll more or less be able to come to the conclusion that this is a legitimate group, doing legitimate deals, and has the ability to raise and manage capital.

From there, we’re gonna get into actually looking at the deal. As I’ve explained to other investors, I came out of an operator background and was going out and getting institutional LP to partner with me on my deals… I’m kind of turning those tables – I’m acting like the institutional LP on the other side of the phone and meeting, and hearing the pitch from these operators over the country and kind of putting assumptions to the test.

So to give you that case study example, this was a deal that we looked at recently, an example of a credible operator. I would say we would totally look at doing a deal with this group in the future; it came to us with an office deal. It was kind of in the Midwest, but in a major metro, suburban location, pretty good-looking asset, had the right bases coming in… I would say this was an office asset, 80-something percent occupied, had some roll, they were gonna add some value, going in basis at about $70/foot over an 8-cap going in, and they were gonna exit at an over an 8-cap and they were gonna add some value [unintelligible [00:10:36].19] kind of scenario.

So at the surface, the deal looked pretty good. It was an institutional-quality asset, it sat on a major highway, so it had great visibility, and it seemed to have a place in the community.

What got us ultimately uncomfortable with the deal was when you looked at the debt that they were putting on the deal. It was a short-term loan with a refi provision, and to get to the refi you had to trigger the refi, I should say, you had to solve to a 12% debt yield. When you looked at the rent roll and you looked at the tenant roll over the first ensuing three years, there was a decent amount of roll and there was a couple of tenants that were significant in terms of the total GLA, and the ability to meet the refi provisions on the debt yield. So in essence, you had to get both of those tenants to renew; if one or the other didn’t renew and you couldn’t backfill them immediately, which if they did, you kind of look at the market and say “Hey look, we have to have reasonable assumptions. How long is it gonna take to backfill those?” That’s where we said “Look, I think there’s a shot here, and it’s reasonable that you don’t have the 12 debt yield in place that you need to be able to trigger the automatic conversion of the refinance to kind of the mini perm scenario. So therefore, if you don’t have that, you’re kind of looking at one of two scenarios. Either a) you’re going to go back to the capital markets in three years from now, which we don’t know what those will really look like, and you’re gonna be trying to refi a deal that didn’t meet its previous debt yield hurdle. Or b) if you can’t find the debt that looks good if you go back to the market, which might not be the case if you didn’t actually get the trigger to refi with your existing lender, now you’re into what we call forced sale scenario, and we know how those go and we’ve seen that happen.”

So at the end of the day, the conclusion was the debt risk that was in place on this deal didn’t really seem to fit with the overall context of the deal. It seemed to insert excess risk to maybe achieve returns that didn’t necessarily [unintelligible [00:12:36].16] enough to us, so we just kind of said “Hey look, I think this is one that we’re just gonna take a pass on. Show us the next deal.”

Joe Fairless: And you said there’s a three-step process – I wanna make sure I’m writing it down right. One is sponsor, two is deal, what is three?

Ian Formigle: Third is terms review. After we get to the point to say if I like the sponsor and I like their deal, so I’ve looked at their proforma, the assumptions – let’s just say we get through that scenario with that operator and all the assumptions in their proforma seem sound, they seem defensible, I’ve checked the sales comps through RCA, I’ve looked at my CoStar reports, the rent comps look pretty good, the market reports feel pretty good and we’ve gotten some local market level intel – often times we’ll talk to leasing brokers in the market to kind of get a sense of what’s going on… We come to that conclusion that the deal now looks good, now let’s go through an analysis of the terms of the deal. We’re gonna look for things, for example sponsor co-investment amounts.

This is where we get into prefs and splits, we’re gonna look at capital call provisions, we’re gonna look at voting rights, and what I’m really looking to solve to at the end of the day on that piece is are those pieces of the terms industry standard?

Now, considering that we’ve done over 170 deals and I’ve looked at 10x of those deals at least kind of at this level, I have a pretty good sense of what’s industry standard. If something comes in and it is kind of out of bounds, we will call it out pretty immediately. Often times the case, we can actually have a good conversation with a sponsor at that point, maybe in many cases leading to changing the terms of the deal before it goes live on the marketplace, and if something really sticks out and they don’t change it, well that’s where the deal dies. Or if we look at the deal and the terms are pretty industry-standard, then it continues on and it gets on the marketplace.

Joe Fairless: What are a couple other examples of some not typical industry terms that you’ve come across?

Ian Formigle: For example, I would say look at capital call provisions – it’s pretty normal to have kind of a cascading series of rights for the sponsor to enact if they have to call capital. First would be that the sponsor could insert a loan into the deal. Interest rates might range from 10%-12%, onerous terms could be 18%-20%. I’ve seen that. That would be a scenario where we’ll say “Look, if you’re gonna insert a loan into the deal…”

Joe Fairless: That’s crazy.

Ian Formigle: Yeah. “…that is higher than the targeted IRR from the get-go with the equity…”

Joe Fairless: They’d have incentive to do the capital call. [laughs]

Ian Formigle: Exactly. Or potentially, if we get the deal done, go to their [unintelligible [00:15:09].26] and say “Hey look, if this thing gets sideways, I’m gonna bring it to you and it’s like the best [unintelligible [00:15:13].25] you’ve ever seen.” So that would be one where we’ll just pause. We’ve seen that a couple times and we said “You guys have gotta change this.” That would be number one.

Number two would be then what happens in the next step? Let’s say that we have the option to actually go into a capital call of the partnership… What is reasonable at that point? Well, dilution can occur in a deal, but what is reasonable? Well, reasonable would equal anywhere from 1.5x to 2x dilution, and that is on the capital call itself, not on the total equity.

A little example is if you’re saying “Hey, I’ve got $100,000 in this deal. You come to me for $10,000. If I don’t give you the $10,000…” then the numerator – it was $100,000 over $100,000, so numerator and denominator being one; in the new scenario, if I don’t participate, well immediately the denominator goes to $110,000, because we’ve called 10% of the original capital, and then if you’re a bad actor/investor and you don’t participate, well I could theoretically dilute you by 50% of the capital call (another $5,000), so therefore your ownership stake in the deal, what was 100% is now basically $100,000 divided by 115, or about 85%. That would be theoretically reasonable, versus everything that we’ve seen out there.

What’s not reasonable is if you see a clause in there that says “I can come to you for a capital call and if you don’t participate, I can dilute you 100% out of the deal.” That’s just onerous, that would be out of bounds, that would be a deal that we would pause and say “Look, if you’re going to a sponsor and stick to this term, that’s a deal killer” because while investors are going to accept the possibility of the ultimate loss, risk of loss scenario is 100% of your capital – that doesn’t really include “I could come to you for capital and if you don’t give it to me, then you’ve lost 100% of your money.”

Joe Fairless: I find this fascinating, because you’ve seen so many of these deals, you’ve been able to identify some of these ridiculous things that are in there. Do you have one or maybe two other things that you can think of?

Ian Formigle: Yeah, let’s see… For example, when we look at voting rights, what would be a good sponsor and would be very right down the middle is sponsor, and in this case sponsor is manager of the entity, so you’ve gotta look to who’s managing the entity, and if you say hey, when it comes to day-to-day decisions, and kind of even relatively important decisions at the property level, passive investors do need to understand they need to empower the sponsor to take the appropriate measures and also keep in mind investors that sponsors are the ones on the non-recourse carve-outs… So even though they have a non-recourse loan, there is the potential for the bank to come after them if something really goes awry. So in order to get that kind of risk by them stuck in the deal, you need to empower them appropriately.

Now, where appropriately can go too far is while those day-to-day decisions and maybe some meaningful decisions can be saying “I need to determine how I’m gonna run the deal, who I’m gonna hire to manage it, whether it’s affiliate or a third-party, we’re gonna make key decisions on capital expenditures and all the like… Now when it comes to major decisions of the partnership, for example are we selling or not selling? If things go bad, are we filing bankruptcy at the entity level or not?” Those begin to trend into the territory of hey, you probably wanna go to your investors, now reasonable can have a range – it can go to majority vote, it can go to supermajority, but you at least wanna be able to have passive investors have some sort of say over stuff if it’s either really good, like “Hey, are we selling or not, because we’ve crushed our proforma at year three”, or potentially bad, like “We need money. How much and under what terms are you guys willing to put it in?”

If you don’t give any investors any ability to participate in any of those major decisions, well then the sponsor a) better have the majority of the equity, and/or b) have all of the risk in the deal, have recourse, have a material co-invest with recourse loans and all the like. There’s a couple ways to mitigate that, but at the end of the day it’s gotta be logical, and I would cast that over everything that we look at. When it comes to the terms of the deal and the operating agreements, logic is king, that makes sense for that piece of language to be in there, and you can get to the understanding of why it is logical, that can get done.

If you look at something and when you understand the whole context of the deal and you’re left with the feeling of “This is illogical”, that’s where you’ve gotta pause, ask a lot of hard questions and then maybe walk away.

Joe Fairless: And then one more example, I’m gonna stretch you.

Ian Formigle: Alright. Within terms of a deal, another thing that we would look at — oh, here’s something that we came across recently… Sometimes there is a misperception in deals – when you look at an operating agreement, we’ve had investors look at them and incorrectly assess that “Hey, it looks like I’m giving the sponsor ownership in the deal for nothing”, because the language of the documents will say “At the inception of the company, the managing member (which is the sponsor) is gonna own X units of the company”, and that will be all the units of the company, and then the company will get capitalized and then there will be more units of the company… And from the surface, that can look to the investor like “Wait a minute, we just did this deal, and now the sponsor is showing up with ownership shares at the company that they did not capitalize through a capital account.”

Then we have to explain to the investor to say “Well, you have to go one step further”, because what you will then start to read about is to understand that the ability for the paid upon dissolution and the cashflow – really not even cashflow, but dissolution during a capital event – the ability for those ownership shares, which were kind of the founder shares, so to speak, are subordinate to a) your return of capital, b) they’re subordinate to your preferred return, and then c) they turn into a pro-rata share — well, I should say a percentage share of profits over the return of capital and the preferred return… Which is really another way of saying that what we’re looking at here is tax structure that is intended to give the sponsor the ability to convert their promote to ownership in the company, which will enable them to take capital gains at exit and not income, which in a normal partnership share if you say “Hey, I’m gonna hire this sponsor, they’re gonna do the deal, and if the deal goes well, they’re gonna earn a share of the profits” – that’s income.

So the sponsors have found a way to structure kind of triggered ownership, which if you think about a 40 or 50 million dollar deal, a promote could equal 3, 4, 5 million dollars, and now the difference between ordinary income on corporate levels – which we know is kind of changing – but income versus capital gains could be material, over a million dollars. So I think that’s an example of when we see that structure, we don’t necessarily get bent out of shape; we just wanna understand it and make sure that it ties correctly to the waterfall and that it is structured appropriately, and unsurprisingly sometimes it’s done exactly right, sometimes it is not done totally correctly… We will then point out some of the nuances to the sponsor, they’ll go back and clean them up, and then the operating agreement that the investor sees is actually not the operating agreement that we saw.

Joe Fairless: This is outstanding. I really am glad that we are digging into details here and that you’re going through this with us. Based on your experience as a real estate investor and also part of a startup that has grown over the four years since you’ve been there, what is your best advice ever for real estate investors?

Ian Formigle: Alright, I will give you kind of like my top three really quickly. First, when it comes to passive commercial real estate investing, focus on sponsorship over targeted returns. There is definitely a behavior pattern on the Crowdstreet marketplace to chase IRR, and I understand. It has an allure. Everybody wants great returns, and they want the sexiest story sometimes that hits the marketplace. However, we’ve seen on the marketplace that when a group has a great track record, that it’s long-standing and they’ve done 70 or 80 deals and all of those had gone swimmingly, they zealously guard their track record, which means they’re gonna be less likely to over-commit on the next one; they kind of wanna continue to manage expectations, so they’re gonna have a tendency to kind of push the IRR down.

So look at that scenario, understand that the sponsor really has a proven track record delivering returns, and when they say a 15%, versus maybe another group saying  20%, they really think in their minds 18 to 19, but the group that maybe says 20% is thinking and hoping 20%, but knows there might be a chance that it’s 18% or 19%. So I think that is number one. And it’s not to say that you can’t find [unintelligible [00:24:25].11] proven younger groups with fantastic IRR’s… In that case, the sponsor should be compensating you for their kind of risk of unprovenness with basically better splits and better price. So if they can compensate you through structure that is quantifiable, so be it. Otherwise, really pay attention to sponsorship.

Second, when it comes to value-add investing, pay attention to basis. Basis is so important. It’s essentially the equivalent of that adage of saying “You make your money on the buy, you realize it on the sell.” Really what that means is that buy low basis. If you can get into a deal and you know that your basis is lower than your comp set, you are immediately set up to win. That’s gonna allow you to price rents very competitively and win tenants over that comp set, particularly in office deals.

If there’s been deals that I’ve seen crush it, it’s because they had basis going in. So you kind of look at basis going in, basis going out – if it all makes sense, then I think you’re looking at a pretty good deal.

Joe Fairless: Is there a percentage that you look for on that?

Ian Formigle: It can be a percentage, it can be on a per-foot basis, so sure… For example, if you’ve got a 10% advantage on basis relatively to your comp set, it’s pretty good; you’re gonna compete. Now, whether it’s multifamily or office, sometimes that has some variances, but in general, look to be having a similar type product in a competitive location, and if you feel like you can undercut your competition on actual basis – not current basis, but actual basis – what did they buy at and what are you buying at, that’s what’s really gonna matter.

It doesn’t matter if the deal should be worth $250/ft, but your competitor bought it at $200/ft. Well, to price deals competitively and to do them profitably, it’s based on their $200 basis, not the current $250 prevailing market basis. So if you’re buying at $225/ft thinking that you got attractive basis, well maybe you don’t. Maybe you’re actually above the competitor, and they’re the one that’s gonna be winning on a deal like this.

I think the last thing is that — this one was kind of mind-blowing to me in a way, and I’ve seen this a few times… It’s that if you have conviction in what you think can be achieved at a property in a given location, do not be afraid to dismiss conventional wisdom. I have a great case study in this. I know a family operator that acquired a property a few years ago for 21 million dollars; the local conventional wisdom in this submarket – the deal should have traded at somewhere between 19 and 20 million. In essence, he overpaid. Well, this operator didn’t care about what happened in the past, and that’s where this conventional wisdom — it was rearward-looking and saying “Well, look where rents have been, and look where deals have traded, and therefore it should trade at 20 million, not 21.”

This sponsor was solely focused on where the asset sat in the submarket, what was happening in the market today, and what he thought could happen in the market tomorrow. So his analysis was solely forward-looking and he was saying “What’s in the past is past. I’m doing this deal for what is in the future.”

What ended up happening in that deal is that the market did explode, his rents went up by 40% over the next two years. He leased up his property at all the new rents, and he sold that property two years later that he bought for 21 million, for 37 million. It was the best single deal of his entire career, and it was one of the only deals in which all the prevailing players in the submarket thought that he was over-paying.

Joe Fairless: Wow, the irony is thick, because number two is value-add investing/pay attention to your basis… And you said 10% advantage relative to your comp set, but then on number three, everyone was wanting to pay 19 to 20, and he bought it at 21, and it sounds like (based on how you described it) he was buying based off of speculation.

I’m almost sure – I don’t know, you can verify it – that he did an analysis for how he’s validating that speculation, but it goes against in my mind (on the surface, at least) your second piece of advice.

Ian Formigle: Which is why I believe you have to have conviction in that analysis. In a normal market, with normal assumptions, basis is super important. And then there has to come a point in time where you feel like you are in the right market at the right time and positioned well; that’s when you have to kind of put that analysis a little bit to the side and say “Am I willing to take the bet that what everybody else is thinking in this market right now is wrong?” In this case it was a relatively small market that was seeing a massive influx of population growth, at the same time where there was minimal supply… So they knew that they were gonna get pent-up demand that was coming, and it had started to accelerate and they felt – and they took a critical bet – that the acceleration that they started to see was going to continue and perhaps intensify, and if it did, it was gonna completely change that entire market. It was a smaller metro, so this kind of thinking happened rapidly in a smaller metro.

It’s not gonna happen as fast as in San Francisco as it could happen in kind of a tertiary market, for example somewhere like Colorado. But if you get that kind of transcended growth into a market, that’s when you can kind of take — again, I kind of go back, if you did have basis, well then that’s just more fuel to the fire. But even if you have to look at a deal and say “I need to stretch out and do a deal that I think is gonna be awesome in the future, even if it looks okay today” – and in this case the sponsor was really putting in its own money to work, so it could easily take that bet – that’s when you’ve gotta go with it. Like I said, it hinges on conviction. You have to forcefully believe that your analysis is the right one, that conventional analysis is currently incorrect; there’s a reason for that incorrectness that has to do with basically kind of the overhang of what the market has been doing… This is a hugely powerful analysis that applies to a lot of markets in kind of the 2012 to 2014 period, where essentially every single deal, anybody that stepped up to overpay at the time was rewarded handsomely two or three years later.

Joe Fairless: That’s great stuff. We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?

Ian Formigle: Yeah.

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

Break: [00:30:31].20] to [00:31:21].00]

Joe Fairless: Ian, what’s the best ever book you’ve read?

Ian Formigle: I would say The Mystery of Capital by Hernando De Soto. This is  a book that changed the way that I looked at how markets function. This book compares and contrasts how capital is formed and the key tenants of capital formation, and I think for anyone who is in the business of understanding capital formation, this books is a must-read.

Joe Fairless: Best ever deal you done – not the first, not your last.

Ian Formigle: Alright, a deal that I did somewhere in the middle was a multifamily deal in Dallas that I bought in an emerging area of Dallas called North Oak Cliff. I bought the deal because it was essentially a class C property that I could fix up a little bit and cashflow. It had million dollar homes going in across the street, a brand new primary school… It sat on six acres of land, about five of which were on a plateau with unobstructed views of the Dallas skyline. [unintelligible [00:32:04].14] was to buy this deal, improve it some, cash-flow it over a 3-4 year timeline, and then sell it to someone who would ultimately redevelop the site, given its location.

We bought it for 2.6 million, a month later we had a 3.6 million dollar offer on the table to sell it to a developer who was gonna build townhomes. So we proceeded to sell it three or four months later, and the buyer ultimately scraped it and had to sit on it for years, and I think it hammers home the point why an exit strategy is really important; actually, timing is everything. That was a timing deal, so think I got kind of lucky on the timing, which made it my best deal.

Joe Fairless: What’s a mistake you’ve made on a transaction?

Ian Formigle: Not contemplating that sometimes your analysis can be so right that it’s totally wrong. When we sold that deal in Dallas, we bought 260 units in Oklahoma City. This was over a decade ago. The analysis at the time was “Hey, we’re gonna go and buy these two properties in Oklahoma City that cater partially to the FAA Student Academy. There’s an airport in Oklahoma City, it trains FAA employees, it trains them to be air traffic controllers, and it gives them continuing education.

These were at the time ten properties that would service the FAA student population. We’d done all this analysis – look, the demand for FAA training is on the upswing. 1981 was when Reagan threw out all of the air traffic controllers; it takes 25 years to get to pension status. 25 years later, we’re looking at this deal in 2007 — essentially, the majority of the air traffic controllers in the country were becoming eligible for retirement. We were gonna buy these properties, we were gonna cashflow them and we were gonna convert them more towards FAA student housing. So we did that.

At the time we bought them, there were about 50/50 regular apartments and FAA. The demand ended up being so strong in 2007 and going into 2008 that we converted them 100% to FAA student housing. Now, keep in mind that at the time an apartment in this market was running for about $650/month; we could get $75/day for FAA student housing. So therefore, when you convert the deal, you furnish the apartments, the yield go off the charts. We were up to a 14% cap rate.

Then what happens is that the demand was so strong and then the market turned some, that the FAA decides they’re gonna change the criteria by which they had been operating to get into the game. It was previously these ten properties, it was quiet, it was a super good gig… Now all of a sudden 2008-2009 happens, they open the floodgates. You could imagine what happened. We had a 40% spike in supply to the FAA student housing market in six months.

I’m going from 100% properties that were 100% occupied by FAA students, to now all of a sudden being 50% occupied [unintelligible [00:34:42].13] capital calls and I’m converting units back to apartments. It was that scenario of like, though right, we were completely wrong because we completely ignored the fact that if our analysis was that good, that the game was gonna change and it was gonna completely turn our business model upside down, which is what it did. So we had to manage through the trough, we had to throw away a bunch of furniture [unintelligible [00:35:07].28] and then today we’re about 70% apartments, 30% FAA, and we’re kind of right back to where we started.

So don’t ever think that your analysis is so good and you’ve got it figured out, because guess what, if it is that good, the market’s gonna change in a way that you didn’t think it was gonna change.

Joe Fairless: That’s a great case study. What’s the best ever way you like to give back?

Ian Formigle: I enjoy mentoring kids. I had a teacher early in life that literally changed the course of my life, so I’ve never really forgotten that and I thought that it would be great that if I got old enough I could help some kids or some young adults, kind of help them along the way. For example in 2002, after I left the trading floor, I spent about a year – I kind of hung out and I tutored kids, I helped them with SAT test prep and college essay writing. In essence, if there’s young, bright, motivated people, wherever they are, I wanna help them get on to the next thing and give back what I got.

Joe Fairless: And how can the Best Ever listeners get in touch with you and learn more about Crowdstreet?

Ian Formigle: A couple ways. First, you can go to the website, it’s www.crowdstreet.com. There’s a lot of information on the website there. You can personally always reach me at my e-mail address. It is Ian@CrowdStreet.com. As you can imagine, I get a lot of e-mail, but I do try to check it and get back to investors as quickly as possible.

Joe Fairless: Ian, thank you for being on the show and sharing with us your background and lessons learned, and what you’re doing now with Crowdstreet, the three-step process with deal flow that you all look at… One is the sponsor, two is the deal, three is the terms review. Some specific things within the terms that you look at; you know what the industry standard is, so knowing what is and isn’t out of bounds. The case study with the office deal that you talked to us about with the debt yield hurdle as the reason why you all decided not to participate; it otherwise looked pretty good on the surface, and I suspect a lot of people wouldn’t pick up on that… That’s interesting that you got into that level of detail with us on this show, so that if we’re passive investors, we know what to look for.

And then also your Best Ever advice, the three-pronged approach… One is if you’re passive, focus on the sponsorship team over the targeted returns. Two is value-add investing, pay attention to the basis you’re going in at, and you mentioned the 10% relative to the competitive set at what you buy it at and what they bought it at. And then three is maybe throw number two out the window, and if you have a conviction about something, don’t be afraid to dismiss conventional wisdom, and certainly that case study of 21 to 37 million proves that.

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

Ian Formigle: Yeah, thank you, Joe. It was a pleasure to be on the show.

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