Dan and his company UC Funds provide funds for larger deals for investors. If you’re a syndicator, you can go to him for 100% of the financing, rather than tracking down the funds on your own. At the same time, wealthy individuals will invest their money with him and his company so they can get great returns on their money. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
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Dan Palmier Real Estate Background:
- Founder, President and CEO of UC Funds – a vertically integrated private commercial real estate firm
- Been in the real estate business for over 25 years, as investment manager, owner, developer, and financier
- UC Funds originates, structures, underwrites, and manages commercial real estate investments
- Based in Boston, Massachusetts
- Say hi to him at http://ucfunds.com/
- Best Ever Book: Purpose Driven Life by Rick Warren
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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 invsting podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff.
With us today, Dan Palmier. How are you doing, Dan?
Dan Palmier: Very good, Joe. How are you doing?
Joe Fairless: I’m doing well, nice to have you on the show, my friend. A little bit about Dan – he is the founder and president of UC Funds, a vertically-integrated private commercial real estate firm. He has been in the real estate business for over 25 years as an investment manager, an owner, a developer and a financier. UC Funds organizes, structures, underwrites and manages commercial real estate investments. Based in Boston, Massachusetts. With that being said, Dan, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?
Dan Palmier: Absolutely. We are a firm that focuses on capital solutions and providing financing to entrepreneurs nationally. We have a growing investor base, we’ve done about two billion over the last four years. We’re transforming, we’ve got some really good new investors and joint ventures with some of the biggest banks in the world, and we’re very eager to grow our platform and provide capital solutions.
Most of what we do is debt mortgages, first mortgages, mezzanine capital, equity, preferred equity, and all asset groups.
Joe Fairless: Who is your ideal client?
Dan Palmier: We have a lot of repeat business, so I think the smarter the client is, the more entrepreneurial, the quicker they need things is the best client for us, so that they understand the difference between our capital solution and something more commoditized that our competitors or another bank will do. We’re very creative, so entrepreneurs that are very skilled and experienced are really our best customers.
Joe Fairless: Will you elaborate or perhaps give an example or two on having a creative solution versus what a traditional bank would do?
Dan Palmier: Sure. So one of our groups centralized here in Boston is called our screening group. Borrowers will come to us, brokers will come to us and they’ll ask for a first-mortgage loan to buy something, or they’ll come to us and say “We need some mezzanine capital” or “We need a little equity…” So we encourage them to give us all the information on the deal, and we’ll go back to them and say “We could do it this way, we could do it A, B, C, D.”
Joe Fairless: What would be examples of A, B, C, D?
Dan Palmier: If an entrepreneur or borrower comes to us and says they have a first-mortgage bridge loan, or first-mortgage loan to acquire or construct a property from the bank down the street, and that looks like 65% leverage and they’re looking for the remainder of the cap stack, so the next 35%, and they’ll say “Well, we have the equity, we only need 10% mezzanine loan.” So we’ll say “Great, here’s what that would look like. Your request was a mezzanine loan, 10% of the subordinate capital stack, but we can also do a 90% first-mortgage loan versus the 65%, and we can also do the equity piece, and your blended cost of capital would be less than doing it the way you’re doing it”, which is three phone calls, three meetings – one to the bank, one to the mezzanine lender, and then syndicating, which is basically cobbling together equity or going down the street to a big institution to give you that equity piece.
The syndicator would go to the country club and raise that equity, and all that is time, energy, and most of these guys lose the deal. So as a one-stop shop for commercial real estate capital solutions they could call us, and right here under one roof I can provide them 100% of the capital. That gives us a lot of flexibility on providing that A, B, C, D options. We could do the first, we could the first and the mez, we could do first, mez, preferred equity, or first, mez, preferred equity and the equity.
Joe Fairless: So there’s one of two thoughts going on right now. One thought is a Best Ever listener who is thinking “100% financed… Something’s not right here.” And the other thought that is going on could be “I want in on that. I want 100% financed deal.” Help me understand a little bit more about that, and kind of talk us through a little bit more, please.
Dan Palmier: Okay, so a traditional capital stack for a real estate owner to buy something, if they’re financing it – they can do this all-equity, but that doesn’t make much sense in our arena… So there’s the traditional debt piece, which if you go to a bank today, depending on what it is that you’re gonna do, between construction and something that is fairly stabilized, that may look like — let’s just call it 65% of the capital needed to buy or construct.
The 35% to get to 100% – that’s where some creativity comes in. Some of our borrowers will come to us for the next (let’s call it a) tranche or segment of the capital stack, and we’ll call that a mezzanine tranche. We’ll call that another 15%-25%. Let’s call it 15%, so now we’re up to 80%. The next 20% is typically equity, so what the entrepreneur or the buyer is bringing to the table; it may be his cash, or a combination of his cash and others. That’s kind of a traditional — 80% of the buyers buy like that.
What we can do, and do do here at UC Funds, we can do that 65% piece, we can do that 15% mezzanine piece, and we can do the equity piece. Now, the cost of those tranches are different, but because our investor base is diverse, we have investors that wanna be in the first piece, they wanna be in the mezzanine piece, another would wanna be in the preferred equity and the equity. But it’s one phone call and we can do 100% of that cap stack.
Joe Fairless: With the actual investor who comes to you, if your group is doing all the financing, then how do you have alignment of interest with that individual so that you know they have some skin in the game?
Dan Palmier: Are you talking about the borrower?
Joe Fairless: Yeah, the borrower. Let’s just use me for an example. I’ve just found an apartment building, it’s (let’s say) 500 units, we’re talking right now, and I’m like “Yeah, I’ll roll with you, Dan. You fund everything. Here’s my deal, and I’ll take some ownership, and great. I hope it works out.” How does this work exactly?
Dan Palmier: Right, so every deal is unique. We wanna make sure that our investors that are providing the capital are safe, so we would like you to have skin in the game, we’d like you to have cash in the deal, but if you, like some of our other investors, just know how to buy right more so than others, and you’re buying something that’s worth 20 million for 15 million, being an entrepreneurial provider of capital, I’m gonna give you credit for that 5 million.
So I’m gonna say, “Joe, nobody does this except you. You’ve got something for 20 and you paid 15, so I’m gonna give you implied skin in the game an equity value of that 5 million bucks.” So I feel good that if I’m financing 90% of your acquisition, you still have more equity in the deal. So it’s a case-by-case basis, but we look at the deal and we figure out “How are our interest aligned? How do we get paid back?” I wanna make sure we always get paid back with the appropriate yield on our investment.
So there’s some implied equity, there’s cash equity that we like… If they wanna give us a personal guarantee versus putting cash in, we’ll take a look at that, also being entrepreneurial on our side. You may say “I don’t have that much equity. Can I pledge another asset?” That’s another way of skinning the cat, and as a private institution I can do it, while others are not allowed, or don’t want to or don’t understand how to do it.
Joe Fairless: Yeah, that is incredibly nimble, that’s for sure… With the implied equity – let’s just go with that example that you used… We’re buying a 20 million dollar property for 15 million, so that’s at a 25% discount, so the implied equity – would you give me credit for all 25% of that, or just a percent of that 25%?
Dan Palmier: Again, it depends on the deal. As a real estate professional, you understand that every deal is unique. We try to do as much of the 25% as possible.
Joe Fairless: Wow. And what do you read from a interest aligned standpoint? You’ve mentioned implied equity, cash equity, personal guarantee, pledge another asset… What is the total amount, percentage-wise? …and I know every deal is different, but generally, what percent of skin in the game do you look for, regardless of how you get it, from any of those sources?
Dan Palmier: I would say that here we’d like to have about 25%. We can mix and match what the different enhancements are, but we like to have about 25%, whether it’s cash equity, or implied, or a pledge of another asset and a personal guarantee.
Joe Fairless: Got it. Very interesting.
Dan Palmier: Yeah, a very unique way of looking at things. And we too commoditize stuff also, but I think the audience probably wants to know something more entrepreneurial, and we do a lot of this stuff.
Joe Fairless: Two billion dollars in the last four years? Help me understand how that’s derived? Just break that down for me, will you?
Dan Palmier: I’d say we’re probably up to almost 150 separate transactions, in 26 states throughout the country; a lot of downtowns throughout the country, where we’re actually breathing life into obsolete buildings in urban areas, so that millennials can go down there and live, work, and play, we do that. A lot of multifamily… I’d say 75% of the 2 billion is in the multifamily sector, and then everything else of the 2 billion – most of it is debt, 75% of it is first mortgages, and mezzanine, and equity, and we do some ground-up construction, and we bought some assets, too. We bought two hotels and a nice multifamily in downtown Stanford, Connecticut a year and a half ago; we bought a hotel in Pittsburgh and we bought a broken condominium in Gulf Shores Alabama. So we do a little bit of everything throughout the country.
Joe Fairless: What is your best real estate investing advice ever?
Dan Palmier: I’d say get to know your customer, your borrower. It’s never really a good time to lend to somebody that’s not credit-worthy, and it’s never a bad time to lend to somebody that’s very credit-worthy. So know your customer.
Joe Fairless: In addition to 25% equity in the deal – there are many ways to get that we’ve talked about – what are the other things that you look for in the borrower, other than credit-worthiness, and will you define credit-worthiness a little bit more?
Dan Palmier: Well, we do a background check, we look at their history in the real estate field, we kind of rate their experience level, their credit score and all that traditional stuff. We really get to know the people we do business with, and not everyone has not had a problem. Obviously, we came from a very bad time back in ’07, ’08, ’09, so most borrowers have some kind of workout history, so we just evaluate what they’ve done, how they’ve done it, whether they’ve been honorable with their creditors and others. It’s very important to us.
Joe Fairless: I’ll give you a scenario, and based on the information I give you, I’d love to hear your thoughts, and then we’ll go from there. So let’s say I just quit my W-2 job, so no W-2 income. I’ve found an apartment deal; it’s the largest I’ve ever bought, any transaction. It’s about 100 units. The closest to that I’ve done is a single-family house, and I only have one… But the deal is a really good deal, and I have a good third-party property management company who I’ve lined up to manage it.
The deal appraises for 20 million, but I have it under contract for 15. I have good credit. If I come to you, are we doing the deal?
Dan Palmier: Absolutely. If the market is okay… You see, we look at the deal like a pyramid – we’ve got the borrower on one point, we’ve got the market, and we’ve got the property. For us, not all three things have to be stellar, but if it’s a good property, you’re buying it right and you’ve got a good property manager, we’re doing the deal.
Joe Fairless: And I have no money to put into it, but I can use that implied equity for it?
Dan Palmier: I’d like you to put something in.
Joe Fairless: [laughs] But I don’t have any money. I just left my job, but I have that one house… So let’s pretend maybe I have $15,000 in equity there; can I just say “Hey, here’s the house if things go wrong?”
Dan Palmier: We can do it that way… One of my mantras is we’re not going to lend a dollar unless we’re ready to own and operate the underlying real estate. So if that 5 million dollars is real, because it’s gonna be better luck next time – although we’re certainly not predatorial, we’re relationship lenders, we have no problem in taking the asset. And then it depends on the state. Some states are easier to take assets than others.
But I would do that deal for you, if that’s you, and I’m seeing you’ve got promise, and I like the story, and I think you have a lot of skill and future potential – I would help you. I would grow you and I would expect in return “The UC Funds guys, they helped me. They helped me actualize the American dream, they’re my guys. I’m going back to them over and over again”, and then you’ll say nice things about us.
Our referral network is very important to us. A new borrower that comes to us that may not know us, we give them 5-10 names and we just say “Just call them.” We don’t tell them to say nice things about us, but that’s what we work for. Reputation is very important.
Joe Fairless: I have a feeling you’re gonna get a lot of calls after this interview airs.
Dan Palmier: Joe, we do things others can’t or don’t wanna do. I’ve done a million, two million dollar working capital facilities for people that were referred, they needed some help making payroll, what have you, and I’ve done it off an e-mail. And subsequently, I’ve done hundreds of millions of dollars with the same people, because they remember that you did something that others can’t do or won’t do.
Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?
Dan Palmier: Yeah, let’s do it.
Joe Fairless: Alright, let’s do it. First, a quick word from our Best Ever partners.
Joe Fairless: Alright, best ever book you’ve read?
Dan Palmier: The Purpose-driven Life, by Rick Warren.
Joe Fairless: What’s a best ever deal you’ve done?
Dan Palmier: I haven’t done it yet, but starting UC Funds is a deal to me, and that’s awesome. This new product called UC Go – it’s a joint venture with Barclays Bank, and we’ll do a billion a year, 85% loan-to-value, and transitional [unintelligible [00:18:41].16] resonating throughout the country.
Joe Fairless: What’s a mistake you’ve made on a transaction?
Dan Palmier: Lending to the wrong person.
Joe Fairless: I would think that would come up frequently with the 100% finance stuff.
Dan Palmier: In reality, have I lost a dollar in this business? I’m asking myself…
Joe Fairless: Yeah.
Dan Palmier: I lost on one transaction out of — I’ve done a thousand. It was a guy that we didn’t do a good job underwriting.
Joe Fairless: If presented a different person, but the same exact scenario, what question would you ask or what data point would you research to then mitigate that risk?
Dan Palmier: [unintelligible [00:19:17].17] just make mistakes. We would have done more due diligence. It was my mistake.
Joe Fairless: On what particular thing?
Dan Palmier: Really evaluated the history that he had with investors and other bankers. We overrode the [unintelligible [00:19:31].10] because we looked at the real estate and we fell in love with the real estate, and we can do some hard money asset-based lending, and we got wrapped up with somebody that really didn’t wanna pay us back, and couldn’t and then then Great Recession hit, and we just didn’t have enough capital to wait it out… But phenomenal real estate, phenomenal real estate. So it was definitely a timing thing, and we made it through the Great Recession at all odds, but there was definitely some bruises and some scar tissue.
Joe Fairless: Best ever way you like to give back?
Dan Palmier: Palmier Foundation. I woke up probably six years ago, seven years ago and was a little sluggish getting out of bed, and it occurred to me that God made me to create, so… I like to give back, throughout the world, for different causes.
Joe Fairless: And how can the Best Ever listeners get in touch with you?
Dan Palmier: I’m on LinkedIn, and also my website, UCFunds.com, and my initials, dp@UCFunds.com.
Joe Fairless: I thoroughly enjoyed this conversation and really enjoyed learning about your business, how you structure deals, we got into the specifics of it, and how you approach transactions in a creative way… So thanks so much for being on the show, Dan. I hope you have a best ever day, and we’ll talk to you soon.
Dan Palmier: Thanks, Joe. Take care.