April 2, 2018

JF1308: From Small Deals To Over One MILLION Square Feet Of Office Space with John Bogdasarian

John is here to tell us how he went from no money down loans (because he had no money) to owning a huge portfolio of commercial and residential real estate. Hear high level money raising, asset management, and investor relations tips in this educational episode. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

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John Bogdasarian Real Estate Background:

  • President of the Promanas Group, a real estate investment firm
  • Began with nine initial investors, has strategically guided the firm to serving more than 300 investors today
  • Ownership in multiple entities with more than 2M square ft. of industrial, warehouse and distribution space
  • Has well over one million square feet of office space
  • Obtained his Certified Commercial Investment Member (CCIM) designation in 1999
  • Based in Ann Arbor, Michigan
  • Say hi to him at https://promanas.com/
  • Best Ever Book: Atlas Shrugged

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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, John Bogdasarian. How are you doing, John?

John Bogdasarian: I’m doing great.

Joe Fairless: That’s great to hear, nice to have you on the show. A little bit about John – he is the president of Promanas Group, a real estate investment firm. He began with nine initial investors, and has strategically guided the firm to serving over 300 investors today. They’ve got ownership in multiple entities with more than two million square feet of industrial warehouse and distribution space, and has well over one million square feet of office space.

He’s got a CCIM designation, had it for 1999 to 2018. What is that math? That is about 20 — is that almost 20 years?

John Bogdasarian: I’m that old.

Joe Fairless: Holy moly. That’s crazy, almost 20 years. Based in Ann Arbor, Michigan. With that being said, John, do you wanna give the Best Ever listeners a little bit more about your current background and your current focus?

John Bogdasarian: Yeah, I started out as a residential agent. I was actually just a broker, selling houses, and I started figuring out very quickly that I was always working myself out of a job; you only got to eat what you killed. So I started buying single-family homes, and I built a portfolio of about 20 single-family homes, doing very low down – and even zero down – type deals, because of course, I didn’t have any money. That’s where I really cut my teeth, in that real estate residential arena.

Then after a while the deals got bigger, and I found some things that made sense, but I didn’t, again, have all the money to do it, so that’s when I started syndicating deals. I didn’t really have any idea, I was sort of figuring it out; there’s a lot of information out there today, and it’s really interesting… I’ve been on a few podcasts, and this is a great one; I’ve listened to a number of your episodes, and back then, there was nowhere to learn this process. I just kind of conjured it, and just kept doing deals and figuring it out, and getting a little bigger, and then really started taking on investors in earnest in about 2005.

We really only work with accredited investors, so that’s mostly what I can speak to, is what makes a smart investor and what they should focus on, and things like that. But I did the whole do-it-yourself, start-from-nothing as well, so if that’s of interest to anybody, I can certainly speak to that.

Mostly what we do now is we purely represent accredited investors, we put deals together, fund development deals, acquisitions, we run a major portfolio and we just distribute out cash pro rata. I like to say we make rich people richer.

Joe Fairless: Well, let’s talk about that, because the Best Ever listeners tend to have some deals under their belt; we’ve got a lot of passive accredited investors as listeners, and then have people who are syndicating deals, or wanting to syndicate deals. They have bought those homes similar to what you did starting out, and they wanna go larger. So let’s focus on what you’re doing now, versus how you got started, and some things that might be of interest.

So what’s the most challenging question an accredited investor asks you?

John Bogdasarian: You know, the scary thing about it, to be honest with you, is that I don’t get many questions anymore. Most of our investors are direct referrals, and they hear about it – “Hey, I heard from Bob that you make him money. Can I get a couple shares? Here’s a couple hundred grand.” “Do you have any questions?” “No, I don’t know anything about this stuff.” And that actually is the worst thing I get – no questions.

In terms of tough questions, I would say the toughest questions are easily answered at this point in time. I wouldn’t say there are any difficult questions, but there are good questions, that’s’ for sure.

Joe Fairless: Good distinction. What are some good questions?

John Bogdasarian: Some of the best questions I get – and this is what I’ve discovered about the smartest investors that I have, all of them, hands down, almost all of their questions are about me, the person representing the deal: my background, my track record, my motivation… And not as much about the deal itself.

The good questions are kind of things along the lines of “Why are you doing this project and what do you see the likely outcome of it being? What is the worst-case scenario? What’s the worst deal you’ve ever done? Where did you learn to do what you do, and how?” They’re not focusing on pedigree or what university I attended or anything like that, they’re focusing on experience and where I am in life and what my overall deal philosophy is.

We tend to take very much a preservation of capital strategy first. We wanna know that our worst-case scenario is that potentially our equity gets locked up in a deal for longer than we’d like, and maybe we end up accepting a lower rate of return. This actually has not happened, but we kind of look at it like “That’s what could happen.”

We’re very much into trying to set expectations and temper them and look at the downside of the deal, and those are the best questions I think I get from people, for those types of things… If that makes sense. I’ll tell you some worst questions I get, too.

Joe Fairless: I’m gonna write that down and we’re gonna get to the worst questions, because you’ve piqued my curiosity for sure… But I do wanna ask a follow-up question on the types of deals that you do. How about we take a step back and talk about the types of deals you do, because for other syndicators or aspiring syndicators – and then also for passive investors – it’d be interesting to know how you’re able to have a good return for your investors, but then the worst-case scenario is equity gets locked up, versus you lose it all, then there’s a capital call, then you lose that, and then everyone’s upset.

John Bogdasarian: Sure. Well, to speak to the asset — we don’t really focus on a specific asset class or geographical location. We’re really situationally-driven is what I like to say. What I mean by that is I’ve done single-family homes, obviously; I had a big portfolio of those at one point in time, that I sold actually earlier this year. Apartment complexes, small retail properties that were more service-based businesses, ground lease deals where we owned the ground and leased the land to restaurants like McDonald’s, TGI Fridays, Joe’s Crab Shacks, Applebee’s… We owned a number of Applebee’s at one point in time… Special purpose buildings we’ve done, bowling alleys; I owned a bowling alley in Baton Rouge, Louisiana… Don Carter All Star Lanes – if anybody’s listening from Baton Rouge, they’ll know Don Carter.

Joe Fairless: I know Don Carter from Fort Worth. There’s a Don Carter’s in Fort Worth.

John Bogdasarian: Is there?

Joe Fairless: There used to be, I don’t think there is anymore.

John Bogdasarian: A very famous bowler from back in the day… But I’m not a bowling guy really; only for entertainment, at my kid’s birthday parties now.

We have industrial, we have multi-tenant office, we have single-tenant office, we have hospitality, we’re building a hotel, we do acquisitions of existing properties, we build from the ground up, I’ve done office condominium projects, residential condominium projects, land splits, subdivisions… So really no two deals are anywhere close to being the same to each other from an asset type or whatever, but situationally they’re all the same. Situationally, what we’re doing is we’re structuring a deal whereby we have many layers of protection before our equity is at risk. And what I mean by that – I’ll give you a quick example, on a condo deal we’re doing right now, where a guy… And so you know, we don’t always act as the principal developer. So for the younger people starting out doing deals, we’re a very good source to developers all over the country. We have people we’re working with in Denver, Nashville, Florida, where they have a project teed up, they have it ready to go – or not ready to go; maybe they just have it concept-ready and they need the money to get it through the approval process and get it built and do whatever.

So what we will do is come in and we’ll say like I, John Bogdasarian, am the investor; I negotiate a deal with him and say “I’ll provide all the money, and here’s how we do it.” If they like our proposal, which 99 times out of 100 they do, then boom, we get involved together and we go forward and do this deal, and then I’m accountable to my group of 300-400 investors (that’s about where we are now). We put the package together, syndicate it, put it out, and put the shares out. So we’re between those two groups, essentially.

An example of how I would structure something like this is our Kingsley condos we’re building in downtown Ann Arbor right now. A guy comes to me, the land is four million dollars (let’s say) and we wanna build these condos on it and sell it, and everything else. I say “What kind of debt do you have on the property?” Let’s say they have a million and a half of debt on the property; I say “Okay, here’s what we’ll do – we’ll close on the land, we’ll pay you the million and a half, but you’ve gotta contribute the other 2.5 to the deal, and you get that once we get the return of our equity.”

So let’s say we have to put 8-10 million dollars in equity into that project. We go, we build this thing, we have another (let’s say) 20 million dollars of bank debt paired with that. We go, we build it, we sell condos… We first use the condo sales to pay the bank, we then use the condo sales to pay back all of our investor capital first, then he gets the balance of his land – so he’s risking his land against that, and then his profits also come at the end as well.

So essentially, we have multiple layers of what I call protection before we get [unintelligible [00:12:13].23] The only thing that’s ever in front of us is the bank and the lender, and I would say it is possible to go out and put something up and over-leverage and build into a bad market and lose the money. The worst-case scenario is always you lose all your money. My investors don’t sign personal guarantees on our debt or anything, so they could lose all their money. But for that to happen, with us putting 35%-40% down on a project and projecting a pretty massive profit on the back-end, the profit has to erode, and then a lot of things have to go away before we’re losing our money.

Typically, we have a certain number of pre-sales that would pay the bank down to a number that’s good enough so that even if we were stuck with 20 units, we could just refi the bank out of that position, or I have enough cash around myself typically that I can just pay the bank off and charge some nominal 5% interest-only while we rent those units out and wait for the market to come back, to sell those units. Sometimes that can be a long wait.

In 2006 I was selling my single-family home portfolio as fast I could. I could only get rid of so many, and then the market tanked in 2007 and I just sold the rest of them all in the spring of 2017, so that temporary setback lasted 10 years. But the good news is they were rented the whole time, and there was plenty of income behind them, so there was something backing them. I didn’t lose any money, I just lost net worth on paper. So that’s kind of an example of how we would put something together.

Joe Fairless: That’s helpful, I love that you went through a specific case study. And with your deals – and you’ve got how many going on at one time?

John Bogdasarian: That kind of depends on the season and the time of year, but typically about five or six is about where we are right now. It used to be we’d have one at a time, one acquisition; we’d be doing one deal, because it was me and an assistant and one other guy. Now I have a team and an investor relations department and a marketing department, and a lead asset manager, and a chief operating officer and a chief financial officer, with people reporting to all these people.

So as the organization has grown, we’ve been able to do more. Right now we’re kind of at my comfort level. I don’t ever like to get too many cards out of the table – or too many chips, I should say – without seeing some of them coming back in, and seeing things being realized. We started getting into development about three years ago, and I started testing it with small projects. 18 townhomes – it was a small 6-8 million dollar deal we did, total deal size. And then once we saw that worked and we saw how the numbers came in, then we would expand and do 2-3 more in that particular market, higher-level deals.

Right now though, we could handle way more than six. I need 2-3 months to see the sales going and the lease up and so forth. We just don’t like to get over-extended. We wanna be able to back this stuff up if for some reason it’s not working out as we originally projected… Which again, knock on wood, we haven’t had that happen, but it can.

Joe Fairless: With that case study, I was taking notes and trying to get some of the core pieces, but it would be helpful if you can summarize – when you go into a deal, since as you said, no two deals are the same, so you look at risk mitigation and capital preservation… What do you make sure is in place for every deal, so that you have capital preservation at the forefront?

John Bogdasarian: So another example – I can’t remember who it was, but on one of your shows you had a guy who bought apartment complexes, and it kind of blew my mind because he was buying like 50 units and less, and I was like “Wait a minute, that doesn’t work. You’ve gotta have 100 to 200.” But he said something in there that was critical – he said “You know, the fact is the cost to manage these things and maintain these things is way higher, yes, but if you put that number into the deal, it’s okay, because you’ve got enough to do it.”

That’s a mistake I made at one point in time – I bought an 84-unit apartment complex and I realized I’ve gotta pay a full-time manager, I’ve gotta pay a full-time maintenance guy, and the only reason I was able to make that work was because I owned a ton of single-family homes in that same area and I had him run all those as well, so I could diversify their cost… But that was a lesson.

So I would say basically on an acquisition, the layers of protection we put in there – a broker will tell you you need 15 cents a foot per year as a reserve on an industrial building. We put a dollar a foot per year in there as a reserve… And that’s even if we have like a 15-year absolute net lease, we still will let a buck a foot in there to accrue over the life of our hold period. Multi-tenant office buildings – two dollars  a foot as a reserve, because you’ve got buildouts, TI, leasing commissions… It’s expensive.

So we’ll put hefty reserves in there… We have not only a property management fee that pays for really managing the property, but we also have an asset management fee, because we’re running 300 investors, and reporting to them and doing other things. These are things that we could theoretically live without if we had to, without missing projections to investors; we could cut those back. We wouldn’t wanna do that, but they’re layers of protection that we put into the deal.

It’s kind of like the godfather – you wanna sit in a place where you can see the exit. We pretty much wanna see the exit. I know you’re gonna get to some questions about some of the most important lessons or mistakes or things, because you ask good questions on your shows and I’ve heard them… But for the most part, these are the types of projections we put in there — or protections we put in there.

Another one is just having the trust of my investors. We came across a deal, for instance, on a hotel, and we had originally projected that 10 million would be enough equity to get the hotel built, based on the loan quotes we had. And we had a lender basically change the terms of the loan on us the last minute, and they wanted us to put in three more million dollars of equity… So I just created a mezzanine piece. I had plenty of mezzanine lenders that would have loaned that three million, but we don’t do mezzanine loans because they tend to be predatory lenders, and we certainly don’t wanna risk our capital with an extra lender… And they have pretty high fees, and so forth.

So what we do is create a short-term loan opportunity for our members and say look, we have this loan, let’s say, for 25 million and we really need 28, so we have an opportunity here where the members can loan 3 million dollars temporarily, and once the thing is built and stabilized, the lender will extend that extra three million out and we can pay you back.

In addition to that, I’ve never had to make a capital call. Like I said, I hope I don’t. But if I did and it made sense, it wouldn’t be very difficult for me on any one of our deals to double the money that we’ve got in it in about 24 hours. So that’s why we try and go smaller, gross lower than we can.

I know, for instance, if I put 4 million dollars in a deal and that represents 30% down and the bank gets squirly or we can’t sell units, I can just raise another four million and boom, pay the lender down to some stupid number, or raise a little more and pay him off, and we can own it free and clear. Because again, we’re not building things in farm fields, for special uses. We’re going city infill, where demand is far outweighing supply, and it’s just a matter of time, if there’s any setback at all, for us to hit our numbers.

Joe Fairless: Is the asset management the same across different types of asset classes?

John Bogdasarian: It varies, but it’s similar. I don’t like property management, I’m being honest with you. I’m not a day-to-day operations guy. I like to say I have a lot of RAM, but I don’t have a giant CPU. I can figure things out very quickly and make quick work of stuff, but on a day to day basis, day in and day out, dealing with managerial tasks is very challenging for me… So I initially try to outsource all property management, and was really disappointed, frankly, at the level of service we got, and reviewing the expenses…

One of my best friends came on board years and years ago and is now my business partners. He’s the director of operations and he is an incredible day-to-day eye on the ball management mindset, so we complement each other very well, and we’ve taken all management in-house, and we’ve been able to shave costs substantially… Which doesn’t always make us more money, because a lot of our properties are triple net, and even absolute net leases, but in some cases we’ve been able to save our tenants a dollar or even two dollars a square foot on their pass-throughs. And when it comes time for a lease renewal or negotiation, we can point to that and say “Hey, we need a 50 cent/square foot bump here, but look, we’ve saved you $1,50/foot on your expenses.” So it does eventually pass through to us, and it’s just good business.

Joe Fairless: I guess I was asking that question because I’m just wondering what is an asset management fee? Not property, but an asset management fee for office versus industrial versus apartment community versus hotel.

John Bogdasarian: Oh, okay, I get it… So an asset management fee is very similar across all the assets. The property management fee itself covers property management. If we have an office building, the property management fees are higher because there are salaries that are attributed to those buildings. So the buildings themselves pay the expense of running the buildings, and property management is not really a profit center for us. It’s just basically a breakeven to manage all these properties.

The asset management fee, which theoretically should be a profit for us, is not really a profit for us either. It just covers office overhead, and salaries, and it basically allows us to break even. We might be slightly positive now. I think we crossed over from losing money… When I started out it was like a $50,000/month drain, so everytime we closed a deal, I’d make a commission and pay off a line of credit at the bank, and then start drawing it back out again to get to the next deal. This happened from 2009, all the way to — actually, it started in 2005, I guess, all the way through probably 2015 is when we got to the point where our global asset management fees (property management fees, everything), we started breaking even on that, probably about 2015. And it’s kind of interesting, because the acquisitions market has really dried up. We haven’t really bought anything in the last year, so we haven’t really added asset management fees.

We do now have developer fees on deals. That’s another layer of protection. We have these big developer fees on these projects we’re doing, but we don’t charge those. So far we haven’t charged those as we’ve been building the project; we wanna draw them out, we let them accrue, and we wait until the end to make sure that we’re gonna be able to return 100% of investor capital, pay the bank off and give people their pref return before we draw that money out. Legally, we can take it, but so far we have not, we just accrue it, because again, it’s just a protection mechanism.

Joe Fairless: And just so I know – your asset management fee is or is not the same on a hotel versus an apartment?

John Bogdasarian: It’s the same as a percentage. In our PPM, in our subscription agreement we reserve the right to charge up to (I think it’s) 6% of the net operating income of the property as an asset management fee. And sometimes it’s all of that 6%, sometimes it’s half of that… We kind of look at it and say “Is this thing causing us a bunch of headaches and hassles and so forth?”

What I will say to young syndicators and to investors is that it’s very important that you operate with 100% transparency. All of these things are explained, outlined, they’re part of the prospectus, they’re in the PPM, and all our returns that we project and calculate to investors are net of every fee that can be charged. I just think you have to do that, there’s no reason not to; for deals that bad that you’ve gotta hide stuff, then you don’t wanna be doing it anyway.

Joe Fairless: It makes sense. What is your best real estate investing advice ever?

John Bogdasarian: Focus your questions on the sponsor, do the work once and get paid forever. You find a good sponsor, you do your due diligence on him, they’ll make you money forever, if you’re an accredited investor.

Joe Fairless: What’s a worst question that you receive? Because I mentioned we’d get back to that… What’s a worst question?

John Bogdasarian: The single worst question I get is a statement, and it’d be a statement about a certain market, or somebody not thinking something’s gonna sell, or whatever. It’s someone second-guessing what I know. I’m interested in the input, I’ll listen, but the reality is I kind of feel like I know what I’m doing and that they should be coming to me and not doing it themselves.

Joe Fairless: Alright, we’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?

John Bogdasarian: Sure, let’s go.

Joe Fairless: Sweet. First, a quick word from our Best Ever partners.

Break: [00:25:54].04] to [00:26:22].17]

Joe Fairless: Alright, best ever book you’ve read?

John Bogdasarian: Atlas Shrugged, by Ayn Rand.

Joe Fairless: Best ever deal you’ve done that we haven’t talked about already.

John Bogdasarian: By far and away a deal called Crown Point. We bought a billion for 3.6 million dollars. The investors made an 18% return in six months, and then I sold the property two years later for 11.3 million and split the profits 50/50 with the guy who brought me the deal.

Joe Fairless: And the investors made 18% because there was a refi and you cashed them out, or how did that happen?

John Bogdasarian: We bought it all cash, closed in seven days; the investors got all their money back, plus 18% in six months, and then they were out of the deal. We don’t typically do that. We would like to keep the investors in the deal. But the guy who brought me the deal, that was a condition of the deal – the investors got their 18% and they were out, and then he and I owned the deal together. He didn’t want a lot of investors. But the investors made 18% in six months, so everybody was happy… But we took a 3,5 million dollar cap gain on it.

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

John Bogdasarian: The biggest I’ve ever made is… Two of them. One is not doing enough due diligence up-front, and the other one is being too creative and too tricky in getting something done and closed that other people cannot get done and closed, and then I was trapped in it. A quick example – I bought a six-unit, nobody could get commercial financing; once you go over four units, you might as well go to 400. So I got a six-unit done because I have the credit and I could just get it done with a bank on a line of credit. Then when I went to sell it, I couldn’t get it sold because nobody could buy it.

Joe Fairless: Best ever way you like to give back?

John Bogdasarian: My favorite is my wife’s charity, called The Generosity Project. We also like the 2|42 Community Center here in Michigan; they’ve opened multiple church/community centers throughout Michigan and the country… But thegenerosityproject.org.

Joe Fairless: And how can the Best Ever listeners get in touch with you?

John Bogdasarian: The best place is ir@promanas.com. Or lisa@promanas.com.

Joe Fairless: Your website is promanas.com, right? And that will be in the show notes. Best Ever listeners, you can click on that and go check out John’s group.

John, thank you for being on the show, talking to us about your career and what deals you’ve done, how you approach your potential deals – you’re situationally-driven, not focused on an asset class or a location, and how you apply that so that you are mitigating the risk and being focused on capital preservation with your deals, regardless of the type of asset class it’s in, or location.

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

John Bogdasarian: I appreciate it, thank you very much.

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