November 26, 2021
Joe Fairless

JF2642: How Smaller Deals Can Lead to Bigger Payoffs with David Kislin


 

During the 2008 recession, David Kislin’s bank that handled his construction loan filed for bankruptcy. Fearful for the future, his partners backed out of the project causing David to lose half of his equity on the deal, totaling around $6 million. From lessons learned on relying too much on investors to the time saved on more granular deals, today David shares why he believes smaller deals can be smarter deals.

David Kislin Real Estate Background

    • Full-time commercial real estate investor since 1999
    • Primary focus in multifamily, select commercial properties, and land for ground-up development using a mix of personal capital and a small group of high-net-worth investors
    • Current portfolio consists of over $300M properties completed
    • Based in Boca Raton, FL
    • Say hi to him at: https://jeldevelopment.com/

 

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TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the Best Real Estate Investing Advice Ever Show. I’m Joe Fairless. This is the world’s longest-running daily real estate investing podcast, where we only talk about the best advice ever. We don’t get into any of the fluffy stuff.

With us today, David Kislin. How are you doing, David?

David Kislin: Excellent, guys. Thank you.

Joe Fairless: Well—

David Kislin: Thank you for having me.

Joe Fairless: I’m glad to hear it. It’s my pleasure. A little bit about David – he is a full-time commercial real estate investor, and he has been one since 1999. His primary focus is on multifamily, some select commercial properties and land for ground-up development. He uses his own money, as well as high net worth investor money. His current portfolio – well, he’s developed over $300 million worth of properties, and he is based in Boca Raton, Florida.

So, with that being said, David, do you want to give the Best Ever listeners a little bit more about your background and your current focus?

David Kislin: Sure, absolutely. I primarily grew up in Brooklyn, Manhattan, the Tristate area.

Joe Fairless: Where in Brooklyn?

David Kislin: Coney Island, right off of Ditmas Avenue. I’m a Russian-Jewish, so that’s where a lot of our family and relatives and friends were. We moved around a lot between Brooklyn and Manhattan, so constantly being surrounded by real estate, and in many cases, beautiful buildings and beautiful structures. I was always interested in the concept of what real estate is, how it works, and the ownership of it, and the stability of it, and the solidness of it, and the concept that you could build something that would withstand multiple generations, especially a ground-up construction. So that always interested me from a very young age.

I graduated Babson College in 1994, and finished with a mix of entrepreneurial studies, international business. Because I was fluent in Russian, growing up in a Russian neighborhood, at that time, the Russian market had opened up, and there was a lot of opportunities. So I spent about 4-5 years in Russia, trading commodities, primarily with Western Europe, China, etc. and really got a nice feel for trading physical products, because you actually had to buy the physical product, move it across borders, get it to your buyer, get payment and all that; it wasn’t just a paper trading process.

Joe Fairless: What were you buying and moving?

David Kislin: What we call is basically things like hot rolled coil or cold rolled coil. These are things that go to the manufacturing of dishwashers, brake pads, HVAC, precursors to the fabrication process. And we would typically handle large-sized containers, whole entire boats; 5000, 10000, 20000 tons of material at a time.

Joe Fairless: Wow. Okay.

David Kislin: And we were under a conglomerate of Swiss companies, because Switzerland has always been a major trading center for physical commodities. By the late ’90s, it became apparent that I wanted to settle down, I got married, and it was just a very natural transition to go into real estate. I had been fortunate enough where I had to put away a few dollars from my earlier years, and I started selectively investing in real estate, in more speculative products, but that’s where my career started. I looked at your questions, and you said, “What was your most profitable deal ever?” and funny enough, it was probably my first deal ever.

Joe Fairless: Really?

David Kislin: Yeah, because it was early ‘99. The stock market had been very very active, and a colleague of mine came to me and said, “There’s a loft in Soho that’s up for foreclosure, and you’ve got seven days.” And the place was in the disastrous condition, absolutely disastrous. So very few bitters came in, we picked it up for a song and a dance.

Joe Fairless: What’s disastrous? Describe that.

David Kislin: Basically, everything is exposed, the flooring was uneven, there was water leaking from the upstairs, the windows were basically broken. So it was just a complete full rehab, you know.

Joe Fairless: It sounds like they did that intentionally on the way out.

David Kislin: It was a rent-stabilized/rent-controlled property that somebody had effectively gotten out of previous tenants legally, but once they took the job over themselves, they decided they were going to do it themselves and it was just a disaster.

Joe Fairless: Okay.

David Kislin: So they got in trouble with the banks, lenders, etc.

Joe Fairless: What did you buy it for?

David Kislin: We bought it for $400,000.

Joe Fairless: Wow!

David Kislin: A 1,600 square foot loft in Soho.

Joe Fairless: Wow!

David Kislin: And we put in about, I would say, $600,000 at that time, which was a nice sum, and we almost immediately flipped it for double that to a famous basketball player who played for the Nets at the time—

Joe Fairless: Nice!

David Kislin: —in six or eight months. So that, unfortunately—

Joe Fairless: Just keep doing that every time.

David Kislin: Yeah, I was like, “Listen, I can do this all day long!” You know, buy something for four, put in 500-600, flip it for two. Sounds good! But by the early 2000s, the market had changed a little bit, and I had decided that I wanted to focus on more value-added… So I did a few smaller multifamily deals in Manhattan, primarily focusing on buying existing properties. And my strategy was relatively simple and very effective, and it wasn’t too uncommon at the time; it’s just about execution… You would buy two properties in the neighborhood, and you would focus on properties in the East Village, the West Village where there’s a high concentration of rent-controlled and rent-stabilized tenants.

Now first, some of your listeners who are not familiar with rent-controlled and rent-stabilized, it’s a legacy law in Manhattan that goes back to the 40s, and a tenant who occupied an apartment in the ’40s or in the ’50s or in the ’60s could be paying an effective rent at that time in the early 2000s of $200 to $300 a month for a two-bedroom apartment that the market rate was $3000.

Joe Fairless: Mm-hmm.

David Kislin: So our strategy was very simple, it’s just that instead of trying to buy out these tenants, which was near impossible, is you would offer them a relocation. So you would buy two buildings, one with eight or 10 units, another building with another eight or 10 units, vacate one building completely, make it basically a vacant building, and move all of your rent-controlled and rent-stabilized tenants to the other building… Legally, obviously; everybody is signing all of the proper paperwork, etc. And what happens when you do that – and we did that on three transactions – is the vacant property becomes very attractive to a developer, and the rent-control rent-stabilized property becomes very attractive to somebody who’s just looking for long-term cash flow. And you distinguish your product and you maximize that value therein. I typically did not take the full route of developing both of those properties, because the exit was profitable enough where I could simply walk away.

Joe Fairless: What are the numbers on one of those three transactions where you bought two buildings?

David Kislin: We were purchasing a four-storey or five-storey building at that time with rent-controlled and rent-stabilized tenants, so the cash flow was pretty low, between the 2.8 and the 3.2 mark. So we would buy two buildings, and then effectively sell the empty building and pay off all of our debt and have a decent gain.

So to your question, the total project size would be between $5 million and $6 million on those projects.

Joe Fairless: Got it. And then when the dust settles, what would you exit at?

David Kislin: At that time we were exiting out at, for a raw vacant property, between the 500 and the 600 mark per square foot, and we were purchasing the properties at the 250-300 mark. But I want to stress to you, that would be the vacant property that we would sell at that price. The rent-controlled property, we would be looking at a very, very small return on investment.

Joe Fairless: Hmm. I haven’t heard that strategy before, and I lived in New York for a decade, and I’ve interviewed a lot of New York City people… And I should have heard of it but I haven’t heard of that before. Are there people still doing that?

David Kislin: People are still doing that, and what you find is it’s not something that’s very attractive to a typical investor, because there’s no guarantee on when your exit is out. So you have to be patient, you have to go through the lawsuits. So that’s why it’s not going to be something that you’re going to go out and raise capital with. I was able to use my own funds and bank funds on a properly leveraged basis to do that. But ultimately, after one or two successful transactions, or actually after the third successful transaction, I felt exactly how you’re saying, is that there’s just not enough opportunity here. There’s just not enough volume to grow your career and make it work. So that’s why we pivoted our business and started doing ground-up construction thereafter.

Break: [9:47] to [11:20]

Joe Fairless: Where did you do that ground-up construction?

David Kislin: Our first project was 519 West 23rd St. It was called the Highline 519, and it was purchased—

Joe Fairless: Is that by Chelsea Market?

David Kislin: It’s 23rd Street between 10th and 11th Avenue.

Joe Fairless: Yeah. Okay, that’s near Chelsea Market, I think.

David Kislin: It’s basically a stone’s throw from the Highline Park, the elevated Park.

Joe Fairless: Yeah. Yep.

David Kislin: So when we bought the property, the elevated Park had not been fully approved yet, but we saw the value in the neighborhood, and Related had already been there with a large rental that had done very well. So we took the route of doing a slightly better design building for what the market was offering at that time – high ceilings, both concrete, Italian finishes, kitchens, etc, and started that project in 2003/2004 and finished it basically towards the end of 2007. But we really only delivered the condominiums in 2008, and that project was considered a pioneering project at the time for that part of Chelsea, because it was a little rough and tumble in that corridor up until that time. Now, it’s a totally different story, clearly.

Joe Fairless: Mm-hmm.

David Kislin: And that project taught me a lot. It taught me a lot about the Byzantine Empire, that is real estate entitlement in Manhattan, and how long it takes things to get approved, and the difficulties in dealing with your neighbors in particular, because you have a lot of older structures, and when you do ground-up construction, you have a lot of issues in the ground movement.

Joe Fairless: Hmm.

David Kislin: So it definitely taught me a lot about all of the inherent risks that as a real estate developer you might not see at first, but you kind of have to be aware of over time.

Joe Fairless: Did it teach you just to stay away from developing in Manhattan and move on?

David Kislin: Unfortunately, no. That was the next project.

Joe Fairless: [laughs] What was the next one?

David Kislin: So the next project was — I had done so well on my previous projects and I had done so well on my strategy with the rent-stabilized, rent-controlled and on the 519… I had hit records as far—

Joe Fairless: How much did you make on the 519?

David Kislin: Our cost basis was about 800-850 a square foot, and we sold out at about 1100 to 1150 a square foot. So we netted out about $3.5 million to $4 million on that project, and the banks provided financing — our equity in it was about that, so we basically got all of our equity back, plus the $3 million, and the bank financed about $6 million of that transaction.

Joe Fairless: Wow! $3 million is more than your very first deal in terms of total dollars.

David Kislin: Yeah, but you know what the old saying is, “Money won is more fun than money earned.” I really had to earn that. Like, the first—

Joe Fairless: [laughs] I’ve never heard that saying.

David Kislin: I just renovated the place, put it on sale, I sold it a week later. When you’re dealing with four lawsuits and you have to wait nine months for the fire department to show up to give you a CFO, and you have buyers who want to walk away from deals and you know—

Joe Fairless: Oh, Gosh!

David Kislin: —just a million things that could go wrong.

Joe Fairless: You loved it so much, did it again. So what was this next one?

David Kislin: So the next one, we decided that we were going to go big style and I was going to go build a 30-storey tower in Tribeca.

Joe Fairless: Wow.

David Kislin: And we hired a starchitect, Ben van Berkel.

Joe Fairless:  What’s a starchitect?

David Kislin: That’s an architect who’s a star.

Joe Fairless: Okay. [laughs]

David Kislin: He or she brings their own reputation. So let’s say somebody like a Zaha Hadid who’s passed away, or Stern, or Norman Foster, or Peter Marino. If you are a real estate developer and you want to sell at the highest possible price per square foot in an elite area, by hiring a world-famous architect, you’ve generated immense amount of publicity, free publicity.

Joe Fairless: Wow. I feel so ignorant because that’s a real thing. I just searched Google for it and surely, starchitect is actually a term people—I thought you just made that up. Okay, fair enough.

David Kislin: No, no.

Joe Fairless: Sorry.

David Kislin: I wish, I would have trademarked it if I made that up.

Joe Fairless: Noted. So you hired someone, a starchitect. Got it.

David Kislin: And we got very ambitious, and we basically went full-throttle on the project, and we received all of the entitlements, and support and we pre-sold almost 20% of the building, even before we started demolition… And then the Great Recession of 2009 happened. And we were still okay, because we had all of our financial stack was in good shape. We had all of our commitments, we had our equity in place. But unfortunately, the bank that provided us the construction loan was a bank called Corus Bank. They’re bankrupt now. They were a bank out of Chicago. And we had a schedule with them, where it was between $90 million to $110 million of total construction costs, and they were prepared to finance everything, and the last $20 million was subject to us hitting certain marks. And they fronted us based on our schedule, I think it was for the foundation, we got about $3 million, $4 million or $5 million into it; I think was like $4.8 million to be exact… And they declared bankruptcy.

Joe Fairless: Hmm.

David Kislin: And the funding stopped, and this is basically the greatest lesson that I ever learned is this – I had three other partners with us on this project. That was the time for us to show up or not show up, and my partners all got scared, decided that they wanted to walk away from the project. So we spent about a year or two marketing the project, and we eventually resold it to another developer, because at that time, it was nearly impossible to get new financing in place, and the only way we were going to be able to finish the project was through five or seven years of litigation, because the Corus Bank would have had to finish their litigation prior to me creating terms for mine. And we just kind of chose to just take a little bump, take our bruises, but walk away with as much equity as we could, and that’s exactly what we did.

Joe Fairless: Hmm. What’s the little bump? How much did investors lose? And how much did you lose personally?

David Kislin: I lost about $6 million personally, and each investor lost an additional, I would say $1.8 million to $2 million. So I would say each of us lost about half of our equity invested at that time.

Joe Fairless: Got it. Okay. How many investors did you have?

David Kislin: We had a total of four investors.

Joe Fairless: Okay. What’s that conversation like?

David Kislin: The conversations?

Joe Fairless: With investors, when you realize that that’s going to be the result. What’s that like?

David Kislin: Basically, you lose friends, and you lose faith in people’s ability to look past a short-term event, which this was in my mind, and it wasn’t going to last forever. And those conversations, if you know you’re at fault, those conversations can go a certain way. But when the whole financial system literally falls apart and everybody suffers, and even your lender has declared bankruptcy, you have to have a certain stomach and be willing to fight through that, and my investors were unwilling to do that.

And that taught me a very important lesson, and that lesson is – sometimes, or many times, you’re better off doing smaller deals, where you know that, God forbid, you can always show up and finish the deal or conclude the deal without being 100% dependent on your investors. And that’s where I pivoted my business thereafter.

Joe Fairless: And what did you pivot it to?

David Kislin: After that – you made the comment, were those conversations difficult? That whole process was extremely difficult, because I’m a real estate developer; I consider myself somebody who adds value to a project, who takes something from a piece of dirt or crappy property and makes it beautiful, and makes it long-lasting and adds that value. Sitting around for almost two years in lawyers offices litigating and fighting… For me, every dollar you spend on the lawyer is $1 less than you’re spending on the real estate, you know what I mean?

Joe Fairless: Mm-hmm.

David Kislin: And that was just completely debilitating and completely just a morale suck. And at that time, my kids were at an age where my daughter was a very good tennis player, and my wife wanted to move down to Florida… So we moved down to Boca Raton in 2011. I liquidated the vast majority of my assets up North and I made a pledge to myself that from now on I would do deals that would be smaller in nature, more granular, but that I would be the primary investor, like I was in my earlier deals, and that the only investors I would bring on in the future would be people who are more silent in nature, are more high net worth, and their investment is limited to their initial cash outlay, and I would never need to come back to them for additional investments. And that’s the way I’ve been structuring my business over the past 6-7 years, and that’s more (almost nine years) and it’s definitely helped me sleep better at night.

Break: [20:47] to [23:40]

Joe Fairless: What’s the last deal you purchased?

David Kislin: So the last deal I purchased was in May. It’s 226 North K Street in Lake Worth beach, it’s a 6750 square foot site, and it’s basically the epitome of an infill granular site. It’s a midblock site. I can build four units which I will be, about 4500 square feet in gross total buildable square feet, three two-bedrooms and one one-bedroom… And we’re looking to basically build it out, stabilize it at a rent roll. Basically, upon completion, our goal is to be at a 10-12 cap after a period of seasoning; we like to season our products anywhere between two and three years. And then we look to sell them at a five or six cap and cash out at that point.

Joe Fairless: You say “we,” who’s we?

David Kislin: Just myself and my employee. I just have one other employee. And my wife I guess as well because she’s an inherent part of the team; she’s also a real estate broker.

Joe Fairless: Mm-hmm.

David Kislin: So it helps in having very close people ensure that the rentals and all that is being processed.

Joe Fairless: What’s been your favorite project while in Florida?

David Kislin: My favorite project is the one I’m finishing right now. It’s 604 Lake Avenue in downtown Lake Worth Beach. I bought a site with the goal of developing a hotel there years ago, and again, it was going to be more of a boutique hotel, 20-22 rooms, that sort of thing. And I spent all the money, I hired all of the top agencies, HVS, and the different hotel groups, and all of the third party reports really, really told me not to do that, and that I wouldn’t be able to justify my investment.

So we took a different approach, we did a very minimal renovation to the property, which is basically new roof, new HVAC systems, and we realized that the property was a former restaurant, and one of the things we didn’t realize, which was a great benefit to us, is that the property has double-height ceiling. So we have net clearance of almost 24 feet. We put it on the market to a restaurant group, and I’m happy to say that a group from New York, a Michelin-rated chef signed a 15-year lease with us.

Joe Fairless: Nice!

David Kislin: The restaurants called Caña. For me, it’s a great project because it really enhances the neighborhood, it brings a lot to that local downtown corridor, and I believe as a developer, when he develops in a certain area, it takes a certain social responsibility with the goal of wanting to improve that. I think too many developers go in, buy property in an up-and-coming area and keep it vacant in the hopes that their property price just goes up.

Joe Fairless: Mm-hmm.

David Kislin: And here, I feel like we’ve done a great thing for the neighborhood and the community at large by bringing this quality of tenant and this quality of build-out, and everybody’s been super supportive. The banks have been super supportive. The local community banks have provided us with the support that we need, which you don’t find that every day… And the beauty of it is, is that it’s a triple net lease. So once the guys in there, I wait for the ACH once a month, and that’s the beauty of a good commercial tenant. So that’s the project I’m most excited about, and we’re in the act of build-out of that now, and we hope to deliver that to the market by February.

Joe Fairless: Taking a step back, what’s your best real estate investing advice ever?

David Kislin: This is something that I learned really over time – it’s not what you sell it for, it’s what you keep. I think a lot of people in real estate, they look and they’re like, “I need to do a huge transaction, I need to do something big, I need to do this, I need to do that. I need to have four partners and buy the best condo”, or whatever it is.

At the end of the day, if you do a large deal, and on paper it looks like you made a million dollars, and maybe you did, on the statements, but if you needed to have five people around or if it took you four years, that all should play a factor into it.

There’s a really intelligent real estate guy out in Palo Alto, he does YouTube, podcasts, John McNellis, and he came up with this concept, and it’s called ‘Net to Me.’ As a real estate developer, you should always sit down and say, “Well, what am I getting out of this? And what is my ultimate benefit?” Because I’ve learned the hard way that on paper, a deal could look great, but if it takes you two more years to execute it, or if you’ve got to spend 10 hours on that deal every day as opposed to an hour, that directly affects everything, and the stress level and all that. I would say to any real estate guy is put your ego to the side and really think about – it’s not what you sell it for, it’s what you keep.

Joe Fairless: We’re going to do a lightning round. Are you ready for the Best Ever lightning round?

David Kislin: Sure.

Joe Fairless: What deal have you lost the most amount of money on? Was it that $6 million deal?

David Kislin: Yeah, five [Inaudible [28:40]

Joe Fairless: What’s the best ever way you like to give back to the community?

David Kislin: By delivering a well-designed, well-executed product and not compromising.

Joe Fairless: How can the Best Ever listeners learn more about what you’re doing?

David Kislin: My website. I also have a Twitter account and an Instagram account.

Joe Fairless: Are you tweeting a lot?

David Kislin: Not really.

Joe Fairless: I didn’t think so. [laughter] You don’t come across as much of a tweeter. That’s just me—

David Kislin: No.

Joe Fairless: As a real estate developer, I didn’t see it, you doing that much but—

David Kislin: Ultimately, you would just send me something and I would call you anyway.

Joe Fairless: Fair enough. I’m in your boat. I don’t tweet often, or really ever. Your website is  jeldevelopment.com. Is that correct?

David Kislin: That is correct.

Joe Fairless: Okay, cool. Well, David, thank you for being on the show. Thank you for talking to us about a lot of really interesting transactions. You’ve got some really big league deals that you’ve done or been a part of… And what you learned from that;as you said, “It’s not what you sell it for, it’s what you keep.” So think about the opportunity cost, not only financially, but time and emotion and sanity. So thanks for being on the show. I hope you have a best ever day and talk to you again soon.

David Kislin: Alright. Thanks a lot, guys.

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