Ben Lapidus Real Estate Background
- Chief Financial Officer for Spartan Investment Group LLC
- Portfolio: 51 operation, $100M AUM
- Founder and host of the national Best Ever Real Estate Investing Conference and managing partner of Indigo Ownerships LLC
- Say hi to him at www.spartan-investors.com
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Slocomb Reed: Best Ever listeners, welcome to The Best Real Estate Investing Advice Ever Show. I’m Slocomb Reed. This is the world’s longest-running daily real estate investing podcast. Today we have Ben Lapidus with us. Ben, how are you doing?
Ben Lapidus: Doing well. Thanks for having me.
Slocomb Reed: Great to have you here. Ben is a partner and the chief financial officer for Spartan Investment Group LLC, where he has applied his finance and business development skills to acquire the company’s current portfolio, build the corporate finance backbone for the firm, and organize hundreds of millions of debt capital. Ben is also the founder and host of the National Best Ever Real Estate Investing Conference, and managing partner of Indigo Ownerships, LLC, where he sponsored 40 plus single-family and multifamily real estate transactions. Ben, you were just telling me, you’ve put together a pretty big deal here just last month. Why don’t we start there? What do you have going on right now?
Ben Lapidus: Sure. Spartan is a self-storage development and syndication company. We focus all our energy on self-storage assets. We’ve had a pretty big breakout year, we went from 13 operations to 51 operations this year, we’ve 5X’d our acquisition take-down, we’ve 8X’d our revenue, we’ve 6X’d our employee headcount, and that was kind of capstoned with a $100 million portfolio, 18 properties in Texas. The day before Thanksgiving, we finally closed. A 100-million-dollar total project costs, almost a 60-million-dollar loan.
Slocomb Reed: That’s exciting. That’s a lot of big numbers. You’ve got a lot going on. It sounds like explosive growth for Spartan. Talk me through that. That’s just in the past year, those numbers?
Ben Lapidus: Yeah, that was one deal, the 100-million-dollar deal. But we did 260 million dollars of takedowns this year.
Slocomb Reed: Gotcha. That 260 million – how many deals is that?
Ben Lapidus: 12 transactions.
Slocomb Reed: Gotcha. That’s exciting stuff. Tell me, with this 100-million-dollar portfolio – you said it’s in Texas?
Ben Lapidus: Yup. The 100-million-dollar portfolio is in Texas. It’s all around the Dallas-Fort Worth area, in Tyler, Texas.
Slocomb Reed: Awesome. I assume these deals came from brokers. Have you found that particular broker relationships have been more fruitful for you than others?
Ben Lapidus: For sure. Not all of our deals have come from brokers; some have been direct sellers. But yes. In the storage industry, it’s a little bit different than multifamily. There are more multifamily brokers in Dallas-Fort Worth than there are storage brokers in the US. So you want to build strong relationships with all of them. I mean that very literally, all of them. But yes, there are some that we tend to find that our transaction methods and our values for doing business match their values for doing business more so than others.
Slocomb Reed: That’s awesome. So this 100-million-dollar portfolio – tell me more about what makes it so exciting aside from just the size.
Ben Lapidus: Well, we’re excited about the opportunity to execute Spartan’s business plan, our standard kind of bread-and-butter business plan, which is to identify self-storage assets that have existing cash flow, but extra land, and market conditions that allow us to expand with low risk, so that we can take advantage of the cash flow from our existing structures, build new cash flow on top of the vacant land, and allow the cash flow from the existing supply, the existing structures, to cover the debt service on the expansion, so that we can essentially have the margins of a ground up development, with the risk profile of a cash-flowing asset.
We have, in this 18-property portfolio, five assets that we’re planning on expanding right away, but 11 of them can be expanded. Six of them, we did not believe were quite prime for expansion quite yet, but there’s at least five assets that we can expand on.
Typically also in self-storage we have 30-day lease cycles as opposed to 12- month lease cycles in multifamily, or a three to 10-year lease cycles in office, industrial, and retail. So we’re able to push rents very quickly, and on average, we’ve been pushing 15 to 20% in collections in nine months. So we could take 100,000 of rents and push it to 115 to $120,000 of rents in about nine months. We’re excited about the opportunity to do that.
We’ve also [unintelligible [00:05:13].11] these 18 assets down on top of a preexisting portfolio of about 12 assets that we already had in the area. We’re really excited about the economies of scale and economies of scope that can be achieved by adding these new assets and new team members in the region.
Slocomb Reed: So you’ll have 30 sites in the Dallas-Fort Worth area. Is there a sense that there’s a certain critical mass, a percentage of the market share or something like that, that gives you more control over what self-storage looks like in Dallas-Fort Worth?
Ben Lapidus: Absolutely. There’s more self-storage facilities in the United States than McDonald’s, Burger Kings, Starbucks, all combined, all three of those combined. So there are over 50,000 self-storages knocking on the door, 60,000 self-storage facilities in the US. It’s really difficult to take over markets like DFW. However, in Tyler, Texas with a population of 150,000 people, we’ve just added our fifth facility and we’re looking to have more. So we’re going to be the largest owner operator in Tyler, Texas, and the most sophisticated operator, which is great for search engine results and for competitive landscapes. We anticipate being the highest profitability operator in the region of Tyler, Texas. It’s easier to take over a market like Tyler, Texas, or Chattanooga, Tennessee, or Bentonville, Arkansas, than say a DFW, or Denver, or Seattle. But yes, there is a way to hit critical mass in some of these markets.
Slocomb Reed: Got you. You have a value-added business model. I don’t know if value added is the term that you’re going to use. You said you’re looking for ground up development type deals, but with cash-flowing asset financial structures… Do you see more opportunity in larger metro areas where you have vast competition? Or is it the Tyler, Texases that give you a better opportunity to do that?
Ben Lapidus: Right now, our investment thesis is focused on secondary markets and suburbs of primary markets. We’re not interested as much in competing with REITs. If I’m in Atlanta proper, I’m competing with — 92% of my competition is going to be REITs. Companies like Extra Space, Cubesmart, U-Haul, Public, Prime Storage, StorageMart, the last two being privately owned companies. But these are the top 10 largest operators in the world of self-storage. The majority of them are publicly traded, and they have access to much cheaper capital than us, and we would lose in a price war. And that happens.
During COVID times we owned a mall conversion in Fort Worth Texas proper, like downtown Fort Worth. It was a mall that is still in the process of being revitalized into different utility, the existing purpose. Across the street was an Extra Space, a mile north was an Extra Space, a mile south was an Extra Space, and something like 87% of the square footage in a 15-minute drive radius was REIT managed.
When COVID happened, Extra Space said “We’re cutting all rates nationwide by 50%.” Not the most intelligent play for all of their assets. They had assets that were 99% full, that went to 98.5% occupancy, that they still slashed rates 50% on. It didn’t make any sense, but that was still a policy they did. So across the street, where they had 99.6% occupancy, they slashed their rates 50% for six months. We invested a ton of money into search engine optimization, which is a typical playbook strategy that usually works. In Fort Worth, it wasn’t working, because Extra Space is spending a whole lot more.
So we tend to avoid heavy REIT competition areas and focus more on secondary markets. That’s a fear-based strategy. But the winning strategy that accompanies that is these REITs don’t really have the attention and capacity to take down five-million-dollar assets in a Tyler, Texas. They do, however, have the capacity to take down a billion-dollar portfolio. So we’re seeing a cap rate arbitrage between a 10-million-dollar transaction and a one-billion-dollar transaction, with exactly the same operational structure, the same avatar of ownership.
So you could buy a 10-million-dollar deal at a 5.5 cap and see the exact same billion-dollar portfolio that’s just comprised of a hundred 10-million-dollar assets, trade at a 3.75, or 4.0, or 4.25 cap rate, without changing anything to the operation, doing zero value add, zero rent pushes. So we’re seeing an arbitrage play by portfolio composition of concentrating our assets in secondary markets where we’re the largest operator, because it allows the top 10 ownership groups to get in at scale. So our portfolio thesis is to build a one to two-billion-dollar portfolio concentrated in the secondary markets that are attractive, to allow one of our big brother competitors to enter that market by buying a portfolio, if we choose to let that happen.
Slocomb Reed: It sounds like you’ve found maybe not a niche, but you’ve found a property size or an asset size that really works well for you guys. There’s probably a limit where something is too small to make sense for you, but you have an upper limit where you don’t want to be competing with REIT money that can handle those three-caps. And correct me if I’m wrong, Ben – what you guys are doing is amassing portfolios from smaller properties to get them to the size that REIT money becomes interested in them and you’re able to sell them at a severely compressed cap rate?
Ben Lapidus: That’s right. And we’re often repositioning these assets, too. We’ll take over something that looks like a dog from an owner operator that wasn’t interested in investing in deferred maintenance. We’ll refresh it, we’ll push rents 20% in the first year, even if there is no expansion potential on the asset… And just the aesthetic appearance makes the coastal money more attracted to the asset, just by swapping out the first impression on the frontage. Which also improves our ability to increase rents, because tenants show up and they say, “Oh, this looks nice, it looks safe, it looks secure, it looks well managed and taken care of.”
Slocomb Reed: A little easier to do that with self-storage than it is with apartments, isn’t it?
Ben Lapidus: That’s right. Yes, it is.
Slocomb Reed: Gotcha. Do you see this business plan, this skill set that you all have put together in self-storage, do you see it translating to other asset classes?
Ben Lapidus: For sure. We don’t consider ourselves to be self-storage operators, we barely consider ourselves to be real estate investors. We consider ourselves to be students of business operations, and to combine our unique competencies as a team, and deploy them under a strategic thinking planning process that allows us to attack any business challenge. So we just happen to have decided, have landed on self-storage today, because that looks like the best opportunity in front of us… But we can take our business operation and mold it into any other asset class, really any other business model inside of the investing landscape.
Slocomb Reed: Gotcha. Ben, you’re a friend of the show, you’ve been on the podcast a few times now, I believe, and people know you from the Best Ever conference… But I don’t know that you’ve been on the podcast since COVID became a pandemic. How has COVID impacted the demand and possibly the supply of self-storage in America?
Ben Lapidus: Yeah. In the reverse way from what you think, it’s made everything a lot more attractive and a lot more lucrative in self-storage. COVID became the highest performing asset class in commercial real estate outside of data centers. After about a year, it even surpasses data center. So self-storage…
Slocomb Reed: This is self-storage during COVID?
Ben Lapidus: This is self-storage during COVID. I made mention of the first six months, how in primary markets it got really competitive as everybody kind of waited and buckled down for “shit to hit the fan”, but it didn’t. There was more new self-storage built between, I want to say, 2015 and 2020 than the previous 30 years of the industry combined. In that five-year period, a massive amount of new self-storage came to the market, peaking in Q3 of 2018 is when construction completions peaked. Everybody anticipated it was going to take three, four or five years for all this new supply to get incorporated into society. There was even an asset in Denver that was selling for 40 cents on the dollar that nobody purchased. A year later, it went back on the market for two and a half X and they got taken down within a month.
In Denver, it was probably the second most concerning city in terms of oversaturation of new storage supply. But all of the new supply got eaten up; the demand was there to match it in about a year or year and a half, more than twice as fast as the best predictions. Consequently, rents nationwide increased from June of 2020 to June of 2021 by 12%, while occupancy went up by 4.6%. So just massive rent growth over the year.
And new construction has gotten more difficult. Wood skyrocketed, metal tripled in cost, labor went up 20%, all in about a year. So our construction for a flat-graded site in Texas went from about 40 bucks a foot, for climate control, single story buildings, to about 60 bucks a foot, climate control, single story buildings. So a 50% increase in overall costs, which is just nuts. It’s making new construction more difficult; it’s making markets like Tyler, Texas, where the rents are lower than DFW, almost impossible to build new in, unless the rents are increased. That’s what started to happen, because there’s no additional supply and there’s this great migration pattern happening and people moving to Tyler, Texas. Rents are increasing as occupancy increases. It’s making the identification of assets much simpler. Three or four years ago, we used to say Denver is oversaturated, but you can find a good deal. It’s an intersection specific play, it’s a convenience play. So if you find the right intersection in an oversaturated market, you could do very well.
Today, it’s not as necessary. Almost every intersection is either neutral or slightly under supply. As opposed to a couple years ago, we assessed it to be oversupplied. So there’s more opportunity out there; the ride, the wave of self-storage is not over. More than $40 billion of dry powder has entered the space in the last year and a half. Blackstone, KKR, Brookfield have all gotten into the business. Bill Gates and Singapore sovereign wealth funds just funded StorageMart, Prime Storage just launched another three-billion-dollar fund that they just finished raising… There’s just so much dry powder. Public storage sat and waited for about three or four years without buying anything, and it took down two billion and a half dollar portfolios this year. It’s just a massive shift in the last year for storage, and cap rates have compressed despite interest rates going up.
Slocomb Reed: That’s a lot of great information, Ben. A couple of things – you said during COVID, your cost to build went from $40 a foot to $60 a foot. That’s a 50% increase. What is the rent growth during that same period? Is it proportional?
Ben Lapidus: No. 12%.
Slocomb Reed: Okay. And that’s 12% in Tyler, Texas as well as Dallas Fort Worth?
Ben Lapidus: No, it varies entirely. Yardi is the number one data provider of nationwide shifts, macroeconomic shifts in self-storage. I don’t remember the number one city, but I remember the number two city on their top 25 lists, with Atlanta, and it had 24% rent growth. So it’s all over the place, but on average, it’s 12%. In Tyler, Texas — like I said, we’re finding ourselves pushing collections by 15 to 20% in the first nine months of almost every asset that we’re buying, whether it’s Georgia, or Texas, or Colorado, or Wisconsin, or anywhere else that we’re buying. But a lot of those assets that we’re buying have rents that were under market even a year ago. So it’s difficult to tell exactly based off of our own acquisitions. Tyler, Texas is not a metro that Yardi measures, but at least 12% in Tyler, Texas.
Slocomb Reed: So for someone who wants to get into self-storage now, end of 2021, early 2022, you’re describing compressing cap rates, increased construction costs, outpacing rent growth, although the rent growth is solid… Where do you see opportunity for someone who wants to get into the self-storage game now?
Ben Lapidus: It’s fairly difficult.
Slocomb Reed: Let me ask, Ben, is there a property that is too small for you and your team? You guys play underneath the “big money?” Are there people who can get into a space underneath you and still get really good returns?
Ben Lapidus: For sure. We typically look for assets that can generate at least a quarter million dollars a year in revenue. We do own a few – they’re smaller, maybe they do 100k or 150k in revenue, but there’s expansion potential and we know that they can improve there. If you have a 20,000 square foot asset in Harlingen, Texas or in Tea, South Dakota, it’s not really a place that groups like myself or the big REITs are going to identify as an acquisition target. There are some groups our size that do go after assets like that. KO Storage is very good at operating in rural areas with smaller purchase prices. But for the most part, groups like ours don’t attack those.
So yeah, a 20,000 square foot asset that’s generating $100,000 in revenue – there’s just not enough revenue there to support the overhead, the cost to operate it the way that we’d like to operate it from a centralized location in Denver. If you’re right around the corner, you could end up doing very well and have a very lucrative business operation. Just know that it’s not just buying passive real estate, it is a business operation that does require a time investment, and does have a burden of ownership, just like any other real estate. It is more hands on than retail or office, but not as hands on as multifamily or mobile home parks.
Slocomb Reed: To that point, Ben, that it’s not as management intensive as multifamily or mobile home parks – how big does a self-storage facility need to be to justify a full-time employee on site?
Ben Lapidus: It brings up another can of worms conversationally about where the industry is going to a contactless experience, which is more efficient from a cost standpoint. But right now, we typically target 200k to 250k in revenue is our minimum that we’re looking for to support our operational model, which does include somebody on site. That typically is around 35,000 square feet in a market like Florida, or maybe as much as 45,000 feet in Gary, Indiana.
Slocomb Reed: Do you think there’s opportunity for people who want to get into self-storage, it sounds like, if they’re willing to owner-operate in a smaller than that space?
Ben Lapidus: Yeah, for sure.
Slocomb Reed: And it sounds like the opportunity you guys are taking advantage of is buying the assets smaller than what the REITs are interested in, in order to do some construction, do some new development and some building a portfolio of assets in an area large enough that the buyers at the lower cap rates will be interested in buying it from you at a multiple of what you’ve got in it.
Ben Lapidus: Yeah. And one clarification there is that we do have some assets that the REITs would love – they’re beautiful assets, 15 to $20 million – but they’re in markets that the REITs aren’t already in, so it’s more of the scale inside that market that’s too small.
Slocomb Reed: Got you. They need scale, so you are bundling scale for them to sell it to them at a multiple of what…
Ben Lapidus: Exactly.
Slocomb Reed: What is your Best Ever advice?
Ben Lapidus: Best Ever advice is to focus on people’s why’s, and then to identify who have why’s that complement your why, but have different competencies to support you. I think everybody focuses too much on the how. There’s a great book, Who, Not How by Dan Sullivan, and there’s a great book Start With Why by Simon Sinek. When you combine those two together, they are magical. Identify people’s why’s, incentivize them, and empower them to achieve their why by making them your who to achieve your mission in your life.
Slocomb Reed: Awesome. Ben, are you ready for a lightning round?
Ben Lapidus: Let’s do it.
Slocomb Reed: Awesome. What is your Best Ever way to give back?
Ben Lapidus: Right now, I’m 100% concentrated on scaling our business. We’re trying to create a great place to work. Our big, hairy, audacious goal in progress – so it might change, but our big, hairy, audacious goal in progress is to create wealth for every Spartan, and 100,000 active investors at Spartan investment group. The creating wealth for every Spartan component is where I’m most concentrated, creating a great place to work. We’ve grown to 70 employees and we’re targeting 300 in the next year or so. So identifying where we can improve the lives of our people – that’s where I’m currently focused. I’d like to broaden that scope as I age in life. Right now, I want to stay very, very focused on my team.
Slocomb Reed: That’s awesome. What is the Best Ever book you’ve recently read?
Ben Lapidus: Ah, man, I’m going to be a little bit off the beaten path, but Carlo Rovelli is an Italian physicist that specializes in gravitational loop theory. He has made gravitational physics accessible for the layman like me who has never taken a physics course. It’s changed my entire concept about time and space and purpose of life. Physics has become my new religion. I think that everybody should be a student of quantum particle gravitational physics, because it is the most interesting subject matter in the human experience.
Slocomb Reed: Ben, do you see direct correlation between what you’re learning, reading about gravitational loop theory from Carlo Rovelli with what you’re doing with real estate?
Ben Lapidus: Yes. People ask me that all the time. They’re like, “Why are you concentrated on that?” I think that too much of us in the business world focus on business books, self-help books, psychology books… And I’ve done a ton of reading on leadership in the last couple of years as we’ve grown our team. But when you’re a leader, you have to start thinking about different psychology and philosophy of conversations and interactions, so now you start studying things like stoicism, nihilism, and different ways of holding yourself, and interacting with others. Then you kind of think about like, “Why be a stoic? What’s the purpose of life behind that?” Gravitational physics helps give me a grounded sense of reality as I explore different philosophical postures in my interactions and expand my emotional intelligence to be a leader with my people. That’s all helping coagulate our team to drive in a particular mission, in a particular direction. It doesn’t help me be a better investor. I read the Economist, I read the Wall Street Journal, I’m a student of economics, but that’s a different subject matter. But in building a team and leading them, I’m way too introspective and way too cerebral to just say “Do this thing, I expect you to do it.” I have to understand the why behind all of my individuals, what motivates them, I have to understand the why behind myself. How do I optimize my own energy flow throughout the day? How do I not get decision fatigue? So I read Marcus Aurelius, and – I don’t know, I’m blanking on other philosophers, but I read those books…
Slocomb Reed: Lucius Seneca maybe.
Ben Lapidus: Exactly. Thank you.
Slocomb Reed: I have a philosophy nerve too. Back into the lightning round. Ben, what is the most money you’ve ever lost on a deal?
Ben Lapidus: The most money I’ve ever lost on a deal was two flips in the Chicagoland area for about $180,000.
Slocomb Reed: Those are single-family flips?
Ben Lapidus: Single-family flips. Yeah, not a great solo flipper.
Slocomb Reed: Gotcha. What about the most money you’ve made on a deal?
Ben Lapidus: The deals not over yet, but 24 million.
Slocomb Reed: Talk about that. That’s the money you’ll make on a deal you’re doing now?
Ben Lapidus: Yeah. So on a $100 million portfolio, we might generate four million dollars of revenue in our first year, which we did, and anticipate $20 million of upside to our ownership group after hitting all of our return targets and beyond for our investors. The second deal…
Slocomb Reed: What’s the hold period on that?
Ben Lapidus: Five years. A better option – we built a mobile home park in Sequim, Washington. It started in February of last year, we purchased the land, we just got our CFO last year, we’re under contract to sell it in two weeks, we’re more than double our cost basis. We’re generating about $13 million of upside in about a year and a half.
Slocomb Reed: Awesome. What does that return look like for your investors?
Ben Lapidus: Spartan is going to earn a couple of million dollars on that, but our investors are getting 175% return in about 18 months approximately.
Slocomb Reed: That’s awesome. Where can people get in touch with you, Ben?
Ben Lapidus: email@example.com or firstname.lastname@example.org.
Slocomb Reed: Yeah, the Best Ever Conference is coming up soon. We are soon going to release an episode exclusively about the experience of the Best Ever Conference. We’ll get into that more here soon. But for today, Best Ever listeners, we hope you have a Best Ever day. Ben Lapidus, thank you again for all the insight you’ve given to us. We will see you again tomorrow.
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