July 10, 2023

JF3231: Questions You Should Be Asking Your GPs ft. Brian C. Adams




Brian C. Adams is the president and founder of Excelsior Capital, an owner-operator sponsor of commercial light industrial, flex space, and medical office properties. In this episode, Brian discusses the struggles he’s faced building a $275 million portfolio, why he prefers flex, light industrial, and medical properties, and how LPs can do next-level due diligence on GPs before committing to a deal.

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Brian C. Adams | Real Estate Background

  • President and founder of Excelsior Capital
  • Portfolio:
    • $275 million gross AUM
  • Based in: Nashville, TN
  • Say hi to him at: 
  • Best Ever Book: Outlive by Peter Attia
  • Greatest Lesson: Put substantial resources into investor relations, and ask the right questions of your GP so you know who you’re going into business with.

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Slocomb Reed: Best Ever listeners, welcome to the best real estate investing advice ever show. I'm Slocomb Reed, and today I'm here with Brian C. Adams. Brian is based in Nashville, Tennessee. He is the president and founder of Excelsior Capital, an owner-operator sponsor of commercial light industrial, flex space and medical office properties. Their current portfolio consists of 275 million in gross assets under management. Brian, can you tell us a little bit more about your background and what you're currently focused on?

Brian C. Adams: Yeah, absolutely. And thank you for having me. I'm originally from New York, I married a Nashville native... We met in college, up in the Northeast, we both did the graduate school thing up there... Moved to Nashville 15 years ago; my wife's family has a single family office based here in Middle Tennessee. That's what got me into commercial real estate and private equity, and exposure, through my father in law and our CIO; I learned about the business through the LP lens, started our firm 11 years ago now with my partner... And we have done many different things over the years, but the current situation and focus, like you mentioned, is we are a pure play syndicator, raising capital on a deal by deal basis from accredited investors.

Slocomb Reed: So you guys moved to Nashville before it was cool.

Brian C. Adams: Yeah, very much so. Well, it was getting cool in the mid 2000s, but it certainly was not what it is today, which is just frankly incredible to see what's happened. For someone like my wife who grew up there in the '80s, it's mind-blowing, honestly.

Slocomb Reed: I believe it, for sure. You were introduced to real estate investing in general and commercial real estate through your wife's parents' family office... So Brian, being a host of the Best Ever podcast, and for our avid listeners, we're connecting the dots in our heads right now unfairly, because I haven't asked questions that I should ask... So let me ask, why is it that that introduced you to commercial real estate investing? And why is it that a few years after that you started your own firm?

Brian C. Adams: I grew up in a very comfortable financial household. My father was a successful attorney, my mother, child psychologist... But we didn't talk about money in our home. And certainly not alternative investments or private equity. That wasn't the conversation around the dining room table. So when I became a member of the board, as an ex officio officer --

Slocomb Reed: Which board?

Brian C. Adams: The board of the family office.

Slocomb Reed: Okay.

Brian C. Adams: Yeah... I learned about all these things that really hadn't known about before, honestly. This whole world of private investing and entrepreneurship was not something that I was terribly familiar with. So that's ultimately what opened up this window for me into this world... And then I very quickly became enamored with real estate, specifically as an asset class, and as an operating company, opportunity, and that's what originally was to source opportunities for the family, and then it became friends and family, and at this point we have a pretty broad network of investors that we partner with.

Slocomb Reed: Broad network of investors... Does the OG family office still invest in your deals? Are you attracting other similar-sized family offices, or are you looking particularly at individual accredited investors?

Brian C. Adams: They still do invest. I have to pitch them the same as anybody else. They don't have any special economic rights or control rights; they don't own my GP, or anything like that. They typically do participate, but not in every deal. Profile-wise, I'd say 80% of our capital comes from 20% of our investors. So we have a number of larger families or RIAs, multifamily offices or [unintelligible 00:05:18.15] high net worth individuals who typically are the anchor investor on any given opportunity... And then 20% of the equity is probably 80% of our investor base, who are accredited investors, high net worth individuals.

Slocomb Reed: Brian, let's dive into the weeds a little bit here... I'm a commercial multifamily guy, also residential multifamily... I have some joint venture partnerships; I've never raised passive capital before, so I'm curious, also based on my experience with the interviews that I've done for the Best Ever podcasts, there are a lot of syndicators, sponsors, who give preferential terms to someone like a "anchor investor" the way that you just used the term. So I'm curious, you referenced the Pareto principle, that 80% of your capital is coming from 20% of your investors... A couple of questions here. Are your "anchor investors" getting preferential investing terms? And also, if 80% of your capital is coming from 20% of your investors, why not just focus on that 20% to make capital raising easier for you?

Brian C. Adams: First question - sometimes. It depends on the opportunity, it depends on the investor profile... We certainly are open to it if we think it's going to be a long-lasting relationship, and more of a programmatic relationship... Obviously, I've got to be wary as an operator-sponsor to make sure that I can manage my overhead costs. I have 10 folks that I need to make sure that I can feed them all... So it's always a balance, but we're certainly open to it, and we have done it in the past.

A couple of things in response to your second question... One would be one of the reasons I like syndicating is because I'm not beholden to a certain group of LPs. Because sometimes those LPs can realize that they have leverage in that relationship, and it can be a dynamic that's not great, in my experience. So I've always wanted the ability to go out and backfill a position, or not have to rely on a very discrete set of LPs... Now, there's certainly some downsides to that, but it's just the way that we've structured the platform. And I also created the company to give people access and opportunity, and I don't want that to just be given to a select population set. I think a larger cohort deserves that access to these types of opportunities.

Slocomb Reed: That makes a lot of sense. I've also interviewed limited partners or limited partner cohorts who do specifically that, they try to corner a deal so they can get better returns for themselves and for their investors. So I totally get where you're coming from there. Light industrial, flex and medical office. What markets do you all invest in?

Brian C. Adams: Being based in Nashville, we have a preference for the Sunbelt. So Texas, Tennessee, Florida, the Carolinas, Atlanta. But we have a mandate to be opportunistic and go where we find good deals. So we're in a number of markets in the Midwest, for example, and we continue to go where we find opportunity. But the majority of it is in the Sunbelt area.

Slocomb Reed: Opportunity has driven you to the Midwest. What does that look like?

Brian C. Adams: Yeah, I think that oftentimes some of these markets get painted with a fairly broad brush, of being in the "Rust Belt", or out of favor, because they're not in the Sunbelt, so it creates pricing inefficiencies and pricing dynamics that you can take advantage of... So we're in places like Minneapolis, Detroit, Cincinnati, Kansas City, those type of markets... And you have to be careful, because you don't necessarily have the demographic tailwinds that you do elsewhere... But if you pick and choose, you can find good investments there.

Slocomb Reed: I'm based in Cincinnati; if I can ask, what do you have here?

Brian C. Adams: We own a legacy office building that we bought pre-COVID in Blue Ash, and it's done really well, actually.

Slocomb Reed: As much as I want to pounce, I'll let you be the interviewee, Brian... For those who do not know, why has an office building done well in Blue Ash, in this era of hybrid work and remote work?

Brian C. Adams: Different markets respond differently to these type of macro events. I think in office building in Blue Ash - which, for people who aren't familiar, it's probably the strongest office submarket, suburban market in the Greater Cincinnati MSA - very different than in midtown Manhattan, or downtown San Francisco.

Slocomb Reed: Or downtown Cincinnati, for that record...

Brian C. Adams: Yeah, or CBD Cincinnati. So you don't have any new construction really that's come online there in the last 20+ years, aside from maybe some build to suits, or some corporate relocations, owner-occupier type stuff. So there's a lot of demand and not a lot of product to go there. And in a market like Cincinnati, that doesn't really have geophysical barriers, it really matters location-wise where you are, because decision-makers want to be close to their home, their club, their kids' schools, other amenities, and they are beholden to those locations, and they will not go outside that 15-minute perimeter, typically. So once somebody is there, they're typically very sticky tenant, staying in the building long term.

Slocomb Reed: Yeah, particular to the Greater Cincinnati MSA, I know, this statistic is several years old now, but it was the only or one of the very few top 25 MSAs in the country that had a larger percentage of its white collar jobs in the suburbs than in the urban core... And also, just things particularly about Blue Ash - basically saying the same thing you just did, but from a different light... Blue Ash is, as you said, a suburban office core that is within and very close to several very highly-rated school districts. So the kinds of people who will likely become office tenants, not only the people who are signing the lease, but their employees, are going to be attracted to a location like Blue Ash, because of some newer amenities, but also because of the proximity to the places within Cincinnati that they want to live.

All those things are going through my head when you say Blue Ash; I just wanted to make sure we were sharing those with our listeners, and I think the value-add here is that there's a Blue Ash in almost every market, if not more than one. So that makes a lot of sense. Brian, why is it that you all chose flex, light industrial and medical?

Brian C. Adams: So the previous iteration of the firm focused on suburban office, which Blue Ash is one of our orphan assets that remains from that... It can be a very attractive product type, but it has some challenges; tenant improvement deals and leasing commissions can really eat into your cash positions... Typically, deferred maintenance and capital expenditures like roof, HVAC and elevator can really kill your cash flow as well. Nobody really wants to pay for those types of things, so they typically get kicked down the road... And it can be challenging, because the day one cap rate, or per square foot costs can look really juicy, but over time it gets eroded by all those things that I just mentioned.

So light industrial flex is typically single story, triple net leases, where you can pass through those expenses to the tenant, and they usually don't have any common area, or not much common area load, so you don't have some of those challenging dynamics that we've experienced in the past, which is why we like those deals.

Break: [00:13:34.21]

Slocomb Reed: When Excelsior is looking at new offerings from brokers, what are the key variables or metrics that you're looking for in a deal, that gets you excited to underwrite it?

Brian C. Adams: Well, we're recording this to June of 2023...

Slocomb Reed: That's why I highlight excitement underwrite, because it is so hard to get excited for underwriting with the deals that we're seeing.

Slocomb Reed: Yeah, it's very hard right now. You're looking at a lot of negative leverage deals. Yield isn't just really as attractive as it once was, when the 10-year is giving you upwards of three plus percent, or below 4%. So for us, I think we're looking at shorter duration, higher IRR type returns, something where there's maybe a distress in the selling group, or some kind of motivation to take a deal to market, and the ability to actually create some type of value on the asset, beyond bringing it to market, more or less. So usually some vacancy, a compelling story, and the ability to get debt that makes sense, or be able to put a capital stack together that makes sense in today's environment can be really hard. And so I think deeper value-add, shorter hold makes a lot more sense in today's environment than 12 months ago.

Slocomb Reed: Brian, let's see if I can repeat back to you what I just heard... Please correct me anywhere that I'm wrong, because I'm making some assumptions here. The return metric that drives your investing is internal rate of return; our listener base should be fairly familiar; if not, there are plenty of blog posts. You can Google why you would use internal rate of return. In today's market, in order to achieve the IRRs that you all target, you're looking at assets that will be more distressed day one, that lend themselves to a really solid IRR, with a short hold period and a disposition as soon as you achieve stability or optimal occupancy, and you put together the trailing 3, 6, 12-month that you need in order for brokers to be able to pitch you as a stable, cash-flowing asset. Correct me where I'm wrong here, Brian - it seems like you'd be taking a little more risk now to get that same IRR that you were looking at from a longer hold period, the more value-add stable style of investment from 2, 3, 4 years ago.

Brian C. Adams: Correct.

Slocomb Reed: Have you acquired any projects like this thus far?

Brian C. Adams: We closed a deal in Charleston, South Carolina, that was on this profile, 30-45 days ago.

Slocomb Reed: Gotcha. Tell us about it.

Brian C. Adams: So a fact pattern that you're going to hear more and more, that we'd like to see - this is a deal that we chased last year. We couldn't get there in pricing originally; it was just too aggressive. We ended up losing at best and final to a different buyer; that buyer could not perform, the deal fell out. Seller did not want to run a full process again, so they came back to best and final group with a repricing, based on what's happened in the market... We still liked that he was still able to achieve new leasing momentum at anywhere from $2 to $5 per square foot on a triple net basis, above what current rent is in terms of tenant role. So we thought we could execute on a value-add lease-up play in the next 12, 24, 36 months, and without having to get really aggressive on cap rate assumptions; still solve for high teens, low 20s IRR. So we were able to buy that property, and so far so good. It's a lot of asset management work cycling through that rent roll, but we're excited about the opportunity. We love the market just in general, a lot of good things happening in Charleston.

Slocomb Reed: A lot of asset management work cycling through the rent roll... Can you break that down a bit further for us?

Brian C. Adams: Sure. So when you're doing a value-add play on an existing property - and like I referenced before, if current rent roll is paying X amount of square foot, and market is $5 more than what they're paying, as those leases come up for renewal, you have the opportunity to bring them up to market. Many times those tenants, especially if it's been managed by an individual like this asset has, who has really not been very aggressive or active on the asset management side, the tenants will balk at having to pay that new rate. So there'll be some that you negotiate with that will go along with it, even though it'll be fairly painful. Others will opt out, and they'll want to go elsewhere, because they don't want to pay that new rate... And so you've got to have the ability to weather that downtime, and then bring in new tenants at market rate, which will require working with leasing brokers, and negotiating those deals. So it's achievable, but a lot of work to do that.

Slocomb Reed: Last question before we transition this episode, Brian - where have your biggest struggles come from in building the 275 million gross portfolio that you have now?

Brian C. Adams: Well, I'll go back to my previous firm that I started, the first iteration of the company. I've made a lot of mistakes. The bigger ones would be not putting enough resources - time, money energy - into the investor relations, communications, reporting component of the firm. That was a big challenge that we had the first time around doing this, something that we've since fixed in this platform... But it's just paramount, especially when you're working with a large group of individuals, to manage those relationships. That was a big one. I think just overall, and generally, the realization that you are a real estate professional, you're looking to execute on these real estate investments, but regardless of the real estate side of it, you're also starting a small business, and you have to deal with HR, marketing, sales etc. All these other things that really have nothing to do with real estate itself. But the reality is that roughly, I think the most recent stat is 84% of businesses in America fail within three years... So you're taking real estate risk, and you're taking startup risk. And those are two very different risk profiles, and you're combining them together. And I don't think LPs ask a lot of questions around that when they should; it can be very challenging.

Slocomb Reed: What are some questions you think LPs should be asking in that case?

Brian C. Adams: Kind of like what I referenced - what does your tech stack look like? What is your investor relations portal? How does it work? Why do you use it? What do you like about it? What is your CRM? What does your ability to raise capital look like? How big is your team? How long have they been with you? And I actually wrote a series of blogs around this question. One was about tech stack, the other was I think people should ask GPs what their Uber rating is, because the way that people treat a driver that they may never see again I think dictates a lot of what their value system looks like, and morality...

Slocomb Reed: I was wondering where you were going... I was like, "Uber ratings for GPs? Oh, gotcha." Right. Yes.

Brian C. Adams: It can be a proxy for a lot of things that are very hard to find, or discover quickly... And then the other would be when you ask for an investor referral, I'm going to give you somebody that's pretty happy with me probably, right?

Slocomb Reed: Yup.

Brian C. Adams: So ask for an investor referral from someone who's in a deal that's not going well, because we've all got them... And then if you really want to get creative, you can try to ask for a referral to a former employee. And you can ask that person what it was like to work in the firm. What the culture was like, what the relationships were like, what they think... Harder to do, especially with NDAs etc. But I think those are the type of questions that I'd be asking.

Slocomb Reed: That makes a lot of sense. Brian, are you ready for the Best Ever Lightning Round?

Brian C. Adams: Let's do it.

Slocomb Reed: What is the Best Ever book you've recently read?

Brian C. Adams: Outlive by Peter Attia.

Slocomb Reed: Tell us about it.

Brian C. Adams: He's a health and wellness expert, concierge medicine, and goes through this thesis of if you want to live to be 100, it's not really a matter of what your life span looks like, or what your health span is, how you can maintain a certain level of wellness and live longer. And I think the most compelling part is the last chapter, which goes into mental health and wellness, and more of the psychological components of living well... It's very profound.

Slocomb Reed: Nice. What is your Best Ever way to give back?

Brian C. Adams: I'm a huge believer in education, and so most of my giving and philanthropy goes towards my children's school. They go to a K through 12 co-ed private school here in Nashville, which is the most diverse school in the state of Tennessee... And the ability for it to be that diverse hinges on people who can give/giving. Roughly 84% of overhead is paid by tuition. The rest is made up for by individuals and families that donate to the school. And that's where the majority of my efforts and focus go.

Slocomb Reed: Nice. Brian, on the properties you have acquired, what is the biggest mistake you've made, and the Best Ever lesson that resulted from it?

Brian C. Adams: The biggest mistake I made would be alluding to, or having a reference to what I alluded to earlier, which is being fixated on that day one per square foot cap rate, because it can be a value trap.

Slocomb Reed: That sounds like the lesson. What was the mistake?

Brian C. Adams: The mistake was executing on that deal. Once you acquire something, you're married to that basis for the whole time that you own it; you can never escape it.

Slocomb Reed: So you acquired based on a day one cap rate that didn't hold weight, through the life of the deal. And the resulting lesson is place less weight on the day one cap rate, and more weight on - I imagine, based on our conversation thus far - maintenance items, especially larger, potentially deferred maintenance items, elevators, HVAC and roof?

Brian C. Adams: Right. Even if you get something off market, even if you don't think the broker knows anything, or that it's a principal to principal transaction, there's probably a reason that cap rate is what it is... So be careful.

Slocomb Reed: And Brian, what is your Best Ever advice?

Brian C. Adams: I will use the advice that I was given in law school, which is the best piece of advice that I was ever given is don't listen to other people's advice. Focus on your own book.

Slocomb Reed: Nice. And where can people get in touch with you?

Brian C. Adams: I'm very active on LinkedIn. If you just look up Brian C. Adams, Excelsior Capital; give me a shout, connect with me, drop me a note. I'd be happy to help in any way that I can.

Slocomb Reed: Nice. That link is in the show notes. Brian, thank you. Best Ever listeners, thank you as well for tuning in. If you've gained value from this episode, please do subscribe to our show, leave us a five star review, and share this episode with a friend you know we can add value to through our conversation today. Thank you, and have a Best Ever day.

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