GI345: From $1B in Bank Loans to 5,300 Apartments with Sam Morris

GI345: From $1B in Bank Loans to 5,300 Apartments with Sam Morris

Sam Morris is a Partner at Lone Star Capital, overseeing acquisitions, asset management, and investor relations. With over 20 years of experience in real estate, Sam has led acquisition and disposition teams on over $650 million in multifamily transactions. Before joining Lone Star Capital, Sam was the CEO of Sunset Capital, where he built a strong track record of sourcing and executing high-performing investments. Prior to his real estate career, Sam spent 18 years as a corporate banker, involved in over $1 billion of real estate financing. 

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Transcript:

Charles:
Welcome to another episode of the Global Investors Podcast; I’m your host, Charles Carillo. Today, we have Sam Morris. He is a Partner at Lone Star Capital, overseeing acquisitions, asset management, and investor relations. With over 20 years of experience in real estate, Sam has led acquisition and disposition teams on over $650 million in multifamily transactions. Before joining Lone Star Capital, Sam was the CEO of Sunset Capital, where he built a strong track record of sourcing and executing high-performing investments. Prior to his real estate career, Sam spent 18 years as a corporate banker, involved in over $1 billion of real estate financing. Sam, thank you so much for being on the show!

Sam:
Charles, man, great to be here. Great to see you. Nice to meet you and to learn a little bit more about your audience.

Charles:
Yeah, no, it’s awesome. Thank you so much to come here and share your experience with us. I think we’re gonna get a lot of value out of this. So I touched on your professional background a little bit, but if you can tell us a little bit about yourself, both personally and professionally prior to kind of founding Sunset Capital, and then we can kind of take it from there on what you guys are doing now at Lone Star.

Sam:
Yeah, so I, you know, I always tell people my, my favorite stat of all is I’ve been married 22 years, so I have four teenagers. And so real estate’s easy. You know, it’s all subjective and relative, right? No, but I got started, my, my start was right outta college. I went into corporate banking, which you know, at the time I didn’t think was like the most sexy of things. ’cause All I did all day, every day for really years was underwrite deals. And it’s kind of funny the way it worked out because it was the best education for me because by the time I was, you know, 25 say, I would already had my mastery of knowing how to underwrite deals. And so if they say it takes 10,000 hours to, to master something, I had, I became a master underwriter before I was, you know, really old at this point, I was still a young man doing underwriting.

Sam:
And so I then worked my way up to lending on assets, specifically real estate assets. And I got introduced into multifamily. I started investing in multifamily when I, in 2007. And so, and it really was, I started to learn from the, the quantitative side how these guys were making money, how syndicators were working the deals, what they were doing, and, and seeing the process with things and seeing that in my young twenties. And so I took that leap to go ahead and invest into multifamily in my, in my twenties. And so it was one of the things that was, you know, got me really excited because I learned to cut my teeth fairly early on, you know, some of these larger multifamily projects. And I didn’t do what a lot of people do, which is, you know, that single family home or the, you know, the duplex, triplex, whatever, and move up.

Sam:
I went straight into, I think the very first deal we did was a hundred unit apartment compacts. And so everything was always go bigger because I noticed the scale of things, the numbers just worked out a lot easier that way. And it was just as easy to do a, a larger a hundred unit deal than it was to do a, you know, five unit or a 10 unit deal. Matter of fact, it was became easier from a management perspective to do those larger deals because those larger deals could actually pay for the onsite staff you needed to run those type deals. And so I, I cut my teeth early and learned a lot of things that that worked and learned a lot of things that didn’t work. And so, you know, that’s kind of the gray hairs that I got now a couple decades later. So,

Charles:
So yeah, that, that was one thing when I started getting financing on small commercial multifamily properties years and years ago, I realized that it is much easier to work with larger properties because you had a lot of lenders that wouldn’t need to talk to you. And you had all these lenders that were interested, Hey, if you’re back, then it’s like, if you’re a loan size, a million dollars plus or whatever it might be, we have all these different other ones. If not, it’s really like you’re kind of calling local banks, you know what I mean? Which isn’t a problem and it’s a great way of getting started. But what,

Sam:
What are

Charles:
Those kind of things that you learned in that first investment? What were some of the things you took away that maybe you still utilize in your career today? Maybe some lessons that you learned, maybe they could be mistakes or things that you luckily did correctly?

Sam:
Yeah, so the very first deal we did I, I mean I’ll never forget it ’cause we closed it in August and in September you know, I’m in Houston, Texas. We had a massive hurricane come through and actually just destroyed the property. I mean, it came through and literally destroyed the property. We went from legitimately a hundred percent leased to 12% leased overnight. Oh my god. Yeah. And there was already a big plan in place that we were gonna be doing a lot of rehab and deferred maintenance work and things of that nature. And so the insurance had to come in though and helped us significantly with that. So I quickly learned everything you needed to learn about insurance and contractors and all those things that you would have to deal with when there’s destruction to your property. But also in the state of Texas, when you’re the landlord, you are required to provide housing for your residents.

Sam:
And so quickly learned, wow, we really have to be communicating a lot with our residents as well and make sure we find alternative spots for them. Because some of these, you know, some of these buildings are gone. I mean, there is no roof anymore. There is no, no more anything. They can actually live an inhabitable spot. And so we learned a lot through that. And this happened so early on in the very first deal. I mean, I literally thought, oh my gosh, we just lost everything. ’cause The buildings are destroyed. And what I quickly learned was having great contractors in place, understanding insurance and things like that quickly was able to turn it around and having knowledge in the, the finance world and understanding the lending it turned out into being a great positive because once the insurance came paid for things, we were able to rebuild the project and actually re you know, bring the residents back or, or releaase those property, the property up.

Sam:
We actually were able to lease it up for quite a bit more from what we were leasing it for, because everything was brand new. So residents that had left came back and they had brand new everything, appliances, flooring, you know, HVAC roofing, everything was brand new. And so they were willing to pay a little bit more closer to what market rate would’ve been for that type of product. And it enabled us to go out and refinance the property. And when we were able to do that back in that, that timeframe, we were able to refinance the prop property and pull the bulk amount, I think all of the cash that we had originally put in as investors within the first year of doing that. Now, it was an act of God that allowed us to do that, but it was something that I was hooked by at that point when I realized, wow, there are things that you can do and you can actually make a lot of money, pull all of our equity out of it. So we still own it, but we have no money in it. That was the light bulb moment for me to go, wow, this is something that really can be impactful, not just for the way that I want to invest, but for the residents that we’re gonna service in our local area.

Charles:
Yeah, I had a I was at a mastermind. Someone explained to me a similar story about a property that they owned in I think it was Ohio when her tornado came through and, you know, huge mass, everything like that. But yep, they were able to renovate ’em and they were getting, you know, back then you know, seven, 10 years ago, whatever it was, you know, 400 rent bumps right. When they were getting it back. So for the investors, obviously it’s not the cleanest deal, however, it’s a very high, you know, return deal a a higher IRR than most deals because of that, what they went through in really doing a full renovation versus your typical, I guess, value add renovation. Correct,

Sam:
Yeah. And it’s, it’s because one, you’re forced to, because building’s destroyed, but, but it’s the things that you learn are who are the appropriate contractors to have, making sure you really read and understand insurance and, and really have an understanding of what it’s going to cover, what it’s not going to cover and making sure you understand the responsibilities you have as a landlord to your residents and understanding all the contracts and things of that nature. And so it was a, it was a, an even greater education from just the straight quantitative that I’d had prior to that.

Charles:
That’s very interesting. The one of those things is that it’s not just having the contractor as well as just being able to have that contractor be able to get the material. Because if it’s anything like where we are down here in southeast Florida, you know, when it comes up and someone hears that there’s a hurricane coming, you know, all these supplies are gone, and then afterwards, if you were hit, I mean, it’s just barren. You’ve got people coming from 18 hours away, driving contractors coming in materials, it’s, it’s a mess. So it’s really not just rebuilding it, it’s actually getting the people and the materials there, which usually something we don’t even think about. ’cause You think about just going down the street and picking up materials. So yeah, there’s a lot of logistics there too. So, you know, that’s, it seems like a lot of work, but it seems like you did really well for your investors on that first one.

Sam:
No, we did. It was, it was a very exciting one to be a part of. So,

Charles:
Kind of full fast forwarding to where we are today and what you’re doing. So can you kinda explain a little bit about what’s going on at Lone Star, kind of what you guys do, your current investment strategy there? Yeah, I know you’re really focused in Texas, so maybe what markets you guys are focusing on there as well.

Sam:
Yeah, so at L-S-C-R-E, so I’m a partner at the firm. I have the great benefit and blessing of getting to oversee our acquisitions, our asset management, and our investor relations side of the business. And what we do is we’re a, we’re a larger, or I would actually, we a smaller company, but we, we typically buy larger properties. And so our buy box is in that, let’s say 30 to $70 million range. And because of that, it’s gonna put us into certain markets of Texas, and we only purchase in Texas. It’s where we have all of our units. We have a little over 5,300 units here in the state of Texas right now. And because of the size of what we purchase, it’s typically gonna lead us straight into the primary markets just because that’s gonna be where the, a lot of those higher value or higher dollar amounts are.

Sam:
And so we’re predominantly in Houston we’re also in Dallas and San Antonio, and we have a couple other secondary tertiary markets that we’re in that we’re probably be exiting in the years to come. And kind of focusing on what we call the Texas Triangle. And in that, in that Texas triangle, right, there’s a, you know, there’s a, a significant amount of people, tons of migration. One of the reasons why we still love Texas is if you look at, I mean, almost all the KPIs, which are those key performance indicators you know, either tech, either Houston or Dallas, are gonna be beat number one or number two probably in the country. And that has to do with like you know, job growth population growth and migration growth. And so we still have a lot of people moving to Texas. And so there’s a lot of demand associated with housing.

Sam:
We absolutely had a lot of supply being delivered in the last few years, and we’re starting now to see the bulk of that being burnt off. And so we still focus solely on Texas and in those primary markets, our portfolio, like I said, consists of about 350, 300 units right now. It’s a little over $750 million in total value. And we we’re constantly out shopping the market. We do have a deal under contract right now. Last year we only closed two deals. And so we’re, we’re pretty picky for what we can, what we go after, but there’s also an availability thing. And so we were, we were made the bridesmaid on a few deals, no doubt last year, but you know, we we’re still out there hunting each and every day for, you know, those deals that will be beneficial to our investor base and the growth of our company.

Charles:
So one of the big things when you hear Texas obviously is taxes. Most people, when they’re thinking of Florida, they’re thinking insurance. But obviously in Houston, insurance is the big thing like we’re talking about in your first deal, but as he’s being like really two large expense items what strategies can large syndicators employ to really mitigate them? Yeah,

Sam:
And and I would actually tell you there’s, you don’t even have to be large, but you know, those are uncontrollables, those two expense line items that you just mentioned, and they’re, they’re larger for us, obviously in Florida and in Texas, right? ’cause We have large property taxes here and we have, you know, significant insurance as well. Insurance has actually been kind of one of those better things to be a part of the last few years here because we’ve actually been getting pretty significant reductions. And a large portion of that is we haven’t had a lot of weather events that have actually occurred to impact the global for it. And we’re part of a master policy, so all of our insurance is under one policy and we spread the risk amongst all of our assets when we do that. Because of that, we’ve gotten some pretty significant reductions the last two years, and we actually expect another reduction this year in 2026.

Sam:
When I say significant, I mean double digit type reductions for insurance. And so it’s actually been quite beneficial. And one of the things that, that occurs, or one of the reasons that occurs is you actually are starting to see more insurers come into the state of Texas. So they’re starting to see that there’s some value associated with that. And when you have that, it creates a little bit more competition and so premiums will go down associated with it. That being said, it’s still not at a level that it was, you know, caught prior to 2020 or something of that nature ’cause of the weather events that we have had and the losses sustained by some of those, those insurance companies. But we’re now getting back to that level where that pendulum’s coming back around a little bit and we’re starting to see reductions of significance.

Sam:
And so insurance has actually been one of those things that’s actually kind of been a, a bright star for us because as an uncontrollable expense and the fact that it’s being reduced, it’s actually been quite helpful for us with the existing portfolio we have and with some of the things that we’re underwriting taxes a little different, but a lot of people don’t realize about, at least the state of Texas and taxes is that you have to fight ’em every year. So they get reassessed every single year, you get your tax value every single year, and there’s no cap, meaning it’s not like they can go, all right, we, you know, as a state we’ve decided we’re only gonna be able to go up say 10% and that’s the max we’d be able to increase. No, you can have a hundred percent increases in your tax.

Sam:
And that’s just the way that it works with a lot of counties. And you got to go and effectively hire a group, which we always do to go fight the taxes on your behalf for valuations that you then come to agreement with. And it is something that we consistently do for all of our properties. However, one of the strategies that we’ve employed, which is a little unique, is we brought, we’ve been bringing in a tax abatement strategy over the last few years to our properties, and this answers a few different things. One, it helps us control a lot of an uncontrollable, which is the, the tax values of the property, but two, it also answers an affordability issue that we have with our state. And so what we do is we, we take about half the units in general working with the county in jurisdiction to bring an affordability aspect and we call it affordable little a not big a to the property so that, you know, people that live, work and play in that area that may not otherwise be able to afford our units or actually able to afford our units and actually live in those.

Sam:
And the benefit for the property is that we get an abatement for the taxes associated with that property.

Charles:
Yeah, that’s a very powerful thing. We have a property right now a deal in, in Dallas, and that was one of the, the taxes were one thing that we were like 20% off on and we’re fighting it right now, but it was just like for a proforma and it was it’s something that, yeah, you gotta fight ’em every year and we are actually employing something similar to what you’re doing. We’re actually in the process of getting a application approval for it to hopefully bring ours into more of an affordable housing sector to save on those property tax, which is kind of one of the ways I’ve heard from a number of different operators down there.

Sam:
Yeah, we’ve done it now 14 times with, with our properties. And so we have a fairly, you know, a good understanding of how it works. However, that being said last year, so in May of 25, the state actually started changing some rules associated with it in the PFC and HFC world. And so we haven’t gone back to that into those particular stripes of structures and probably won’t until call it, let’s say well into 2027 when we have a better understanding of how that bill is actually gonna be implemented. And so that bill gets implemented January of 27, and so until that legislative risk is really understood, we’re probably not going to be putting properties into that type of structure.

Charles:
Interesting. So as your firm with Lone Star, you guys controlling full on the investment pretty much the whole vertical because you’re handling everything in house what are, what will you say some of the benefits of vertical integration keeping your construction management and property management in-house and not just, you have some that people will say, well, we have our property management in house, or we use third party, but then it’s another step to have your construction management and your construction in-house. What do you feel, I mean, other than just the full control, which is usually what I hear, is there any other huge benefits? I imagine control of the cost is probably one of the big ones.

Sam:
Yeah, it’s, it’s pretty, actually, it’s fairly dramatic. You know, I was talking to some investors yesterday ’cause of the property that we’re acquiring we, we need some significant roof work done. And, and actually full on replacements for probably several of the buildings. And we have examples where our in-house construction management’s able to do it for anywhere between a third to a half the cost of what we would have to hire out third party, you know, roofing contractors to come out and do. And it’s ’cause we have the expertise in house, so there’s, there’s pluses and minuses to it from an investor standpoint, it’s almost all pluses. The, the, from a minus standpoint is, you know, we have about, call it 220 employees in our company. The overwhelming majority of those are onsite staff. So those are the people that are helping us run our properties, right?

Sam:
You can be much smaller as a group and third party out property management or third party out construction management and things like that nature. But there’s a couple things that you’re gonna give up as a company if you do that. One is the cost control, like you just mentioned. Another one would be timing, right? We actually control the timeline associated with this, whereas we’re, you know, we’re at the behest of another group, but they come in to actually do things. And then the biggest one I would say is actually quality. So we can control the quality of the work when we do that as well. And so it’s, you know, it, it’s what are those things where we paid a contractor to do it and the contractor wasn’t as great as what we had hoped for and the quality came in not what we would want or not what we would expect, right? When we do that in-house, we’re able to control all those aspects of it. So a fully vertically integrated company, which we are, I mean, we have property management in-house, we have asset management in-house, and we have construction management in-house. Gives great benefits to really, to our investor, our ownership for those things, right? We’re able to control the quality, the timeline, and the cost associated with all the aspects of running the property.

Charles:
Yeah. Yeah. That’s a huge benefit. I, the whole timeline was something I wasn’t even thinking of. I just, one of the things that when we would be working with like third party construction companies, renovating units, and you go in and it’s not, it’s not a hundred percent ready and you’re going, it’s, it’s just like you’re going back and forth. So having your ability of having that all on site and knowing that something’s a hundred percent done at the right time, I mean, imagine it cuts down on your turns too

Sam:
Considerably, makes it cheaper. It’s all cheaper because of that, right? Because if I can turn a unit that much faster and have it ready for the onsite team to lease, you know, days off a market is a, is a true cost to us. And so if they’re able to go, if we can give the onsite team the confidence to go lease as soon as the thing comes off because we have the teams ready to come in here and fix everything, do everything to the quality and standard and the expectations of that onsite team will, that changes a lot of things. And that, that means you make more money, right? And so it, it’s tremendous. And you know, when you were talking about hurricanes and things like that earlier, when you have those people in house, right? Yeah. And you’re talking about sourcing materials and things like that, which we’ve gone through all this stuff before.

Sam:
I mean, we had a a major freeze event that occurred, you know, several years ago where I was looking for shark bike fittings because of all the pipe breaks that we had had, and we couldn’t find them anywhere in Texas because it was a major freeze event that it occurred here. And so we were sourcing material from outside the state to come in, but you had the onsite teams that were able to come in and fix things faster than what our competitors were. Meaning I got back up and running and I had units ready to lease for people that were impacted to come lease with us prior to either staying in that bad situation they we’re in or trying to wait it out to figure out where they can go live. Well, we offered that to them. It was one of those things that are beneficial, kind of, we were the first one of the finish line, and so we win.

Charles:
Yeah, that’s, that’s a very powerful ability of adding that into your kind of your arsenal of what you’re able to do and offer to your properties and to your investors because many people don’t have many different indicators, don’t have the ability of kind of going in and being able to kind of pull that card. You know, you mentioned before starting in investment banking, doing a lot of underwriting when you were younger, and I think it’s one thing that maybe some passive investors don’t understand, maybe even active investors, the number of deals you’re looking at before you’re purchasing one. And I mean, as a general partner, you’re probably reviewing hundreds of deals before purchasing and you know, there’s few fees like acquisition fees that are used to compensate the syndicator for pretty much all that effort over all those months, maybe years of doing that and buying those two deals like you did in 2025. But how does a passive investor know if a deal is really fee heavy or if the fees are really appropriate for the deal?

Sam:
Yeah, so for starters, right, everything needs to be disclosed. If a, if a, if a general partner’s not disclosing all the fees to you it’s a major red flag, right? And so it’s not something that you shouldn’t be upfront about, right? So for our deals, like it’s real simple. We charge a 2% acquisition fee on the deal, meaning 2% of the purchase price. We are charging the partnership as a fee for us, and it’s for pursuit cost, it’s for the risk associated with the deal. A lot of times it’s for signing on the loan or things of that nature. And so you, you’ll be able to see the fee structure associated with it, but there are a lot of fees that can be built into ppms that you need to look for. We disclose what we charge for property management, which we charge 3% of the gross revenue for property management.

Sam:
That’s actually very standard in the industry. We charge 2% for asset management on the gross revenue. That’s a fee that does get changed around a little bit where you’ll see some syndicators charging it based upon the amount of dollars that are raised. And that can be a very different number to have an understanding of what that looks like on construction management. Meaning if we’re gonna go oversee a big project, let’s just say we have a a million dollar project that we’re going to be doing at the property when we acquire it, we got a million dollars worth of work to do. Part of the fee for that million dollars is going to be a construction management fee, and that’s gonna be anywhere between five and 10% of the actual budget that we’re what we’re going to be spending. That goes to pay for a lot of that construction management that we do.

Sam:
You’ll see people put in exit fees, meaning once we sell the deal, we’re gonna charge you another 1% to sell the deal. But, you know, there are a ton of fees that are different that are out there that different people can charge. And each group’s gonna be a little bit different based upon how they are built and structured. For us, we typically charge a 2% acquisition fee. We’re 3% for property management and 2% for asset management, and that’s our fees. It’s pretty simple. And so for us, we, we look to make our money or we’re more incentivized on the end, which we feel keeps us more aligned with our investor base.

Charles:
Yeah, no, you’ll have some investors that understand that, especially ones that have done deals before and they understand the extent. I think when, when I’ve had calls with past investors or potential passive investors and there’s a lot of talk about the fee structure, which jars is very similar, if not identical to yours. It’s one of those things where I, they don’t, it’s the amount of work. It’s not really a, you have to really educate, I think that investor on the amount of work that goes into this, and when you’re reviewing it and you have that construction management fee and stuff, project management fee there’s a lot of work that goes to make sure that those units are turned correctly or that roofs are on correctly or whatever it is that has to be done a hundred percent in your, ’cause it’s a major part of your business plan. So Yeah,

Sam:
Even before that though, yeah, even before all of that, the pursuit costs and the risk and the risk dollars that we put up ahead of time, a lot of people don’t really understand. So we’re like, you know, for instance, we’re putting a deal under contract right now. It’s a 61 and a half million dollars deal, so 61 million bucks, right? As part of the contract, they want us to put money up hard, right? Meaning I have to put risk dollars in place, whether we close or not, this money is now up to risk and so I’ve gotta put a certain dollar amount in addition to dollars that we’re gonna have to escrow for a deposit for the deal. And so what it is, is the seller is sitting there going, I want to know that you guys are really gonna close, so you’re gonna need to put up a certain dollar amount that can be anywhere between one to 2% of the purchase price.

Sam:
So keep in mind that’s, that can be anywhere between 600,000 to $1.2 million of dollars we have to come up with ahead of time to pay at risk for the deal. In addition to that, as you start moving through the process, there’s deposits that I gotta put with our lender to get going associated with that, and we are, we haven’t even rate locked yet. When you do that, there’s another big dollar amount that you’re gonna have to put down associated with that. So there’s a lot of dollars to get outlaid just from a risk standpoint upfront. In addition to that, I have people that help me, you know, go find and source the deals and they’re flying in to come look at the deals and we’re all doing things and then we’re having dd our due diligence that we’re having bringing people to the property. We’re doing lease file audits, we’re actually walking each one of the units and all this stuff is done before we put investor capital at risk.

Sam:
And so it could be on something like that, that we have millions of dollars into this deal, right? And our fee associated with it is commensurate with the risk that we’re taking when we put all these things in because we’re also chasing deals all throughout the year and underwriting deals and you know, it’s really weird, but our employees like to get paid every two weeks. I mean, they’re a little, you know, selfish that way because, but that’s how it is, right? That’s what we need to do to be able to provide these great opportunities to our investors.

Charles:
So in addition to, you know, putting down that that EMD that earn plane deposit that’s in your situation here, going hard initially, so you’re not getting it back if you don’t close. I mean, you’re probably also laying out six figures in different fees between all the due diligence inspections between all the work that’s done for going in walking every unit, all the reporting, everything like that. So I mean, it’s a considerable investment Yeah.

Sam:
At this level. I mean, we, we call it putting on your big boy pants because you’re gonna have to, you’re gonna have to put some money at risk

Charles:
When you’re hearing like preferred equity. It’s one of those things that we, we didn’t really hear too much. I guess when we start, when we started syndicating deals, I guess in like 20 20 18, 20 19, something like this we weren’t really utilizing preferred equity and it’s something that really started around 2022. I started seeing 21, 20 22, Peter started utilizing this because the prices started going up and to get the returns they were bringing in a private equity firm, usually with preferred equity. Now as preferred equity is really sometimes a layer in some of these capital stacks and it might confuse some past investors. Can you explain a little bit about how preferred equity can effectively be utilized in the deal?

Sam:
Yeah, so it’s, it’s different ways that we’re seeing it being done in the timeframes that you’re talking about, right? So there are people that use preferred equity at the front end and that preferred equity was typically utilized like a loan, meaning if you have a capitalist stack, if you can envision like three sections, right? The common equity would’ve been up top right as the last piece to get paid. That preferred equity would come in between that and the senior loan and the preferred equity, typically the reason why they call it preferred would get paid prior to the common equity that a lot of people have utilized. And they did that because they were able to go, all right, well hey, you know, the common equity to get the returns that I need, I need to bring in a preferred sliver that I’m gonna pay pick the number 12% to right?

Sam:
And that’s all they’re ever gonna make. They’re not gonna make any of the upside of the property. But my, my common equity is, but I need to get to better leverage associated with it to be able to get to those returns of common equity. Where you’ve been seeing it a lot more in the last few years is what we call either cash in refis or people utilizing it to fully, you know, to fund their deals, meaning, hey, we need some additional equity into our deal to, you know, ride out this situation we’re in, or because we’ve had costs like insurance go up and we, the property itself needs more dollars. And so they’re bringing in preferred equity right? To come in. It supersedes the common equity and they’re gonna pay them effectively a rate associated with it. People are also utilizing it to rightsize their loans.

Sam:
Meaning I did a loan say in 2022, it was a floating rate deal when I did it, and I was paying 3% at the time, and it was great. Well, interest rates shot up and I’m now paying 7% on it, my cash flow is suffering because of it, and I need to go and refinance my deal. Well, when I took it to the lender to go refinance the deal, they said, well, hey, this is fine. We’re willing to do it. We can cut your rate down to 5.5%, however, we’re not gonna be able to lend you what you have on the deal. Meaning we need a, we need to be at a, an appropriate loan to value. We feel your value is impacted, which a lot of real estate has been impacted and the values are not quite where we were in 2022. And so to do that, what they’ve done is what they call a cash in refi, and they’re bringing in preferred equity to cover that gap for it. And so the way that a lot of people are selling it is, Hey, we’re bringing in equity, but all we’re doing is paying down our first debt. But what a lot of people don’t realize is that preferred equity is it, it typically supersedes the common equity stack, meaning it’s gonna get paid first, it’s dollars plus its return prior to anything getting paid to common. And so that’s where you’ve been seeing a lot more of that, if it’ll be called a lot of different things. Right. But that’s effectively what you’re asking. Yeah,

Charles:
I just, I think some of the investors don’t understand a hundred percent how it sits behind really that, or they are sitting behind that preferred equity as common equity investors, and it might not be something that many syndicators explain to them fully about how they’re doing it or how they’re really capitalizing the deal and what that really means to really, when you’re going to retail investors, you’re getting common equity from them. Correct.

Sam:
And a lot of people don’t realize in most ppms, which is the op, you know, the agreement that you sign when you, when you initially do the deal, it’s built into that from the beginning, meaning the GP is a, has probably already got it pre-approved that he or she can bring in preferred equity throughout the life of the, the ownership.

Charles:
So as we’re kinda wrapping up here, what would you say over, you know, reviewing, I would say maybe thousands of deals over these last couple decades being involved with a hundreds of millions of dollars worth of multifamily deals, what would you say are some common mistakes you would see real estate investors, maybe multifamily real estate investors making?

Sam:
Yeah. I have seen a great property turn into a mediocre one because of bad management. I have seen a mediocre property turn into a good property because of management. And so to me, I always tell people the most important person in the entire project is the person that’s sitting in the chair on site, because that’s the person that’s executing your business plan. That’s the person that’s running, in our case, multimillion dollar business. I mean, it’s, we’re giving a lot of trust and that’s the person that probably needs the most amount of support on an ongoing basis, right? I really look at three people when we’re doing a deal and the impacts associated with it. One is the resident, right? The person that’s actually gonna be living on site and paying for the rent, you know, paying your ability to be able to do the things that you’re going to say you’re going to do, right?

Sam:
Willing to pay for that business plan that you’re putting together. The second one is that onsite manager, I wanna make sure that he or she is supported the way they need to, that they have the capability of doing what it is, and that they have the staff around them to help them all succeed. And the third one is the investor, right? The l the LP that’s in the deal with us. I know if I can take care of those three people, right, the deal will take care of itself. Because if we’re, if we’re taking care of the investor and communicating with them and able to, to respond and do what we said we’re going to do, right, they’re happy. If we’re able to take care of the onsite manager and the staff associated with it, right? They’re going to be able to take care of the residents who, if they’re happy, they’re gonna be renewing and we’re gonna end up making a lot of money. So it’s, it’s a pretty easy system. That’s why I say it’s not really that difficult. It just takes a long time to do and the processes have to be in place to be able to execute that way. Well

Charles:
Sam, thank you so much for coming on today. How can our listeners learn more about you and your business? Yeah,

Sam:
So real simple. Our website is LS CR e.com. And so if you just join, you know, hop online, get there, we’d love to learn more about you, you can join our platform. We put out a lot of content we’re, we typically do about two, two newsletters every month. And we also are you know, actively seeking new deals and new investors.

Charles:
Okay, well thank you so much. We’ll put those links into the show notes and looking forward to connecting with you here in the near future.

Sam:
Alright, thanks Charles.

 

Links and Contact Information Mentioned In The Episode:

About Sam Morris

Sam Morris is a Partner at Lone Star Capital, overseeing acquisitions, asset management, and investor relations. With over 20 years of experience in real estate, Sam has led acquisition and disposition teams on over $650 million in multifamily transactions. Before joining Lone Star Capital, Sam was the CEO of Sunset Capital, where he built a strong track record of sourcing and executing high-performing investments. After years of collaboration and shared success, Lone Star Capital formally acquired Sunset Capital, bringing Sam’s expertise, investor relationships, and operational excellence into its fully integrated platform. Prior to his real estate career, Sam spent 18 years as a corporate banker, involved in over $1 billion of real estate financing. His deep financial expertise and operational experience allow him to identify opportunities that drive strong returns for investors. He also serves on the board of directors at Texas Traditions Bank.

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