Charles:
Welcome to another episode of the Global Investors Podcast; I’m your host, Charles Carillo. Today, we have Nick Jones. He has been involved in commercial real estate management, investment, development, and brokerage for over 20 years. During his career, he has underwritten and purchased over 70 commercial investments and/or developments, representing more than $250M in value. Currently, his firm, Alakai (ALA-KI) Capital, manages a portfolio of over 1 million square feet of industrial, retail, office, and medical office space. His team’s mission is to help investors build lasting wealth through real estate that delivers predictable performance, even in unpredictable markets. . Nick, thank you so much for being on the show today.
Nick:
Thank you very much. I’m happy to be here chatting with you today.
Charles:
So 20 years in the business. Can you tell us a little bit about yourself both personally and professionally before investing in real estate and, , launching your current firm?
Nick:
Yeah, I actually started, , I, I grew up in Seattle and I moved down to Orlando, Florida, , after high school to wake more professionally for about seven years. And as a young athlete, I figured I’d be doing that forever. But, , you know, as most of us know, your, your body age is quick. And so by my mid – 20s, I was going to UCF. I started looking at, you know, other aspects, other, , careers to jump into. And real estate has always been attractive to me. And the, the clearest path to get into was through brokerage. So I, I jumped in after college with Colliers International and was on the land brokerage side at a time that it was very challenging to sell land. , You know, buildings were still being sold, , as short sales, as foreclosures. And so there were a few years that I felt like I was probably selling, you know, timeshares.
Nick:
, Not many buyers. But as the market started to get better, , you know, the multifamily developers, the hotel developers, the retail developers started calling back. And I was fascinated by, , you know, the way they were underwriting deals, the way they were thinking creatively about investing. , You know, some were doing quicker deals where they’d reposition some of the land, sell it off and develop other parts. Others were going all the way full cycle. And from that really got drawn into the idea of being on the principal side of things. So after a few years of doing brokerage, I ventured off in my first deal and it was a small retail deal. And then, you know, had some success, had some great tailwinds of the economy behind my back and continued to do, you know, more deals then started to build a team behind it.
Nick:
And, you know, looking back 20 years, here we are today.
Charles:
Do you think brokerage is a good way for people to get involved that wanna have like maybe the ultimate of being a real estate investor in commercial, , getting in on the ground floor really with a brokerage?
Nick:
I think brokerage is a really strong way to get involved. You learn each player’s position within, you know, a deal within the market. You learn about the tenants and what their expectations are, which is very different than any other type of real estate. And you kind of can hear how everyone talks about the lingo, how everyone looks at deals, underwrites them. So it’s a great first step. I will say just getting into brokerage doesn’t result in being able to transfer to the principal side of things. I spent a lot of time, you know, at nights and weekends studying, , a lot of time with online classes to get to my knowledge to where I can make that transition where brokerage was a way in the door, but it still took, you know, a lot of extra effort that, , wouldn’t, you know, be necessary for just brokerage.
Charles:
You know, when I started buying multifamily properties, one of the things that was much easier to work with brokers, agents that had some sort of background in actual the investment portion of it because it was just much easier to work with them. Even if you’re buying smaller, , you know, like residential style, , smaller multifamily one to four unit type stuff or two to four unit, , stuff, it was easier to work with someone that kind of knew has done that before and had an idea of what you kind of questioned, what was going through your head as you were walking the property. And, , if they were very good, they would already do a little bit of research on that beforehand. And then moving into more commercial. I’ve never worked with one’s, , brokers before that were really involved in investing, you know what I mean?
Charles:
You have a lot of people that kind of take the path of being just a broker. But then I have found some older brokers that I’ve gone to and they’ve been very successful which kind of going into that investment round. So it’s a very interesting way of getting into the business while still having a check because obviously when you’re investing in a real estate, these aren’t, I mean, these are, these deals don’t cash flow right away, you know what I mean? And they’re not gonna be that much. You gotta do a lot of deals to be able to, you know what I mean, cover your expenses.
Nick:
You have to do a lot of deals. I think people, , misperceive how much is made on a deal. And, you know, I’ve, I’ve known quite a few brokers who have gone on the, the principal side, on the development side, and then they went back to brokerage because, you know, the risk, , the, the different profiles, you know, aren’t as rosy on the, on the principal side. I mean, you’re, everything that you make has a string attached to it. Whether it be, you know, with a, with a tenant, with a lender, with investors. , You know, when you get a brokerage mission and it’s in your account, it’s, you know, there’s, you can do whatever you want with it. So it’s a very different way of looking at it. And some, you know, think it’s, it’s great to try and then they go back and they like the idea of, , the risk-freeness of brokerage.
Charles:
I also find it too on the residential agent side, there’s very few I have found, , agents that I’ve met that actually have a portfolio. You know, maybe they have one house here or there or something like this, but not many of them that I’ve met before that actually have a sizable investment portfolio. You know what I mean? There’s, there’s very few that actually go that route because it’s, , I mean, they already started one business really by becoming an agent. So now they’re going to the other side again. So
Nick:
Yes, it’s hard to balance both. But I have noticed the ones that can speak both languages are the most successful. So, you know, if the broker knows how a developer thinks, they may not choose to be a developer because, you know, maybe they don’t even wanna do the, you know, the back of office work. I mean, there’s just a lot of time you have to spend underwriting deals and going back and forth municipalities and whatnot. But if they can speak that language and they can look at a deal from every angle, , it, it can make such successful careers just by knowing how each person is thinking that’s at the table.
Charles:
Yeah. That makes perfect sense. Yeah. So kind of give us an overview today of your firm and your current investment strategy.
Nick:
So our firm, about 15 of us, and it ranges everything from property management, accounting, asset management, development, capital markets, acquisitions. And, , we are focused really in the space of retail and industrial. And we like both of them for different reasons. So the small bay industrial space, we’re really fond of right now because we’re seeing a lot of inefficiencies in the market with, , seller’s expectations on rental rates and where we’re able to adjust the parks with, , you know, sometimes we have to come in and do a, you know, a good amount of capital improvements to the roof, the facade. , But other times, you know, it’s just marking the, the tenants to, to current market rents. And a big reason for this is the recent inflationary pressures we’ve seen across the country where we’ve seen rent increases, you know, 10, 20%, you know, kind of cumulatively probably 30 to 40% over the last few years.
Nick:
And for many longer term landlords, you know, we, or kind of everyone was brought up in the industry that 3% annual increases was standard. And a lot of leases are still that way. So when you’ve had 3% annual increases and, and maybe you’ve pushed a tenant to 5%, but it kind of feels a little high, meanwhile inflation’s at 10, 20%. , There’s a lit – large gap between where market rates have, you know, gone to, to where, you know, sellers have their, , their leases at. So we’ve been able to come in, renegotiate some of those leases. , A big part of it’s working with the tenants. You know, some of the tenants know about this and they’re already charging higher pricing to their customers. So they’ve just been, you know, getting a free ride. And so when we come in and say, “Hey, we gotta, you know, push rents to market,” they’re very understanding.
Nick:
Other tenants are, are pretty naive to the changes in the economy. And it takes them a while to, you know, change their pricing. And so then they’ll change their pricing down to their customers and their customers will do it to them. So you’re almost seeing like the bulkiness of inflation, , firsthand when you’re working on these industrial deals. So we’ve really enjoyed those. And on the retail side, what we like about retail is that in most commercial real estate, there’s really two people sitting at the table. The investor or developer and the lender. In retail, there’s three. There’s a tenant. You know, our, our tenants are some of the biggest in, , you know, in the, in the world. And there is some of this in industrial and some in office, but, you know, not generally where, where we spend our time. So in the, the retail side, you know, we’re building for a lot of these national tenants like Dutch Brothers, Starbucks, Chipotle.
Nick:
, You know, we’re doing some bank branches as well. And you have an opportunity to talk with the tenant and understand what their goals and objectives are. And as long as we can meet those, we can still reach ours. , It creates a good long-term relationship to where you can start to do multiple projects with them. So on the development side, all of our development deals are with these, you know, larger national and, , credit tenants. And the idea is, you know, we start to create a system where we can roll out, you know, numerous deals with them. So we have one tenant that we have six projects, , you know, that we’re going through development on right now. We have another, we have three. So building those relationships allows us to scale quite a bit. And then we also do retail strip centers. And that story is very similar to the small bay industrial where there’s been a mismatch of, you know, rents relatively inflation in a lot of the markets.
Nick:
And the benefit that we see in that is we’re actually able to add a lot of value more than on the industrial by doing the facade renovations, by updating the parking lots. , You know, by changing the signage in the storefront. Because an industrial user may not care as much when, you know, you’re doing those kind of, you know, finishes, but the retail users very much notice it and they appreciate it. Their customers appreciate it. Even if it’s just subconscious, when customers go into like a newly renovated center, it just, it just feels better. It creates more alignment with what the retailers are trying to do. And it helps them with their sales, which then, you know, helps us get our rent payments in.
Charles:
What would you say are some of the pros and cons of, say, retail investing versus small bay industrial investing? Why do you like them? And kind of how does it trickle down to your end investor?
Nick:
So the, one of the biggest pros of retail, as I mentioned, the tenants are, , a strong aspect of it. That can also be a con. I mean, these, these tenants are very strong negotiators and they’re very knowledgeable on, you know, what market rates should be, on what construction costs should be, on what land values are. So those deals tend to be a little tighter, , because you just have, you know, very intelligent people, you know, on the other side of the table when you’re negotiating. Also, the longer term leases that you sign, , once again, it, it can be a great thing, but in inflationary environments where, you know, you’re locked in for a 15 year lease with five, five year options, , you know, you’re not going anywhere. Regardless how much inflation there is, the, the rent’s staying per that schedule for a very, very long time.
Nick:
Where on small bay industrial, you know, you’re doing sometimes 12 month leases, , on average, you know, three to five year leases. And so you’re able to bump those rents a little more. But you’re also dealing with more, you know, local mom and pop type tenants. So that comes with its own, you know, set of just risks and variables. But I will say what was fascinating for us was during COVID, , you know, we had a mixed portfolio of, , you know, credit, larger tenants and local tenants. And when, you know, things kind of hit the fan and everyone had no idea what was gonna happen to the world, the larger tenants were willing to stop paying rent. And they just said, “Hey, hold on. Let’s figure out what’s going on. You know, let’s not pay rent if the world’s ending.” , where it was the, the small bay industrial tenants, you know, the, the more local guys that, you know, maybe it was, , you know, someone that’s 5,000 square feet and he grew his business or, you know, he’s second generation.
Nick:
, That would call us and they’d say, “Hey, you know, we know that things are tough.” You know, in, in some states, like in Seattle, I don’t think they were able to work. , And they’d call us and say, you know, we’re gonna get rented on time, you know, we’re working on the weekends. , So we’re gonna figure this out together. And so there was a lot of comfort in, you know, the more personal type tenant relationships that that provided. Because of course, you know, we still had to pay our debt. You know, no one, no one forgave us, you know, of, of paying our, our debt payments. Some lenders converted to interest only, but it was still a very challenging time because we were kind of stuck in the middle between tenants that couldn’t open and, you know, lenders who needed their mortgage payments.
Charles:
How has that, has that changed your perspective at all on working with national tenants? Maybe I know you do the development portion of it, but having them as, you know, when you’re going in and maybe repositioning or renovating a property with the goal of renting it to, , a high credit national corporate tenant, has that changed at all because of what happened during COVID or is it just kind of you just have to deal with it?
Nick:
Well, COVID was a black swan event that, you know, you talk about, you hear about, but you never really expect. What we got out of it was, , that the unexpected can happen very quickly. And to really take our reserves seriously for events that may be out of the ordinary. So we put a lot more effort into underwriting what our reserves, you know, the, the time period we can hold a property. , If certain tenants blow out, , you know, what that looks like so that then we can be more strategic if, if something goes wrong. ‘Cause Also during COVID, you know, several tenants had to close down while others, you know, were, were deemed necessary and they were able to stay open. And a lot of tenants that stayed open or, you know, did very well, , because, you know, people didn’t have many places they could go.
Nick:
So it definitely had a perspective of risk adjustment. As far as the tenant type, you know, I wouldn’t say COVID was, was a big factor in that. I mean, we, we’ve had some issues with all kinds of different tenants. And, you know, with the credit guys, you really just have to make sure that you know everything you put in writing because it’ll be, you know, per the law of the lease. So if, if you don’t deliver a project on time and there’s a penalty, you know, that tenant will smile and they’ll be friendly with you, but they’re gonna charge you that penalty every single day that you’re late. , Where on a local tenant, you know, there’s a little more flexibility and sometimes, you know, they may not read the whole lease. And so it’s a little more of a, a handholding relationship. So you have to make sure that you, , appreciate the person that you’re signing that lease with that’s, you know, coming into your space.
Charles:
What do you usually see with your small bay tenants, , industrial tenants that are renewing? Like what kind of percentage do you see that continually are renewing if they have a 12 month or a 24 month lease with you?
Nick:
So what percent do we see renewing?
Charles:
Yeah. How high is that?
Nick:
After we come in and we fix the properties up and start to build the relationships, they’re pretty high. , I mean, industrial’s still been in the states that we invest in, which has been, , Seattle, Washington, , Texas and Florida have been, you know, pretty strong industrial markets. And when we’ve had tenants not renew, a big part of it is because they’re expanding. And we’ll try to have them expand within our parks or move them to another park that we own. , Or they just, you know, they won’t be able to fit and they’ll, they’ll move somewhere else. But generally speaking, I’d say our, our tenants have been, you know, pretty stable and, , pretty open to, you know, the three to 5%, you know, rent increases that we’re seeing on industrial Small Bay right now.
Charles:
So you talked about some of the markets that you guys focus on. What could you say are some of the key drivers for choosing a market?
Nick:
The, the largest historically for us has been a deep understanding of the demographics, , and the movements of the market, as well as relationships. So Florida’s been our backyard and that’s where we started to build our relationships initially. And that’s why it’s been, you know, 75% of our acquisitions and developments within the state. , We’ve started to expand outside Florida. And as we’ve done so, we are choosing markets that have a level of liquidity in the exit investment that we’re comfortable with. And we, we saw this firsthand when we bought a deal in Ohio. And we followed a tenant up there who had a strong tenant of ours down in Florida. , Found a building, put them in there, renovated it. And then we went to go sell, we realized that the buyer pool for that property in Ohio was, you know, maybe people within the state of Ohio, maybe people within that city.
Nick:
Where when we invest, you know, right now we have some deals in, , as I mentioned, Texas and Florida. You know, we have buyers from all across the world. So every continent more or less, there’s a buyer that’s comfortable in those markets and understands them. And so that provides a lot of liquidity on the backside. , You know, when you sell something, it really comes down to, does your price align with market expectations? Not, is there a market for that asset? And so with how many deals we’re doing, you know, we do about 10 to 15 deals a year. Having that comfort that, you know, when we do decide to sell, , there’s, there’s buyers out there is, is powerful for us. , You know, we’re clearly looking at demographics as well. So, you know, the states we invest are generally ones that, you know, you’re, you’re seeing population growth, you’re seeing income growth, education growth.
Nick:
You know, those are three bellwethers that if you have those, you know, at your back, , and you can invest at a good basis, you know, you’re probably gonna do all right long term, , regardless of, you know, hiccups that you may have in the property. At least a lot better than other states where you’re seeing, you know, out migration.
Charles:
Yeah, it’s very interesting. I didn’t think you were gonna answer that with having the buyer pool of the property. So that’s, , that was, that was unique, what I was thinking. But, , what would you say for key parameters must a deal meet before you guys begin your formal due diligence? If you’re doing 10 to 15 deals per year, you’re looking at hundreds of deals. Kind of like what happens in the beginning of that funnel that gets it down to a formal due diligence?
Nick:
Yeah. I mean, the first few things we look at is first, does this, does this property fit within the market? , You know, what, what it currently is or what we’re looking to do, does it just make sense? You know, does the access make sense for the use? Does the visibility, does the, you know, the layout? , Does it just make sense from a fundamental real estate perspective before you dive into the details? When, when the market was really hot back in, you know, 2021, there was a luxury that some people could do good deals on bad real estate. , You know, in today’s market, I think you have to have good real estate and a good deal to really make it have sense and to really, , have the risk be worthwhile. So first of all, we just wanna see, does the real estate check the boxes of, , you know, the location, the visibility, traffic counts, you know, things of that nature.
Nick:
And then does the building have any, like, oddities that would make it a challenge if our plan went wrong? So if we’re buying something existing, you know, we wanna see what’s, what’s the ultimate downside risk that we see potentially happening, and how can we mitigate against that? And is that a crippling for the, for the project? And once we kinda get from those perspectives, then we start to analyze, you know, the upsides. And well, well, where can we really add value? Where can we create alpha on this deal? And then if that’s asymmetrical to the downside risk, we start to get really excited about it and interested. So a lot of times, you know, like you said, we’re looking at hundreds of deals, , you know, maybe over a thousand deals a year. And the first things you cut out are just the things that, you know, have just too much hair.
Nick:
You know, they’re too, they’re too unique. They’re in a funky market. , The building’s kind of like off the beaten path a bit. , You know, things like that where just maybe a local, you know, group that is, is doing less deals, you know, may be able to figure out. But for us, it’s just getting certainty of success and, , you know, reducing the risk as much as possible. So obviously if you have one bad deal, you know, it sets you back up quite a bit. It sets not only, you know, the, the sponsor back, but it’s also a, a challenging conversation with investors. And, you know, that’s, that’s who really we’re looking out for, you know, that’s who our fiduciary is to. So, , we spend a lot of time, , just vetting out kind of the junk to get to some, some gems each year.
Charles:
No, that makes, that makes perfect sense.
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Speaker 3:
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Charles:
When you guys are doing like lease up phase, let’s say, of a small bay industrial property, what kind of, , do you put that out to a broker to find your tenants? Or what have you been successful in doing during that phase of, , if you have any vacancies, how are you renting them during the marketing process? Yeah,
Nick:
We, I mean, we are very broker dependent. We’ve had such phenomenal relationships with our brokers. And, , they’ve, they’ve been by our side to help our company grow. So when I look back on, you know, I think every single deal for the last few years that we’ve bought has had a broker involved. , You know, a broker generally, you know, sharing it with us, whether it be on or off market. And then through the leasing strategy, we have our leasing brokers involved. And we even have our, you know, our exit, you know, our investment sales brokers involved. So the second that we see a deal that we think is, you know, worth looking at, , generally if a broker brought it to us, we’ll ask them, you know, their, what they think the strategy is. Then, you know, we’ll verify the, the lease rates in the market with our leasing brokers before we even close.
Nick:
A lot of times before we even have it under contract. And we’ll even call our investment sales brokers, outline the deal, share the location, , you know, let them know what we’re thinking about it. And they’ll give us their feedback on if we were to sell it in, you know, 12, 24, 36 months, where they think the market would be. And, you know, of course, these are all just opinions. The markets are changing drastically. But, you know, each one of these individuals all day, you know, is just working on investment sales or all day is just working on leasing or, you know, bringing us, you know, bringing off market deals. So their insight is, is very granular and is something that, you know, we’ve had quite a bit of value on. When we have it under contract, you know, we’ll, we’ll start talking to the tenants.
Nick:
If there’s tenants that we know of in the market that are looking, you know, we’ll start talking to them as well. Ideally, we get a few leases signed or, you know, some, some warm renewals, , from existing tenants while under contract. ‘Cause Once again, we’re always trying to mitigate risk before we close. And even after closing, you know, get leases signed as quick as possible. So, you know, we have an investment thesis, of course, we put a deal together. But, you know, we’re not naive to the, you know, the fact that if, if we have a vacancy and we have a tenant coming, you know, to our table to negotiate, every single month that we spend negotiating costs us money, right? It costs us money where we’re not getting return to our investors where we’re having to pay, you know, a, a mortgage or having to pay CAMs, you know, because it’s dead space.
Nick:
And so, you know, we’re trying to get tenants in there as quick as possible. And the quicker we get a tenant and we can negotiate, the better deal we’ll give them just because we’re fine sharing with that, you know, to build that relationship with them.
Charles:
That makes perfect sense. What has 250 million dollars in transactions taught you about risk?
Nick:
I think risk is one of the most misunderstood, , aspects of investing. And I constantly see that, , most investors are overly optimistic. , If they’re not investing, then they’re, you know, generally pessimistic. But to be an investor, you have to be ostimi – optimistic in general. But you really have to get to a point that you can measure risk. And a lot of people, as they get better at a certain thing, , or they do more volumes of it, so like real estate investing, they may go the opposite way and have it be more of a feeling where we have gone the, the direction of underwriting our risk to be more detail oriented. So we’ve started to quantify our risks into checklists, into, you know, various things we do for every single property just to make sure we’re turning over every single stone. And we also, after we have a successful deal, analyze and we say, did we get lucky on that deal?
Nick:
Or did we actually make the smart decisions? Because there’s this, this notion a lot of people have that when they are successful, it’s because they did the right thing. And it may just be that they were lucky. And hey, if you’re lucky and you have a successful deal to make time, that’s awesome. You know, great for you. But if you fail to recognize that and you get lucky on a few times, then you let your guard down. I mean, that’s where we’ve seen it time and time again. Then people start to waver on their, you know, risk analysis. So on, on every single deal, I mean, we have checklists as we go through each process of the acquisitions process. And, , you know, we’re outlining everything we think that could be a risk so that it can be pretty quantifiable because in real estate, you know, you can measure a lot of the dynamics.
Nick:
You know, some, some are more challenging, like market movements, but you, you, you pick your locations, as we mentioned before, you know, you pick your states, , that you’re investing in. So hopefully, you know, you’re, you have the tailwinds of the economy, you know, at your back.
Charles:
No, I have a, , I had a mentor one time tell me that just because you made money in a deal doesn’t mean it’s a good deal. And, , it’s one, it’s, if you start thinking about that and go back through all these different deals, you, you start, I mean, without even going to numbers, just knowing kind of the hair that was on that deal, you know what I mean? You kind of go back and you’re like, that one was a little aggressive. You know what I mean? And how do you really distinguish that from the strategy, from the luck? Is there something where, I mean, if you’re working through checklists now and everything like that, so like, it’s a huge different story if you, , if you have your standard operating procedures and make sure everything checks before it goes. But what have you found before where you had to kind of distinguish luck from strategy with deals that maybe made money, but maybe weren’t the smartest deals?
Nick:
So the area that I’ve seen where we have had the most challenged underwriting risk has been with non-credit tenants. So tenants that are growing, that have, you know, various, you know, and they may have dozens of locations, , who appear on the surface that they’re doing everything right. And in the financials, there are potential questions that are unknown or the financials aren’t being shared. And over time, there can be cracks in their business model, , or they can be expanding too quick. , There can be turnovers of executives, you know, whatever it may be. And we’ve been able to keep up on that. You know, we definitely try to build relationships with our tenants and understand what they’re doing. We, we follow the news on them. And, , you know, we’ve had to, we’ve been lucky enough to exit some of those deals prior to, you know, anything possibly coming to fruition, , that could have negatively affected the investment.
Nick:
, But we have had somewhere we’ve been caught. You know, we’ve had a tenant that we, we though we underwrote properly and, , their business model failed. And so we had to deal with the costs of, you know, repositioning that space or that property. But I’d say tenant, tenant underwriting is something that, , a lot of people, , get lazy on.
Charles:
Yeah. No, that’s, that’s not just something that’s in, I think in commercial, as us being multifamily investors. I mean, it’s also the tenant base that you’re, you’re buying a property and obviously a tenant base to their clients that are paying everything, right? And I think people kind of brush over that and they don’t see the strength of that. And I don’t, we, you know, credit tenant’s usually something that’s used mainly in commercial, but we’ll use it as well in residential. And it’s something that like you just have to know that’s the tenant base that you’re gonna be renting to. You know what I mean? You can’t transform the property from a C to an A overnight or anything like this or at all. And it’s something that, that’s the tenant. You know what I mean? Maybe you go C to a C+ or C+ to a B minus tenant, but it’s really similar that you’re dealing with.
Charles:
And that’s one thing you really have to understand the risk that you’re taking on with those people are the ones that are behind paying everything.
Nick:
Absolutely. And it’s, it’s tough because, you know, you wanna lease up your spaces. So I mean, on the residential side, if, if you’re taking on a questionable tenant but they’ll start paying rent today, I mean, it’s hard to, to pass that up. Oh, I know. For a potential tenant down the road, especially if it’s a space that sat vacant for a while. Yeah. But the, the damage they can cause, I mean, they’re sometimes literally inside your home. You know, like it’s a, it’s a very, you’re, you’re exposing a lot to them and you’re putting a lot of faith in them to, you know, respect, , you know, your building and, and the finishes in it and everything.
Charles:
No, that’s one thing I had when going to third party management after a few years of being, , self-managing myself. And that was one of the benefits was that the property manager didn’t really care too much about when I was paying the mortgage or whatever, if I had to put money into that account. They were making the best decision for the performance of the property. And that’s much different when you know you have a mortgage payment coming up and you got, you know what I mean? And so it’s like separating that emotion from what, what you know is right and sticking with it, which is not as much of an issue anymore, but it’s something that, one of the benefits of kind of separating that management from the ownership, , I found as like kind of one of the other, , unknown or not talked about really benefits of having a third party manager.
Nick:
So did you see that, did you actually see better results or was it just a, a nice emotional separation? ,
Charles:
I saw a better result. It took, I remember it was probably like six years of self-managing properties and then it, it took one year. It was literally one year for it to really show, you know what I mean? , Just because they were putting in their own procedures of how they were doing it. It was kind of rocky for the first, I say, six months. And then, , six months that first year, let’s just say. And it was really after that. And then we saw it really come around. You know what I mean? That was our property manager that we had for that portfolio of properties before we sold them in 2022. But it was just one of those things where it was, , I, I just, I’d never had a third party manager before. So I was really new. And like it takes so long.
Charles:
And when you hire a manager, I find it very interesting when people like change the managers really quickly. And it’s like, even if it’s a one year lease, it doesn’t sound like that long, but even if you have just a few units, I mean, it takes years really, , for. That for what they’re doing to actually come through, you know what I mean? Because maybe you made mistakes with tenants, maybe your tenants went bad, , they’re fixing those issues that you maybe had, and it’s also, you won’t know for years down the road of kind of what the product is, you know what I’m saying? , So it’s, it’s difficult to blame that property manager until you give them enough runway where they’re able to really execute on what they’re supposed to do, I guess.
Nick:
Yeah, I mean, it’s, it’s, , having management changes is a very slow moving vehicle. So I mean, I think you can’t make those decisions too quick.
Charles:
Yeah, no, for sure, sure.
Nick:
‘Cause They’re hard to unwind. And then, and then the tenants, if they’re seeing management changes, I mean, it gets them a little s – you know, spooked.
Charles:
Yeah. It’s not as bad as when you sell a property, but when the management changes, then there’s just, you’re just getting, you know, you’re, you’re dealing with every tenant one-on-one, you know what I mean? To make sure that, obviously, more so with a tenant in the commercial sector versus a residential, however, it’s something that, you know, they’re just worried about the one thing about, is my rent going up? You know what I mean? Which probably is gonna hit a residential tenant a lot harder than maybe a commercial tenant, , in, in, , for some reasons for that. So, but, I don’t know, it’s, it’s just interesting when you’re going through it. It, it takes a lot of time and I just, when you’re changing management, just you had to really choose that manager correctly upfront or you have, it’s a very time consuming process. You said from finding, from integrating, and from seeing if they’re actually making a difference many, many years.
Nick:
Yeah. Yeah, it is, it is interesting how you’re talking about, you know, residential tenants, generally speaking, aren’t making money, you know, what you’re renting to them. Where on the commercial side, since each tenant’s making money within, you know, those four walls, , the rent increases, if you can justify them, are a little easier for them to swallow. And, you know, that’s why we try to do all these, you know, capital improvements, so they can see that value’s being added. We’re not just, you know, bumping it for the heck of bumping it. I mean, sometimes that’s just the case because, you know, inflation and whatnot, but, , it’s a little different for the residential, for sure.
Charles:
What are some common mistakes you see retail and/or kind of industrial real estate investors make?
Nick:
So the biggest mistake I see is people make assumptions about what they can lease vacancies at, that they put into their underwriting without understanding the depth of a market. And so we’ll constantly see, you know, if there’s, if there’s a strip center that has, you know, two, 2,000 square foot bays, well, market rent may be $30 a foot. So they’ll underwrite $30 a foot, , you know, that it’s gonna be vacant for, for three to six months. The problem is without understanding, well, what specific tenants wanna lease this? And once the tenant makes within the, the current retail strip center, , who would compliment it? Are those tenants interested in this market? Is this market growing? How is this relative to competitors? Those spaces can sit vacant for a long time. And so if you’re overly optimistic on your assumptions rather than your in-place incomes, , a lot of times people get burned.
Nick:
And this happens, you know, if you have a few vacancies, but you’re buying something that’s, you know, more value add, , but it cashflows day one, you, you can afford that to some extent. But when people are buying deals that just seem like it’s a good basis, , without fully going through the full underwriting and understanding of, you know, the, the downside risk if that tenant never comes, , I’ve seen people, you know, get caught and the carry starts to eat them alive. So that, that’s a part of it. And kind of piggybacking on that is not underwriting an exit. So as I mentioned, when we are acquiring any property, regardless if we plan to hold it, you know, for, forever per se, , we’re finding out what the exit looks like in, you know, two to three years. Because we wanna know that our plan actually is creating value and that the market would perceive it at that point.
Nick:
And then know that there is this exit where at that point we could say, okay, we were successful or not. There is value built in. So now do we wanna sell? Do we wanna refinance it? Or we just wanna hold and hopefully have a lower loan to value because we’ve increased the value, you know, during that time period. So if, if you’re incomplete and you just jump into a deal with, , you know, assumptions based on what the rent could be without understanding the market and not knowing your, what your exit looks like, you could find yourself, you know, upside down just because you didn’t really think through the various potential issues or strategies that can come from that.
Charles:
No, that’s a great answer. Are there any type of, , businesses that you don’t like renting to, whether it’s in your industrial or whether it’s in kind of your retail? Is there, are there any type of business types and/or, I mean, anything like that that maybe shies you away from investing those properties or renting those tenants?
Nick:
Well, there’s, there’s the standard ones that I’d say, , you know, generally don’t sell very well. , You know, very unique uses. So like industrial would be uses that work with a lot of, you know, , I guess potentially environmentally risky, , materials. , You’re just opening yourself up to potential risks down the road where if a tenant has a spill or creates an issue, , and that’s a lot of uses that, you know, work with, , you know, cars. So, you know, auto body shops. , We do that, but you just wanna make sure you understand the tenant. And, , you know, gotta be careful. Event spaces are really tough
Charles:
Because when you – Yeah, liability too.
Nick:
The liability’s massive. , You know, when you have an event space that you’re doing for, you know, weddings or whatnot, if the economy goes sideways, , you’ll start to open that up to a lot of other things. , As any business owner would, you know, to succeed, , you know, or just stay afloat. So, you know, we don’t like those types of uses. , You know, certain bar type uses, , you know, create more liability as well. So there’s kind of a theme. It’s like, is this use gonna create liability? , And is it gonna create risk to the, the tenants next to it? So our, our tenant mix for every property, if it’s multi-tenant, is really important to us that they compliment each other. So a lot of times, you know, whether it be liquor stores, bars, , you know, auto, it just, if it doesn’t make sense to the spaces next door, then, then we won’t lease them.
Nick:
, I mean, that being said, we have amazing, you know, bar tenants that we work with right now who, , you know, is great for the community. You know, they mostly have food, , but serve, you know, great food and are just, you know, overall amazing tenants. We have great auto tenants. , So we will deviate, but then you really have to underwrite the tenant, you know, a little deeper.
Charles:
Yeah, the environmental’s a very interesting thing. I didn’t know if you were gonna go that way. That’s a great thing because I always tell people, it’s like, whenever you’re buying any property, , I mean, always get that phase one, because it’s not just automotive. It’s really, I mean, it could be dry cleaners. It could be something that was previously there too. It’s such, , I mean, it’s such a, like a, a newbie mistake of not getting any type of phase one, which most banks require it. However, if you’re going and getting, like, seller financing, obviously the seller’s not gonna require it. You know what I mean? So it’s just something that, you know, you gotta get that phase one because there could’ve been something there two, three businesses before that wasn’t the best on keeping it clean. You know what I mean? So it’s, there’s, there’s so much that comes back to you when you’re owning that property.
Nick:
Yeah. I, so I didn’t, I didn’t bring that up earlier, but I should have. , We’re just so anal about it that, , I didn’t think of it. It’s just a standard. I mean, when we first put a property under contract, you know, my phase one consultant I use, I generally use the, the same group for almost everything, at least in the state of Florida. , You know, they’re, I mean, we’re pretty friendly at this point. I mean, because we, we’re talking all the time. So they’re one of the first people I talk to about a, a project. And they’ll go and they’ll look at the historic uses of that property, even before I cut them loose, if I’m saying, “Hey, you know, we’re gonna buy this thing.” , because they know we’re always gonna use them for the business, and then we can get ahead of, , you know, any potential risks.
Nick:
And, and we’ve had times where, you know, we were buying a property that we had a tenant in tow. We really liked it. It was a restaurant. And the, , there came back pictures from, it was like the ’50s. As you can imagine, satellite pictures back then were very, very blurry. , But it looked like it was a gas station. And on this one, we were kind of unsure about it. So we kept on going down the, you know, the due diligence process. , We’re pretty close signing a lease with a tenant and we couldn’t really figure out what was going on. So our phase one, you know, environmental consultant, he drove two hours to the house of the lady who owned it at that point to ask her what that use was. And, , unfortunately, it was a gas station. So, you know, this is one that we kind of let go further than usual.
Nick:
So we were a little nervous, , you know, about what to do going forward because there was no record of the tanks ever being removed. And so if you’re buying a property with underground tanks still in it, and if there’s cracks in those things, in Florida at least, because, you know, the water tables blow us, the aquifers, , I mean, you could just have unlimited liability. You know, we were talking about risk earlier, how you can quantify it. I mean, environmental risk is really, really hard to quantify. You’re making a, an educated guess. And that’s an educated guess that, you know, we don’t wanna play in that space. , So we had to drill down and, and see if there were tanks down there. And it was, , it was nerve-wracking. Luckily there weren’t and we were able to close. But, , yeah, generally speaking, environmental is just not something you wanna play with regardless of the property.
Nick:
You know, you just walk the other way.
Charles:
And it’s not the previous owner. It’s gonna be you as the current owner that’s gonna have to deal with it. And, , I mean, that’s just, it’s, it, it can get extremely expensive.
Nick:
Yeah. And sometimes that’s why people will offer seller financing, because they’ll know it. And so they’ll think that a naive guy comes in and hey, if, if they offer seller financing, you, they transfer it, you know, to you. And then you own it and something comes up bad and, you know, they got their deposit, maybe they take the property back. I mean, they’re in a bad position as it was anyways. So it, it can be a, a warning sign that you maybe double, double check to see what their motive is.
Charles:
Yeah. No, perfect. Well, Nick, thank you so much for coming on today. We’ve gone a little longer. , Can you tell us how our listeners can learn more about you and your company? So
Nick:
You can go to our website, which is alakai-capital.com. And on there you can reach out to myself or my team. We can jump on a call. , As you can probably tell, we are obsessed with real estate, so we love to talk about it. , You know, if you have a deal you’re looking at or wanna talk about our process or how we look at things, you know, we’re more than open to do that as well. , Or if you wanna look at one of our, our investment deals, you know, we’re doing 10 to 15 deals a year. We syndicate every single deal. And, , you know, we have a phenomenal relationship with our investors. Right now, I think we have about 130 investors and over 60% have invested five times or more with us. So, , you know, it’s, we really build relationships and, , I think our returns are, , get people excited to wanna come back.
Nick:
Or you can find me on LinkedIn. If you go to LinkedIn and type in Nick Jones Real Estate, you’ll be able to connect with me and send me a message and I generally, , respond to all the messages I get.
Charles:
Fantastic. We will put the link into the show notes, and I wanna thank you so much for coming on today, Nick.
Nick:
Thank you. I’ve had fun.
