In this episode we welcome Brian Shirken. Brian is a Cofounding Partner at Mountain Pacific Opportunity Partners, and the founder of its precursor, Mountain Capital Partners. He also co-founded Columbus Pacific in 1995. Brian has been principally involved in millions of square feet of retail, over 10,000 student housing beds, development of over 3,000 multifamily units, and 5 assisted living projects. He has also provided more than $200 million in mezzanine and equity capital. Mountain Pacific, his current concern, focuses upon investing in QOZ projects across the West. Brian’s a talented entrepreneur with deep expertise in all things commercial real estate finance and development. He is a South African immigrant and a man after my own heart with a mountain residence in Los Angeles, CA and another in Park City, UT.
Key takeaways in the episode:
- In the beginning of your real estate career, you are not smart enough to get in your own away. That is a good thing. Action carries the day.
- It is all about the people. They capitalize developers. Yes, they can step in and take control if things fall apart, but to do so is a failure. Brian’s seen good deals with bad developers, and bad deals with bad developers, both are just bad. Trust and reliance on the partner’s ability to execute along our expectations is the core of what they do. They give up returns for great project, great area, and great developer. They never give up on the great developer.
- Mountain Pacific Opportunity Partners will bring the debt financing to the deal for a developer who is not credit worthy.
- Do not rely on momentary variance, underwrite to long term trends. Even in a COVID moment, they expect rent growth trends to return in 12 to 24-month timeframe.
- Lock in low financing as best you can, now, to reduce capital markets and interest rate risks., but always use appropriate leverage and hold through any cycle.
- We all need to beat the market.
- They have never been that concerned with developer co-invest. Fee subordination can work as a substitute.
- Stay small. Contract out commodity services and keep an agile, lower cost, team. Cyclical businesses and fixed overhead are a mismatch. They focus where we make money and let vendors and consultants make money on services because they have scale. Contract with those services, do not build them and take on the overhead.
- Passion – find what drives you and enjoy the work.
Transcript
Kevin Choquette:
Hello everyone. Thank you for joining me on episode one of Offshoot. I am going to start with an apology. I think I’ve got a lot of learning opportunity in front of me as an interviewer. We’ll call this step one on the journey of 1,000 miles. I find myself talking over Brian Shirken, my guest, not once or twice, but at least a few times.
So my apologies to Brian and my apologies to you, the listener. But I was too focused on trying to get from A to B to C to D in terms of items I was hoping to cover and not letting the conversation breathe like a good jazz recording night. So apologies. But you’ll hear him here a bunch of great content from Brian.
Things about being too smart and letting that get in your own way of starting a venture, partnerships with people and developers, and how the people, part of all of his ventures is the priority, the credit enhancement that they’ll bring to investments that they make and conversations around cyclical businesses and fixed overhead and the potential mismatch there. And finally, a conversation around passion and what drives you. So a lot of really great takeaways from Brian. And I look forward to improving in episodes that follow. Thanks a lot.
Hello everyone. Thank you for sharing some of your time with me and my guest today, Brian Shirken. Brian’s the co-founder at Mountain Pacific Opportunity Partners and the founder of its precursor Mountain Capital Partners. He also co-founded Columbus Pacific, 25 years ago. Through all of that, he has been principally involved in millions of square feet of retail, over 10,000 student housing beds, developed over 3000 multi-family units and five assisted living projects.
He’s also provided more than 200 million in mezzanine and joint venture equity capital. Mountain Pacific, his current concern focuses on investing in QOZ projects across the West. I’ve known Brian for many years with an initial introduction, probably 12 years ago through a good friend of mine Bob Phillips.
Brian’s a talented entrepreneur, deep expertise in all things, commercial real estate, finance and development. He is a South African [inaudible 00:03:27] which you will hear for yourself in just a moment, and a man of my own heart who lives on the beach and in the mountains with one residence in LA and another in Park City. So Brian, welcome to the show.
Brian Shirken:
Thanks, Kevin. Great to be here.
Kevin Choquette:
Yeah, thank you. So look, there’s a million things we could talk about. We don’t have that long together. So really, I’ve just got a few ideas about topics we might cover, but really it’s just a conversation. So this is take that tack and see where it goes if that’s all right.
Brian Shirken:
Sure.
Kevin Choquette:
Cool. To start, could you just tell me a bit about yourself and the company?
Brian Shirken:
Yeah, sure. So as you said, I immigrated to United States from South Africa. I grew up in a city called Durban on the beach, went to the university of Cape Town. I graduated with a degree in finance and accounting. Immigrated to the United States in 1983, started out in public accounting, became a CPA, got a green card, and then went into the real estate business in 1986.
Worked for a company called Standard Management Company until 1994, at which time, a partner and I started our own real estate investment company to buy a shopping center for redevelopment from the RTC, that the company we had worked for had chose not to buy. And that is now 25, 26 years ago. It’s amazing that it’s been that long. And I’m married with two kids. My son is 23. He just graduated from New York University last year. He’s a musician. And my daughter just finished her junior year at Tulane University.
Kevin Choquette:
Okay, great. Congrats.
Brian Shirken:
Thank you.
Kevin Choquette:
So how is it that you came into the U.S? I don’t really know much of your story in that regard.
Brian Shirken:
So growing up in South Africa, what I would describe as the American dream was very much in our vision. And I think it’d been an aspiration for me, probably from my late teens when I was in college. It was something that we talked about pretty regularly. At the time, South Africa was in a pretty difficult situation part HUD was at its peak. We had a mandatory military draft.
I wanted nothing to do with the military. And we had the option of either going into the military when we graduated high school or college, and effectively I was a draft dodger. And so, when you combine my desire to leave South Africa and the dream of living in America and being able to take advantage of what this amazing country offered, that’s how I ended up here.
Accounting was a pretty straightforward path. It’s one of those professions where not a lot of other people want to do it. There were many opportunities, so it definitely provided a great path to immigration and also a great grounding. I knew very little about the business environment here, and in public accounting was exposed to many industries from manufacturing to retail to distribution to real estate. And that’s what really peaked my interest in real estate, was working with a number of real estate clients.
I love the creativity of the profession, the financial framework, which I was always interested in, and the opportunity, and also kind of the scale of the market. It struck me very early that because the markets are so big in this country, both geographically and in terms of property type, there was plenty of opportunity for everybody to succeed.
So real estate really struck me as something that was consistent with both my passion and my skill set. And I was fortunate to go to work for a company where I advanced through the ranks pretty quickly. And by the time I left, I was running both the financing and the acquisition side of the business. My partner has worked there as well, and he’s a lawyer by profession, and he was running really the development and leasing side of the business. So by the time we left, eight years later, we thought we had the tools and the skill set to succeed on our own.
Kevin Choquette:
And you say you guys stepped out with Columbus Pacific, right, during or TC?
Brian Shirken:
Exactly. So we picked up our first project in 1994. It was a defaulted loan on a shopping center, just outside of Columbus, Ohio. It was a big center. It was about 300,000 feet, but it was cheap. It was $6 million. And it seemed enormous at the time, but 20 bucks a foot, maybe around a 10 cap at 50% occupancy, everything we kind of dream of today that we never see anymore. It had a supermarket that was looking to expand, but basically a bankrupt developer that didn’t have the capital to do it. Had a lot of excess land for [inaudible 00:08:56].
It had a CS department store on 100,000 feet on 10 acres that everyone was concerned about the renewal. We knew it was a good development opportunity if they didn’t renew. So what a lot of people saw as risk, we saw as opportunity. And the reality of it is we weren’t really smart enough at the time to understand the complexity associated with the deal and all the issues associated with both the redevelopment and development.
We only figured that out about two years into the deal. But it always struck me that in the beginning of a real estate career, sometimes you’re not smart enough to get in your own way. So we took on a deal, but I definitely wouldn’t do today, but it really started our career and started our business, and ended up being a very profitable transaction for us.
Kevin Choquette:
Yeah, that’s super interesting. I completely agree with you. I think the entrepreneurial plight is one where a lot of folks chuck themselves into things that with their current knowledge, they might not have done, but I think that’s part of the learning and growing. So I know Columbus Pacific, you guys did a ton of retail, and then you created a JV with one of the capital markets brokers in Southern California for Mountain Capital Partners and did a bunch of multi-family and student housing finance. Now with Mountain Pacific Opportunity Partners, you guys are focused on the qualified opportunity zones. What’s, led you to focus on that in the current environment.
Brian Shirken:
So it was really a transition from a capital markets business that as you mentioned, we created about six years ago. That business was positioned to provide what we call non-institutional equity to multi-family developers. And what that really meant is deals that were too small for institutional investors, typically in the five to $15 million range of equity, or were in markets that institutional investors wouldn’t go to, five or six years ago.
Those are markets like let’s say Park City or … Sorry, not Park City, Salt Lake City or San Antonio. And it was our expectation that everything we were doing over time would become institutionalized, which it did. And as more capital started flooding into the deals, land became more expensive. Obviously construction costs have gone up pretty significantly over the last few years.
And we started to sell off the properties that we had developed and over the last couple of years, and really didn’t see a lot of great opportunities to reinvest the money. Everything seemed pretty expensive. So we started to pass on doing 1031 exchanges, which we typically would have done and started looking at the opportunity zones as an opportunity to invest our own gains on a tax deferred basis.
Our return requirements were slightly lower, given all of the tax benefits, and given the long-term hold required for opportunities on development projects, we saw the ability to go into areas that were still gentrifying with the expectation that over a three to seven year period, we would see significant enhancement and improvement in those areas.
So we really started the business off with our own capital. Our idea was to come into deals very early in their circle. And we’re not a multi-family developer, we’re a provider of capital. So we started to look at identifying developers that had opportunities or insights tot up that needed capital for pre-development, land entitlement and land acquisition.
So we have right now about eight projects either in development or in pre-development with development partners. And we have really positioned ourselves as a capital provider for multi-family development in the opportunity zones in the Western States. So we have a concentration right now at California, Arizona, and Texas, although we would look at Utah, Washington, Nevada and Oregon as well.
Kevin Choquette:
And are you guys looking to be that kind of pre-development co-GP capital that maybe gets a project going with a more commodity JV equity partner on the LP side that comes in once you’ve got maybe a full construction budget, or are you going to take it from those early days all the way through to stabilization?
Brian Shirken:
We’ll take it from beginning to end. So we’re looking to be both the GP partner, to participate on the GP side before coming in a pre-development and providing pre-development capital and also providing the LP capital. We have the ability to provide capital, I’d say after about $20 million per deal.
So anything over that, we would look at bringing in some type of institutional entity. But anything after $20 million, we’re doing with our own capital and our own assets, businesses, real estate, who are looking to invest in the opportunity zones, but don’t have the wherewithal.
Also oftentimes, they don’t like the yields because many of the projects that we’ve seen marketed in opportunity zones are not generating what we consider to be an economically viable return on costs that mitigates the risk return concerns that we would normally have, but by coming in a pre-development and taking down the land at unentitled pricing, we’re able to get closer to what we would consider to be appropriate risk adjusted return.
Kevin Choquette:
And finding a good QOZ projects, I think, in primary markets is difficult, or it’s a QOZ for a very clear reason, but are you looking at primary, secondary tertiary markets? What the mandate in terms of geography?
Brian Shirken:
I’d say it’s primary and secondary markets. So we have a project, a larger project, 220 units that we’re doing in Phoenix right on the border of Tempe. So obviously, Tempe is a very advanced and evolved market, but with the log rail line, you can see the Tempe market expanding across the border into Phoenix. We’re doing a deal in Dallas in an area called the Bishop’s Arts District, which is very close proximity to downtown Dallas, and you can see the evolution happening.
And we’re also doing two projects in San Pedro, in Los Angeles, which has tremendous development coming in. And we see the long-term prospects as being very positive. We’re also doing a bunch of stuff in the mid-city area of Los Angeles area between Robinson and Downtown LA around the Expo Line and Jefferson, which is somewhat connection between [inaudible 00:16:15] and Downtown LA. So these are all areas that we expect to improve dramatically over time, where we’re comfortable owning the projects long-term and where we expect to see rental growth and barriers to entry over time [crosstalk 00:16:32].
Kevin Choquette:
Yeah. And you mentioned lower hurdles. So it’s probably over a half a year, maybe even a year ago now that we took the time to kind of build out a tenure hold and then made assumptions on the nature of the gains that were being exchanged into a QOZ, whether it was short-term or long-term, and then kind of looked at cap rate compression that could be done to equate to the same investor IRR.
And when you talked about this earlier, you sort of said we can kind of a little bit of a lower return expectation because of some of the tax advantages. I think we landed at like a 200 basis point IRR delta, which is to say, put two projects side-by-side and look at them on an after-tax basis. If one of them was returning like a 13 IRR and then the one in the QOZ might be a 15, does that math tie with what you’re seeing? And how do you guys think about kind of the lower return that you would accept?
Brian Shirken:
So that is really a reverse engineering that the accountants and tax planners have done to calculate the benefit of the tax benefits. We don’t really look at the deals that way. We really want the deals to have an attractive risk adjusted return, given the risk of the deal. Typically if we’re translating it, it might be more like a 25 basis point differential on the untrended return, of course.
So we really do it the other way around. IRR is over a 10 year period or easily manipulated by making minor modifications to things like rental growth or expense growth. So we tend to pay less attention to the internal rate of return and much more retention to the return on cost and the differential between the return that we’re building relative to what a market capitalization rate would be today. That gives you a better picture of where you’re at and what you’re doing without allowing a significant manipulation of the [crosstalk 00:18:47].
Kevin Choquette:
Yeah, that makes a lot of sense. There’s something I thought we could bring up later but we’re kind of all around it right now. And I realized the scope of the question here is significant, but you’re talking a lot about risk adjusted returns and assessing projects on the front end to kind of make go no-go decisions.
Do you guys have … I mean, I know the answer to this question is yes, but what is your thinking and methodology around assessing investment risk and discerning good for bad? I’m sure there’s a lengthy process, but if you could share it with the listeners kind of, how do you guys approach a new deal and try to kick it out or find out that it’s when you really want to support?
Brian Shirken:
So having capitalized on a probably close to a couple of billion dollars of development over the last 25 years, I will tell you that the biggest lesson we have learned is that it is all about the people. So in our business model, we’re capitalizing developers, and we have spent a lot of time trying to fix good deals with bad developers, bad deals with bad developers.
And at the end of the day, the most important thing for us is to have a partner who we can trust and rely on to execute the business plan and in a manner that is consistent with our expectation. We are always positioned to step in if we need to, but if we do, and we have in the past, it’s a failure in our business plan and requires a diversion of resources that is incredibly inefficient for us.
So it really starts with the people. It starts with having a well-designed value chain and having a good understanding of the path to entitlement and cost. We would always give up return particularly over a 10 year period for a great project in a great area with a great developer. So you don’t always get all three, but the one you never give up is the great developer part. So that is really the threshold.
Economics change over time and particularly in an environment like today, which I guess I would describe as a COVID environment, where we all share the concern that rental rates are actually declining right now. And we have some uncertainty about when rental rates will continue to increase again. So it has a real impact on underwriting and economics, that we’re also looking at that in the context of what we expect to see a big decrease in construction costs.
We’re expecting apartment construction costs to go down by five to 10%. So we’ve actually slowed some projects down in order to get the benefit of what we expect to be the chronic costs. And that’s one of the reasons we expect to see more opportunities in this area in conjunction with reduced supply. A lot of projects that are contemplated or planned right now will never get built because they will not get financed.
One of the advantages we have, and our developers have been looking with us is oftentimes we will bring the depth to the deal. We have a wide range of banking relationships, and we’re able to bring very efficient and cost-effective depth to transactions in an environment where just getting debt is [crosstalk 00:22:20].
Kevin Choquette:
And is that [crosstalk 00:22:21] You guys will support with balance sheet and guarantee kind of participation? Or is that still on the developer?
Brian Shirken:
I would say that in about 50% of our deals, we have provided credit enhancement on the debt, which is us providing a guarantee or some other type of credit support. And it has a pretty dramatic impact on the economics of the deal when you can decrease the cost of your debt by [crosstalk 00:22:50].
Kevin Choquette:
Did you say there? I lost it.
Brian Shirken:
We can [inaudible 00:22:55] the cost of our debt by sometimes as much as 50% [crosstalk 00:22:59] bringing in an institutional debt source.
Kevin Choquette:
Yeah. Well, I tend to agree with you on multi, although the one sort of tailwind, if you will, that has me intrigued and I’d love to get your thoughts on it, is kind of the cost of debt financing, in particular, I don’t know if you’re checking, on the topic of rent declines, cost declines, a lot of apartment projects being unfinanceable or potentially falling off of the pipeline.
The tailwind that I see there, those all being the headwinds is the recent dramatic drop in interest rates. And in particular HUD has a program at 223F that prior to March 2nd, you couldn’t get without three years of stabilized operations. That money is being quoted at like 2.45 to 2.65%. It’s fixed rate, 80% LTV, 35 year AM money.
And what’s interesting is if you take the space you’re playing and you take that middle market developer who is perhaps is still able to build to six yield on costs and you look at that [inaudible 00:24:13] 4.3%, you can just get to stabilize operations and I’ll guarantee you, you may want to stress them in terms of total occupancy and proforma rents, you may want to stress down.
But if they can build to a six, you’re looking at like 120% of costs being refinanced in the form of an 80% LTV HUD zone, and I’ve never seen that dynamic in the marketplace. So I was just curious, have you guys looked at that side of the takeout financing and kind of implications between, what I would say is a pre-COVID yield on cost proforma and a post-COVID cost of permanent financing? Because it looks compelling to me.
Brian Shirken:
So you’re absolutely correct. The financing environment is really pretty amazing right now. And theoretically, it should allow us to build to a lower return on cost. On the other hand, these projects are not being delivered for oftentimes or stabilized for two to three years.
So to rely on a financing structure and an interest rate environment, two to three years out in underwriting today, is not what we would consider to be responsible, not to the extent that those programs are still available and those rates are still available two to three years from now, that would make the deals that much better.
We saw a lot of financial engineering going on over the last, let’s say two to three years that took deals that were of average or lower than average economic quality and made them look really good by creating a high leverage structure, which might’ve been a combination of a first mortgage or a mezzanine loan or high leverage loan from a debt fund. Those are the deals that are battling right now because of the leverage.
So we’re obviously happy to take advantage of great financing when it’s available and then in the growth of our student housing business, that’s what broke our business. For the last 10 years, was the differential between cap rate and borrowing rate. The good news in that business is rates did nothing but come down, over the last 10 years, which was actually contrary to our expectation, but yeah, the HUD programs are fantastic. There are administrative issues with them and timing issues and cost issues, but generally [crosstalk 00:26:50].
Kevin Choquette:
I agree with you. I think a lot of folks, especially some of the larger multi-family merchant builders, the household names of the big guys doing three and 400 unit projects, a senior piece, a pref piece, sort of pref piece within the GP and then the GP. And a lot of those deals I think, are going to really struggle to hit proforma and find what was the proforma exit on either sale or refinance typically sale. But are you guys seeing any distress there yet or are we too early kind of in the game for that stuff to be trickling out?
Brian Shirken:
I think it’s still very early. There’s a tremendous amount of forbearance in existence in the marketplace. So not too many lenders have elected to take action against the borrowers in this environment. My guess is you’ll start to see more of it three to six months from now. Obviously, a lot of it is going to depend and I’m talking specifically about apartments right now on what happens with rental collections. I know for most of us, the rent collections have been a lot better than expected over the last couple of months.
There is some concern about what rent collections will look like when all of the capital coming into the markets from the federal government starts to disappear, particularly unemployment and what the return of jobs looks like. So we expect to see some distress. We don’t expect it to be widespread. We do expect to see some type of processing adjustment in the short to mid term, but over the next 12 to 24 months, we expect both rental growth and processing to return to the trend [crosstalk 00:28:45] on pre-COVID.
Kevin Choquette:
One of the other phenomenon that I think is really unique, I think the central bankers parlance is coordination of monetary and fiscal policy. And so, you’re seeing kind of a nationalized bond market, if you will, and yield curve control with the fed, just buying everything that treasury is putting out, add to that backdrop of it looks like nationalization and reassuring and a bit of protectionism, all of which I think were brought to a head by this [inaudible 00:29:23] but I don’t know that they come exclusively from that.
But where are you guys, your crystal ball in terms of those more macro dynamics, where do you see us going in terms of perhaps inflation growth, job growth, recessions, depressions, lots of LUW shape recessions, recoveries. What’s your view of kind of the big macro stuff that’s taking place?
Brian Shirken:
So we really don’t have a strong opinion that underlies our business. I guess the reality of it is that we’re not economists and our guess is probably no better or worse than anybody else’s. The reason we like multi-family development front now is that we expect the markets to be in relatively good shape two years from now. It’s very hard to predict what’s going to happen over the next two years, but most of our projects will deliver two to three years off. And that feels like a very good environment to be delivering in.
Most of the studies that we read show us returning to rental growth in that timeline. We’ve been betting wrong on inflation [crosstalk 00:30:36] So I wouldn’t take a bet on inflation right now. On the other hand, if we do see some inflation, it’s going to be good for our business. Odd asset’s always going to perform well in an inflationary environment. We’re obviously trying to lock in as much of that debt long-term as we can right now, because it’s very hard to predict where interest rates are going to be two years from now.
So if we lock where interest rates are today or two years from now, when we deliver a property, we’re going to lock in our financing, because there’s enough risk in the development process that we’re not looking to take capital markets or interest rate risk. So I think there’s a lot of uncertainty, I think, that exists over the, as I said earlier, the short term, mid term, the next six to 18 months. I think the conventional wisdom is that we’re going to have some type of vaccine or cure within that timeframe. I think it will cause the economy to really stabilize and settle down, and will diminish the risk premium that we’re all looking for today.
If you’re looking to commit significant capital to a deal today, you need to have a risk premium in your return, regardless of what your outlook is, to make sure that you’re getting compensated for the uncertainty of what happens over the next 12 to 18 months. But I’m generally an optimist. You don’t develop real estate or provide capital for development if you’re not an optimist.
And if you use appropriate levels of leverage and you’re able to hold your assets through any SACCO, and this is the fourth big SACCO I’ve been through, I think that regardless of your kind of macro assumptions, over time, and particularly with the opportunity zones where you’ve got to turn your whole period in order to access the, what I think is the greatest tax benefit, which is no tax on the gain from the property we developed.
I think over that period of time, everything will be fine. I still have a lot of faith in this country and in our ability to create a civil society and maintain our democracy and have a stable economy. And so, we remain optimistic [crosstalk 00:33:00].
Kevin Choquette:
Yeah. And on that risk [crosstalk 00:33:02] for kind of the current ecosystem, let’s establish the answer of appropriate risk premiums on a project by project basis is always kind of, it depends, but if we’re talking yield on cost to proforma exit cap and appropriate at being perhaps 150 basis points on [inaudible 00:33:23] with an expectation of selling a four and a half cap, let’s say that’s pre COVID. If you were to look at that same deal now, all the facts of the project remaining the same, what kind of a risk premium do you think you’d be looking for? It’s kind of reflective of the whole bid-ask spread in the marketplace right now.
Brian Shirken:
Now, the reality of it is that no one’s really building to a six. All these deals get presented at a six, but by the time you pull up what we consider to be the unsupported assumptions around rental growth and operating expenses and cross contingencies, I would say that everything being developed was really … Not everything, but most of what we’d seen in the Western States was lower than a six, particularly given construction costs.
And so, it’s kind of hard to say it ultimately depends on the asset and the location. On a development project today, there may not be a substantial risk premium if you’re delivering in two years, because we have a pretty constant conviction about what things are going to look like in two years versus what they’re going to look like in six months.
So I would say if we’re buying a value add property and we have a whole lot of properties over the last few years, we’re probably going to want to see an IRR that’s 10 to 20% higher that we would have wanted to see three to six months ago. On a development deal, I’m not sure that there really is a risk premium to be [crosstalk 00:35:06] demanding one.
Kevin Choquette:
Somewhat confidence inspiring that you’re kind of looking at the whole thing as a speed bump that hopefully in two years, we kind of look in the rear view mirror and we’ve more or less reset. And I certainly have heard other viewpoints that have a more Dr. Doom, Nouriel Roubini being one of them that has a much more draconian view of what’s about to unfold.
Brian Shirken:
The reality of it is that in the real estate business, you always have to be somewhat contrarian. I talk about appropriate risk adjusted returns, but what that really means in my world is that we’re getting returns in excess of what we should be getting, given the level of risks that we’re taking, because I have to beat the market. That’s what we’ve been doing.
Whether we were buying retail in 1994 or student housing in 2011, our goal is to always take a position that is not consistent with conventional wisdom in the market, or in an area where we’re positioned to execute on a business plan that is not accessible to everybody. So we always try to understand the point of view of people who have a perspective that is contrary to ours, but you don’t do what we do [crosstalk 00:36:29].
Kevin Choquette:
[crosstalk 00:36:29] Actually think your view of building now is a bit contrarian. And I think those who lean into it, especially with the backdrop of some of the financing granted, we have to know that it will be there in two years, and maybe not underwrite to that financing, but I think you’ll be rewarded handsomely QOZ or not, because I think a lot of both the lending community and the JV equity side as evidenced by huge layoffs in the larger multi-family development shops, they’re just going to pump the brakes and wait for things to settle down.
And I tend to think with you, the cost declines, the improvement in the responsiveness you’re probably going to have with all of your vendors, the drop in interest rates and kind of structural supply demand imbalances. And certainly in Southern California, I don’t know about all of the other markets that you mentioned in terms of Tempe and Dallas and things like that, but I think you’re … Well, we should probably reconnect in two and a half years and do another one like this.
Brian Shirken:
Yeah. It’d be interesting to look back and see what happened. There is one other thing that happens in this environment and where there is, let’s call it a shortage of capital for compelling deals is that as a provider of capital, we look for much better structure. So for example today, we can structure a lot of our positions as preferred equity with terms that would typically be seen with traditional JV equity.
So as a capital provider today, oftentimes, I would much rather take better structure than better returns. So we might give up some upside in order to have a developer subordinate their equity to ours. And in this market, we’re quoting much more preferred equity than traditional equity. And that’s one of the advantages of investors working directly through us because we have access to so many developers and pretty good insight into how the market is operating at any point in time. So [crosstalk 00:38:43].
Kevin Choquette:
And as a [crosstalk 00:38:44] provider, are you guys doing a kind of a typical leverage point of, call it 80, 85% LTC, or are you going way higher, like you might on a 90/10 or 80/20 JV, but just giving that subordination, developers equity is being subordinated and you’re getting kind of a sweep of capital and return?
Brian Shirken:
The latter. So I’ve never really been that concerned about developers co-invest, as long as they have the characteristics that we’re looking for in a developer. So we have deals where we brought up to as high as 100% of the capital share with the [inaudible 00:39:26] developer with appropriate feasible ordination. So we’re always very high in the capital stack. We’re not looking for a coupon, that’s not our business. So when I talk about preferred equity, it’s really JV equity that’s structured into a preferred position where we have [crosstalk 00:39:43].
Kevin Choquette:
Well, let’s turn the page a little bit and talk about you and your sort of personal engine, the things that kind of make you go. And I guess I’ll start with teams. I know that Columbus Pacific, you guys were, I believe a very lightweight shop, you and your partner. I remember running into you once with a backpack and you were sort of explaining how you could fly out to spend the night in the market, fly back and really have everything you need just in a laptop. And I think you changed your clothes in your backpack.
And I know Mountain Pacific also was a very lightweight … Or sorry, Mountain Capital Partners was a very lightweight team, and it looks like you’ve got some heavyweights, but also a small team with Mountain Pacific Opportunities. So just your thoughts around team building and what is it that has had you continue to keep a small team as opposed to doing what a lot of folks do, which is build a full-scale operation and pick up all that overhead?
Brian Shirken:
So we’ve built multiple businesses around real estate. Each of our businesses are run by a partner who has day to day responsibility for that business. And every relationship with a partner is structured in a way that creates maximum alignment. I’m a big believer in alignment. Most of these partners have significant ownership in every business. And today, we have a shopping center business, we have a student housing business, we have an assisted living business, we have a capital markets business, and actually have a resort development business as well, each of which are run by very senior people in the industry that are enormously capable that participate in profits.
Typically, to the extent that we can contract out commodity services, we’re looking to do that because building overhead in the real estate business is we believe or I believe, in consistent with the countercyclical nature or cyclical nature of our business, where you can’t be in a position where you’re having to do deals in order to support your overhead because you end up doing a lot of bad deals.
So we would rather contract out as many services as we can so that we can scale up when the opportunities exist and scale down when they don’t. And that’s the way all of our businesses are structured today. I mean, obviously, student housing is a very management intensive business. We co-own a management company with a partner and we have 250 employees in that business and that’s labor intensive. But in an opportunity zone business, there are four key people and we’re very focused on a few streamlined analysis and decision process and getting deals done, and focused very heavily upfront and figuring out what we can [crosstalk 00:42:41] and not wasting a lot of time in things we’re not going to do.
Also, when I started in the real estate business, I worked for a company that had a very large in-house staff, and I found that I was spending probably at least half of my time on personnel related matters. And when we started Columbus Pacific 25 years ago, we wanted to spend all of our time on the areas of our business, where we make money, which is always what we’ve done. I’ve never seen a lot of margin in the management business. In certain aspects of our industry, you need a control management, but where you don’t, the margins go to those people who have the scale, and we want to have the ability to scale up [crosstalk 00:43:26].
Kevin Choquette:
Yeah. Clearly it’s a very effective strategy. We don’t have to look any farther than those multi-family builders of scale that we’re just referencing, and look at, I think, they’ve laid off 35 to 50% of their staffs because they were doing exactly what you mentioned, which is generating fee income that’s sufficient enough to keep the teams fully employed at all times. And when they hit headwinds, there’s only one thing for them to do, which is try to reduce overhead and skinny up and push through. So congrats. I think it’s a very intelligent.
Brian Shirken:
And also we also believe that you have to maintain flexibility to move through and into different areas of the real estate business. We did a lot of shopping center deals coming out of the downtown from 2010 to 2013, where we were buying distress centers that were, let’s say, half built or half leased, but as they stabilized, we sold them as well as 80% of our remaining retail portfolio, and really cycled into the student housing business, which we thought had an income stream with much greater integrity over time.
But if we’d had significant infrastructure and retail, I think it would’ve made it much more difficult for us to cycle out of retail and into students. And even in the multifamily development business, we’ve built and owned probably as many as 3000 units over the last six years. We’ve probably sold 70% of that already. With big infrastructure in place that was entrenched, I think it would have been much more difficult to sell out of those assets at what I think [crosstalk 00:45:08].
Kevin Choquette:
If you move away a little bit from kind of teams and that team building strategy and just to kind of the personal side, my view of life is kind of, if I can kind of win the day, I’ve got a much better chance of, if you will, winning it all. So [inaudible 00:45:34] series of kind of daily routines that I try to send myself through to kind of frame the day and my head, if you will, as it pertains to approaching it. And it seems like you’re very clear on what you have been doing for a long time. I wonder if you might have many daily routines that help you kind of focus and perform at the level you have.
Brian Shirken:
So before I get into that, what I would talk a little bit, not adapt, and I speak to a lot of young people that are in the real estate business or coming into the real estate business about their path. And I think most importantly is for people to try to identify their area of passion. Real estate is not a generic business. There are lots of different aspects, lots of in different property talks, lots of different geographies. And I think in order to be successful in this business, you need to find the areas of the business that you’re passionate about, and that can change over time. And I’ll come to your question in a minute.
We built a home in Park City about 12 years ago now and became very excited about the idea of creating exciting contemporary spaces and created a, what I call a home building company in Park City, which eventually became a condominium building company, which is now a hotel development company. And we have become very, I want to say, my wife and I become very passionate about the process of creating exciting places and spaces that people can experience in a way that affects the quality of their life when they’re in that space.
And so, what I’ve continued to do in this business is to find my areas of passion, and we’ve been fortunate enough to be able to evolve into creating projects that are very near and dear to us. In terms of daily routine, our routine changes depending on where we are. So we’re fortunate enough to be able to spend half of that job in Santa Monica and the other half in Park City. And a big part of our routine today revolves around the outdoors and spending a good amount of time outdoors, whether we’re skiing or snowshoeing or hiking or mountain biking.
And the one thing I’d add is that my daughter got us into meditation about a year ago, because that was the one error of our lives. We did not think we could control, which is the area of stress. And for stress management, I’d say that meditation has become very significant [crosstalk 00:48:27].
Kevin Choquette:
I have dabbled in it off and on throughout the years. And I actually just recently got turned on to another of these apps. It’s called Waking Up. Sam Harris is the guy who kind of is in there. And I have found it absolutely fantastic. So that’s great. Another point back, you mentioned kind of relationships and it’s all about the people, meaning the developer was the context, but the longer I’ve been in this business, the clearer it’s become to me that relationships are really essential.
I mean, whether it’s you and I having a conversation around a particular development opportunity, or any of the other dialogues in the industry, it seems that the people are the conduit through which all things travel, hopefully good things. But I’m curious what your view of relationships is and kind of their impacts on your business.
Brian Shirken:
So we really look at it as partnership, and whether it’s one of my business partners, who’s running one of our core business or one of our development partners. It’s all about the integrity of the person and the commitment to the relationship and the alignment of goals and values. It’s very difficult to have a great relationship if you don’t have shared values. So underlying all of these relationships of people who have shared values.
And I have found that by engaging in a community and philanthropically around areas that we’re passionate about, I have been able to develop relationships with people that share my values and that share my commitment to the various communities that I’m engaged in. So I think that’s what really underlies all of these relationships. And it also takes an investment. Relationships don’t just happen. They develop over the time, and it takes an investment of time to build the relationship. But it’s not difficult to do if you have common interests and you’re engaged in common aspects of either the industry or your community [crosstalk 00:50:45].
Kevin Choquette:
Yeah. Okay, this sounds a little 90 degree turn here but I’m curious about it because you are highly productive, and what my personal affliction is, I’m almost certainly kind of adult ADD. And I find it a both a gift and a challenge. But there’s a lot of noise, whether it’s the phone, the email, the kids, social media, meetings, the 12 applications I’ve got open on my desktop.
The more that step sort of shows up, the harder it is for me to find the time to have the kind of conversation we’re having right now to get my brain onto the kinds of thoughts that you just expressed as it pertains to having a passion, but also having the flexibility to let that evolve over time. I’m curious what you might see within the context of the digital ecosystem and the noise of our, if you will, kind of current today existence.
Brian Shirken:
So I tend to look at the technology a little differently. The way I’ll look at it is as a tool that provides me with the ability to live my life, where and how I want to live it, whether I’m on a golf course or on a ski mountain, I could still be checking emails. I could still be on a call. And I think there’s certain people that would prefer not to play golf with me because I might be checking my emails, but that’s what gives me the ability to get home at night and not have 200 emails waiting for me, and gives me the ability to spend time with my family or my kids or my friends. So I don’t look at it in a negative way.
I think I’ve been fortunate enough to be able to focus myself in the area of my strengths, which is really vision and strategy and team creation and team building. And I’ve been able to surround myself with really talented, capable, motivated people who are able to execute. So I actually find today that I have more flexibility with my time than I ever have.
Since my kids went to college, we’ve traveled a lot, and I’ve had the ability to run my businesses while still traveling. And I’m a big believer in purpose. We haven’t talked much about this, but I believe we’re put on this earth with a purpose and with the goal of accomplishing so much more than just personal success.
And so, I’ve engaged pretty significantly in community building, philanthropy, travel, personal development. And my goal is to leave this earth a better place than the one I found it in. So if you’re driven by purpose, I think that you start too at a certain point, find the things that are fulfilling and important and provide meaning. And I’m very focused on that [crosstalk 00:53:52].
Kevin Choquette:
Yeah, it comes through. It’s fantastic. Well, look, I don’t want to keep you too much longer, but maybe if … I mean, you have shared a lot of wisdom. I appreciate your insights and the candor of the exchange. If you have something, there’s probably been four or five of these already that you might want to share, business entrepreneurs, real estate entrepreneurs, maybe something that you wish you had learned sooner or thoughts on what it takes to be successful in this business that’s it kind of maybe close on that front. And I just thank you again for taking the time.
Brian Shirken:
So maybe I would go back to one of the comments I made earlier about the difficulty of getting out of your own way. If you spent too much time thinking about all of the things that can go wrong, you tend to get paralyzed in the decision-making process. So I think the real estate business, particularly when you’re looking to accomplish compelling returns and there’s a relatively significant amount of risk involved, you need to be comfortable with risk, and you just always need to ensure that you’re being compensated adequately for the risk you’re taking, given the fact that things can go wrong.
I’ll go back to the first deal I did where clearly our risk was not capital because we didn’t have any, but it was time. And had we known how much time or how much energy we’d have needed to go into the first project, we probably wouldn’t have done it. But a certain amount of ignorance or naivety is not necessarily a negative thing. Oftentimes, that’s the thing that enables us to accomplish what other people might’ve looked at as being impossible.
So I feel very strongly about the fact that the opportunity that this country delivers is incredible, whether you’re starting with everything or nothing. I really came here with nothing and this country has provided me with amazing opportunity access to capital markets and opportunities and amazingly talented people. And a lot of people would have said it was impossible, but I came here with amazing naivety, and probably never would have done half of the things that I’ve done if I’d listened to the [crosstalk 00:56:30] of the people.
Kevin Choquette:
Yeah. The ski analogy that you’re pulling up for me, one of my good buddies had said years ago, “Check myself so I don’t wreck myself.” It’s important to assess those risks before you send yourself off of some slope that’s destined to have qualities that you can’t perceive before you head down it.
But at the end of the day, I think you’re right. You got to send it. If you’ve got it in, you’ve got the risk tolerance, is spot on. So Brian, thank you again. I really appreciate you taking the time to chat with us. Your website for Mountain Pacific Opportunity Partners. Do you want to share that with listeners?
Brian Shirken:
Yeah. So it is www … That’s a very good question [crosstalk 00:57:18].
Kevin Choquette:
I think it’s MTNPAC.com, is that right?
Brian Shirken:
I think it’s [crosstalk 00:57:23].
Kevin Choquette:
Maybe it’s [crosstalk 00:57:26]. Yeah. But I’m sure Google, you can find it, Mountain Pacific Opportunity Partners. And through the website, I think folks could get ahold of you if they were so inclined. Correct [crosstalk 00:57:36] Brian, thank you again. Really appreciate the time, and look forward to catching up.
Brian Shirken:
Great. Thank you very much, Kevin.
