Automating Credit Underwriting with Josh Feinberg


Justin welcomes Josh Feinberg, the CEO and Co-Founder of Otso. Josh discusses Otso’s underwriting and risk management process. Otso uses technology and multi-year bonds to assess the risk of potential tenants for industrial property and helps building owners make informed decisions. Tenants contribute to the process by providing their banking and payment history, which is used to forecast trends and rate risk.


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  • Josh Feinberg’s background in commercial real estate – 2:00
  • Creating Otso to help landlords efficiently assess the credit worthiness of tenants – 4:20
  • Automated engine to track tenants’ credit and financial trends – 7:15
  • Report of tenant’s credit risk – 11:00
  • Using AI to help normalize information – 14:30
  • Recommendation of lease security and bond option –17:47
  • Otso multi-year bond – 19:26
  • Underwriting Report fee and 24-hour turnaround – 29:43
  • Two fundamental challenges in commercial real estate – 32:20
  • A great time to operationalize your assets – 36:14


Episode Resources

Connect with Josh Feinberg

Connect with Justin Smith

Justin Smith: Hi everybody. Welcome to the Industrial Insights Podcast. We have Josh Feinberg of Otso today. Josh is awesome in my quest to figure out a better way to underwrite credit and to learn more of what makes acceptable risk for credit for when you’re looking at tenants for industrial property and which ones the best one to pick. Josh has a different approach. He’s using technology and he is having tenants help pay for this and help go through their banks and history of payments to forecast trends to help rate risk and to help building owners underwrite property based on the risk of the tenants that are in place. So this is a challenge that Josh has stepped up to and I hope you enjoy.

Justin Smith: I found you, or you found me, maybe in my quest for figuring out how to be a better resource for landlords for underwriting credit. And me and writing books is the intellectual curiosity to try to figure out how to market myself and learn more all at the same time, above and beyond just normal experience. And nothing like putting out a book for landlords to try and do better, right? And so I found this whole credit underwriting, there’s a big gap where when I talked with chief investment officers and asset managers and asked them what’s so important to you? And everyone’s like, credit, credit,credit. And then what do you do to make sure you’re doing a fantastic job with credit? And everybody says, that’s not my job that’s someone else’s. I don’t know but it’s really important. And no harm, no foul. Life is good. We’re all trying to do the best that we can. But so I’m so glad that you’re out there in this credit world with us on this journey. So maybe you could start a little bit with just, you started like me, you’re a broker, and then you had two nickels to rub together and started investing in deals with your clients, is of how I understood that. Can you tell me a little bit about that?

Josh Feinberg: Yeah, absolutely. I’m definitely from the brokerage world. I started when I was 20 years old, doing what everybody else does, which was making a lot of cold calls. On the tenant reps’ side, I spent five years on the occupier side just learning the market. I was very fortunate to have two great mentors here in Texas. I spent a lot of time learning from, two in particular. One is named Herb Jackson. He is no longer with us, but he’s the Jackson in Jackson & Cooksey, if anybody’s ever heard of them. And then Jeff Beard, who’s with SVN now, but his company here locally, who was the first to bring me on. I was very fortunate cause they’re two to very different people. One, Jeff is really from an appraisal background, super good with numbers. really professional and polished. he’s the science piece of the business. And then Herb was much more the art side of the business. he was a great speaker, had great communication skills, and really understand how to close gaps in deals.

Josh Feinberg: I got addicted to the business early. I really enjoy what our business provides, which is just creation. I love the concept of we take a piece of land, a building is envisioned, tenants come and occupy it. All those jobs are created and then people occupy those buildings for a long period of time. It’s really satisfying. I think it’s unique. There’s been a lot of businesses that do that. So I spent five years doing that. The last 10 of my careers was mostly vertical development. We’d go find that piece of land for ourselves at the partnership level. And that’s really where Otso came when I took the brokerage hat off, I put the owner hat on. I was the GP at the time, and it was fascinating to understand the lack of resources as you just described. Not only for institutional, but for small partnerships like us with 30 or 40 year assets. It was really difficult for me to assess the credit worthiness of these tenants. It was a challenge and I think as a broker we’re facilitators for that. We’re going to provide what our clients have. And if you’re a landlord rep, you’re sort of presenting it to your client and saying, this is what we’ve been able to collect to your point, it’s not their job. Somebody at the asset management level or somebody at the ownership level is making a decision. They’re probably not a fully trained credit analyst. So if they don’t find something super-

Justin Smith: 99.9% chance.

Josh Feinberg: Yeah. Look, there’s no rocket science. We’re trying to lease these buildings. We’re trying to get rent. That’s how our buildings were valued. But to your point, risk equals rate. and unfortunately that leads to mistakes from time to time. And so we as the partnership experienced several defaults. If we had a hundred something tenants, I’d see 5, 6, 7 a year, and our partners internally said, we need to do better. And so that was really what prompted Otso. Otso, number one, first and foremost was a landlord product to build a system where landlords can quickly and efficiently assess the credit worthiness, especially with private companies, but really small to midsize businesses and of course we handle public now too. But that was really the idea is landlords need tools that really assess tenants for purposes of commercial real estate leasing. We compare things with economics and benchmarks and things of that nature. And then we have an alternative lease security solution, which is really for ourselves but now we offer it to landlords across the country. Where we replace letters of credit in cash deposits with a rated multi-year bond. The idea being the tenant keeps their money and landlord gets significantly more coverage against default in terms of cash value.

Justin Smith: Yeah, probably blows everybody’s mind up thinking I don’t want the cash in my hand. I want to bond instead. I’d love to finish with that if that’s okay. We’ll stick on credit and then, we can blow people’s mind if they’re ready to learn more about it. So the credit review journey, so I’m writing a book and it’s all about industrial landlord leasing. And so it could be a thousand feet, 10,000 feet, a hundred thousand feet, or a million feet. And the journey of renewing tenants, which was a huge thing for 1,500,000 foot units over this past cycle. and then when your building goes vacant and what do you need to do to let it up and have it be rent ready and to pick a brokerage team and marketing and leafing and proposals. So you get proposals. Now maybe you have competitive bidding and you’re trying to figure out who do I pick, what do I offer them? Everything has this line number eight, nine or 10 that says subject to financials. And then, hold up, let’s stop the show. Let’s reel all those in and then we’ll figure out either rate or securitization. And tell me how you come into that, because I found your approach was so unique of like, Rocket mortgage now you connect your bank accounts, right? And there’s other like a rocket money. You connect your bank accounts and you people are starting to feel more confident in doing that. That there’s nothing nefarious there and that can be another way to automate business and underwriting and a sharing of credit and background and statements and all of that. Maybe you can get into that a little bit. That’s something that was unique to you. Yeah, that was intriguing.

Josh Feinberg: The first challenge with credit is collection and there’s two really many challenges within that is most landlords are dependent upon their third party teams for collection of financial information. And to the brokerage point, that’s not their job. They’re collecting what their clients have. And if you’re a small or mid-size company, to put it politely you may have your information in a variety of formats. And so maybe it’s an Excel sheet, maybe it’s a personal financial, maybe the landlord has an application they have them fill out which is very manual. We see that from time to time. The bottom line is there’s not really a standardized system, unlike a public company where you can say, hey, go to Yahoo Finance and Google by 10 Q. That stuff’s not hard. It’s the 98% of tenants that aren’t publicly traded, that becomes quite difficult. Number one is landlords want as much information as they can get, but also, they want information that they can rely upon. The issue is with small and midsize companies is that information is relatively unaudited, right? They’re not hiring BDO or Deloitte to go through their statements. And so, landlords are reliance upon that information. It’s not standardized, it’s disaggregated. And that leads to human error, whether it’s a mistake in reading them, whether it’s a lack of understanding. Or just from a collection standpoint, maybe they’re really good at it, but maybe they have too much to do. And we hear that all the time is, the leasing team sends me 15 of these a week and it takes me seven or eight hours to get through each one. I’m out of time and it’s a real frustration point I think, for landlords because you want to move people through that cycle quickly. If there’s interest, to your point, if there’s an LOI moving and in the brokerage world that’s awesome. We’re pushing paper, we’re getting things done, and this becomes a real friction.

Justin Smith: I could imagine all the shallow bay owners that own multi-tenant projects are so much value in a 50 or a hundred tenant business park, but they say that there’s the juices and worth the squeeze because there’s so much work to do that’s not adding value. So this is a fantastic way for people who own to do a better job.

Josh Feinberg: Yeah, so that’s really the first thing we build is a collection engine. It was a way for landlords to, essentially, they make a request where they enter things like their deal economics. They enter information on the asset, they enter information to the tenant and say, they get two choices. One, if they want us to do the collection from the tenant, I’ll get them that in a second. We’ll do it. And we have a system that feels like Rocket Mortgage. If they say, hey, this tenant actually provided me with automated financials, that tenant’s not going to connect their back account because they’re a big company. Cool, they can just upload those financials and it’s a lot easier for us to do that. And we’ll do the analysis either way. Our automated engine does require that the tenant connect their bank account and the reason we do that is because a lot of leasing should be about liquidity in our opinion, right. Balance sheets are great, fixed assets with equipment especially in industrial, they probably owe somebody else money for that. And so, the landlord’s not going to get a great opportunity.

Justin Smith: B of A is not going to pay your rent.

Josh Feinberg: Yeah, if they experience a default, then they’re probably not going to get much out of the equipment. So really, it’s about liquid assets. It’s not about stockholder equity and things of that nature. And so while we like balance sheets too, and we like PNLs, it’s mostly about if there was a problem. How can they support rent? How long can they support rent based on their current cash flow? And so that’s where the bank account’s really helpful because we can pull in basically every transaction that bank account has done or several bank accounts over the past two years on a daily basis as I’m talking, tens of thousands of transactions. Then you’re able to say, hey, here’s the inflows, here’s the outflows, here’s the affidavit of the balances, and we can weight them and score them. That combined with a deep credit profile that gives the landlord a really good sense of what they really want to know.

Justin Smith: Josh, I’m not giving you access to my bank accounts. No way. That’s crazy. Why would I do that? You could imagine unsophisticated people that’s a common thing that people must get comfortable with.

Josh Feinberg: Sure. And so we use a system called PLAID, which if you’ve ever applied for a loan anywhere, anytime they build the banking APIs. And so it’s military grade encryption. We’re happy to provide security and things of that nature, but we use a highly secure system that’s not dependent upon us to collect that information, it is PLAID. It’s extremely difficult to get approved for PLAID, just like it’s extremely difficult to get approved for some of these credit systems. You have to meet a lot of standards and requirements. as far as the tech goes, just from a software perspective not to bore everybody, but we do give them an out. And so if they say, hey, I just won’t connect my bank account, we will collect the information a different way and we can do that manually. Because you’re right, there’ll be one out of 10 or two out of 20 that’ll say, Hey, I’m just not comfortable with this process. It’s our job to get their information anyway and so we’ll collect it a different way.

Justin Smith: Awesome. And then connected, life is good, we’re underwriting and then, you’ve gone through the collection engine. What happens next?

Josh Feinberg: Yeah, so at that point it’s about decisioning and so this is really what’s important for landlords to understand is. It’s about benchmarking the tenant against your actual deal. There’s one thing saying a tenant is credit worthy, but is it credit worthy in comparison to what? Really, what we want to understand is you’re going to write a big fat check for tenant improvement allowance. You’re going to write a big fat check for commission, which is worthy and then you’re going to write probably, not a check, but you’re going to give the tenant some sort of free rent period. Those are your out of pocket capital costs. If you were to experience a default, let’s say it’s a 10 year deal. If you’re going to experience a default in the first couple of years, there’s no chance you’re breaking even if you’re writing a check for all three of those things. In fact, most deals we save from the institutional. Nuveen, PGIM, Hines, and et cetera. They’re not breaking even till like month 40, month 50 in some of these 10 or 15 year leases because of the relatively high costs, which we’ve all seen these past couple years in TI and commission don’t change. But TI is extremely expensive and that’s the big concern is I spent a ton of money to put this tenant in and now I got to spend that same money or more if they default to put next guy in, now we’re behind the eight ball and the assets struggling, et cetera, et cetera.

Justin Smith: I could imagine like medical office landlords too, right? When you think of like in Highrise office and all of like in the more intensive asset classes.

Josh Feinberg: Life science is a killer because they’ll put 250 bucks a foot into a deal, and the rents are very high. But it’s all dependent upon the rent coming all the way through for all 10 years. And if there’s an issue there, that’s where the landlord’s really got to make a decision because they may be borrowing money from their lender just to make the deal. And again, when you’re a fund, if you’re a Nuveen or Hines or somebody like that, these things hurt. But if you’re a small, mid-size partnership and you own 10 buildings or 20 buildings, one of these deals it could crush you. It could crush the entire house.

Justin Smith: I have a life science client for you afterwards. I’ll connect you with, that’s like this profile.

Josh Feinberg: Yeah, and it’s just difficult for the landlords to know, like they don’t understand the tenant’s business. And so what our job is to normalize information after we collect it and then distribute that to the landlord in a simple format that they’re able to say this is a good bet or a bad bet. Ultimately, it’s always a landlord’s decision, right. They’re the ones who are going to have to say, it’s worth writing a check for this tenant and I think that they’re a good bet. I think they’re going to be able to support rent over the time, but we try to give them as much information in relatively quick fashion. Most underwriting, when we did a big study on this, basically took two to three weeks for most institutions to turn around a decision that frustrates brokers, it frustrates tenants, it frustrates the landlord side. It’s just too slow. We turn around things in 24 hours and give them a gut check. If there’s more information that needs to be collected, we’ll tell them, look, we would look at this. Or these small deals a lot of time it’s personal, right. If you’re a new industrial tenant, you have two years in business and you’re paying yourself out of the 1099. You are the business. And so yeah, that’s when we get into the back account, very important. And also some personal stuff. They have lawsuits, fraud, judgment. This is the type of stuff as the landlord, you’ve got to know because in the prelease you’ve got some options. You can get more lease security. Yeah, you can tell the tenant you want to do a shorter deal or put less TI in. But both parties, once you sign a lease, there aren’t a lot of modifications that can occur after the fact.

Justin Smith: The cake is bake. No doubt about it. So that’s an awful lot of information in a very short period of time. And then to glean what’s important and material and then to size it up, what does that mean to your deal and the risk of your deal. And that tells me there’s a whole lot of computing power going on. Where does that go? And where does that go wrong in terms of all of that goes in the system and then the systems making meaning of it are giving you what you need for you to make meaning of it. This is like Chat GPT of credit.

Josh Feinberg: AI is super powerful, and we actually do use Chat GPT to normalize information. And so this is getting very nerdy. You’ll get a lot of raw data from these polls, and they won’t be in tabular form, or they won’t be in a form that you and I would be able to read very simply. AI and machine learning is very good at saying, Hey, here’s a bucket of information. Let’s pump that into a table. And so for like financial statements, we actually have a, it’s called an OCR, obstacle care recognition. We’ll pull out stuff from balance sheets because we get a lot of pds. That information goes in another bucket, which then goes to the AI. The AI reads it and says, here’s what you need to know in a format that you can actually do something with. That being said, it’s not a hundred percent accurate, so we use a human in the loop, which means that everything, the AI does, even though it’s super good at it, it makes our lives way faster and easier. We don’t trust a thousand percent. We have a human being look at it and say, this is correct. This looks good, this doesn’t look right. This is an error, et cetera, et cetera. Before anything goes to the client, because the last thing we want to do is provide a report that’s based on some AI making a mistake or pulling out the wrong piece of information. And I think that’s where we’re headed with this stuff is AI is good and it’s a tool. But it’s 10 or 20%. It’s not a hundred percent in terms of how much of what you should be using it for. It’s an amplification but that’s it. It cannot be a replacement for what human beings do, especially in our business or your business.

Josh Feinberg: Yeah. I love that. Let’s talk about making everyone more powerful and more capable. so what shows up in the report? So you got 24 hours and then you get another 60 page PDF or it’s a one pager with a flashing red light or what’s the deliverable? You get a six page report. 50 is too long and one’s not long enough. So first and foremost, you need information on the business. So, you have your SIC code, your ZS codes, your BIN numbers, which are a bunch of acronyms to say who’s who they are. You get a deep credit profile on their payment trends and so think days behind terms. And this is especially impactful for drug companies, industrial tenants, groups that use a lot of vendors and pay a lot of vendors. It’s very important to understand. And the landlord’s a vendor. That’s really what it is. They’re another vendor they have to pay. And so if we see, a typical tenant’s going to pay within 30 days for most vendors. If we see 60, we go maybe that’s a cash flow strategy. If we see 90, that means that they’re three months behind on an average basis, across all vendors. That’s not good. That means that they’re already not paying bills on time, and we weigh this. And if they don’t have a ton of credit, we’re not going to kill their score. But we’re going to tell the landlord, look they don’t have a ton of credit but the credits that they do have is not great, and here’s why. And so that allows them to understand payment trends are very important. Of course we’re looking for bankruptcies, judgments, lawsuits, personal lawsuits, things of that nature. and then the financials are really key. It’s what does their quick ratio look like? What are their assets, their liabilities, their, debt ratios? Are the trends positive from this year to that year? What does their liquidity look like? What’s their average daily balance? What’s their cash to rent? How many months of rent do they keep on hand at any given time? And that way that gives you a really good sense as a landlord of, look they carry a lot of cash. They have 10 years of rent on hand. That’s awesome. Doesn’t mean it’s all for you, but it means that they can support rent for a long period of time. I.e. if they have a problem, there’s a bucket for you to go get something from. Those are the types of things that are drawn out in this report.

Josh Feinberg: The last thing we do is we make a recommendation on lease security. And this is really important. It’s based on risk. And so landlords have asked us a lot over the past couple of years, what should I collect? And it’s not about what they can collect. That’s a different problem. It’s what should they collect? That’s number one first. And so we take that risk and say, hey, here’s the percentage based on the deal costs that you’re spending. You’re spending a million dollars to put this tenant in and the rent’s 5 million over the next five years, and their credit is X. This is what we recommend you collect based on that scale. We give them a little range. We say, here’s the minimum don’t get less than this. Here’s the max, if you want to push it and here’s the midpoint and that’s for cash. Then we obviously, we have our bond, and we say if you want a bond, they’re approved here’s what it would cost. Pick your poison.

Justin Smith: I’m assuming part of the bond idea is also that a lot of your analysis probably came up with you should be collecting more than the market will allow you collect if you want to adequately protect yourself. And so you’re like, okay, there’s a rub there.

Josh Feinberg: That’s the biggest issue is yeah, when you get down to brass tax, it costs the landlord on an average basis a lot more money than they can collect in lease security. And look, that’s the business. The landlords have to take some risk here. You’re not going to get five years to rent up front. But let’s say you’re putting in 20% of the rent over the term to get them in. That’s not uncommon, like you’re going to spend a million dollars to get $5 million. That is not uncommon at all for a landlord. That being said, that means that we got to have a year worth of rent just to protect ourselves. You’re not going to get that in cash in most markets. New York, LA, San Francisco aside, but you asked for that in Houston, Texas. They’ll say, cool. Your building looks exactly like that one. I’ll walk to that one.

Justin Smith: I’ll see you later.

Josh Feinberg: Correct. So what the bond allows them to do because we have the bond of the tenant not having to put the money up, is collect that six, eight to nine months of rent, which gives them a lot of different breakeven point than collecting a month or two.

Justin Smith: Yeah, let’s get into the bond. That’s you’re paying upfront for a security that gives you promise of payment should your tenant default on you. How does the ratio of what you pay to what you get compared to a traditional security deposit?

Josh Feinberg: Yeah, so it’s actually a lot easier. And so the tenant actually pays for it because they want the benefit of the liquidity and so we’re an option. And so let’s say that the landlord’s going to spend a hundred thousand dollars to put a tenant in and the rent is $20,000 a month. And they want a hundred thousand dollars, the tenant says no. So that’s very common. What the typical deal is the landlord will settle for 20 or $30,000 security deposit in cash, meaning that they’ve got an unsecured risk of $70,000 and the tenant didn’t really want to put the 20 or $30,000 up in the first place. If you think about it from a business perspective, and you work with this all the time, there’s nothing more wasteful for a tenant than locking up money. It’s 0% interest, especially in the current environment. For I don’t know, 5, 10, 15 years. Most tenants have an annual return that they put on their cash, some internal rate of return. Maybe it’s 20%. So they know for sure if they lock up money for five years, they’re guaranteed to lose a hundred percent because it’s a lack of opportunity to capital.

Justin Smith: There’s no upside.

Josh Feinberg: Correct. They want to invest that. They want to hire, they want to build, they want to grow. That’s what money should be used for. For landlords, it’s the opposite problem is they got to have something if there’s a problem. And that honestly is what insurance is for. That’s why insurance was created. It was created to say, hey, if something goes wrong here’s a big bucket of cash that you can draw upon based on the risk profile you will pay X. So for a hundred thousand dollars bond, in my example, the tenant would pay something like $500 a month in additional rent. There’s no lien, there’s no loan, and the idea is that they get to keep that 20 or $30,000 they would normally put up. Or if the landlord was adamant, they get to keep a hundred thousand dollars in their pocket and the landlords now got the $100,000 they want, it’s a two and a half billion dollar insurer that’s backing the policy. They know that if there’s a problem, they get paid and it functions a lot in looks and feels like a synthetic letter of credit. And that’s what’s really important here is cash actually isn’t great for the landlord because if the tenant goes bankrupt, you can’t even get it. The trustee will keep it, it just goes into a bucket for the trustee. Whereas with letters of credit in our product it’s a third party and so you get paid and you go and mitigate and do the rest of what you got to do. That’s why the product’s popular.

Justin Smith: I learned this point on my first book. I screwed up on that one where cash in hand, cash is king and then I had found so many people stayed away from letters of credit, just a too much hassle and not enough people wanting to play ball with that. And then, I just wasn’t seeing a part of where that was the more prevalent and so it’s great to have even a third option.

Josh Feinberg: Yeah, the tenants, honestly, they hate letters of credit because they’re paying to lock their own money up. And honestly it was funny is we talked to JP Morgan and some of these huge banks, they don’t really like them either. It’s a waste of capital for them because it’s locked, they can’t loan it to anybody else. It’s stuck in this account that they have to renew every year. It’s really a product that exists out of a problem that hasn’t been solved effectively. We feel like the market is leaning towards these synthetic financial instruments because they function almost as a hybrid of banking and insurance, which is where a lot of finance is going now.

Justin Smith: So tell me about the mechanics of the bond in the sense. So the tenant has an option. You can, pay a small amount every month rather than a big amount over time and hope you get it back or think you may and lock up all that money. And then, instead of having an instrument with your bank or cash in your own account that can’t be protected in the sake of bankruptcy. Time goes by and let’s say the tenant stops paying is something that could go wrong that you have to figure out and make better again. Or they default and you have a bankruptcy event. Or they default on the whole lease, but they default on some contractual part of it. How does that then work of you’re the landlord, the tenants paid for this, and now you get into your first wrinkle or two?

Josh Feinberg: Sure. So the landlord makes a claim. We pay within 30 days or less, and so we function a lot like a letter of credit in that standpoint, the idea being that our assumption is the landlord is correct and so we don’t ask the tenant. The landlord just has to provide the documentation their lease requires. And typically there’s a letter that has to go out for monetary default and there’s a cure period. Then maybe another letter, maybe that process takes 15 or 16 days. If that 16 day mark, the landlord can make a claim to us. We’ll pay that landlord and then we go seek restitution directly from the tenants. If that tenant has money, we’ll get it. Our partners have been suing people for a hundred years. They’re good at it. Much better than landlords. And most landlords will tell you this too, it’s like they’ll collect these personal guarantees or a corporate guarantee, whatever it is. They’re very hard to enforce and they’re very expensive. Let’s say you own a $5 million multi-tenant industrial building in every tenant’s 5,000 or 10,000 square feet, if one of them blows out are you going to go spend 50 grand to go collect 40? Probably not. And that’s why getting it right on the front end is so much more important. Your balance sheet as a landlord, this is a tangent, but I really feel like buildings should be looked at as debt. And the underlying credit within these buildings should make up the risk profile, i.e. the debt rating, the shadow rating essentially, of the building itself. It’s a much better way to look at the asset than, hey, here’s how much rent and here’s our cap rate. That’s very point and shoot, we’re great at saying the anchor is good and that’s 50% of the building. We’re really bad at the other 50%. And that’s what we’ve got to get better at as an industry because that risk is so important. We do these acquisition reports and honestly, it’s hilarious because we’ll have somebody put a building under contract for $15 million. And they’ll tell us it’s a seven count. We’ll go great, okay send me the rent roll and we’ll do the rent roll. We’ll run through it, and we’ll say, all right, 90% of these tenants are great, but this one is 10% of the building and they have 120 days behind on vendor payments, and they have a bad credit profile, whatever it may be. And we will actually tell them, we don’t think you can collect this rent for the life of the lease. They’re clearly not paying their other bills. And so that discounts the NOI and when you discount the NOI, it affects the value. And if you affect the value, it affects the cap rate. And all this stuff is very, it’s not rocket science, but it allows you to go am I overpaying for this asset? You think the lender would care and you think the buyer would care. And so just like we get a title report and an environmental report. One of the very first things we should be doing as an industry is assessing the credit worthiness of the underlying tenants in a building so we can test the veracity of that income stream that is so important to me. We still buy a property as a partnership. I will not buy a property anymore without that information.

Justin Smith: It’s really the quality. Yeah, and right now, I think saying all quality is the same or not all.

Josh Feinberg: We’ll re-lease it. We’ll treat it like hospitality. We go, oh, somebody else will lease it. Yeah, but it costs money. I got to go spend money to put somebody else in. And I think our industry suffers from what a lot of finance suffers from, which is we use other people’s money, whether it be a lender or an investor. And I’m not saying we’re actively, not making these decisions in a malicious way, but these tools didn’t exist. Now they do and we have a responsibility, I think as an industry to do better when we buy things and when we make leasing decisions. And that’s a long story tangent, but that’s how I feel about it.

Justin Smith: Yeah. That’s what leads to you have a product for that, right. Is a natural evolution of, hey, these are the problems in our industry and in terms of credit underwriting and analysis and so why not have a solution for that as well. If we finished the bond for a moment. Insurance companies have carved outs and have all sorts of reasons why they’re not going to pay. What is the carve out that could be typical or something that someone would want to be more familiar with that doesn’t meet the eye of its initial like a broad overview concept?

Josh Feinberg: Yeah, so essentially for landlords, there’s really no way the insurer can deny a claim unless gross negligence or fraud is committed by the landlord. The landlord’s the beneficiary here and so our assumption is that they’re correct when they’re making a claim, meaning that they’re going to get paid and then the tenant’s going to go get sued. If throughout that process the landlord’s already been paid, we find out that it turns out that there’s something untoward occurring, that will be a problem for the landlord. Now they’ll already have been paid I want to be clear about that, but the insurer would have some recourse because of for lack of a better term, fraud that had been committed. Beyond that, it looks like a letter of credit for the same reason that if a landlord would make a fraudulent claim to a bank and take tenant money, they would be under the same provisions. Our ours functions very similarly to that.

Justin Smith: Okay, less to worry about that there. Yeah, it’s the tenant that’s causing the issue and is the bad actor in the default sense.

Josh Feinberg: Yeah, and the tenant doesn’t get a chance to say, hey, they didn’t fix this window and that’s why I didn’t pay rent. We don’t care about that. We’ve made the payment to the landlord, and we say, The landlord’s, right? Your lease says this. We don’t get into the practicalities, but I will say this, most landlords are smart, and they don’t want to kick tenants out. And so that’s good for my business. But it’s expensive to re tenant to space. There are practical reasons why landlords, I think are trying to work things out with tenants. We’ve paid plenty claims, but we rarely get to a point where the landlord hasn’t tried, at least to work it out with the tenant. We don’t see defaults. It’s day one and they missed rent, and somebody sends us a letter. That doesn’t happen. What happens is the landlord’s been trying to work with them for six months and it just isn’t working and that’s fair. Just like you would recapture their deposit. You should make a claim to us.

Justin Smith: Yeah. So it works on the smallest and the small and the medium. What’s the biggest you could imagine?

Josh Feinberg: Yeah, we got $5 million bonds in places like New York, and we’ve got$2,000 bonds in places like Central Texas. We do any and all my insurer loves the small ones, obviously diversity and as many as we can. That being said, the big ones are great too because the quality of the tendency is so great. And that one’s been really interesting is for landlords, first and foremost, it’s about underwriting. Can we make better decisions as an industry? because the general or thumb for us is everybody gets underwritten, but not everybody gets a bond. That’s why I mentioned the bond. Second, because the underwriting is really important. Like whatever the deal you work out with, the tenant is up to the landlord and the tenant to figure it out with their respective brokerage teams. It’s our job just to be a facilitator of that process. We’ve got your underwriting report and we want to use this alternative solution, great. But the first and foremost thing we should do is make sure it’s worth everybody’s time to even consider the deal.

Justin Smith: And price of the underwriting report is? How does that work?

Josh Feinberg: Yeah, so we charge $299, which we feel like is a pretty fair price for the report that we provide. At volume, obviously they get cheaper and so we’ve got groups like Nuveen that use us now that are doing multiple reports every week and they obviously pay a lower price. So we’re happy to talk to landlords individually. Our clients are typically asset management groups and institutional landlords. We’re underwriting for them at scale. we just bolt on our program and they’re able to make a request in our system. We go collect the financials and 24 hours later they’ve got themselves a report and they thank us and go do their deal or don’t. And that’s how we leave it.

Josh Feinberg: Yeah, you’re going to be a very successful man. When you think of the institutions that are in our world are growing by leaps and bounds. There’s so much opportunity for scale there that this is a scalable solution. Yeah, fantastic. Just like title reports and environmental reports, like these financial reports should be a critical piece in our opinion of how not only current owners, but future owners look at their real estate and lenders too. The funny thing is lenders own more than the buyer.

Justin Smith: I was thinking about lenders.

Josh Feinberg: We’re putting 30% down on our assets. I’m not sure what you guys are doing, but like that means the lender owns 70 they should care about it. And it’s funny, the lender goes, we get the due diligence package and that’s where we leave it. They’re not doing a ton of this either, believe it or not.

Justin Smith: I’ve seen enough to believe it.

Josh Feinberg: And I don’t blame them. We all want to make the deal, but we’ve got a responsibility to our investors and our lenders and the people we partner with to do the best job we can. Brokers I think, really embody that process. They do a great job of providing solutions to their clients. And that’s why I love talking to folks like you.

Justin Smith: I look at it as it was once an alternative asset class and it is no longer, and as it becomes more mainstream there will be more need for more transparency and more apples to apples comparison. And this is another sign of progress as us getting there, as being a mainstream asset class for sure. Fantastic, I love what you’re doing. I got two questions for you to close it up because this is fascinating stuff. This is where we’re at now in the industry, what’s next? What’s on the horizon that you could imagine? As we add, we did not get into any of these underwriting buildings and what that looks like and all the gory details. What else can you see out there on the horizon of how we use AI and credit and assets and do better.

Josh Feinberg: So I’m really fortunate one of our investors is Second Century Ventures, which is the National Association of Realtors, institutional investment arm. And so we get access to a lot of the new technology that’s coming out. We see a lot of companies and our cohorts that are doing different things. Just being in that environment, we get to see a lot of solutions that are very forward thinking. I think there’s two things, fundamental challenges in the industry are going to have to solve here the next five to 10 years. I don’t know if it gets solved, but in residential there’s an MLS and there’s not one in commercial. And this is not for you and I to solve, but at some point, there’s going to be enough small businesses that complain about not having what the average price is for a building in their market, that there’s going to need to be some sort of solution that is provided. So I don’t want to get into the CoStar battle, but that is a massive pain point that somebody’s going to have to solve. I do think it will take federal intervention to do it just like the MLS required, at the residential level. I don’t think brokers should be afraid of it. Brokers do a lot more than quoting prices, but it is necessary, I think to your point, to close that gap in transparency that’s coming. I don’t know what it looks like, but that is a huge topic of conversation. It’s a national realtor level. And again, commercials 10% of their customer base or their user base but it’s 50% of the money because the quality of the value. At some point there’s going to need to be a change there.

Josh Feinberg: In terms of technology and where we think things are headed, I do think what we’re going to see is assets being put into a more liquid style of ownership. If you think of the way assets are owned now. We go with a lawyer, we’ll put together an LLC or an LP, and then everything’s written down and if you want to get out that partner, It’s extremely difficult. It’s not going to happen. Somebody’s going to have to buy you out and it’s a friend or a partner or an investor, whatever it is. It’s slow. Somebody has to go pay for evaluation from somebody else, that doesn’t work.

Justin Smith: And a steep discount.

Josh Feinberg: Yeah, exactly. But stocks and bonds and even residential real estate, you’re starting to see it as well. With REITs, they’re putting together classes of property allowed for liquid in and out of investments and things of that nature. I think we’re going to see some of that technology get poured into small to mid-size partnerships. Maybe mid-size first, but the idea of being that a group of investors will have what’s essentially an exchange between all their assets. And be able to say, hey, I’m the merchant and when it gets to this value, I’m moving out of this property class into this one and this investor’s going to step in, and it happens automatically. And so these are the types of things that I think where we’re headed. Where we are going to have much more liquid sales of ownership. And again, everything registered and on the up and up. But in 10 years, I would be surprised if we have to have a lot of LPs and LLCs that handwritten. That’s a major pain point for a lot of investors as well. It’s relatively illiquid when you invest in a commercial real estate asset. Anybody who solves that liquidity portion, is going to be a very wealthy person.

Justin Smith: Yeah, that’s one of the first five things you learn about real estate was like the illiquidity part. And now that it’s more mainstream maybe there’s got to be a liquidity solution there.

Josh Feinberg: Yeah, and the lenders have it. The lenders can go to the Fed and trade things in and out. The banks are able to do this. And so the question is, can we solve that for the equity side? It’s possible. We don’t want to give to the blockchain stuff, but that’s probably where it gets solved in a liquid.

Justin Smith: Yeah, it definitely is technology’s going to play a big role in that for the heavy lifting and for some of the mechanics of it. And then, I’m going to find you a deal, Josh. I come across a lot of deals. I know you do too. So what’s a Josh deal? What do we bring you for the Feinberg Family Trust.

Josh Feinberg: I like multi-tenant assets. I like industrial and flex. I like stuff that’s 50 50 think e-commerce, landscaping companies. I like local tenants. The stuff that’s close to us. I’m in central Texas now. So Houston, Austin, Dallas. I love properties like that because I think that they’re low ownership expenses from an expense load standpoint. They’re easy to finance. But before I buy anything, interest rates got to go down. That’s a huge part of our business. And I don’t know if you’re seeing this too, but until interest rate’s kind of correct, I’m probably not buying. Great time to sell though.

Justin Smith: Yeah, it’s the time right now and what do you do with this time other than manage what you’ve got and improve what you’ve got and lower your expenses if you can.

Josh Feinberg: It’s a great time to operationalize your assets. And this is what I tell owners every day, which is now’s a great time if you weren’t looking at solutions. Not necessarily just us, but if you haven’t looked at like operating systems for properties or investor management solutions or at least your brokerage team using like interesting comp data. I’m not sure you guys at Lee have a ton of technology on hand. Now’s the time to ask those questions because we’re not looking at 50 deals a month. Lean on your broker, they’ll tell you, they see it. And so now’s the time to talk to your advisory team. It’s not just, hey, what can I buy next? It’s how can I improve what I already own?

Justin Smith: Yeah. Amen. I love it. That’s a great one. Josh, I appreciate you and your time and, I hope that did a justice to help people understand what you’ve got. And it’s so intriguing because there’s such a small sliver of the industry that’s working at this level of providing solutions and providing liquidity. So I really appreciate that you’re out there doing it and I look forward to working with you.

Josh Feinberg: Thank you so much. I’m excited about the book. Talk soon.