Justin interviewed John Meek of Ranch Harbor. They discussed how industrial and multi-family real estate operators and syndicators rely on John’s team to source limited partner capital, to help underwrite and test business plan assumptions, to co-GP investments, manage assets, and source debt financing.

Key Takeaways:

• Having a few brokers, creating good relationships with them, and then performing when they dig up what you wanted is kind of the way to find really good deals
• Ranch Harbor’s niche is sub-institutional limited partner capital. Industrial’s such a hot market that even some of the bigger institutional guys are coming down into that sum $10 million range.
• A lot of success in today’s market is being able to execute on business plans that aren’t straight down the fairway necessarily
• Capital flexibility is key right now. Both equity and debt, for industrial, it’s been a lot trickier lately than people assume it is. Everyone wants it to be multifamily and industrial, which are the two hottest products, but there’s a real difference in what kind of time type of financing you can get for both, and you just have to be super aware when underwriting with that kind of knowledge.
• Ranch Harbor excels in having a great back office for asset management that they and their partners can rely on. That can help with accounting as well when needed. They can provide support to some of the smaller groups looking to grow and that don’t want to go and hire, one or two other people, especially right now where it’s hard to find deals, and more important to really execute
• Multi-tenant industrial is gaining steam because deliveries over the next four or five years will be negative, because you just can’t build the product to the markets extreme demand. So, if there is going to be less of this product, that is going to drive more competition on the multi-tenant deals. Even though they are management intensive and bigger investors don’t want that responsibility, there are plenty of smaller firms out there putting these deals together.

Listen to the full episode below and subscribe to the podcast on Apple.

 

Highlights

• One of the best ways to find good deals – 0:47
• What he learned on the acquisition side – 2:25
• The broker relationships – 4:10
• What’s ideal? – 4:59
• Looking at future deals – 11:36
• Be transparent as an investor – 19:05
• Their fees – 22:41

 

Episode Resources

• Connect with John Meek 
• https://www.linkedin.com/in/john-meek-0543741a/
• https://ranchharbor.com/
• Connect with Justin Smith
• https://smithcre.com/ 
• https://www.lee-associates.com/ 
• jbsmith@leeirvine.com 
• https://www.linkedin.com/in/justinbsmith  

 

 

Justin Smith 

It’s going good. What’s up, John?

 

John Meek

Hey, Justin.

 

Justin Smith

Yeah, we can hear the deal is pinging through on your computer right now.

 

John Meek

I just think that was you guys.

 

Justin Smith

Thanks for joining us. When you and I talked on the phone last there was no Grant. So Grant is in year two in the business. He’s my partner and been getting a lot of experience running through deals. It’s been fun for him on the calls to hear what the hell we talked about.

 

John Meek

Cool. Nice to meet you.

 

Justin Smith

I figured this is just the intro.

 

John Meek

Yes, kind of just talking about topics. I think it’s always good to think about what you’ve learned in the past. There’s no doubt about that. Certainly, I think one of the big things for finding good deals is trusting good brokers, which correlates probably to you guys.

 

Justin Smith

It’s amazing brokers that most trusted and most mistrusted industry, right, depending on who you’re talking to. Sometimes you’ll see like tenants won’t see as much value in having a broker on a tenant rep assignment. Or think of like on renewals, where it’s something they can do on their own, but I feel like when you’re fishing around for investments, it’s a lot of fun to be able to work together with people.

 

John Meek

Yes, absolutely. I mean, I was at a group prior to this, where I was looking for retail acquisitions. I was sort of given the guidance because I had come from the capital side of call owners and call those on the ground in and try to get straight to the people selling the product. That didn’t work and it might have worked in the past where there was just not as much knowledge, but everybody I talked to who was on the ownership side of that or hung up quickly or was like, No, I’m going to call my broker or that’s not what it’s worth, or I’m not selling or something. It was always easier, as I learned to go along to sort of talk to a broker and kind of pick one that you like, that you got along with, that was hard working and just said, hey, these are the types of properties I’m looking for. That was sort of their job to go and take up those. So certainly, on the acquisition side, I just learned it took me a little while because I wasn’t told this but I learned that having a few brokers and creating really good relationships with them and then performing when they dug up what you wanted was kind of the way to find really good deals.

 

Justin Smith

How has that changed now? I feel like if you’re more on capital and less on the operating side, maybe you’re not fishing up the deal so much as you’re fishing operators and getting connected to the right operators. That’s kind of changed the game a little bit.

 

John Meek

For us, we’re telling our sponsors that we like obviously go straight to the brokers and they’re pretty well versed. That’s who we’re partnering with is the guys who have the best relationships with the brokers. For example, for multifamily, we’re looking out in Phoenix and there’s really just a handful of really good brokers who have been active, say, since the beginning of the year, and we’ve got CoStar and come look at who those brokers are. By all means, we can reach out to him directly and say, Hey, who are the guys who have the best relationship with those brokers that are going to see deals in our size range. It’s sub sub, kind of 200 units, and that’s sub institutional. So, it’s not the greatest spot for a lot of brokers to be in because they obviously want to have bigger property and better clients. But for us, we can come in as kind of a capital partner and help them out and help them with surety of closing with their better clients and with our better clients. So again, it all comes back to the broker relationships, and then just relationships in general.

 

Justin Smith 

There’s quite a few industrial guys in LA County.

 

John Meek

There are a lot. Maybe you could tell me what separates the best from those who are not. It’s those guys that you want to have good relationships with, too.

 

Justin Smith

I was looking at one or two of the last deals that you guys did in industrial and was trying to understand a little bit more about them. Usually, those are great examples. Done deals, tombstones of what made those good deals for you. I saw one on Signal Hill, and one with Stoss partners, we just had fish tacos with Tanner last week. So it was great to understand what is an ideal for you guys and we’ve been out there looking and trying to help them find more.

 

John Meek

Yes, absolutely. I think what’s ideal for Stoss and our other partner is kind of the deals that we just did. Which for us, our niche in the market is LP capital sub institutional. So really kind of above friends and family syndication range for our sponsors and below kind of the bigger, cheaper capital that’s chasing everything. For industrial, I think that started at about 10 million of equity and up and now it’s such a hot market that even some of the bigger institutional guys are coming down into that seven and six areas. The first deal we did was kind of a sale leaseback with a single tenant. The reason we were able to kind of lock that one in there is our capitals a little more flexible, we don’t have a timing constraint. The lease went out five years, it was under market rent. In the sixth year, you boost it to market rent, or you can sell it to an owner user. Some high-net-worth guys don’t want to hold on and let a business plan play out. But our capital, what we see in the market is that flexibility can open up some opportunities in that in that zone so that’s a good example of that. The other example is in Signal Hill, it was just about a $2 million equity check. Part of that was structuring the debt, which we’ll do as well if our partners not bringing it in. So we’re able to go 50% leverage on something like that, bring in a little more capital and make it safer. Give it time, one to let the business plan play out and not be sort of hampered by high leverage, high octane debt that’s just constantly chipping away at your returns. But two, if we get a good tenant in there and we like the property, it’s something that we want to own forever. So, if you have high leverage debt on industrials, not as a creative as it is in in multifamily, so you kind of got to figure out how you’re going to get taken out. We just wanted to sort of put our leverage point at a place that was , we could take it out and put long term financing on if that’s what we chose to do.

 

Justin Smith

You set yourself up for success on that for sure. It’s funny, your sale lease back, I feel like one of the moves that’s stopping some people but where there’s opportunity are like these single tenant buildings where there’s a couple of years left of lease rate. Lease rates have skyrocketed and so you got to know it, believe in it and willing to wager on whether they’re going to bite the bullet or whether you’re going to clean it up and lease it back out and leasing commissions, like a refurb and TI costs or sell it to a user. But I feel like, if you’ve got the capital for that or you’ve got the right operator, I feel like they’re not everywhere, but I feel like there’s quite a bit of those around. That’s kind of just one of the moves that maybe we didn’t have that move is often when we didn’t have the lease rates, like increasing so fast. Now that they’re increasing so fast, super great. Now, that’s kind of opened up a little bit, but only so many people will swing the bat at a single tenant building that could go vacant in two years. And be excited about that as opposed to like be worried about that or have that muck up your debt.

 

John Meek

I think you hit on two things. It’s like our operator, Stos is top of class. I mean, we would trust him, this is what he executes on a business plan that most people could be a little bit scared of. I think that’s why he sees these deals more so than some other groups. He just is able to execute on business plans that aren’t straight down the fairway necessarily. So it’s trust in him there. We had a good relationship with a lender as well, when you dig into the single tenant stuff, your banks disappear for the most part, life insurance doesn’t like it, this is too small. For some people, we had a good relationship with the with a lender that was comfortable with that, and then comfortable with our partner. I think that’s why we were able to get that deal but also why others just shy away from it. A lot of it is just the capital and how flexible it can be. Both equity and debt, for industrial, it’s been a lot trickier lately than I think people assume it will be. Everyone wants it to be multifamily and industrial, which are the two hottest products, but there’s a real difference in what kind of time type of financing you can get for both, and you just got to be super aware of it and makes it a little bit easier to underwrite it when you have that kind of knowledge.

 

Justin Smith 

Without a doubt, you would think all lenders would be all about it all day long. Then you realize like, oh, that doesn’t fit the box. That’s not you’re just like a bread-and-butter type of deal. That list gets short quickly. So why would some of those folks, I would think on occasion, they would be able to take these down on their own right. They’ve spent most of their LP capital and it saves them time having going with you as a partner as opposed to trying to source more LP capital and recycle it faster? Or is it more of saving time and expertise on the debt side? Or it seems like some of these partners sometimes would go it alone, and sometimes would look fora capital partner like yourself? When did when did they do one or the other?

 

John Meek

I think it depends on our partner, we get a lot of guys who have syndicated equity over the last couple of years, done very well and they still want to syndicate some deals, but they’re looking to grow or their investors are tapped out or something and they’d like just another option at a certain point. So instead of us becoming a programmatic partner that will do every deal. It’s a, hey, here’s kind of a deal size that we’re better at then a syndication. We hear from some operators that started out in syndicating and want the ease of, Hey, we want to focus on the day to day, we want to focus on just closing the deal and having an equity partner in there. So, the time that it takes away from not only just closing the current deal, but also looking at future deals. These are not shops that have 20 to 50 people where they’re constantly seeing deals unable to underwrite. It’s shops that are 2 to 10 for the most part, so there’s a lot of people who are hands on deck when they’re trying to close a deal on it and not having to syndicate takes away some responsibility. Also having for us kind of a sophisticated I think organized group of capital in that where we sort of get the nuances of a business plan and something like the sale leaseback and maturing their lease and then trying to re-lease it at market rates. If there’s a lot of sophisticated individual syndicated investors out there and there’s some that just want to go, Oh, I see a vacant building, and it’s a 1% vacancy market, I get that story. But I don’t get this whole you’re buying, how are you buying it this. So, I think for us, sometimes we just get that, Hey, you guys get a business plan. You guys know how to run real estate. We love that fact that there’s other eyes on this to sort of. We’re not getting into the day to day at all, but we do require some major decision. We’d like some control rights as far as just as refinancing and business plan. So, we can bring some sophistication and help, again, the groups that are two-to-five-man teams. With that we have a good back office for asset management that they can rely on and that can help with accounting, if needed. So, we can provide support to some of the smaller groups looking to grow and that don’t want to go and hire, one or two other people especially right now where it’s really hard to find deals, and more important to really execute on deals once you have them.

 

Justin Smith

Yes, I could totally see that. The question is more, why wouldn’t you? It’s like a maturity thing as you just think of like the food chain and the operator business. That’s just a sign of elevating your game or maturity, when you realize, like handholding LPs is not where your time is best served?

 

John Meek

Probably not, for most people. It’s funny, some groups we talked to have great syndicated investors. I mean, they’re older real estate guys, and they get it or they’ve had a really good track record. Then you get the guys who want to move into our kind of private capital that’s a little more sophisticated and obviously, that’s strenuous because of reporting and we want sometimes weekly calls, sometimes monthly calls, just depending on how intense the business plan is in the reporting. Then most of those guys who want to use this also say, Hey, we want to get up into find a big endowment or pension. We’re like, Well, we’re a good steppingstone for that because we’re going to require more feedback and transparency than syndication investors. We’re not going to be as much as an endowment or a pension fund, who’s really going to dig in and kind of lift the spirit on your whole operation. So, it’s a good place, I think we’ve found that people come and they’re like, Wow, you guys are kind of digging in and we’re like, well, this is nothing compared to if you want to get bigger and do that. So, this is probably a pretty good place for people to land and just kind of stay in that kind of private capital and grow through that.

 

Justin Smith

It’s learning the ropes along the way and then you can decide if you still want more and you want to increase your complexity and you’re reporting. It seems like the people that have gone to the next level, they sure do dig into quite a bit of detail, no doubt about it and you would do if you were them, so it makes perfect sense.

 

John Meek

Yes, absolutely. We remind them that we are writing a big check, 90% of the equity and for that requires a lot more transparency than somebody who’s putting in 25k to 150k. It’s tough when you first close the deal to kind of get everything set up, but then it can run pretty smoothly after that.

 

Justin Smith

You’re able to invest in some manner into these as well and your team or how does that work?

 

John Meek

Yes, exactly. So, we fund everything off call it like an acquisition line for lack of a better word from a family office that has partnered with us. So anytime that we issue an LSI we have the money in the bank, there’s no risk of syndication on our part or funding risk. It’s all ready to go kind of really almost day one for it. So that’s important for us just we’ve spoken to a lot of prior sponsors and who have used maybe like a crowd street or another syndication platform and they’ve been left , sort of with a week to go to and having to raise 500k or a million or something and most of them are able to but it puts you in a really hot spot, and you just want to have more power, when you’re going to close the deal. That was kind of a big issue for us is we wanted to make sure that we circled our capital first and had it ready to fund day one, and then we reserve the right to lay off. We probably lay off anywhere between 80 and 90% of that, and that’s to our friends and family, some high-net-worth investors and pension funds and family offices are involved. That side of the business is really to provide access to these guys. But it’s also to give them sort of the middle between a blind pool and a syndication where in a blind pool, you have no discretion over what deals you are, but you get all the LP protections of the single check partner. So, you know you’re protected, if anything happens on the GP side. Whereas a syndication, you have full discretion over what deal you go into, but you don’t have any say, from the GP. So if they get off business plan, if, God forbid, there’s fraud. We’ve heard cases of some GPs passing away, and there’s just no ability to take the project over and essentially, the LPs are stuck there and at a loss. We’re sort of providing that protection in the middle, where we’re giving them full discretion over what deals they can invest in. But also giving them like saying, Hey, we’re there, we’re overseeing each project, we have the ability to step in, should these guys go off business plan, we require some cost overruns from the GP. So, we’re trying to avoid capital calls at all costs, but just an extra layer of protection for those guys.

 

Justin Smith

I could only imagine war stories of deals gone wrong, GPs off the rail, obviously, death, divorce and all catastrophic events. That’s where I could see having a Co-GP or having a capital partner that is capable. That has the skill set has the back office. Right, that’s a you can see how that would help change the game a little bit. And yeah, I

 

John Meek

I think we’re all aware we’ve had a really good run-in real estate, and everything has gone well. You might not know your GP partner, if you don’t know him. Certainly, on the crowd street platform, you probably don’t know who you’re investing with at all. It’s just been a really good run for real estate, but it’s going to have to end sometime. We don’t know when, we’re not sure how quickly that will be but at some point, things are going to turn and you’re going to want somebody there to kind of be able to work it out or oversee somebody. Make sure everything’s on the up and up and be transparent with you as a as an investor. So we don’t know when exactly that’ll happen but we know it well.

 

Justin Smith 

Depending on which asset class you’re in, they all have their own different zoned industrial. There’s never been so many bowls there in the china shop that all feel like it’s going to go forever. Everything you see on the street, you see people struggle with values and with rates, but when you see them continue to take off, it’s hard to deny positive net absorption and continue values. It’s so hard to know how much further there is to run on that.

 

John Meek

Yes, especially in these coastal markets there’s just so much good news. Everyone sees there’s so much room to run here on the coast. We’re focused really on Southern California. So trying to figure out, obviously, one niche is the sub institutional trying to stay away from where all the capitals going, but it’s hard to hide from that. So we’re looking a lot more at multi tenant industrial, as well, something that acts maybe stored for some companies, some groups working out of it. The net, I think deliveries over the next four or five years is negative, because you just can’t build the product anymore to it’s in extreme demand but there are groups that are looking at these and carrying them down and redeveloping. So, there’s going to be less of this product, we like it and have been chasing a few deals with some partners but even that is competitive. Even how management intensive that is and how the bigger guys don’t want that responsibility. There are a bunch of these smaller groups that are chasing the deals and sort of bidding against each other so it’s hard to find anything off market or anything that’s not competitive.

 

Justin Smith

Oh man and multi-tenant, I love it. It’s fantastic!  But, when do you think of what returns are there and if they’re already up to market? Is there value still left in there? It sure is skinny, but I feel like you just have to recognize there’s seven moves and you got to know all seven moves. You got to be able to pivot from one to the next as your site characteristics allow. It’s wild to see like tearing down building when trailer parking near the port is worth more than the 18-foot clear building that was there that you bought. And to think like, okay, we’re really just paving that. That’s one part of the plan, where I feel like that was crazy that would add value to the building by tearing down square footage. For so long you just didn’t do that. That’s not how that works.

 

John Meek

It’s certainly been fun looking at a lot of deals, but more fun to be closing them and they’re few and far between, right now.

 

Justin Smith 

Yes, we used to make unsolicited offers. That was fun and now it’s a chore. It’s not like something you do on the odd occasion. It’s like, you got to be ready to get a counter and go on a short order, and you got to like to come correct the first time. It has changed quite a bit. Tell me about fees, what’s the cost? What’s just the general program for fees when we’ve got a partner in the deal, and how that changes from just when operators are syndicators go in alone?

 

John Meek

We just kind of issue the yellow line, but we’re a small group and so for our fees, typically, we’re looking at maybe an equity placement fee. That’s just kind of a fee for committing our capital upfront to fund the deal. So it’s usually about 2%, we let the sponsor take an acquisition fee. A property management fee, if they’re a property manager. A construction management fee, if there’s heavy construction. We usually try to split an asset management fee, or if they don’t have any real asset management, we’ll take the fee because we have a great back office. We have in house Asset Management here that has a ton of experience in this stuff. In the case of the debt for industrial, we’ve actually been the procure of that debt. So, our advisory side will take anywhere from a half a point to a point, just depending on size and that’s kind of it. The splits are deal by deal a lot of times it’s a six to eight pref, it can get up to a 10 pref, if there’s more heavy lifting, or if it’s a newer sponsor. Just depending on the deal, but we’re trying to solve for mid to higher IRR, really over a three year hold. So, like our deal in San Diego is more of a six-year hold, so a little lower IRR, higher multiple, we’re fine with that. We’ve got a value-add multifamily deal on to Phoenix, that’s a 10-year hold. So more focused on multiple than IRR. Then we’ve got, our single Hill deal, which we underwrote it a little more tight timeframe, because there was just a vacancy to fill and then get in rehab, lease it up and probably exit or refinance. So, no set return profile, necessarily.

 

Justin Smith 

It’s so wild to think of like this search for yield and what are you willing to do in the search for yield. I’ll drive in, can you be more creative and not expand geographically? Do you go geographically and then find compression everywhere or in some sense everywhere? Are people just as excited for a sixth breath than they are in the stock market, because you’re always competing for opportunity cost of being in other investments. So, I feel like that’s interesting and leads us to like, taxes, administration’s, 1031 and capital gains. That seems like there’s a big ball of wax that we’re all wondering what’s going to happen and how that’s going to change things and what’s retroactive and what is the following year. I imagine you guys probably pay attention to that pretty closely.

 

John Meek  

We have been and obviously, it’s of concern and that the front part of us as investors of our investors, asking us, and I think it, the nice thing for us is that we’re flexible on time period, we’re not subject to a fund and a hold period. So, if our investors want to, we can hold long term, if 1031 goes away, if long term capital gains, go up to 43%, or whatever it will go up to for them, we can hold long term. I think that we have a nice bit of flexibility that most of the investors have said, Hey, if this happens are you guys going to exit and have us pay big taxes, because we’re probably not interested in a one- or two-year hold, then. But if it’s going to go out 10 to 15 years, we’re probably pretty interested unless we can exchange into something. We’re very much aware of what’s happening, but think we’ve positioned ourselves to be flexible and to kind of accommodate everything. But, that brings up the point of like, really what’s going to happen if 1031 and long term capital gains go away? It’s just going to slow transaction volume. Guys who bought properties 30 years ago, who wouldn’t ordinarily want to exchange into maybe a newer property, let somebody come in and breathe some life into their property and make a little money there and sort of gentrifying certain areas. That stuff, there’s going to be a pause, certainly. It’ll be interesting to see how this all shakes out. I think we’re hoping it’s somewhere in the middle of what Biden is fully proposing, but we don’t know. We’ll see.

 

Justin Smith

You can’t imagine it all gets passed. But it’s scary to see where the starting line is.

 

John Meek

Yes, exactly. I think that’s the point that’s why they’re starting at this point is to scare people.

 

Justin Smith

I would think like, the financial advisors, the Wealth Advisors, and all the people that do the heavy lifting on, like attack shelters, who are all busy hunkered down in their cave somewhere, creating all these ideas for like, okay, everybody’s going to be looking for additional levers that they can pull. What else can we do to be more creative? Because cost segregation is only going to get you so far.

 

John Meek

Yes, and they’ll find them they always do. There’ll be some loopholes and things that people find, which happens all the time.

 

Justin Smith 

Well, thank you, John. That was great.

 

John Meek

I appreciate it. Thanks, Justin.