Ep 37 - Crisis Averted

 Spoiler alert, after finding out some crucial insider information, we decided to not move forward with the co-working company.  Turns out, well, that they suck.  Therefore, CRISIS AVERTED!  

Now this  news comes with some more challenges, like finding new tenants/tenant.  But that's what we do, so no big deal.  Sucks we burned about 5 months, but was a necessity.  Back to the drawing board to figure out what exactly we need to do moving forward, but we have a good plan in place with some outside help.  

Transcript

SPEAKER_00 0:00

Boys and girls, welcome back to the Commercial Real Estate Starting from Scratch podcast with me, your host, John Kleisch, on episode number 37. Let me check that. I feel like we did 37 already. We did not. Welcome to episode 37. If this is your first time tuning in, greatly appreciate you listening. I'd like to know how you landed on this podcast, how you heard about us. And to give you an idea of what we are doing here, this is a uh vlogumentary, I guess you could call it, right? On my journey into commercial real estate, starting from zero experience, zero dollars in commercial real estate owned, all the way up until however far we take this thing. I've been doing it now for eight, nine months, something like that. And uh currently I own two commercial buildings. Well, technically 50% of two commercial buildings in the Phoenix Metro area. One is an industrial building that is mostly catering towards auto um auto people, mostly body shops. And then I have an office building in Sun City. And um we're doing this raw, unfiltered. I thought it'd be really cool just to document my journey, and um, it is meant to show the good and the bad side of real estate on podcasts. You normally hear just all the good stuff. So I wanted to kind of change that up and shine a light, uh, what's going on behind the scenes. So I know it's been doom and gloom. Well, not a lot, but it's been a lot of bad news here and there. But uh, you know, there's good news sprinkled in here and there as we go. So the big update for this week has been so you guys know that we have been in serious, serious talks with that corporate co-uh workspace, uh executive suites, co-working type of deal. And I mean, my golly, we were like literally, we were there. We were literally there. Me and my partner talked about it many, many times. And the last conversations, I think, even on this podcast, were like, hey, we're gonna, we're gonna go, we're gonna go through with this, and we'll just kind of figure it out as we go. And then my partner, John, also named John, he started to do some more digging into the particular company online and did not find any good feedback and found out the exact opposite. Was there was uh a lot of people that were complaining about that specific company saying they got hosed, blah, blah, blah. And I was like, oh my god, we're gonna need to do a lot more research here. Let's pump the brakes. So we decided to do a lot more due diligence on them. And luckily, I have a connection from someone here in town that has actually done two deals with them, and he was the saving grace. I just texted him and said, another John, I said, Hey John, have you by chance done any deals with so-and-so company? And he's like, You need to call me. So I was like, Oh boy, that's either really good or really bad. I didn't know which. And so it took a couple days uh for us to get linked up, but had a really good conversation about it, and the general consensus, uh, and that's a I guess an understatement. He said, Do not do this deal. These guys are frauds, these guys are scammers, they're just lying to you. I can't believe they are not in jail. They took me for a ride, they're still taking me for a ride, and it's going to end up with lawyers getting involved. So that's all that we needed to hear, right? So at first I thought that was bad, and then the more I thought about it, was like, wow, guys, we were razor, razor close to doing a deal with these guys, and it was a 10-year deal. The soonest we could get out would be the four-year mark. So imagine being in bed with these guys for four years. We spent $150,000 and uh nothing to show for it. In fact, probably would have been losing money, had to cut a check every single month. So that's not good, right? That would have been the worst case scenario, and it would have ended up badly. So that deal is dead. Fortunately, unfortunately, however you want to paint it, if it did work out, it would have been great. And it's easy to always get wrapped up in hearing the big numbers and oh wow, we just hire these guys and we're all good, right? Um, anytime there's third-party stuff where it's a service provider or someone that's gonna be taking care of your marketing or sales or something like that. Uh now I'm sure there are companies that do a bang up job. However, I have yet to have anybody consistently, continuously rave about a third-party provider. So keep that in mind. I haven't come across one. Every time we've outsourced something, it's maybe had a little sprinkle of good in there, but the bad has just outweighed the good by far. So um, and I guess I should have probably thought about that earlier into this deal. But when you are sitting there, you're on the market, you're not getting any real big serious bites. These guys come along, start flashing some numbers, it's definitely easy to get carried away. Obviously, this is what they do, right? Their job is to get as many people in their program as possible because they're not paying for it. They're just there. Um, they they put up an operator and everything like that, but uh, we we pay for them eventually, right? So it's not like they have much skin in the game. So if they get 10 properties and they lose on eight of them, they don't care. They don't care. Their marketing doesn't change and everything like that. In fact, their marketing per click gets lower the more buildings they have because it's spread out over all of those different properties. So long story short, that's that. That's long gone. We're we're not moving forward with them. Now that conversation went further. John was like, hey, um, dude, I have 11 office buildings that I lease out to co-working spaces and they all crush. I've been doing it uh 15 years. So he said, John, I will more than gladly hand over my books. You can see what my numbers are, I will gladly help you guys out, show you my process, and uh what I want to do is even I want to tour your building, uh check it out, see what I think, and then I want to bring you to a couple of mine so you can see how they operate. And that's great because I feel that as it sits right now, the co-working space seems to be the uh the golden ticket for office, and office has obviously taken a hit over the last five years since COVID, and we're kind of feeling that for sure. Uh the office is a little bit big, so we are going after a pretty fairly large tenant, you know, 6,400 square feet rents like 11 grand a month on something like that. So the pool of companies that are looking for a space like that is very, very small. So we're gonna continue to try to lease the place out as a full unit, but I also think that we're kind of at the end of the rope. It's been about five months now since we've had that place up for lease. Nothing overly serious uh has come through the door for a big larger tenant, and I think this is the play to move forward. What we're gonna do is I'm gonna go hang out with John for a day, tour his facilities, check out his numbers, see what he has to say, and run the numbers because we were running the numbers this morning on it as a co-working space, and with limited knowledge we have on the area and co-working in Phoenix right now, the numbers weren't that great based on what we were seeing. So um, borderline not worth doing the coworking. So I feel like maybe there's something that we are missing. Uh, maybe we're not accounting for all of the different offices where we can fit two, three, four people in some of these offices and rent it out for much cheaper. So a lot more due diligence has to be done on that part, which we'll all get taken care of when I go tour these facilities here with John. I'll have a lot better idea on what numbers, what things are gonna cost, and what that looks like and how to run it. But also, too, we can split this place up into uh three units of about two thousand two hundred-ish, two thousand one hundred square feet-ish of space. So then we would need to get thirty, five hundred, four thousand bucks for each tenant, which is quite a bit more uh reasonable for someone to a lot more companies can you know only need five offices and spend four grand, you know, 3,500, 4 grand a month. So we've been trying to do that, but with the broker, I feel like the marketing piece really wasn't there. And uh so we're gonna just not lease it as a full space anymore. Well, still offer it, but we'll have different listings saying, hey, 2200 square feet of office space, five offices, break room, this, that, this, uh, to cater towards that folks instead of having one big listing and it's kind of just muffled up in there. I feel like that would be a really good, uh, much better tactic to get the place leased up for smaller units. And then you can always do a mixture. And this is how I see this one going, where we rent, say, a third of the office to one company, or maybe another third to another company. So we have two different companies renting in uh those larger spaces, the 2100 square feet-ish, and then the other section we can use for co-working, and we'll have five offices there, and I bet we could probably squeeze something like seven, eight people in there. So uh that's how I see that working out. And John did mention that to me as well how a lot of his spaces, there are companies that are renting out, you know, four or five offices or a whole floor on in his case, and things like that. So I feel like that's gonna be a good mix. One thing that I did uh or he did mention and does make a lot of sense is the hard part is in the very beginning of leasing when you're doing co-working because you have a fully empty building, right? There's not people in there, there's not hustle and bustle, there's not the noise, it's very dead air, it's quiet, it seems very sterile. So, in the beginning, you got to get a handful of people in there, probably cut their rates really low, do a lot of marketing up front, and then eventually it'll get um easier as more people fill in the space. So that's something to keep in mind as well. Overall, the timeline, we still have about six months for our notes to be due. And in a perfect world, we can get this place leased up over the next couple months, and then at least have enough revenue on the books, um, or at least revenue from leases signed that we can go out and get an official bank loan. We may have to do an extension with our hard money lender if we don't get that, we don't hit those numbers in time, but um nothing we're overly concerned about. Uh the timeline on that uh I don't think is gonna be a big deal. I feel like that uh asking for an extension for some more months from a lender is is not a big deal. It sounds like that's pretty pretty standard for them. And um, especially if we're leasing it up and we have leases in place and everything like that, that should not be a problem. And besides, it's only like 400 and something grand, four or five hundred grand that we have with them. So if we needed to, we could fill them out on a bridge alone or something like that. But so far, that's that's the plan with Thunderbird. Uh call that crisis averted, right? Um it's all about, I shouldn't say all about, but a lot of it has to do with the deals that you don't do versus the ones that you do, right? And we'll never know how it turns out. And it could have been great and it could have been awesome, but after getting that feedback and hearing all that stuff online, I feel like it was a uh uphill battle, and the odds were way stacked against us for it to even work out at all. So glad we got some information on that because that's been weighing over my head a lot, just not sure what to do with them. And uh, if you guys know having like decision fatigue or having things weighing over your head, and even though you're not working on it every day, it weighs on you. I feel like you're you know you're carrying a 20-pound weight around everywhere you go, um, always constantly thinking about it, what to do, you know, and having those big decisions. So having that lifted off of my plate was was pretty good too. So, overall, not not bad news on that end. Uh, on grand updates, I don't have anything really spectacular to announce yet. Uh, still trying to get that tenant two space leased up. I have uh one guy that's like was seemingly ready to go. Well, two guys that were seemingly ready to go. And then now as we get closer to, hey, let's go, let's go, let's go, everybody gets kind of cold feet and they start getting nervous about everything. Now, the two interested parties that I have still are playing that game. They don't answer my calls when I call and they'll text me at weird hours and stuff like that. So I gotta really figure that out. I wanna really push them. And um, in the meantime, I'm just gonna continue to go out and still entertain uh people that are are looking for uh for that spot. The marketing is still going. I'm gonna my plan on that end on the leasing side is to not act like I have two people um in the hopper and I'm out there trying to get more people in the place to um to show them and hopefully find another tenant or get one of these guys lined up. So my plan is to push those guys a lot this week and see what their plan is and see what how that moves forward. I'll tell you if they don't get a lease signed this weekend, I'm gonna just write them off because that's crazy. I've been in talks with these guys for one of them for like four or five weeks now. So um every day that goes by, losing losing faith in um in that, which is fine. That's totally fine. Um just like anything else, right? Uh it uh how do you say it always works out for us? So maybe it's a good thing that these guys didn't want to sign, maybe they wouldn't work out. Who knows? I'm not overly worried about grand. That tenant two space is very desirable and it should not be a problem. I would say two months we'll have that place leased up, if not if not sooner. If I have to go find someone else new, I bet it'll be like two months. If one of these guys ends up signing here, it should hopefully be uh at a start date within the month. I am finally getting the coolers installed, uh, the evap coolers. That was a big to-do. Um, I don't even know if it's worthwhile talking about it, but basically, we put on a new roof, we sprayed foam and then put a layer on top of that. So the roof got raised up like a couple inches. There was existing ducting that was in place, so nothing was gonna fit. We had to come up with a new install plan, uh, new brackets and uh new elbows and stuff like that to go into the roof. Uh the also the water lines that were there were very bad. The roofer um just cut them and removed them because they were so bad. Um, I don't know if that's the case or not, or if he just cut them because he just cut them and didn't want to work around them. I don't know. But either way, it's only like a thousand bucks to run new water lines. So I guess getting brand new water lines up there, uh not a bad thing overall. So those were supposed to get done two weeks ago, but with all the backups and everything like that, we finally figured out everything that we need. We came up with a good plan. Uh, the crane is ordered for Friday for the install, so everything is finally rocking and rolling, which is good because my tenant from tenant two is moving to tenant one and he's not moving in until those coolers are installed. We signed a lease for June 1st, which I think is Sunday, Monday, let's see, which is Monday. So now perfect timing. We're literally right on the wire for for that install, which is good because I didn't I I I want to just be done, get him into the tenant one spot. He's out of tenant two, that way uh we can at least breathe easy, and we're gonna get a little bit more uh rent from from tenant one. So that's a good thing. Hopefully, fingers crossed, they get they don't run into any snags and they can get it all finished. That way, Josh can move in. Tenant one lease starts, and then uh we're off to a good June there. So, um, what else do we have going on here? My partner John has been really hunting down capital partners because that's a big thing that we are missing in this game are capital partners. So he's been working really hard on finding more partners, and in fact, he has found a couple people that are just capital raisers, which is a really cool job if you can do that. So, what they do is they just raise capital. So their job is to meet people, uh operators like us that have deals and need capital, and then the other part of their job is they go out uh and find people that want to invest in real estate, and they are like basically a capital raising broker. Really cool job, maybe something I'd be interested in as we uh as we progress here as my Rolodex gets bigger and bigger, and I talk to more people that want to invest hundreds of thousands, if not millions of dollars, into real estate. Uh, but so the deal with that is they become um a small like GP of the deal, and they bring in the capital, and then their reward is they get a cut of the deal. I don't think they get a fee. I think it's all depends on the per deal basis, but basically they will get into our deal at no expense to them, and they get that because they are bringing the money. So John's been talking to a handful of guys on that end, finding out what they do, how they do it, what they like, what they don't like, and everything like that. So it may be time to go out and start looking for some more opportunities. There have also been some people in our network that have seen what uh John and I have been doing, and they've been reaching out and wanting to invest in deals too. And the good thing is that the deals that we have right now are just too small for them. They want to put in a minimum of 500 grand into a deal. So the problem is that that won't fit our current deals. But the good thing is that there are plenty of other deals out there that we could operate on that are in that two million dollar range, and they are itching to get into deals too. But am I itching to get into a deal? Not really. Um two reasons. We have two assets that are not stabilized yet, and that's nerve-wracking. And also just my time in general, right? Like my time has been so consumed with these two buildings, and it comes and goes, it comes in in waves, but it's it's hard to want to go take on another project right now when A, I am so stretched thin, and B, we're not we're not stabilized yet. So am I uh totally against going out and finding another building? No. Is it something I'm like dying to do? No, definitely not. Um, but in the near future here, uh things can change in a heartbeat, right? 10 and 2 could sign a lease, then grand is done. Uh we could get uh maybe a small a third of the lease done on Thunderbird, and then I could lease out a couple different co-working spaces, and then boom, that's not done, done, but it's a lot of that work has been done. The stabilization of those assets will be almost complete, and that way my brain is gonna be free to go out and get more deals. So I'd like something else to happen is moving these assets forward as far as getting stabilized first. However, if John calls me and says, hey, I got guys that are ready to go right now, I mean, hard to hard not to say yes to that. And the good thing is that the main problem with commercial real estate is A, you need a lot of money, and then B, it's slow, and then C, you don't, you know, you don't make money right away. However, if we can structure it to where we can collect some kind of fee, some acquisition fee or something up front and you know, get 30, 40, 50 grand each, that would solve a lot of problems. Then I would be very, very interested in going out and getting some buildings because that would put money in my pocket, it would free up some more time that uh, you know, a lot of my time now is also working on active income, right? Having these buildings is great, but as you know, I have not made a dollar. In fact, all I'm doing is spending, spending, spending money, losing money every single month. So I need to make active money to live off of. If we could figure out a way to get active money on the acquisition of these assets, that would be the best situation ever because then I could go out and say buy three or four of these buildings, and if I'm getting 30 grand each, that's 120 grand. That's almost enough right there. So there's that as well. Now, um, but again, for this, I would say that at least that it's next month. I am really focusing on just the buildings that we have and getting those taken care of first. It's easy to get carried away and want to move on and flashy, uh, what is that called? Shiny object syndrome, right? Uh, but trying to stay focused. Trying to stay focused, stay at hand at what we have here. I'd really like to get these assets stabilized, get some leases in place, and then we can start looking at some more assets, which is gonna be fun because now I have a lot more experience, right? I know a lot more about it. I could walk a building and know what it's gonna take, uh, not only on the rehab side, which I had a good idea of before, anyways, but more so on the management side, the tenants, the monthly rates that we can expect, how to find these tenants, how to vet them, and everything like that. So I don't imagine we would be running into a lot of the same problems we had from the first two business. Buildings on the second or on the the future ones that we have coming up. So uh it is also exciting to think about getting some new buildings here. I feel like it will be a lot more streamlined. The process is getting a lot more dialed in, and of course, you learn as you go, right? It's only hard until it becomes easy. So there's there's that as well. But overall, I think that's a good place to to really stop the podcast here before I start rambling on about other stupid stuff. But uh, so yeah, that's what we got going on overall. Thunderbird squash that plan moving forward, about to come up with a plan here next week. Um, after we meet with John, we'll sit down and figure out a good plan for Thunderbird. Granted, we've had that plan for a while now. We just need to execute on that plan, get some leases, and I'm re like I know it from the bottom of my heart. In three months or so, the whole tune of these assets will change dramatically. I feel like in three months we'll be a lot different of a spot. Every week that goes by, we're getting closer and closer, and less bad things are happening and things are starting to move in the right direction, which is amazing because for a while there we were not. We were going backwards. So now we're going forwards. I like to be on the attack, have that momentum. I do not like to be playing defense the whole time. It is a almost a point of weakness, and I do not like operating on that end of things. I like being aggressive, I like moving things forward and pushing, and that is how John stays happy. So that's the plan moving forward. Um, guys, follow me on Instagram, John.cleish. If you liked this episode or did not like this episode, whatever you thought of this episode or podcast, do me a favor, just leave me a five-star review, regardless if you like it or not. And if you didn't like it, but you think you have a friend or a colleague or know somebody that would get a kick out of this podcast, please share it. That would mean the world to me, trying to grow this thing organically. And uh, it's been fun. So I really appreciate you guys tuning in. Thank you very much. Um, and that is a wrap. We'll see you guys next week. Hopefully, have some more cool updates for you. And on that note, we're out of here. Take her easy.