The Real Estate Syndication Show

WS1943 Opportunistic Real Estate Investing | David Hansel

February 15, 2024 Whitney Sewell Episode 1943
The Real Estate Syndication Show
WS1943 Opportunistic Real Estate Investing | David Hansel
Show Notes Transcript

How does a seasoned real estate investor navigate the complexities of the market, build lasting relationships, and structure deals for maximum profitability?Today's episode of The Real Estate Syndication Show offers a unique opportunity to dive into the insights of David Hansel, a managing member of Lucerne Capital Partners and co-owner of Alpha Funding. Starting his career in real estate brokerage in 2002 and co-founding Alpha Funding in 2008, David's journey is a testament to the power of strategic investment and the importance of innovative financing in the real estate sector. He has successfully expanded his portfolio to include multifamily and commercial real estate acquisitions, with a keen focus on markets in New Jersey and the Carolinas.

You will discover the significance of cultivating long-term relationships within the commercial real estate industry. David underscores the necessity of patience, active listening, and establishing a strong rapport as foundational elements for effective capital raising, deal sourcing, and navigating challenges in real estate investments.

Moreover, David shares his expertise in structuring deals to maximize profitability. His experience with a complex condo project in New Jersey serves as a compelling case study on leveraging creative financing solutions to achieve remarkable success.


By tuning into this episode, you will gain valuable knowledge on adapting to the evolving landscape of real estate investment, particularly in the industrial sector, and learn from David's approach to capitalizing on market cycles and structuring transactions for optimal outcomes.

For those interested in further exploring David Hansel's strategies and insights, visit Lucerne Capital Partners at lucernecapital.com or reach out via email at info@lucernecapital.com.

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David Hansel: Opportunistic is a phrase that can have a negative connotation, but I look at it in a positive light. We're opportunistic, and we try to find value where maybe others don't, or find a way to approach an investment opportunity with a different outlook that can really change the outcome of that.

SPEAKER_01: This is your daily real estate syndication show. I'm your host, Whitney Sewell. Thank you for listening to the show. My goal is for you to become a savvy investor by learning from some of the best operators and investors in the business. I'd like to hear from you. If you have questions you would like us to ask on the show, or if you have someone you would like me to interview, please let us know by emailing info at lifebridgecapital.com. We would love to hear from you. Please leave us a written rating and review. I would be grateful. Do not hesitate to let me know how we can best serve you at Life Bridge Capital. And now for an amazing interview with my friend Lance Pederson .

Lance Pederson: This is your daily real estate syndication show. I'm your host, Lance Pederson , co-founder and CEO of Passive Advantage, where we simplify the process of vetting passive real estate syndication deals for passive investors with our LP Deal Analyzer tool. I'm sitting in today for Whitney Sewell, founder of LifeBridge Capital. So our guest today is David Hansel. He's a managing member of Lucerne Capital Partners and the co-owner of Alpha Funding. So David got his start in real estate in the brokerage side of the business in 2002. In 2008, he co-founded Alpha Funding, which provides short-term bridge loans to investors on fix and flip and new construction projects. And in 2016, David and his partners launched Lucerne Capital Partners to acquire and operate multifamily and commercial real estate, primarily in New Jersey and the Carolinas. In today's episode, we're going to talk about the importance of building long-term, long-lasting relationships in commercial real estate, and how structuring deals properly can make or break the success of the deal, and how the supply and demand dynamics that exist today in industrial are very similar to the ones that existed in multifamily back in 2016. So enjoy the show. Okay. Hey, thanks, David, for joining us today.

David Hansel: You're welcome. Thank you for having me on. Good to see you.

Lance Pederson: Yeah, you as well. So, you know, one of the things that I know that you've really You put a lot of your own personal effort into the years, over the years, is just the ability to build long-term, long-lasting relationships. And it takes a team to really go out and acquire real estate and do deals in general, right? They're just, no one can be the master of all things. And I know that on your teams, you've always been the guy who's found a way to kind of build relationships with those capital partners and lenders and all the people that you need to bring together to make a transaction happen. From your perspective, what is sort of your overarching philosophy for that relationship building when you go into any net new relationship and how you nurture those relationships and build them because it obviously takes time and doesn't happen overnight?

David Hansel: Sure, great question. I will say that relationships transcend every business and industry, and real estate and investing is no different. I think that some of the things that people don't always think about when they think of relationships is about just patience and being an open ear, right? People want to talk, you want to get to know someone, and our days are so busy. Many times we're jumping to the next thing that we got to do rather than being open and listening to the person that you're sitting across from or you're on a phone with. And really through that, you build rapport with people. And I can't say enough how much that's helped from every aspect of our business, not just from, you know, capital raising to deal sourcing to solving problems that inevitably come up in your operation. So it's something that I am very passionate about and I make sure that I share that with our team and try to have them reflect that same behavior with all the interactions that they're having throughout the day.

Lance Pederson: Yeah, no, it is super vital to getting anything done. I mean, people do business with those that they know, like, and trust, right? And so if you don't approach it from that side of things, it's just going to be difficult to get things done. I mean, ultimately, people want to be spending time with people that they like and where the relationship exists. And I think that's where sometimes you just see a lot of people just a bit too transactional, a bit too hardcore in their dealings and not realizing or trying to create those win-win scenarios.

David Hansel: Yeah. So important. And it's about getting to know another person, not just on a business level, like you said, but on a personal level, because that helps makes everything go smoother. And like I said, most people feel that it's a waste of time because they have so much on their plate, but I'd argue it's the reverse. Like you can't not spend the time doing that stuff. And I saw, you know, even before I started Alpha and Lucerne, just in terms of how I worked and handled myself in business, it was always about serving others first and making sure that I understood what their needs were. And so that's so important to success.

Lance Pederson: Yeah, that's right. I mean, and that's ultimately the value add hypothesis, which I know you guys are big believers in. And I think there's a good segue just into, I think what it sounds like Lucerne does a great job of is just that creativity and structuring transactions with your guys' background with Alpha, and it's similar to my own, of kind of sitting in a lender seat. And when you're underwriting transactions that you really have you might have a first lean position on the loan, but ultimately you're not making the day-to-day decisions. You need to rely on your borrowers to execute their business plan. It gives you a different perspective and appreciation for risk, that's for sure.

David Hansel: You learn about a lot of problems that you never knew actually could exist, right?

Lance Pederson: Yeah, exactly. The crazy things that borrowers can do that create interesting dynamics. So for you guys then kind of shifting, I mean, obviously having the lending business and then getting into the operator side as value add multifamily guys, and more recently making a shift kind of into the light industrial that's going on. So maybe you can speak to that as just to your guys' philosophy as to how you've you know, used all that experience when you are looking at transactions. Maybe give us an example of, you know, the creative structure that made a deal work that wasn't like creativity for creativity's sake, but really was the solution to unlocking value.

David Hansel: Yeah, I'll tell a really good story on that before I'll just mention. So on Alpha, the lending company, we've underwritten funded thousands of deals for borrowers. So we've we've had quite the experience over the years of of working through all of these construction projects, managing draws, seeing value-add type projects, being a party to that, obviously not as an operator. But it helped really kind of set us up in the right position when we launched Lucerne seven years ago. We also brought in or partnered up with another gentleman, Frank Forte, who's a friend of mine. He's our chief investment officer. And he had had more of an institutional background on the ownership and finance side for real estate. But I'd say, Opportunistic is a phrase that can have a negative connotation, but I look at it in a positive light. We're opportunistic and we try to find value where maybe others don't or find a way to approach an investment opportunity with a different outlook that can really change the outcome of that. I have this really incredible story on a broken condo deal that we did several years back in New Jersey, which is where we're based out of. Most of our investments nowadays are down in the Carolinas. but this was a broken condo project. It had been, it was, Cantor Fitzgerald was rolling up a fund. We'd been tracking the property for a year, both through Cantor and through the city. We eventually were able to buy it at a very, very steep discount. We bought 64 units out of 102 units at $55,000 a door when the one bedrooms were selling for $105,000 a door on the open market. Part of the reason why we were able to get it there was that we've been persistent following along, but it also is a very difficult deal to finance or put together because the HOA had some issues, although it was financially being shored up. Homeowners weren't able to get a regular mortgage. So we were originally buying this at such a steep discount to market we had gone to one of our local community banks, and we walked them through the property twice, and we finally get our term sheet, and we're looking at bringing 30% equity, which is understandable in general, but we were buying it such a steep discount that we said, You know, this is not the right fit. We could lever this up. We knew that there was so much value that we could lever it up further and then quickly stabilize. So we came in and we we wound up bringing an insurance company that we work with on the lending side and. They came in and provided 90% of the acquisition. We actually ripped off nine of the properties and bundled them and sold them to another investor group that we marked up. That money covered our down payment. So theoretically, we got into this deal with no money down, which is very unusual in this space. And we haven't done that before, nor have we done it since. we got in with no money down. We were able to quickly start improving the units. We took over the board seats at the association because we own the majority of the shares. We got an HOA loan, fixed the HOA, got it approved for resume mortgages. We kept pushing the improvements higher and higher. We eventually sold the last pool of of units for 250,000 a door, which, you know, for the county was a really low price for what it had to offer. But it had been kind of in the trenches with all these issues regarding the association. And we saw that opportunity. We followed the deal. for over a year before we won it. Then we got it and we were, we kind of pivoted on our financing that made a huge, huge difference. As a matter of fact, we were able to pay off all the mortgage And we had 27 units that we own free and clear. We were able to put a line of credit against that and use that to go fuel some other investments. So this is a creative story on steroids. I mean, we typically are looking at opportunities where there's mismanagement, maybe needs rebranding, maybe needs CapEx for interior, exterior improvements, and then moving through that. But this is kind of a unique story. Hopefully, we'll find another one or two of those as things move along. But it's exciting. It gets your juices flowing, too, when you're able to kind of put something like that together.

Lance Pederson: Yeah, I agree. I mean, I think that's a big part of it is just that it's engineering and structuring the capital stack and any transaction can make or break it. I know that as well as anybody in cases where it broke it, right? The underlying assets can be great. Your strategy can be solid. But if the way you're capitalizing it isn't appropriate for the strategy or the specific deal, I mean, and a lot of guys are seeing this now just with the debt that they have on their multifamily projects, right, of no rate caps. And it just quickly, what could have been a great project with the right financing suddenly is no longer viable. In fact, has potential to create the risk where investors lose their equity. You know, so I think that that's why obviously I'm a bit biased because I started in from the lending space as well. But I think that as lenders, it does seem that you kind of hone that ability to understand and appreciate the capital stack maybe a bit better than than guys who are because because it forces you to assess your downside risk because your upside's capped. And I know you guys are in the same position. you know, just with, with alpha. And I think that had found similar success that we did kind of then pivoting into the other side of the business, you know, where you're actually acquiring real estate yourself. Cause once you kind of learn it that way, it's hard to, yes, you appreciate the upside. That's why you get into it, but it's hard to, you can't ignore or avoid that downside.

David Hansel: I always say it's like a game of Tetris, right? So there are some people you give, if you gave a game console to someone to play a game of Tetris, and they never played it before, it's going to stack up really quickly. When you've been through so many repetitions, thousands of repetitions of structuring deals, so on and so forth, you just kind of find the spots and optimize what you have, right? And so I think that it's really important that it's a piece of the puzzle that I think a lot of operators that haven't you know, been on the lending side, or, you know, maybe they have done other things that make them think about, but a lot of people don't put as much emphasis on the capital structure as they should, and how much it can make a difference, just like you're talking about with multi right now, you know, without some, some investors have floating rate debt without a rate cap, You know, there's a lot of, there's a lot of structural issues that are changing in the multi side, which make it a little less attractive and it'll make it a lot more challenging of a space to to make substantive returns. So that was a good point that you made and And you got to think ahead and be prepared. And we still learn lessons every day. And we have one asset that's part of a fund that we're having some real challenges on. We have floating rate debt, but we had a rate cap. But our debt's coming due, and the cash flow isn't there. So you have to be thoughtful about those pieces. And even with the rate cap, we still have some challenges that we're dealing with. how you pivot and work with those situations is what can make a bad situation a little bit better or could make it worse.

Lance Pederson: Yeah, that's right. I think when you look at when you guys added to the platform with turning up Lucerne, compared to many others, we got in earlier into the whole value-add multifamily love fest that kicked in. You know, and I think that, you know, you use the word opportunistic and like you said, I think it to some, it has a negative connotation. I think it's just more of where, you know, the word can have multiple meanings, but I think it's more about. You know, when you wake up in the morning, consider yourself a professional investor who primarily, you know, operates in the real estate sector, then it really is, you know, for those of us in the business have appreciation for the fact that these markets cycle, it's inherent, it's just part of the natural, you know, that's just how it goes. It just, it cycles, it's not flat, it's not static, it's dynamic, and it cycles, it goes up, it goes down, it comes back down. It's just the cadence of real estate in general. Neighborhoods gentrify, they raise up and the cycle continues to go on. So much like back in 2016, 2017, when you guys got into multi, fast forward seven years, having that vision and seeing where the next opportunity was. Um, I know recently, you know, in the last year or so, you guys have, you know, began to, um, acquire industrial properties. So, you know, much like multi before it, when you guys made the decision to get into multifamily now looking at industrial, what are those themes or the commonalities that you see between, you know, value add multifamily to 2016, 17 to industrial, you know, 2023, 2024.

David Hansel: Yeah, good question. I think there's a lot of similarities. What's kind of interesting is that when we started investing in Multi seven years ago, we were primarily, as I mentioned earlier, investing down in the Carolinas. And we still are very active and have a large footprint. We have employees down there. We like the macro story of the Sunbelt and of the Carolinas. There's still large migration and jobs that are moving there. You're seeing in the ports more offshoring, reshoring that's bringing in business and industry. But what we saw seven years ago when we started in the Charlotte market down in North Carolina was that there's a lot of old ownership with assets where the basis were really low. These people, maybe they were a family or an individual, or maybe it was a investment group, but they've owned it, owned this asset for so long. You know, they're ripping really good cashflow because their basis was so low. And, um, They didn't bother putting in a lot of improvements or marking up rents even remotely close to market. I mean, you've probably seen some of those too, where you came in and you had like rents that were one third the market rent. Right. So you saw the opportunity and you saw a lot of a lot of building and development going on. You see more jobs. The average income was moving up. So we we found a lot of assets that we could come in and execute on sometimes not even doing extensive reno on the units, but sometimes a light reno would be able to push up rents. And so what we're seeing on the industrial side is similar to what we saw seven years ago. Ownership's a little bit different, but we're seeing Rates that have moved up quite a bit and the bottom tier of the market hasn't really realized it and moved up with where the market has gone. So we're focused on, and you have to also understand that in the types of industrial that we're buying, which are flex warehouse, small bay industrial, 100,000 square feet and under typically in the 50, 60,000 square foot range. you're looking at one to three year leases. So sometimes they have options to renew. And so you may not have a window to move rents up at the time, but we're seeing a lot of these opportunities where you can move rents and mark them to market. And it's really, important when we come into a deal to kind of see that there's a path forward to move those up. And what if those tenants don't want to take those rents and move out? We feel confident that the market is strong enough and has has a support level at these higher rents that we can find other tenants. And to speak to that in more detail is that we have You know, we have assets like one that we're buying right now. We're literally just finishing up the Raison. It's a 50,000 square foot warehouse in the triad in North Carolina. And they have less than 2% vacancy in that market. And we're buying the asset for $80 a square foot. We just finished building a new industrial complex up in New Jersey and we're all in for 200 a foot. So even at 175 to 200, that signals to us that the supply issue is not going to be fixed anytime soon. The vacancy is so low the ability for new inventory to come in the market just doesn't make financial sense. So we feel pretty confident that we can move the rents up to market. And if a tenant doesn't wanna stay with us, that we can move somebody else in. And we typically are looking at a discount to market anyway. So we underwrite to say, okay, if we're 10, 15% sometimes below, how does that look, right? So those are the things that we feel kind of mimic what we saw on the multi side. We saw a lot of upside in rents. We didn't have to do as much work as we thought we would have to. And we see the same on the industrial.

Lance Pederson: Yeah, the same. I'm super bullish on industrial right now for those same things. Primarily that supply and demand is just way out of kilter. Because of that headwind of building that new… In 2022, I think they delivered 500 million square feet, new square feet of industrial, which is… they actually need about two or three times that to keep pace, not to mention the amount of class B industrial that's just knocked down every year for higher and better use in the urban core. It's much like multifamily where it's just this huge dislocation from supply and demand and just the inability to sort of

David Hansel: It just doesn't pencil, like you said, I mean, to build that new at 200 new industrial that's being built, which is softening a little bit is your mega complexes where, you know, it's your Amazon distribution center, a million dollar million square foot, you know, food distribution center. And I think we'll see some softening there. But I relate what we buy to an industrial kind of like your neighborhood retail strip center. Right. You always are going to need a place to get your hair cut, to get your nails done, like little food eateries and things of that nature. And so that's what this light industrial fills in the market is very different than your like big box industrial.

Lance Pederson: Yeah, I mean, and a lot of it supports it, right? So the more that that, you know, the Amazons and that matures and grows, I mean, a lot of that product has to move someplace, it's got to park someplace in a warehouse or distribution center. And let's face it, I mean, much of the economy runs through class B industrial. Fencing, contractors, you name it. It's just these places have to have a home base and where their trucks are parked and their materials show up. That's not going anywhere. The economy requires it. I'm super bullish on that. I think it's shaping up to be

David Hansel: And there's real cash flow out of the gates day one, not cash flow that sometimes exists in multi. And the other part is that you can get positive leverage, meaning that our interest rate is lower than the cap rate that we're buying in on. So, you know, which is- What a shocking, it was a shocking development.

Lance Pederson: Yeah, exactly. Yeah. But yeah, in multifamily, yeah, you see a lot of those negative leverage situations where, you know, your cap rate is lower than your interest rate. Like it's just, that's a lot of pressure on the operator to perform and a lot of execution, you know, excellence and execution required to do it. Yeah, it's just safety that comes along with knowing that you're going in cap rate and the cash flow is greater than your cap rate. It makes it far easier. Even at that, the rents are 20, 30, 40 percent below market. It's just a lot of safety there.

David Hansel: Yeah. The other really great benefit of industrial and why we have pivoted more into that space, we've always had some semblance of industrial. The expense side of the P&L has gotten out of control in multi, and insurance is a big story. Obviously, insurance rates on multi has become outrageous. There are some areas in coastal areas that you have a B-class asset, it's uninsurable. We've had costs. We have one asset, a smaller asset of ours, 100 units, The insurance policy went from $30,000 up to $100,000 this year. So what's kind of interesting is in the industrial side, not all of them, but like the stuff that we've been buying either has a portion of the tenant based on triple net lease or all of it. Because the market's tight, you're able to transition these tenants into these triple net leases, which puts the variable rate expenses on their shoulders, not on yours. And it's one less thing that you have to worry about. And that's become a very big issue across the multifamily industry. Labor's been a challenge. You pay up for staff, and it's hard to find good good management and staffing, all these little pieces add up. And so we find that there's a lot more stability in the industrial space now and the ability to cash flow.

Lance Pederson: Yeah, most definitely. Yeah, there's far fewer moving parts, which makes it easier. And it does, there's more intellectual stuff that needs to be just underwriting leases and the tenants and it has its share of it. But once again, I think that's a good match for a group like yours. Once again, how you structure the transactions, understanding those things, it serves well for those that can get their minds wrapped around those types of things. But yeah, I think it's the next darling and I think it's got some runway. It's at a good point in the cycle and It's exciting stuff and industrial. Where can people learn more about you, David, and about Lucerne, and what you guys are up to, and if they want to reach out?

David Hansel: Thanks. I appreciate it. You can visit our website, which is lucerne, L-U-C-E-R-N, capital.com, and that's C-A-P-I-T-A-L.com, lucernecapital.com. You could email info, at lucernecapital.com with any questions and happy to set up a call with anyone that they want to discuss or learn more about what we're doing. And yeah, feel free to visit, give a ring. And I appreciate you having me on today, Lance.

Lance Pederson: Well, thanks for joining us, David. All right. Have a great day.

David Hansel: Thank you. Take care.

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