Introduction to Brit Properties – Part III
The Importance of Taking a Position
I once had a professor that taught me an important lesson. He said, “if we learn nothing else in his course, to remember this: always take a position on things. Don’t be wishy-washy. Even if you’re wrong, your willingness to take a position will force you to become more informed on the topic. If you don’t take a position, you’ll never think things through.”
While I’m generally a pretty amenable guy, there are instances where I take a firm position and will draw a line in the sand.
As it pertains to real estate, my single strongest real estate position is to maintain a very conservative loan-to-value debt ratio. I do not like taking on debt. I’ve seen so many other people get in trouble this way. Investors become overleveraged and then, if something goes sideways, they cannot cover their debt service and end up defaulting on the property.
This is especially true in industrial real estate, where many buildings are operated by single tenants. If that tenant leaves, goes bankrupt, or for whatever reason stops paying their rent, the property owner isn’t magically off the hook. They have an obligation to continue paying the bank. This becomes much harder when you’re highly levered with costly mortgage payments.
I unfortunately learned this lesson first-hand. Twelve years ago, I had a partner who was more aggressive than me. He wanted us to continue buying properties using debt, and we soon became over-levered. When the market crashed in 2008, we had about a million dollars in liabilities that we weren’t going to be able to pay. This caused a major rift between my partners and I (one of whom was my brother).
The three of us pointed fingers at each other, equally stressed out over the cloud looming above us. In a sad twist of fate, our business partner unfortunately passed away from cancer around this same time. We had all taken out insurance policies, and when he passed, the insurance company sent us a check for roughly $1 million – the same amount we needed to pay the bank. My brother and I were able to salvage the business, but not before causing significant harm to our own relationship in the process. We’ve since mended fences, but the importance of maintaining low debt ratios has never been lost on us.
Through this process I learned that having moderate debt (say, 30-50% loan to value instead of 65-80%) is the best way to protect yourself in the event of any unforeseen circumstances, albeit a sudden loss of tenant or economic downturn.
I’d rather consistently hit a double or triple with safer deals than become over-levered while trying to hit a home run. In any deal where we’ve had any problem, it always could have been resolved if we had had low debt on the property. Just because you can borrow money doesn’t mean you should borrow it. It’s too much of a gamble.
Why It’s Important to Have a Mentor (and Mentor Others)
I’m a strong believer in mentors. Milt Podolsky was my first mentor, and then my second mentor was his son, Steve. Steve Podolsky was a brilliant teacher. He joined the family business but served as the teacher to so many of us growing up in the industry. He taught us how to do our business, and taught us with passion. He’d sit us down in a chair across from his desk, and he would pick a topic for us to learn, imparting his knowledge along the way. I called him Professor Kingsfield, in reference to the old law professor in the TV show called The Paperchase. Everyone was scared of Professor Kingsfield, who was tough but also larger than life. I still call Steve Podolsky Professor Kingsfield to this day.
Milt and Steve were my first mentors, but they certainly weren’t my last. Over the years I’ve gravitated to many of my investors who are older and have a lot of experience. I’ve had about seven or eight different real estate mentors over the years. One of these mentors is a 93-year-old named Nate. Nate is one of the most successful real estate professionals I know. We’ve grown incredibly close over the years and I trust him implicitly. I always run deals by him, and when I’m ready to move on something, Nate is always at the ready to invest alongside me. Nate is still sharp as a tack and we talk almost every day – sometimes several times a day. We cherish our weekend breakfasts together, which have become tradition.
My experience with my own mentors has taught me the importance of mentoring others. I have mentored 60 people over the years, some of whom are just getting started and others who are interested in commercial real estate as a second career. It feels good to give back to these others, after so much has been given to me.
Lessons from My Mentors
One of the early lessons that my mentor Steve Podolsky imparted on me is that every detail matters. When I first started out, I assumed that if I could sell, I could leave the details to somebody else. Steve was a big proponent of detail, particularly when navigating documents and understanding exactly what you’re agreeing to as part of the deal.
Steve reminded me that to the extent you let anything go, it will inevitably be the one thing that will come back to bite you because you didn’t pay attention to it.
Another important lesson I learned from the Podolsky family is that family harmony is exceptionally critical. Many of us get into business with our families, as the Podolskys did and as I later did with my brother David. When there are problems with family dynamics, it can cause tremendous strain on the business. Disagreements and/or mistakes are bound to happen, but it is important to forgive and make peace for the sake of maintaining family harmony.
The “Toughest” Negotiator Doesn’t Always Win
There’s a big misconception in the industry that the toughest, most aggressive negotiators are the most successful. While that can be true in some cases, there are plenty of situations where this isn’t the case. Sometimes, it’s just not worth fighting over every last nickel.
Here’s an example. I was at a meeting with one of my investors who was, alongside his wife, trying to negotiate a sales price with a buyer. We were all sitting down together and the buyer just kept hammering and hammering the sellers, to the point where the wife was becoming visibly upset. She asked to speak with her husband and me privately, so we left the room, at which time she broke down out of frustration and said she wanted the other guy to “get the hell out of her house.” Her husband returned to speak with the prospective buyer and explained that his wife didn’t feel like he was being fair (and she was right), and told him the deal was off. The buyer retreated and pleaded to make the deal work, but at that point, the damage was done and the wife refused to do business with him. Instead, they walked away from the sale.
I’m a firm believer that deals must be negotiated with give and take. The way I treat investors is that if they make a decision that I disagree with, unless I vehemently disagree with it, I concede. In ten years, I’ve always gone with what my investors wanted to do. This has worked well for me, and has allowed me to cultivate strong relationships with my investors, sellers and buyers. They know that I’m not looking to take advantage of them and that I value the relationship more than any last penny I can squeeze out of a deal. It’s not worth burning a bridge. I’ve gone that route before and have found much greater success with this new, more cooperative mentality.
What Gets Me Up Every Morning
After so many years in the industry, people often ask me how I stay motivated. What gets me up and running every morning?
At this point in my career, I’m not hustling for dollars (though, I am). But I’m not the same deal junkie that I used to be. Instead, what really gets me excited is the creativity I get to use in my deal-making. I like finding creative ways to structure deals. I like looking at something that’s not there and seeing what it might become.
A good example of this is when I, alongside a group of investors I had lined up, purchased the former Keebler Cookie headquarters in Elmhurst, Illinois. It was a 100,000 SF facility on a 10-acre site. It was chopped up into hundreds of offices for the Keebler employees who used to work there. There were oversized parking lots. The site just wasn’t conducive to a traditional warehouse or industrial operator, and so it sat vacant.
I started to envision what the property could become—what it could be if we started knocking those offices down. I started imagining the logos of various companies in the same location as the former Keebler sign. I knew the property had potential, so we jumped on the opportunity to make something of it. Once we were done, we lined up a great deal with Comcast. The site was perfect for Comcast, as they had the space to house both a call center and a 650-space parking lot to park their vans and trucks overnight. Figuring out this deal was so exciting, and truly so rewarding. It’s putting together creative deals like these that gets me energized each day.
What Keeps Me Up at Night
On the flipside, people sometimes ask what keeps me up at night. I can truthfully say that nothing keeps me up at night. I don’t want to sound overconfident when I say this. The fact of the matter is, I know we have reduced our company’s risk profile to the point where it would be almost impossible for us to lose a deal to a lender, which is what caused me so many sleepless nights earlier in my career. Today, we maintain a 30% loan-to-value ratio on as many buildings as we can. Now, our portfolio feels so safe that I can truly rest easy at night.