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Soft Skills Needed for Real Estate Finance w Frank Lonardelli – Ep. 5

by | Mar 13, 2019 | Real Estates

SUMMARY

Frank Lonardelli is the founder and CEO of Arlington St. Investments. Frank is a sharp businessman having built a portfolio of real estate assets well into the hundreds of millions of dollars. As well as having an exceptional eye for deals and detail, Frank is a powerful storyteller. He has the ability to paint a vivid picture of situations and opportunities which has surely worked in his favour when financing his projects. We discuss his main focus right now; the redevelopment of 17th Avenue in Calgary, Alberta. He has bought up dozens of properties in Calgary with a focus on reshaping the inner-city. I thought we’d drill down on the hard-skills of how he structures and finances his projects, but instead, Frank shared some interesting points about the application of soft-skills in creating a good deal. For those interested in financing real estate development projects, this is a special episode worth listening to.

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TRANSCRIPTION*

 

* This is a software-transcribed article. 

Cory: [00:01:41] Frank how are you?

Frank: [00:01:43] Fantastic. How are you doing?

Cory: [00:01:45] I’m good. So one of the things I admire is Arlington Street. It comes with a story you named it Arlington. Why did you name Arlington Street investments?

Frank: [00:01:56] Well I grew up on a street called Arlington Street. To be specific 171 Arlington Street and this was a first generation downtown location, happened to be in Manitoba where pretty much we were surrounded by first generation immigrants from 1950’s wave of European immigrants who came over from Italy, Greece, Portugal and it was a really interesting upbringing. So I grew up in this environment. There were no social nets whatsoever so we kind of lived in this environment where I call a “no excuse environment” which meant that you just got up every day you tried as best as you possibly could and you never ever made excuses about why you couldn’t do something. And that’s kind of how life started. The area changed quite a bit over the decade that I lived there and from a demographic perspective of course what happened with the story of most first generation immigrants as they came here. I think when they started making some money and then they moved out to the power centres and as you remember power centres weren’t around in the ’50s and ’60s and then they became the suburban explosion of where people moved their houses into. And so the immigrants gained some affluence then within the downtown cores but what happened was with the downtown core which is where Arlington street was, they became rotten. And they were filled in with really challenged demographics. And so Arlington street became the murder capital of Canada for almost a decade. So half of my life was learning about hard work, very clear ethics and keeping your head up and moving forward. And then the other half the time that I was growing up there was both surviving and being able to see the bend in the road because every day I went to school there was something that was going to happen. And so it was a very dynamic upbringing and it brought a lot of grounding and learnings and appreciation for where I had grown up.

Cory: [00:03:56] From the starting point there to what Arlington Street is now. Can you quantify what you’ve built now from the real estate side?

Frank: [00:04:05] You’re talking about mathematics?

Cory: [00:04:10] Mathematics, square footage. value. Whatever. However you can paint a picture of what you’ve built now from where you started.

Frank: [00:04:20] Well there’s a demarcation line right so let’s talk about the start. So Arlington Street Investments has been my private holding company since I was 27 years old when I did my first transaction. But I’ve been doing real estate part time for 18 years. When I decided six years ago to as we say in the world of business monetize all my learnings I created Arlington Street Investments which became my full time job which became the full time enterprise and corporation I spent all my time and energy. And the goal of the company is really simple. Number one it was going to focus on urban development so we were going to do urban mixed use developments in the core of Calgary but we were also going to go to other geographies in Canada and then into the US within a five to seven year period of time. We started with no assets. I had a goal of having 250 – 300 million dollars in assets secured within the first five years and because we’re not a buy and hold company those assets that we were securing were purchased to assemble, so non-assembled assets, which are just buildings that are all beside each other to become assembled to change land use and then to build vertical density, mixed use development. So you take four or five low-rise buildings, you purchase them and we change land use, you knock them down and then build mixed use developments 5, 7, 17 storeys up. So the enterprise value goes from $250 million dollars in place fair market value to a billion dollars in post enterprise value. That was our five year goal. We got that three and a half years into the program. So right now we’ve got a little over $275 million dollars in fair market value assets with a market value post development of about $1.3 Billion.

Cory: [00:06:06] What amazing three years! As I recall. [When] you started off. You were a business owner before you got into real estate. What were some of the dealings you did early on? And what got you ultimately into real estate?

Frank: [00:06:23] I always knew I was going to get into real estate in some way shape or form I was fascinated with real estate. My first fascination with real estate was the real estate that I was going to buy when I became affluent. So there’s a street which is the polar opposite or the antithetical street of Arlington Street when I grew up called Wellington Crescent in Winnipeg Manitoba. And Wellington Crescent was where Izzy Asper had a home of CanWest Global and a number of the affluent people Winnipeg marketplace and so these were you know ten to twenty five thousand square foot homes that were worth at the time millions of dollars. And so I always had a real fascination for real estate, value real estate. How much real estate costs, how taxes work. Could you create appreciation in different assets? And so I knew that I was going to end up kind of spending all my time in the real estate business. But my first business was a food services company and I would tell you this because I’ve said this to everybody. Two greatest experiences I’ve ever had as an entrepreneur is working in a restaurant which was my mom’s restaurant. Because as you know a restaurant has every aspect of business and you would actually have to execute every aspect of that business perfectly daily because if you don’t especially in competitive city like Winnipeg, you do die. So we have this Italian restaurant called Vesuvio and by the time I was eight years old I was either scrubbing floors or pouring water or doing something in that restaurant. So that was an amazing experience. The second amazing experience I had was when I left law school and I started my first company before I started the first company I worked for a sales organization. Now they call themselves an alarm company. So they literally sold alarms door to door but really the engine of that organization was a direct selling company. So I learned everything about direct sales and you can appreciate if you’ve never sold anything in your life, having a large chip which is what I had to carry with me and knocking on someone’s door to then try to convince them to buy an alarm that had a value that was five times more of the same market competitor in Winnipeg, Manitoba, the wholesale capital of Canada. You have to know to sell. And so I had this amazing experience of being thrown into this organization knowing nothing about sales and being taught by masters of sales how to sell, how to connect with people, how to overcome objections, how not to create objections. And that taught me that you know if I knew how to sell which was really capturing the needs and wants of the person I was connecting with that I could really kind of write my own ticket. And those are the two things that really kind of propel all my business experience forward.

Cory: [00:09:13] When you take that experience and you apply it to the real estate business you have now, surely every deal that you’ve done hasn’t been a home run. And if we’re to focus somewhat maybe on the finance side, some of the finance experiences. What’s been your favorite failure?

Frank: [00:09:33] I don’t think I have had any failures. I think failure is a learning experience and dropping out of business that’s failing. I think that if you’re pushing yourself you’re going to learn some very very valuable lessons that maybe cost you a bunch of money but to me that’s the investment portion. If you want to get a PhD it’ll cost a quarter million dollars too, and a PhD in business sometimes costs millions of dollars. So I haven’t had any failures but in terms of your question, I haven’t. Not everybody hits home runs all the time. First of all our thesis is always ground rule doubles. So I mentioned hitting ground rule doubles every time I get on the plate. That’s my most important and what is a ground rule double. Number one we never lose money. And I have never lost a dollar of equity since I started this company. So that is the most important thing. You know Warren Buffett calls it the Golden Rule. Golden Rule number one: don’t lose original equity. Golden Rule number two: don’t forget Golden Rule number one. So when you grow up with no money you learn that never losing that money is what you should covet. And if you do that it tends to derisk a lot of the exposure on the upside. But in terms of not hitting the ground rule doubles and we’ve certainly hit a bunch of home runs I would just say to you that I think the learning has been don’t ever try to predict the unpredictable.

Cory: [00:11:05] Do you have an example or examples of that?

Frank: [00:11:07] I think the simple example is that if you choose the profession that I’m in which is development and you decide to do development in a city like Calgary, which I would tell you is the most unforgiving city. I’m not talking about Canada. I’m talking about North American development. You better be prepared for the worst because what ends up happening if you think about.. go back and look at a trend line from 1960 we’ve had eight peak to trough energy cycles. Peaks being $146 dollars a barrel troughs being $26 dollars a barrel and so you can never time that peak to trough cycle that runs five to seven years. In other words if you’re building into a bull market at $146 dollars a barrel of oil and all the factors are going for you on the revenue side you’re going to get killed on the cost side because you have a shortage of trades, materials will increase and that becomes a real challenge. So though you may be over exceeding your revenue targets, for example for some condos you sell them for more. If you’re leasing a retail space like we do we’re going to lease them off for more because people are bullish. But if you’re building that building your cost may exceed those gains during that period time. The opposite exists in a down market where you can actually have great trade exposure. You can have wonderful pricing but you can’t lock in the revenue because people are insecure about doing these deals, open restaurants, they’re insecure about buying new condos because of what’s happened in the marketplace there. Commercial office goes to 30 percent vacancies like we had in Calgary with 18 million square feet available. So I would say that I think took a couple of pretty sure bets on where we thought the market would go and we didn’t predict or benchmark what we would do if it went as dramatic as it has on the downside. And so those are some of the worst experiences we’ve had moving forward and certainly some of things we think about all the time before we project into any project.

Cory: [00:13:12] I want to jump ahead to the move you made on 17th. It’s a bold one to say the least. You’ve brought in financing partners. You’ve gone and snapped up a bunch of assets. What’s the story behind that? And after that I want to get into. How did you get those deals done? Because this is not an easy environment.

Frank: [00:13:35] Yes so I think the interesting part for us was to do something that no one had ever done. And I had great experience taking buildings that were located within the path of growth, that were old and tired and needed someone to come in and give us some TLC. Taking those assets, converting them and putting new tenants into them and having some great gains. You couldn’t do that on 17th Avenue. 17th Avenue is a series of fragmented assets in the highest profile street. I called the four blocks of 17th being the cool street or were referred to as the High Street. The place that all the retail goes to, especially food & beverage and has high pedestrian traffic. In the intersection we are in right now, 17th and 5th. 17th and 5th is the highest pedestrian traffic and highest traffic in terms of cars going through an intersection anywhere in the downtown core. And so we wanted to pick not only profile assets but want to pick and control entire sections. So that was the bold aspects of the way about the way in which we were looking at the business plan. The business plan called for secure 8 different development sites, purchasing between 40 and 50 buildings within a three year period of time, assembling that and then change the land use and going into construction. So that was the business plan and so we executed.

Cory: [00:15:00] That looks back to our earlier discussion of the two to three hundred million at fair market value. How did you do that?

Frank: [00:15:09] Well we kept the assets we wanted to go after first of all and we did something that most people never do. We went completely non-brokered. The team contacted a lot of the owners, the existing landowners but I personally met with the landowners and introduced myself, told them why I was interested in buying their buildings, completely transparently. I actually told them my vision of the street which they actually connected to and moved through a process to gain their trust provided a fair price and transact accordingly. Now here’s the interesting thing. We talk about authenticity. That sounds not easy but somewhat simple. One of the things we knew going in is if we ever deceived, if we ever told a lie, if we ever played a game with any one of the purchasers because I’ll get to the end of this in a second. Understand that every single purchaser I’ve purchased from falls within through various categories. Age, their average age is 70 to 75 years old, they’ve owned their building for over twenty five years. And they would have a five to ten thousand percent gain on their original purchase price. Which sounds really cool when we’re sitting down in terms of being investment guys. Five thousand percent return on my money. It scared the crap out of these people and I knew that going in because these people were my mom and dad. Who had nothing when they came to Winnipeg and they bought their first $24,000 house on the street. They had nothing. And at their age what would they do with these millions of dollars that a guy like me who looks all sophisticated with a fancy suit, knows how to talk properly. What would they do with it? That was terrifying to them. So I also had to understand how to deal with that because they were the idea of buyer’s remorse. They had sellers remorse but not because they were upset about losing their building but something almost bizarre to think about. They were scared with the money. They were scared about what they would have to do with that money. The burden they would leave on their kids and how to deal with the trust issues and all that kind of stuff. So what I could tell people, I said this at the Calgary Real Estate forum when they ask me this question. How are you able to go out on a non-broker basis and buy all these assets that everybody else was buying for? And I said, I think the thing that we were able to do that people couldn’t do up to that point was met people where they lived. Because I was them. They were my parents, so I knew what they needed to hear. I knew how they needed to be dealt with and more importantly I knew what we couldn’t do with that. And so that was the integrity that we brought into the process and and the other beautiful thing that happened is everyone knew each other. You know we own the spinning buildings within a four block radius. You do the first transaction. Remember the old word above. They tell everybody. I wasn’t sure about this guy, and then I got to know him, and he told me what he’s going to do, and he did what he said. And that’s all those sellers needed to know for us to have an entry way to go and do this transaction. No one else was able to secure prior to us coming their.

Cory: [00:18:45] I commend you for what you did but it doesn’t sound like there’s more to it than that.

Frank: [00:18:48] No there isn’t. And I think we’ve complicated it. We get our postsecondary degrees and we read all the books and we think it’s really technically difficult to execute on success. And when we talk about success we talk about dollars and cents because that’s the business we’re in. The other part of success is the legacy piece of work we’re going to buy, build and create. Let me suggest this to you, that I think is something important based on what is you do for a living, and what we do for a living. So our business is all about people. And the idea about integrity about what you’re saying, what you’re going to do. Those and those sellers needed to know that I was going to do exactly the thing I said I was going to do. There weren’t any games. No silly barbarism, no delays, nothing. One of the great letters I’ve had as a business person I think we screw this up all the time is that we try to find, we try to hire winners. You know what a winner is like right? You get their CV, you get a resume and you know he’s got his gold medals or she’s got all these gold medals. She worked with these Fortune 500 companies, she was a star athlete, she was this or he was that or [unaudible] case maybe. I don’t try to find winners because that’s table stake. I try to find people who cannot stand to lose and those are the people when I used to invest in people’s companies, I had to believe he technically or she technically knew their business or their product or their scope of work better than I could ever possibly imagine. So how would I try to drill down on whether or not I felt that person was competent? That didn’t seem to make a lot of sense to me. I wanted to find somebody who had a psychological profile who just could not stand to lose. So we say this all the time in our office and we walk around and people are just kind of like looking like they’re happy and you know everything’s good. They’re not jumping up and down and not having bonfires. We’re probably winning. But if you walk into this office, because that’s a normal state right I expect to win. Right. What you will see if we’re losing in this office is you will feel something very different. There is a serious intensity. There is a… We’ve got to get in a room and figure something out. And it doesn’t matter if it’s calling up your wife or kids and saying sorry honey I’m not coming home tonight because we’ve got to solve the problem. That’s really this whole kind of functionality and that’s the foundation of everything we’re talking about because you can appreciate that I had to raise a ton of money in a very short period of time. When people decide to sell a piece of real estate that they have owned for 30 – 40 years, they’re like OK here’s the deal and I want in 30 days. So acquiring that capital quickly was also about going to people that trusted me you’ve done this with me for a longer time. That when I said. Here’s you’re going to buy. Here’s we’re going to go with it. Here’s what we’re going to do. They knew that I was the kind of guy regardless of what the market was that I would stay up all night every night if I had to, to ensure that we execute on what we said we’re going to do.

Cory: [00:21:57] Can we get into how you financed these deals? What those structures look like? What the perhaps the economics of these deals? What were some of the finer details of how you raised that money and also to execute in 30 days.

Frank: [00:22:11] So the classic structure we’ve used since I was 26 is the GPL construction. I am the general partner in a limited partnership. We’ve decided not to pool our assets. We’ve decided to keep them and hide them off individually under a special purpose vehicle. So for example we’re building a 48 unit condominium across street called The Fifth with 30,000 square feet of main for retail. That is the national block partnership to where I’ll be the general partner. So what does a General Partner do? Notwithstanding the legal responsibility, I take all the debt risk so my name, my personal guarantee and my corporate guarantee is on every debt financing we do in every project. So I always tell my partners if we’re raising $10 million dollars, my downside is probably double that. So you can imagine if we’re building a $40 million dollar building I got a $30 million dollar construction financing facility. So the investors may put in $10 million dollars but I have to sign my name on the construction financing facility and so not only can I lose my equity but I could lose a lot more because I did cut a check after I say goodbye to that original equity. So my investors and it’s always been the case where we’ve structured it that way. So generally speaking I always come up. We always put capital in, we always take the largest position and we always take the debt risk. And generally speaking we always get paid last. What we’re toying with now and I use that term seriously. Has been the end result of our success. So that structure has worked very very well but we now have 14 limited partnerships. I operate like a reporting issuer. I provide quarterly updates I have annual AGMs in my office here. So you can imagine over a course of a month doing 14 to 16 AGMs and that prep time and administrative time, it gets a bit bewildering. So last year I told all my partners that I probably would not have the same structure moving into 2019. So we’re looking at collapsing all limited partnerships into a master limited partnership and the beautiful part about our structure is that if you looked at my investor base they’re all multiple investors in multiple projects anyway. It also provides them an opportunity to say – “well, I’ll be a part of the hotel across the talk of the park as well as I’ll do the mixed use development on Fifth as well as I’ll do the masterplan development on 14th and I’ll have a piece of this entire pie”. So we’re moving through that process right now. We’ve soft sold it to our investors. They’ve all said “Yeah, we’re perfectly happy doing that”. And it allowed me to have one investor group, one project, one reporting metrics and it’ll also allow me, which would I’ve told our investors has been my biggest risk, is to gain back the time I’ve lost to continually grow the business because we’re just on step one in five steps in the future of the company.

Cory: [00:25:09] From the limited partnership or the GPLP structures, I’ve heard but can’t articulate the changes from a tax standpoint. Have there been changes there? And what are some of the perhaps pitfalls? Or what are some of the big gotchas that come with structuring A GPLP?

Frank: [00:25:29] I’d say it’s the most efficient tax preferred structure that you can adopt. I’ll give you the technical answer from a taxation structure as we move forward. But I think that in terms of one of the aspects of how we operate our companies is that one of the first things we want to do is want to repay the original capital. So as you repatriate the original capital you buy an asset you bring in the private equity partners and you stabilize it, you upper refinance to get the original capital out. It’s a very efficient way of getting that capital back out to the clients so they get a hundred cents back into their pockets and now they’re really playing with the house’s money. And because they get dividend or distribution income is taxed differently than personal capital gains. Now when you roll up or wind up the company in the event of a liquidation if we sell the business then the partnership is taxed at the partnership level and then issued at… sorry at the GP level of the corporation and then it’s issued out to the limited partners. So the limited partnership has a structure that allows for very long distributions or deferred income implications. And from my perspective it’s the most efficient structure for a company that does what we do for a living.

Cory: [00:26:49] And if we were to look at Fifth Avenue. Sorry… The Fifth, excuse me.

Frank: [00:26:55] Very original name in conventions. It’s on 5th. So we call it The Fifth.

Cory: [00:26:59] I like it. That building there I understand is about potential of a $40 million dollar build. And as a GPLP you came in with your own capital. What does that look like when you go through the paces of the construction financing? Is it tranched out? That’s obviously that the entity of the GP or the LP. When the project’s completed, everything’s sold then what? It is liquidated? Or who owns that real estate? the commercial real estate? or what happens there? What’s that look like?

Frank: [00:27:34] Yeah. So first of all we’re going after assembly assets or assets we want to assemble. We use our own money. So we’ll pick three or four buildings and we’ll negotiate and then we’ll get all four. Bit of a trick to it takes a lot of energy but we’ll get all four people to allow us to transact coterminously. So we’ll say OK, we’ll close in 120 days and we’ll have all the capital and then we’ll close and place them into a limited partnership at that point.

Cory: [00:28:02] Can we drive down a little bit on that? Just a little bit more clarity on that. In essence you paper it up so everyone is on the same terms.

Frank: [00:28:10] Let’s go back to the original premise is that there is no room in lies if you do the type of transaction you do because all the neighbors are going to talk to each other about what kind of deal they got. So it starts with the truth which is the only reason why I’m buying your building is if I could buy the other three buildings next to you and the reason I want to do that is because I want to kill this bill and then I’ll actually show them a record and I’ll say the premium that I can pay for the land based on buying or building this building would be X and you can’t get it by just selling your building on an income basis right. Because there’s two ways to value real estate. One is on the income approach. You have a 10,000 square foot building that kicks out a $100,000 dollars a year. It’s got a cap rate to it, it’s valued at x. But if you’re building which means you’re creating additional density, then you’re actually buying land that has way more valuable as they go higher.

Cory: [00:29:06] And are you, to the degree of transparency, do you share pretty much per square foot basis with everybody across the board, every house?

Frank: [00:29:14] Absolutely.

Cory: [00:29:14] Say I can pay you this. And everybody knows?

Frank: [00:29:17] Because they’re going to call a broker and they’re gonna see if I’m lying to them. Because what I say to them Cory is I say “I am your highest and best exit” not some guy who’s gonna buy your building to own it because he wants one little building. “I’m your highest and best exit.” But if I can’t get all four of you, because I also need them to work with me to convince the other people if I need a little bit of support. That doesn’t happen very often but it has happened a few times and they have been instrumental in getting those assemblies done because now they put pressure on other people.

Cory: [00:29:50] And for clarity. Everyone knows how much each other is selling a business for.

Frank: [00:29:55] Absolutely, the building. Exactly.

Cory: [00:29:58] Yeah. Wow!

Frank: [00:29:59] Yeah It’s pretty transparent. And again this is not what you can learn in broker school right. So I have a lot of friends that I respect them dearly but they don’t teach you that in broker school and they don’t actually teach you not to do that because people think that maintaining secrecy in the negotiation is coy. I think it’s deadly.

Cory: [00:30:18] It’s an interesting way I’ve never… I mean like you said, they never teache this in broker school. So, brilliant.

Frank: [00:30:24] I’ll give you a cute example. We bought some of the most valuable real estate on the corner of 15th and Elbow. In the intersections of Bel Air, Britannia, Elbow and Windsor, some of the most affluent areas right across the Calgary Golf Country Club and we had a beautiful assembled side on the intersection and had a story. There’s contamination across the other side of the street, we want to buy that asset. That got cleaned up so we assembled the entire site, nine separate parcels. And the dry cleaner and dry cleaners are notorious for leaking back in the 70s and 80s, a product called perc. And perc is called tetrachloroethylene and it’s what the dry cleaners used to use to get our shirts all startched right. But they would be, they take this this perc and it would sit in these holding containers and the holding containers would then leak into the ground creating contamination. Perc is a nasty contaminant, there’s lots of contaminants like hydrocarbons, but perc was nasty because it goes north, south, east and west and once it gets to the ground it’s really hard to mitigate. It’s hard to fence it around. So when we negotiated that deal we told all the other sellers that we thought fairly confidently that their sites were contaminated. To which they looked at us and said “absolutely not, they’re not contaminated.” But if you understand the length of time the contamination was half of at this dry cleaner and how that chemical moves you know we felt pretty confident about it. So we said okay well here’s the deal – we’ll spend $250,000 dollars to drill the entire site. And here’s what we’ll pay for the asset if it’s contaminated and here’s what we’ll pay for it if it’s not. And they all agreed to it. And so we took all the testing results and we put them up on a drop box and we gave everyone access to it and it worked out for everybody. Completely transparent. They all got a good price point but they also knew why we’re pricing the way we were pricing because when you’re developing and you dig up that soil you have to deal with that contaminated soil differently than non-contaminated soil. So again this goes back to a way in which… and no one does it. I have told friends in development business – how did you get that deal done? And I told them this, are you nuts? And I think it just it worked very well for us.

Cory: [00:32:41] The secret weapon of transparency but it’s not a weapon at all.

Frank: [00:32:44] Just tell the truth. Who would’ve thought?

Cory: [00:32:47] No kidding. So I understand you recently sold one of your big assets to First Capital, FCR on the TSX. I think there’s an interesting story behind it.

Frank: [00:33:00] The fun part was it had a great exit. Which is kind of why we do these transactions. But let’s talk about going in. We bought that asset in 2009. It was really well located we felt. It was the design district which is 10th and 7th the in the SW corridor about a block from the Co-Op. There is a tremendous amount of gentrification happening within that area. There is a lot of developers going in assembling assets on the open market, not through the brokerage community. And the market did what every Winnipeger hopes it does which is it blew up. So we were trading at $140 dollar/barrel of oil and in at a 2000 we went off the cliff. Global Financial Crisis, the CMBS market in the US, the market traded down to $26 dollars a barrel of oil. Vacancies, before the roll over, were zero percent in the marketplace and they went to almost 22 percent in the commercial office space. So about 10 million square feet opened up which is devastating in commercial office. So what happens in a market like that is people get very fearful and they just sit on their hands and we got extremely aggressive and to tried to buy some distress. And so this was a great asset. It was a 26,000 square foot building, we call it Haiku because the developer was going to buy the building to knock it down to build the 26 storey tower called Haiku. I had already built the designs. Spent a million half dollars really beautiful development. The market collapsed. Of course the condo owners disappeared. He was in four projects just like that. And I called him before he went into receivership and they are extremely classy developers and I said “look, I want to buy your building. Here’s what I think is worth”. And we negotiated a deal and we were the only transaction and we bought two other buildings at the same time but we were the only transaction in 2009 of that asset class in almost a full year. My only regret is we didn’t have more money to buy more assets. But basically what do we do. We bought a building that was empty that we could reposition so we would gut it and put new systems in, mechanical, bring in new tenants, stabilize it when the market corrected. We would then go knock it down, build that Hiaku building because I had the plans for it. So I thought that was a great opportunity, we bought it below replacement cost. So we sat on that asset, we stabilized it, it’s got one of the best restaurants in the city which is Bridget, which is owned by The Concord Group who own National and Double Zero and a lot of other different properties. And so we had an unsolicited offer from two or three companies, Cap. Rates compressing the retail marketplace. Cap. rates were about five and a quarter. Five and half their compress down to four, some were 3 7 5. So we bought the asset, repositioned the asset, repatrate all the money to the investors in the first two years. And then sold it for 480% cash in cash return. And I can tell you there’s a couple of things that happen when I sell an asset. The first thing is I go through this euphoric phase of taking out all my partners to dinner and it’s a thing that I do all the time and I actually literally hand deliver the checks to them. And most of these guys actually to the person they’re all my friends on that transaction. Very very good friends, not just investor friends. So I get a lot of enjoyment out of that. And then I go into a bit of a depression for about five or six minutes because I have a hard time selling. I’m a buy side guy. And I believe that you make all your money on the buy side. Not on the sell side. So that’s why our discipline of really buying correctly and buying the right assets at the right price point and being patient and being diligent has really served us well. But that was a great transaction and it worked out well for the investor. It worked out well for us and it’s gonna work out fantastically for First Capital. First Capital’s an extremely classy organization. They’re going to knock that building down they’re going to redensify that entire area. It’s going to be great for the city and the community.

Cory: [00:37:21] I came in aiming for it for a bit of technical finance talk. What I’m leaving with here, I think we’re all going to be leaving with is an expertise in how you approach the soft side of real estate and soft side finance. The subtleties of sitting down and having a one on one conversation unbrokered with the people and sharing the vision of what you want to do. It’s the art of it, right not to quote Donald Trump or the art of the deal.

Frank: [00:37:49] Yeah look I mean at the end of the day we’ve got to put the financial structures together that align with our partners’ interest in placing capital. Right. So to me it’s actually a market function. I don’t really control it, right. There’s there’s certain debt service ratios, there’s certain amounts of equity, there’s certain return expectations that I have to check those boxes but to think that I’m putting that together, I’m beholden to my partners on that side. The beautiful part about where we are as a company is that I can I certainly can throw my weight around now and say no. But I’m also respectful around that aspect too right.

Cory: [00:38:29] What do you think the future of real estate is going? And not by price, not by valuation but with the world of technology with the new generations coming or changes in demographics. What’s happened? Where do you see real estate going?

Frank: [00:38:46] Well, the real estate is going to reflect all the major changes in this kind of shared economy that we’re dealing with right now. And this really dramatic shift and we’re probably both Xers, I’m a Gen Xer. Gen Xers and baby boomers, we didn’t disrupt anything, we really didn’t. We just kind of did more of the thing that the guy did before us. These millennials are going to change everything in retail. I’ll give you three meta changes. I said this at the Toronto Real Estate forum and got into a ton of poop from some guys who were in the room. Commercial real estate, if you own commercial real estate next 10 to 15 years. You better be really clear of what your eggs is going to be because we will not need as much office space anywhere near as much office space across Canada – pick a city, I don’t care – as we do today. The data centers that the big banks are creating for all their new employees will be hubs for the guys who are selling the products of the banks to shop once every month. Twice a month to have a conversation. They’ll do it in share office spaces. We have a shared office company on our lower level. These are people who do not want to take on long term leases and liabilities. So then where does that go on the investment side. Should we be building more commercial offices, no! That market’s going to contract and its going to contract dramatically. I’ll give you another example. My friend’s the largest private owner of car dealerships in Canada and we’re flying together on his plane to Palm Springs. And I’m saying. I understand you just took all your dealerships and put it into a REIT. Now, I know why he put them into a REIT but I had to ask him rhetorically, why the heck did you put them into a REIT? Millenials are not gonna go to the car dealerships. They’re not going to buy like me and you. I want to smell the leather. I want to hear the engine before I buy my car. My nephew who’s 21 doesn’t care. Couldn’t care less. So those dealerships if they’re well located will become high rise towers to residential developments. Those dealerships will be wiped out to the extent that they are in existence today. In the next 20 to 30 years. And I think it’s gonna happen faster. The other market that’s really shifted so its commercial office a bit of retail, the other market that’s really going to shift is condos. Condos and apartments. The Millennials want to be close to many rich locations. That’s why we’re on 17th. They want to live, work and play within the same one mile radius and they want to live, work and play ideally within the same elevator style. So I literally have to have great retailers on the main force so the guy or girl can go down the elevator and go drop off his laundry get great beer, have a great gastro burger from a pub. Go to Amazon lockers that we’re putting into one of our locations. That’s really gonna shift things. The other thing is from an apartment perspective is… that demographic’s gonna live in one half to one third of the apartments that me and you were renting out when we were in our 20s.

Cory: [00:42:12] By size?

Frank: [00:42:13] By size. The average apartment that I was renting back when people were building apartments was a 1,000 to 1,500 square feet. The apartments we’re building are five to six hundred square feet. They love it if it’s in the right location, it’s got the amenities, it’s got the squeaky cool things that they want and it’s close to all the things they want to be connected to. So those are the three big areas that are gonna shift in the marketplace. The thing that I’m really curious about is single family homes.

Cory: [00:42:42] Me too. I’m very curious about the world of the suburbs.

Frank: [00:42:46] So if you take the largest trend in real estate which is urbanization, a lot of the bedroom communities raise are coming to a significant amount of pressure because more people are moving into the cities, because the amenities rich aspect of it but I also think the other thing that’s happening is those big spanking mansions like in Calgary, the Springsbanks and Elbow Valley all that kind of stuff. People are moving out of that. My three neighbors other than the urban marketplace. My three neighbors sold on average eight to twelve thousand square foot homes to live in a 4,000 suburban homes in the urban marketplace, and love it. So there is a real shift in demographics too. So the baby boomers and Xers are downsizing and shrinking. The millennials are shrinking and they’re all coming into the city. So I think we’ve got a great future for urbanization, for city centers, for cores, all beautiful things historically going back to the times of the Greek era started in the city. That’s where all the philosophers came from, that’s where all the cities were grown as where all that the vitality was. So I think we’re coming, I think this new urbanism is these shrinking of the power as it moved through. The last point I’ll give you this. The power center business is dead. Big box stores are being shrunk to small box stores. Amazon has completely changed the way that people shop in that space. And so all these things are going to happen in a quantum of time. They’ll sell like feel like a millisecond and it’s happening right now. So there’ll be some big changes. As long as you’re in front of that trend you’re gonna do very very well. If you’re not, you’re gonna have some challenges.

Cory: [00:44:26] Before we wrap up. What would three points be that you’d leave for a real estate entrepreneur when it comes to building their portfolio, building their assets? What kind of three points are those tenants you stick to?

Frank: [00:44:39] Well, I think they’ll get caught in the story you think you need to tell. Just tell the right story and the right story is the truth. So I’ll tell you one of the laws that we have is that I will fire an investor if I think they don’t have the same values as us which is sounds really cocky when you start talking about you know trying to raise capital. What I mean by that is this is that a lot of times what happens is especially in the business of real estate. So when I raise capital I’m still competing for some of the dollar and and I’m not there to compete in the shiny buble category because I want to go to sleep at night. I want a good life. I don’t want people calling me and say you said this and you did that. I’m saying, we’re going to buy the best assets at a price point that we think is better than anyone else can get. I’m going to build some tremendous assets and they’re going to outperform the same submarket at any given time over the long run. And if you’re into that program you should be investing with us. I don’t go in there and say – “well, we’re gonna give you the 18 percent IRR, we’ll double your money in five years..” that is not what I say. I certainly tell them on what my return expectations are what I’m telling them that… the creation of wealth around real estate, this isn’t a dot com business or technology business where you can take an idea and bring it into concept phase and then get a bunch of venture capital guys to balloon the value up without having a dollar revenue. Real estate has very tangential aspects of mathematics right. A dollar per square foot of bricks and mortar is a dollar per square foot of bricks and mortar, a dollar per square foot of land is a dollar a square foot of land. You can’t fudge that. So try to tell people you’re going to build a Valhalla play and give them a 400% return, that’s not the way to do it. However, when we talk about how we get into deals on the buy side we say we’re going to be set up for some amazing exit. And here you go, you get a 4 or 500 percent return on an asset based on all those things happening but that happened on the buy side not on the sell side. In terms of the other aspect of raising capital I think you have to be compelling. This goes back to why would I invest in a building. I’m investing in the person who’s building the building, right. The neat part about investors. So first of all, all my investors are high net worth ultra high net worth or accredited investors. They get pitched a hundred times a day. They get emotionally connected to the things that we’re buying and building. Why? Because I’m emotionally connected to things I’m buying and building. If there’s no fidelity there, money doesn’t come into the office right. I think that’s the second thing I talk about is that if you’re not passionate then the people who are placing capital aren’t passionate. I think the last piece to it is really about the aspect of the end result right. You’ve been through my office. I’ve got about 400 investors. We have hundreds of millions of dollars in this company. I don’t have a investor relations department. I had three calls last year from investors, three. And that’s a number that is important to me. And I had three calls because I send quarterly updates. I have AGMs and my clients are informed. Because one of the problems that people do as a I hate the age long axiom. They over promise and they under deliver. And then what do entrepreneurs end up living every day? The stress of having to deal with opening their mouths in ways they should’ve never done to begin with. And trust me. Twenty years ago I was terrified taking the first dollar on my first deal from two people. I got $150,000 dollars from two guys. One who happens to have invested in thirteen subsequent projects and the other who happens to be my brother in law. So you can imagine the stress that would cause. I just don’t lie. Just go in there, be conservative and I see it everywhere. The new upside is flat. And if you think about it that way as opposed to what you think you should be telling people, my guys don’t need to gamble anymore. They’ve already made all their money. So they want to be connecting something cool with someone they respect and they don’t want any surprises. If you just do those three things you’re going to do just fine.

Cory: [00:49:03] Well, Frank I want to thank you for your time. And as I mentioned earlier that. Really insightful so thanks a lot. Thanks for your time.

Frank: [00:49:11] I appreciate your time. Thanks for coming over today.