FULL TRANSCRIPT
Eric Cantor (00:00)
Good morning from cold New York. Thanks for joining.
We are here together today to dig into a real estate deal, a real live deal that's on a platform right now. One that we're excited about. We've got a real live real estate expert here to walk us through it. We've got investors here whose questions we want to answer, dig into. So let's start doing that. First, everything starts with you, the audience here today. So let's take a look at who is out there. And this is just from our survey of people coming in, signing up for this event.
Uh, mostly accredited investors. This, the opportunity we'll look at as an accredited investor opportunity. But of course there's many real estate opportunities for, for the entire investor universe. Um, looks like we've got intermediate, I mean, people with some real estate experience, a couple of pros, um, we'll try to keep this at a sophisticated level, but, but create some room for, kind of making sure we have the foundations shared here. Last but not least, a lot of people thinking about real estate, 63 % per
planning to invest the next 12 months, that's a high number. It is a fit with kind of the rest of our investor audience of 100,000 who've really been more interested in this space as of late, which is why we chose to do this. Couple introductions, while we kick it off, my name is Eric Cantor, I'm the CEO of Vincent. We're here to help investors navigate private markets that includes real estate, venture capital, crypto, and a number of others. We hope to do that today.
my partner, Adam Katz is here as well. You want to give a quick intro?
Adam Katz (01:27)
I'm Adam. I am a co-founder of Vincent and the head of research and content.
Eric Cantor (01:32)
Awesome. And don't sell yourself short, you're quite a real estate expert as well, which is why we wanted you to chime in on looking at these deals and giving us your framework for how to evaluate these offerings. So just a quick mention of our partner, Lightstone Direct. So this group has been working in real estate for decades, but now they're providing investors the ability to partner with and invest in the same multifamily and industrial opportunities that a 12 billion plus dollar institution is doing.
You can get the best of both worlds, the access at a lower check level, as well as this superior track record. We'll drop a link in the chat where you can check out Lightstone a bit more. We'll also come back later and dig in a little bit more about the sponsor themselves. The property that we're looking at is a property that's available today on Lightstone Direct. We're using that as our kind of test bed here. All the analysis is ours though. Quick disclaimer before we jump in.
Nothing here is investment advice. Everything you do is independent. Everyone's situation is different. You've got your advisor. You've got your cash flow needs. Please consult that before making any decisions and do not take any of this as strict advice. Great. So what are we going to cover today? First, we're going to do a brief overview of the real estate market, the industrial RE sector in particular as it stands right now. Then we're going to find some key terms.
that you need to be very comfortable with to throw around these analyses. Then we're going to jump in and break down a deal. That's what you're here for. We're going to look at all of the terms and all of the information provided in this offering. Look at the example of Abernathy itself, which is an interesting industrial project in the Carolinas, live right now. But also just give you a framework for how you can look at any real estate deal. What are the questions that need to be asked? How can you judge those answers? How do you compare and start to build that muscle?
to compare, you know, deal number seven to deal number 207 as you become an expert. We're also going to take investor questions. We'll leave some time at the end to do that. But if you want to drop questions and as we go, if they're relevant to what we're talking about, we're happy to, you know, grab them on the go. So let's start with the market overview. Adam, what is industrial and what are the trends and insights in that particular market that we need to know about today?
Adam Katz (03:42)
So industrial is a subset of the overall commercial real estate market. Buildings that are considered industrial are things like warehouses, data centers, distribution centers, logistics hubs, manufacturing facilities, just anything that is going to support a industrial business. And they're widely varied. You have these giant, giant Amazon distribution centers.
And then you also have, you know, single small storage facilities. so within industrial, there are a lot of different kinds of properties. the property we're talking about today is a shallow Bay property, which is defined generally, as a property or building that is under 150,000 square feet, but above 20,000 square feet.
Usually it's in that kind 100,000 square feet sweet spot. And in general, shallow bay properties also have shorter lease terms than the giant kind of manufacturing facilities, which are tend to be occupied by one tenant for a very, long time. Or, you know, like an Amazon distribution center, which generally is going to be occupied by one tenant for a long time. Recently, shallow bay properties versus
The bigger properties have seen lower vacancy rates. We will define vacancy rate in a couple of slides. And then the rents and the property values and investor demand have been growing at a faster rate for these kind of mid-sized industrial properties. For the sector as a whole, commercial real estate has struggled pretty significantly since the pandemic. And you can see in these numbers,
If you look at the three year returns out of all of these subsets of commercial, which is, know, office, retail, multifamily, uh, every type except for industrial is negative. Industrial has been the lone bright spot in the commercial real estate world since, uh, kind of the pandemic downturn. And you can see that it leads in, it's the only positive one in the last three years, but it also leads in five year return, 10 year return.
and it's been positive throughout. While the other sectors have been catching up and recovering in the last year or so, industrial has seen pretty solid performance. Sales are up 15 % year over year, which indicates pretty good demand from buyers. And vacancy rates have been stabilizing. And again, we will define net absorption in a couple of slides, but that's been rising this year.
Eric Cantor (06:14)
Is there is this just a way to be long and economic development somehow like
Adam Katz (06:18)
the reason that industrial has performed well while others haven't, the pandemic kind of, you know, pushed a lot of people inside and e-commerce really exploded. And in fact, this last, I think, Black Friday saw the most online shopping ever. And with that, you need these giant logistic hubs and distribution facilities.
and storage facilities. All this is like the backbone of e-commerce. And as e-commerce grows, a lot of this ⁓ industrial benefits from that. And then on the other side, which is not that relevant to the property we're talking about today, but is relevant for the entire sector, is AI. mean, AI data centers, all the massive amounts of investment into AI infrastructure has gone towards industrial properties.
You know that we're building a lot of those things like crazy in this country and there's just massive demand and there's not enough supply and when you have big demand and not enough supply, of course, prices are going to go up. The property values and the amount of rent you can charge is going to go up. And we've seen that and that's been pretty constant for the last few years. And so a lot of the environmental factors that have hurt things like office or retail have actually helped industrial.
Eric Cantor (07:33)
makes sense. But it goes back way before COVID even. mean, it's 10 years of this sector out before. It's interesting. Okay, cool. So just kind of giving us a foundational education here. I find a lot of terms. When I look at these deals, there's like new ones every time. Maybe we walk through to some of the key terms and looking at real estate deal, maybe, you know, going specific on commercial, and just what do they mean? How do we let's give us some shorthand just before we start throwing them.
Adam Katz (07:59)
Yeah, so we're going to start with some terms that are useful for all real estate deals. It doesn't have to be industrial. So the first thing that a lot of people will look at is the net operating income, which is very straightforward. It's just going to be all your income. That's the rental income and then ancillary income, is can be anything from parking or laundry or whatever. So you add up all your income and then you
Take away your direct operating expenses and that's important. It's not going to include the debt service. This is just like how is the building performing as a building separate from how you finance it separate from how you have have bought it. And so, you know, let's say you have five hundred thousand dollars of rental income, fifty thousand dollars of ancillary income, your direct operating expenses are two hundred thousand. So your net operating income, your NOI is three hundred and fifty thousand. And so that.
Independent of everything else, you know, at least if it's positive, you're profitable. That's good. But in terms of like the amount, you need a bigger context for that. Because if it's a gigantic building, 350,000 might not be that great. And if it's a tiny building, that might be awesome. So you look at other metrics and the kind of standard one that you look at, this is for residential, this is for commercial is cap rate, capitalization rate, which is
Again, a pretty simple metric. You just take the NOI and you divide it by the property value or your purchase price or potential purchase price. So let's say that this property that has a $350,000 NOI is on the market for $7 million. That is a 5 % cap rate. So it basically measures a unleveraged, what an unleveraged return will be.
So if you bought this property in cash.
this is going to be your return. You've paid $7 million. You're getting $350,000 in the first year. That's your return. And when you're evaluating different properties, you're comparing. And so it's essentially what return an investor is willing to take on a property. So it's a little counterintuitive, but the lower the cap rate, the higher the property is worth. So if the cap rate is 4%,
Versus five percent that means an investor is willing to only take a four percent return. They're willing to pay more for it So if this was a ten percent cap rate, the property would only be worth three point five million Does that make sense?
Eric Cantor (10:29)
Yeah, definitely. So if I'm buying a property, I'd like the cap rate to be effectively.
Adam Katz (10:36)
higher. If you're buying a property, want the cap rate to be higher. If you want this, yeah, if you're selling it, you want it to be lower. So as cap rates go down, which is called cap rate compression, property values go up. it's a really good tool for comparing things. So if you have two identical properties, and you just look at the NOI versus what they're being listed for, the one with the higher cap rate is going to be the better deal for the buyer, the one with the lower cap rate is going to be a better deal for the seller.
Next is the internal rate of return, which is a little more complicated to calculate yourself, but what it's trying to do is essentially measure the return versus the time value of money. And this is important when you're talking about a property with cash flow, right? If you're getting cash every month or every quarter or every year, it's going to change your rate of return. You can say, Oh, I'm getting 5 % every year, whatever. But we know that
your distribution tomorrow is worth more to you than your distribution next year and your distribution five years from now. it's a way of.
taking all these cash flows together plus the potential appreciation down the road and putting it all into one metric. And then finally, you have your cash on cash return, which is just the distributions you're going to get versus the equity you invested, essentially. So let's say that in this particular example, you get $150,000 of cash flow, which is your NOI minus your debt service, let's say.
And then you've invested $3 million, and you had used leverage to purchase the rest of the property. So $150,000 in cash versus your $3 million that you've invested, and you end up with a 5 % cash on cash return. And so this is a measure of your liquid return, because it's not going to count appreciation. It's not going to count any principal pay down. It's just cash.
Eric Cantor (12:33)
Well, not until the end, right? Like after 10 years when you've sold the property, then you'll have a cash in cash return that's effectively an ROI. Yeah, sure.
Adam Katz (12:43)
But you're looking at this as a, this is more of like an annual metric. So you're saying, okay, annually I'm going to get 5 % cash. And you're not thinking about the potential appreciation, which is going to factor into the overall return when you go to sell it.
And then we wanted to look at some of the terms that are specific to industrial. vacancy, well, the first two are not necessarily specific to industrial, but it's more commercial. The vacancy rate is just, it's simple. It's the number of vacant units versus the number of total units. You have a hundred units in your apartment building. Two of them are vacant. Your vacancy rate is 2%. And this can be adjusted over different periods. You know, if
Unit is vacant for a month out of the year, you know, then it's gonna be different than if it's vacant for ten months out of the year But vacancy rate is important because it's going to show you you know The lower the vacancy rate the better because the more rents you're gonna get and that's across all real estate net absorption is a measure of Kind of supply versus demand. It's just the total space that you've leased in a given period whether that's a month a quarter a year
So you're have a net absorption for a month or a quarter or a year, whatever you want to do the time period. But it's the total space leased in that period minus the total space vacated. So if it's a positive number, that means you've leased more space than you've had people leave. If it's a negative number, that means more people have vacated it than you've leased. So you don't want a negative number. A negative net absorption basically means that you're losing tenants. A positive means you're gaining tenants. And this is for
This is most useful as a metric for an overall market. So you say like the net absorption rate for Chicago warehouses has been positive in the last year or whatever, or it's been negative. And so it's a way to evaluate how a specific market or sub-market is doing. And you again, would like that to be positive rather than negative. The other four are just sort of industrial terms to look at a building and what kind of building it is, bay depth.
ceiling height, dock doors, power capacity, it all will determine what kind of business can use that industrial property and what type of property it is. We don't need to go into deep specifics on it.
Eric Cantor (15:04)
think we can jump into those when we actually look at the deal. Yeah. Maybe before we do that, because I want to jump into that as soon as we can. let's ask what the framework is for looking at a deal. So a lot of investors on the call might have five or 10 real estate opportunities in their inbox, maybe trying to decide between those and some venture opportunity or something else. What is the top to bottom framework to follow to just look at one of these?
Adam Katz (15:29)
Sure. So for me, mean, this seems obvious, but you always want to look at this very specific property first. You're looking at what is this property and this is residential, commercial, whatever. What type of property is it? How many units are there? What's the square footage? What are the amenities? What are the facilities? Where is it specifically located? What does it look like? That's always going to be the most important thing is what is this property?
And then for this kind of deal, which is a syndication deal or a deal where you're getting in through a third party, the sponsor is going to be of the utmost importance. You you want to make sure that that sponsor, whether it's a company or a person, has a strong and robust track record of performance and of being responsible and of delivering results for investors. You're going to look at their fee structure and the fee structure is
could be different from property to property, even within the same sponsor. And you want to look at the same thing for property management. Like who's going to manage this property? A lot of times it is going to be the sponsor or the sponsor has a property management company that they've worked with, but you want to make sure that property manager has a track record and that again, you want to look at this kind of property. Is this a sponsor and property management company that has experience with
Industrial, if it's an industrial property, if you're looking at a multifamily deal, do they manage a lot of apartments? You know, want to make sure they have the relevant experience and good experience. Next, you want to look at the projected numbers for this property, you know, and that's going to be, we're going to dig deep into that later, but you know, just the income, the expenses and line items. know, this, it's going to be the most important thing is to, is to make sure the numbers pencil out.
You then want to look at location. So this is going to be the broader metro area. And then you want to dig into the specific, you know, not just city or town or whatever, but like the specific street, the specific neighborhood, the specific area. You know, it's a long and tired maxim, but real estate is all about location. So that is what you want to dig into. And you might think that for industrial,
Location is not going to be necessarily as important as for residential, but I mean it is the area is very important because it's going to be, you know, it's how you evaluate. The potential proximity to customers, whether those customers or retail customers or you're a B2B company, like how many businesses are in the area, the labor pool availability. If you are a commercial business is important.
And then where you're located, are you close to bigger markets? Are you on a transportation hub? Are you in between two big cities? Are you in a big city? You know, I mean, these are all important things. If you're in the middle of nowhere, you want to make sure that this location is going to be desirable. next, you look at the tenants, the current tenants of the property. And this goes again for not just industrial, but retail or commercial or residential.
Who are the tenants? How long have they been there? What are their current leases? What are they paying? Have they paid on time? Are they reliable? You want to make sure that what is projected is actually going to happen. So you need to make sure that these tenants are as advertised and are paying and you want to know if they're going to be locked in below market rate or at market rate and for how long? Is it going to be a year? Is it going be five years? When do you need to
start thinking about vacancies. So that one is very important. And then next, I look at recent sales comps. So you want to find similar properties in a very similar area and see what they've been selling for. And you can look at, as close as possible, but you look at things with similar square footage, similar amenities, similar potential.
You know rent rolls if you can dig into that and see what they sold for so you can kind of get a good base on what your property value is for the property that you're looking at. And then if you are going alone which for industrial is probably going to be pretty rare but you know if you're trying to buy a residential building or whatever you you are in charge of getting the inspection done getting the appraisal done looking at the zoning looking at the environmental assessment looking at title make sure that the person is selling it actually has the title all these things.
you know, and you have a lawyer and all all that within this framework, when you are dealing with a third party deal, and as a sponsor, they're generally going to be taking care of all that stuff. And you are putting your faith in the sponsor to get this inspection and make sure the appraisal and all this stuff goes through legal and, and that kind of stuff.
Eric Cantor (20:23)
Great. It's a good framework. mean, I'm eager to apply it to an actual deal and just see how our investors can use this over and over. Maybe before we head there, I'd love to know just your view on, you know, for most of the investors here, you're not going to be buying a whole warehouse or a building. You're to be doing pieces and following sponsors. So what's the right way to build a portfolio of that? I mean, should I be doing one deal or should I be not putting all my eggs in one basket?
Adam Katz (20:50)
Yeah, I mean, so I think that this framework is something that you can use generally for any real estate, real estate deal and, you know, residential commercial, whatever. It is pretty difficult for individuals to access bigger, even bigger residential deals, but commercial property, you know, one person is generally not buying an office building. They're not buying a warehouse. They're not buying a 700,000 square foot industrial property. These are things that are
done in syndications, they're done by companies. I personally think that the more diversification within your portfolio, the better. if you can get access to multiple deals across both, if you are interested in industrial, you don't wanna just put all your eggs in one industrial basket, but the ideal portfolio, you'd have some exposure to residential, which is
In my opinion, multifamily is the way to go there because that gives you more doors and even more diversification even within a project. And then you might be interested in some retail or industrial. you definitely want to try and I would want to grab a piece of a lot of different deals and have a lot of exposure instead of just trying to buy one building. that's also diversification across.
asset you know across this kind of subsectors but also the diversification when it comes to maybe you know location things like that maybe you want some in the northeast some in the midwest some in the south some of the sun belt it you know that way you are again you're just diversified
Eric Cantor (22:26)
Great. So let's dig in. Let's take the framework we've built out here and defined. Let's apply to a real deal. We pulled an opportunity from Lightstone Direct. It's the Abernathy. Just went live on Lightstone. Interesting opportunity. Let's take our framework and let's just run everything through here. And, this is going to be very hands on while we go through this. Questions are welcome. We have a bunch of questions that people asked on the way in. So let's just start tearing this one apart.
Adam Katz (22:51)
Yeah, so the thing we're going to start with here is the sponsor, which is Lightstone Direct. are sponsoring this. They are putting on this webinar, but we want to be clear that this is an arm's length analysis. This is all our analysis. So we want to make it clear that we are approaching this from an objective point of view.
Lightstone has a long history as a real estate company. This is their first deal for Lightstone Direct. But their track record is, you know, they have $12 billion of AUM. They have 15 million square feet of industrial slash commercial space. So they have a long history and a strong track record. You can see from the returns.
that they have a long history and a strong track record of performing. And they are co-investing at least 20 % in every deal, is above the industry standard, which is around 5%. So that ensures that they have skin in the game. every opportunity, they're emphasizing that every opportunity is something that Lightstone itself would invest in anyway. So this is not them offloading like.
their worst deals on to the investing public. This is them co-investing with you. think.
Eric Cantor (24:06)
that
the ⁓
And yes, we get paid, but we are not really investing in the project. And that by and large is very challenging because incentives are not aligned. So when you're looking at these deals, I think this is very important to know, the manager aligned with me?
Adam Katz (24:50)
Yeah, those kinds of deals, the incentive was just to kind of churn volume. And, you know, I think that there's there wasn't as much vetting of deals in those cases, you know, in, in this case, and with a, you know, sponsor, any sponsor, not necessarily Lightstone, but any sponsor where they have strong alignment with you, and they're only going to be successful, you're successful, that at least gives you some assurance that they are
Eric Cantor (24:51)
WITH THEM.
Adam Katz (25:19)
taking good deals and that they're vetting deals so that they will only pick the things that are going to be successful or that they can.
Eric Cantor (25:26)
it's also looking at these balance sheets, right? And again, this is not just real estate like in venture When I'm trying to fund some venture deal and the first check I'm bringing in is a guy writing a 25 K check, you know, there's a lot of risk there that I'm never going to get big enough to matter. Whereas if I'm already a $5 billion institution, now the guy writing the 25 K check is riding alongside somebody with a lot of track record and a lot of risk already. there's a likelihood it's going to work.
Adam Katz (25:53)
There's less platform risk. There's less sponsor risk when you have a company that has been around for four decades and manages billions of dollars of investments and also manages, you know, many, many buildings of many, many square feet.
And so in for this particular investment, you know, like I said, it's important to know the terms and the fees. and here you have, a management fee, which is 1%. You have different kind of, steps for the acquisition fee, depending on how much you invest. and then there's a 20%, I think essentially a carry above an 8 % IRR.
So once it hits that 8%, after that, they get 20 % of everything above that. And so that's like kind of, it's similar to a venture model. like, but it's one and 20 instead of two and 20. And this is pretty standard. mean, 1%, you know, you usually see one and a half, 2 % for the management fee. The 20 % over 8 % return is very standard for real estate syndication.
So let's talk about the property itself.
Eric Cantor (26:56)
one question about the prior, ⁓ just to make sure we have it clear. So my understanding is in this particular project, if I'm putting in 100K, which is the minimum here, getting a monthly distribution. So is that, just how does that fit in your framework, that sort of frequency of payouts and cash versus the appreciation potential?
Adam Katz (27:15)
I the more frequent a distribution, the better for an investor because you're getting it. You're getting money back earlier. And like we talked about with IRR and time value money, you'd rather get the distribution every month than every year or every quarter. And you'd rather get the distribution now than in five years. And that they're projecting to be profitable right away, to have a cash flow right away. And so that
You know, that is relatively standard for a real estate deal. I would say that a lot of them pay out quarterly rather than monthly, but monthly is about the best you're gonna do there.
So yeah, let's talk about the specific property. It is a Class B industrial complex. It's got six buildings. The buildings are, they average a little over 100,000 square feet each. So they are shallow bay buildings. They have 250 to 350 foot bay depths. Their heights are 25 to 28 foot.
So it's very like mid level industrial buildings, which hits kind of the sweet spot in between small buildings and then massive buildings. So it caters to kind of mid market companies. It is a hundred percent occupied. So right now there's six buildings, there's six tenants. The weighted average lease term is a little less than three years, which means on average the tenants are in there for three years from now.
It's in the Greenville Spartanburg Market of South Carolina. Yeah, so basically you're looking at a shallow bay, Class B, industrial, you know, a complex of these types of buildings. It's in that sweet spot for businesses that are too big for a small bay, but too small for a kind of like massive distribution centers.
So the projected numbers, they are projecting to hold this for four years and have a 7.7 % annual cash on cash, which again will be distributed monthly. 15.2 % net IRR, and that's net of fees. And then a 1.7 % net equity multiple, which we didn't define, but basically.
For every dollar you're putting in, they're projecting that you get $1.7 back at the end of the investment term. But we're going to dig into the numbers now more specifically.
Eric Cantor (29:36)
So that number is like a MOIC for like a venture fund, like multiple. A 3X, whatever, there's a 1.7X. And that's when all is said and done, all your cash has come out and there's no time-weighted component there. If you wait a year or 10 years to get the payout, it's still the same number.
Adam Katz (29:40)
Yeah, exactly.
So this is their unlevered model projection. So Lightstone is planning to finance, I think, 54 % of the purchase price. There's a five-year term and the interest rate, I think it's 5.44%. I don't know if that is definitive or if that's just what they projected. So this is the unlevered look at it. Obviously, when you add leverage, changes the numbers. But it's always good to look at it at a property
without leverage so you kind of understand the fundamental performance of it. So you can see at the top there, that's gonna be the income and they are projecting some vacancy there because as I said, the lease, know, this is a, they're holding it until 2030 but some of these leases expire early and I think five of the six tenants have lease renewal options.
So it's always good to project not having 100 % occupancy because you want to bake some potential vacancy in there just to be conservative. And so you can see there's the potential rent there and the income. And because this is a property that's 100 % leased, they're
especially when those leases are in place, you have a pretty good idea of what the income is going to be. You can always get, always ask for, for any building, ask for copies of the leases, make sure that that's going to match up with the projected rents. and also, you know, make sure that these companies are current on their rent, make sure they've been paying. You want to see kind of past, uh, past performance and you know, you can see past payments and make sure that nobody is behind on rent.
⁓ It looks like that in conjunction with potential vacancies, they are planning to improve the property in year three. You can see the kind of the high level of capital improvements there in year three, which will prepare it for better rents and prepare it for sale in 2030. And then you can look at expenses next real estate taxes. You can actually look those up. Those are public.
Knowledge and last year I looked them up. They were 627,000. For the last full year, so they are actually predicting it to be a bit higher, which is good. You want to be conservative. Insurance you can always if you want to really dig into it and for a couple for a property where you're looking into it yourself, you know you're going to get quotes. I would never fully trust like what a sales broker tells you the insurance is going to be. You want to.
actually talk to an insurance broker yourself. Maintenance fees, is that ⁓ RM CIM, sorry, CAM line item. That's something where you're going to have to, in this particular case, you're going to have to kind of trust the sponsor until you have a lot more experience, both within these properties, but also just looking at them, right? If you see a similar class B property and they're projecting, you know, 10,000 a year in maintenance,
You're going to say, doesn't seem right. This other property is projecting $200,000 a year in maintenance. And then on the other side, if you look at a bunch of different class B properties and they're all projecting way more maintenance, then maybe this one, you think, oh, this is a little low. I need to dig into that more. Is this a newer building? This is an older building. When was it last renovated? What's the status of the big ticket items? know, what, have there been problems with the roofs? Have there been problems with the?
you know, does the parking lot need to be repaved, whatever. Maintenance is something that you just kind of have to build that muscle. And utilities here, similar thing for utilities in a lot of different properties, but utilities here, the tenants are paying the bulk of it. So that line item is sort of not that important. Property management, that's always going to be kind of like a fixed percentage of the rents generally. So that's pretty easy to project.
And then you get the NOI. There's the net operating income. And so you can use that number and kind of evaluate that against the purchase price. You can evaluate that against what you're expecting your cash on cash to be. And so you end up here with a net cash flow. And again, this is unlevered. So this isn't necessarily going to match with their cash on cash is because that come that bakes in the leverage. And I know this is a lot of numbers thrown a lot of things at you.
And this is a slide that has a lot of numbers, but you really want to dig into these numbers. it's going to be the most important thing to make sure that when you are sent, you're always going to be sent a model like this when you're looking at any kind of property. And you want to make sure it least passes the smell test. And then dig into it and make sure that these things could be accurate, seem accurate.
Eric Cantor (34:51)
Maybe just, you get a good framework for like looking at the model here. But when we hear this term pencil, does it pencil out? Does the math make sense? Are we more looking at like, hey, if they execute the way that they're saying they're going to in this spreadsheet, does it actually generate the positive financial results that we're hoping for? Or is it more, I want to vet their ability to execute in a quality way, or is it kind of a
Adam Katz (35:17)
It's both. mean, so for this property where you have 100 % occupancy, it's going to be easier to project what's going to happen. If you were going into a property where it needs to be renovated first, where it's no tenants and you need to fill the tenant base, like those projections might be a little further away from reality than something that is already stabilized. And so you have to, it's
It's a cliche and it's maybe not that helpful, but you have to go on a property by property basis because when you're given a model for something that's a full on, you know, tear down rebuild, it's going to be, there's a lot more uncertainty there. This is something that has been operating. You're, taking over property that where the tenants are going to be the same. The expenses should be more or less known. Uh, and you just have to look at it and kind of.
see if it makes sense. it's always going to be a matter of execution, which is why the sponsor and the manager is so important. But it's also going to be a matter of just following something that's already been performing. So we've got a couple more slides before we get to questions. I know we're running a little bit over, but so I'll quickly go through this. The current tenants, there's six of them. Like I said, they have about a three-year weighted average lease term.
five of the six tenants of renewal options. And those renewal options, I think the average is almost 10 % gain on the current rent as leases roll through. If you look specifically at these six companies, five of them have been operating for over 30 years and in some cases much longer. the chances of a business failing and having to leave are gonna be a lot lower than if say all six of these.
or companies that were founded in 2023. So you have long standing companies in for the most part here and that's super important.
and then we'll quickly go through the metro area. South Carolina has been the fastest growing state in the U S recently. And the Greenville Spartanburg area is in between Atlanta and Charlotte. So in between two major cities, it's close to the port of Charleston. The main, kind of commercial driver there is this BMW manufacturing plant. and then if you look at the market fundamentals in the last, you know, year or so,
Vacancy rates have gotten tighter. There's been a decline in construction, which means lower supply. And you have that with higher demand means that net absorption is increasing, which again means that there have been more people leasing space than vacating space. So that those are all strong signs for this sub market.
Finally, the sales comps. This is a collection of six buildings. It's a bigger property. The price per building is lower. So you can see that the sale price on Abernathy is 48 million, which is 8 million per building, which is on the low end when you look at comparable buildings. And the price per square foot is also less than the comps.
And so it just very simply, when you look at recent sales, this looks at face value to be a lower price than you would expect.
Eric Cantor (38:42)
Is cap rate backed into here somewhere?
Adam Katz (38:44)
when you want to dig deeper into kind of a more robust comps analysis, you are going to try to at least project what these things are getting in rent. And you can kind of compare the cap rates. But you need to know the actual operating income for a building, whether it's residential or commercial, which is not necessarily going to be public information. So a lot of a lot of that's going to be estimates.
Eric Cantor (39:16)
Okay. Sure. Yeah. Okay. What are the tax benefits of investing in real estate. Also specifically is the distribution, and I think we should define distribution as a different types of distribution. Is it considered a capital gain or a dividend for IRS purposes? We can start with those two and then I got another group.
Adam Katz (39:38)
well, disclaimer, I'm not an accountant. So I don't know. And everybody, know everybody's tax situation is different. There are, for most people, there's gonna be tax benefits for this because you can claim depreciation,
These distributions generally are going to be ordinary income. They're not capital gains. You're getting paid monthly, you know, kind of from the rents. And if this was your own building without a sponsor, it would just be ordinary income. So it's the same when there's a sponsor.
and that taxable income can be, you know, you can deduct the depreciation off of that. And so what your return is, is actually going to be higher when you consider the tax benefits. it's, it's really hard to get into specific numbers because it's going to differ for everybody depending on their income bracket and all that. you do get to claim the depreciation off this. Like you'll get a K one.
and it's going to have the depreciation on there and you get to claim that and it will reduce your taxable income.
Again, also, it also depends on you know, if you are somebody who takes the standard deduction versus like if you can itemize.
Eric Cantor (40:52)
Yeah, when these things come through, it really does hit your personal tax situation. If you receive a K1, there might be an opportunity for depreciation. There might be an opportunity for 1031 when you roll one property that you sold into the next one. There's also implications for state taxes. So you do have to understand what you're getting into. Luckily, you receive a K1 at the end of the year or a 1099 in some cases that spells that out completely for you. You just give it to your accountant or file it directly.
Adam Katz (41:19)
I mean, the real answer is always consult your accountant when you have questions like this. generally, the tax benefits are going to be positive.
Eric Cantor (41:28)
Great, so let me bucket a few questions about performance. There's actually four of them that are kind of tied in and I'll start to answer them and I'll hand it off to you. So one is to clarify regarding historical net IRR of 27%. This is from Selva since 2004. Just to make sure an investor who came on board 21 years ago would have realized this IRR and that doesn't include cash from resell the property if they decide to sell now. So that's a performance question I would just say.
We don't have performance data from the manager. You have to ask for that directly. But if someone's talking about 27.6, I would definitely assume that includes a lot of appreciation and sale of properties, not just cash. You'd have a crazy property. You're making that just on rents. So I'm guessing that includes everything. But I would ask to make sure you understand specifics. Then we get into some more nuanced questions. What is the probability that a deal will underperform or even fail? That's a zero.
What is the probability the deal will do better than your estimates? What is realistic the best we could do? And thirdly, again, I'm just bucking these into one big question for you. Would you say that this is only for money you can afford to lose? So it's a question of risk and upside down side in this relative to other deals we've discussed.
Adam Katz (42:40)
Okay, I will take the last part of that question first. think with almost all investing, you don't want to put in money that you can't afford to lose. With real estate, your chances of having a complete loss are are not high. You know, this kind of real estate deal, if you're talking about a real estate debt thing, that that's a whole different can of worms. This is
getting a share of a property, the chances that this property's value go to zero is, I mean, that's extremely, extremely, extremely, extremely small. I wouldn't put 80 % of my net worth into one investment, you know, I wouldn't even put 8 % of my net worth into one investment, but you want the reason that real estate is an attractive asset class is because the risk of failure is very low compared to something like venture.
it's going to just be a safer asset class. again, you don't want to. So another factor that we didn't really discuss, we've kind of touched around it is liquidity, right? Like you are going to get monthly distributions, you are going to get, or you are projected to get, but in any case, there are going to be small chances to get some liquid return, but you're not going to get the bulk of your money back until the end.
There's no way to, it's not a stock. You can't sell it tomorrow in an emergency, you know? And this goes for a lot of other alternative asset classes. So it's not just what can you afford to lose, it's what can you afford to not have access to over the term of this deal. So if you think that you're going to need any of this money for any reason over the next five years, you need to think about how much to actually lock up in terms of whether or not it's gonna un-
underperform, overperform, whatever, like that's, and this is not our deal. You know, this is Lightstone's deal So some of these questions might be better served for them, but I can say that for a property that is fully occupied, that has a track record of performance, the risk is obviously going to be a lot lower than going into a property where there are no tenants or where there needs to be massive renovations.
or where there's not a track record of performance. And that goes for all real estate. If I'm buying a multifamily property and it's got, you know, it's an 80, 80 unit building and it's got 80 tenants that have been there for years, it's going to be more likely to perform the way that I think than if it's an 80 unit building where 40 need to be renovated. And, you know, you've got 10 people who aren't paying and whatever, you know, so
how stable the property has been prior to purchase is going to really inform how well it's gonna perform compared to the model. And they do, their model does bake in some vacancies and it does bake in, know, maintenance costs and capex and they're going to be, those are estimates. They're never gonna be exactly what happens. Some years you're gonna have better, know, less things will break. So you don't need to spend as much on maintenance.
some years more things will break and some years, you know, it's gonna rain more and there's gonna be more leaks in the roof. Some years it's not. That's just the way that real estate investing works. So you're just trying to model this out and average it. So I don't know the answer to this specific property. What are the chances it's gonna overperform, underperform? I do know that because it's a more stabilized building, it's going to be more likely to perform to the model than something where
more work needs to be done, if that makes sense.
Eric Cantor (46:13)
Cool, I wanna squeeze a couple more questions in before we end the hour. We can give you some short ones just to note that the deal specific questions that Adam said since Lightstone Direct is the sponsor here, those need to go to them because we don't have all the every little detail, but we will make sure we pass that along and we'll drop a link here as well as give you a follow-up form to just ask any questions and get connected. So quick answers to a couple that came up and this is deal detail, but just
Recapping what is the payback time? When's the life cycle of this particular deals supposed to end if everything goes according to plan?
Adam Katz (46:47)
They're supposed to hold it for four years. Yeah, the goal is 2030.
Eric Cantor (46:51)
It's a five-year deal.
Yep. So you'd hold you'd they own it. So twenty six, twenty seven, twenty eight, twenty nine, you're holding and then you're selling. You're selling. That's the expectation. Remember, things can work out like expected and they can go faster or slower. Right. That's the liquidity here. And that's why Adam was saying you have to budget your cash because what if all the numbers get hit, but it takes two extra years to sell for whatever reason. And we've seen through the last couple of years of these markets that, you know, things can get delayed or accelerated.
Another question I'd love to get in here. When you talk about fee drag, Abernathy in particular list shows fees of asset management fee 1%, construction management fee 5%, capital CAPEX and TI's and acquisition fee, sliding scale 1.5 % of purchase price. How do I determine if there are other hidden fees that will drag my investment? How are the construction and acquisition fee calculated based on say 100K investment?
That's really a question of how do I make sure that there aren't extra fees in any of these deals I'm working at, not necessarily specific ones on this deal.
Adam Katz (47:53)
I mean, I feel like there are two questions in there. Extra fees, I don't have the answer to that. That's just gonna be something you have to discuss with any sponsor. You know, you're generally signing an operating agreement and signing an agreement where the fees should be spelled out specifically. So there should not be any hidden fees. I do not think that there will be hidden fees on this. In regards to the amount of fees versus your 100,000, you know,
you're looking at 1 % per year as the management fee. The acquisition fee is the upfront costs. And I know there's a scale depending on how much you invest, but I think it's one and a half percent if you're at the 100,000 level. And then the construction fee, I think that's gonna come in when they redo stuff down the road. And then there's going to be the equivalent of carry above a certain threshold.
And so, yeah, you know, the IRR numbers that they project are net of those fees. The cash on cash is not, you know, so if you're getting your 6 % return that it will be offset by a 1 % fee. So, you you always for any deal, you have to look at the fees because if they're saying, oh, you're going to get this amount, you make sure that it's net of fees. And when you look at a building and how it's going to project out,
That's just the building. doesn't count the asset management fee. It does count property management costs, but it doesn't count asset management fee or the acquisition fee or any fees that come at the end.
Eric Cantor (49:34)
I would know you're getting a sponsor here that's vertically integrated. So the people selling you the fund investment are the same people that doing the work. So there's two layers of fees in most deals. Whereas here they're unified. At the end of the day, that business has to make you happy, right? If you're an investor that doesn't make money or gets fees taken out all day, it's not going to be a good business. there's a lot more alignment than there would be in just a fund where they go off to third party sponsors to find deals. Let me do a quick note just on Lightstone.
just definitionally. So Lightstone Direct provides accredited individuals with a new path forward for private market real estate investing. They've done as an institution more than 12 billion of AUM and you can invest in the same multifam and industrial opportunities that they pursue with their own capital. So for each offering on Lightstone Direct, Lightstone co-invests at least 20 % the big commit and brings a four decade track record of delivering strong returns, risk adjusted across market cycles. No middlemen, no added layer fees.
⁓ Lightstone Direct is significantly more aligned, more institutional option than the real estate crowdfunding platforms of the past decade. So that kind of ties into the question you were just asking. Let's try to get two quick answers in to close this. One, Christian just asking, maybe you can just bullet these off quickly. What tools and workflow steps did you use or do you recommend to gather data and break down a deal, this deal, any deal?
Adam Katz (50:54)
⁓ I mean, I think it's always good to have your own model in, you know, Google sheets or Excel or whatever spreadsheet you use, for things like property taxes, you just literally, that, that stuff is all available online. just put in the, know, you find the County, you put in the address, you know, and then a lot of the other numbers, you're to have to rely on getting those from the sponsor in this case, but the seller.
if you are looking at an individual property. And so you have to kind of look, you you get the leases, you look at the rents, and then you plug that into your spreadsheet.
Eric Cantor (51:27)
great. in closing here, I'd love to just sign off with a prediction. know, 2026 is coming up. We a lot of people have a lot riding on today's or tomorrow's decision about interest rates. What do you see coming in the next 12 months? And when we do another deep dive, you know, what do you expect to have transpired? Leave us with some little flash from the future.
Adam Katz (51:48)
Yeah, and I think that that's good because I did want to address kind of like the macro of it all because this this is does not exist in a vacuum like the macro environment is also going to be a big factor on whether or it overperforms or underperforms or whatever. 2026, you know, we were expecting an interest rate cut tomorrow. We're expecting, you know, a couple of interest rate cuts next year. The more cuts, the better because that's going to be a lower cost of capital.
And when there's a lower cost of capital cap rates tend to go down there tends to be cap rate compression, you know, because people are expecting less return. And with cap rate compression, that means property values are going to go up. So I do expect across real estate, but also within industrial within commercial, you know, we've been kind of stagnant over the last couple of years because mortgage rates have been high because the interest rates environment has been higher as that goes down, which it.
it is projected to do over the next year. I think you're going to see property values slowly go up. We're not going to see like a massive exponential gain, but over the course of next year and especially over a five year period, I think that we're going to be in much stronger shape than we are today.
Eric Cantor (52:57)
All right, you heard it here first. Thanks everybody for your attention and time and hope this was helpful. We will follow up with answers to the questions that are more detailed, introductions, to Lightstone and a recording of the session if you wanna share it. And thanks Adam for your time, it a great analysis. Look forward to doing a couple more of these. Thanks Eric. Happy holidays everyone.
Adam Katz (53:14)
Thanks everybody.
