By: Feldman Executive Team
Joe Hamilton: And we are back in the Catalyst studio with Market Catalyst. Joining me today is my landlord, Mack Feldman.
Mack Feldman: Thanks for having me.
Joe Hamilton: Thanks for being here. So Feldman Equities owns a lot of the good buildings here in St. Pete, the majority we’ll say, and and you’ve taken to funding some of your projects with some unique methods, crowdfunding them and making the opportunities open to the public, to accredited investors. So that’s what we’re going to dig into today. So let’s let’s talk about how that first came on your radar today.
Mack Feldman: Yeah, sure. So our very first crowdfunding initiative was actually the Morgan Stanley Tower Building here in downtown St. Pete, right across from the sundial. And really what we had been doing since we got here in St. Pete, we bought our first building in 2010. That’s what we call City Center, everyone else calls it Northern Trust. And that was pretty typical of what we were doing for many years, which is we’ll pair up with a big institutional partner. In that case, it was a publicly traded REIT. We will buy into an office building. We as kind of the boots on the ground guy will co-invest along with our partners. But we’ll really be doing all the day to day work. We put in place a renovation program, really aggressive leasing and marketing campaign, all of which we have in-house, construction in-house as well. So we’ll renovate the lobbies, will install new elevators. We’ll do whatever the building needs to be brought up to a modern standard, and then we’ll bring it to what’s called stabilization. So when we bought the City Center building, the effective occupancy was around 50 percent, it was even a little bit less than that, which is not good in our business. It’s now in the nineties and that took a few years. But it was a really successful program that we then replicated across various properties in Tampa Bay, over in Tampa, here in St. Pete, mostly in the downtowns.
Mack Feldman: But we also in a building up in Carillon and we’ve recently expanded to Sarasota and Fort Lauderdale. So what would happen on those buildings when we had this big institutional partner or a private equity group, as was the case in a few of our Tampa buildings and other buildings here, is they’ve got a stopwatch. They say, I would like to make a certain return. I’d like to hit that return. And then when I do, I want to get cashed out. We are big believers in this city, Tampa Bay, generally Florida as a market. So we wanted to hold on to our ownership and continue to manage these properties, keep them up to date, keep them leased with tenants. That really is our core strength. But when a partner says that they wanted to get out, we want to try to accommodate them. So what we were doing is, or what we decided to do is look for a source of equity that would, one, let us control the day to day operation of the property. A lot of the times that these big institutional partners, they want to approve a lot of different things, slow down our process a bit. Not so we don’t love all of our partners, slow down our process a bit and could be a little clunky at times. So we want something that would give us control over the properties was as inexpensive as possible, cost of equity.
Mack Feldman: And I actually ended up hearing from a friend up in New York that he was looking at real estate crowdfunding. And you can imagine how my dad reacted on that one; older guy, a little skeptical of the Internet. Right. And we had an initial call with these folks and realized that we could actually go out to the market, not just here in St. Pete, but nationally and even internationally, it turns out. And we could collect money from what are called accredited investors. So these are folks with a net worth above a million dollars, putting aside the primary residence or a certain income requirement. And we can bring all those investors in for an average check size of anywhere from 20 to 50 thousand dollars and pool all that money together to buy out those institutional or private equity partners. And these folks typically are more patient in what they’re looking for. They’re looking for more of a steady dividend. They’re not looking for a high yield, high risk return profile. We’ve got a gamut of different investors – some who are really looking for the coupon, some like the appreciation idea. The story in Florida office is so strong. So really, it was a mix of low cost of equity, really giving us control over the property and getting over the initial skepticism around crowdfunding generally for real estate and the many risks that could be associated with that.
Joe Hamilton: Great. And so as investors come in, it gives them an opportunity to access the types of ownership in office buildings that they may not otherwise. This are kind of buried into a REIT, which has a few layers of abstraction issues.
Mack Feldman: Yeah, so that’s exactly right. The big beauty of this or one of the reasons I really was attracted to it is it democratizes real estate investment. These are properties, very expensive buildings that unless you’ve got a couple hundred million bucks laying around, you’re not going to have an opportunity to invest in and access these kinds of returns. These are what we call core assets, meaning they’re downtown great location, good bones in the building, historic great tenants, absolutely. So historically, the only way to get in on that was through. And we have layers of bureaucracy. They have lots of administrative costs and fees that they charge to the properties. And you’re not always seeing a lot of appreciation of the value is mostly a dividend play. We offer both the appreciation and the dividend side. And again, it’s a relatively democratized system. Still needs a lot of work. But the big, big, big thing about what we’re doing is it’s actually the same regulatory structure that’s been around for a long time. So private placement memorandum offering memorandum, all the risks are disclosed, all the deal information is disclosed. The key difference was the 2012 JOBS Act JOBS Act, which basically allowed us to do what’s called public solicitation, Facebook. And we bring in most of our money, believe it or not, through Facebook advertisements, where you’ll see a banner that says invest in a class, a office building and high growth Florida. You click on that link and you’ll actually show up at our website, invest.FeldmanEquities.com, where you can create an account and go from there
Joe Hamilton: If anybody asks. I did. I did tell them it was the catalyst bump that filled up all the building.
Mack Feldman: So we actually we actually did see some really nice investment from that. So I think people love the idea of being able to invest in buildings. They can see they know they know the area. So we love the idea of having a lot of folks in Tampa Bay investing in the buildings.
Joe Hamilton: And then from the return standpoint, how do the returns come out? Do they have a yearly dividend that comes out of the investment? And then is there liquidity before the exit?
Mack Feldman: It’s it’s a great question. So their quarterly dividends and all of our buildings, and I’m very happy to say, even throughout Covid, we made every one of our dividends all the way throughout, which was a little nerve racking for a while. But we did lots of analysis, lots of downside testing and figured out we can sustain it. So far, so good. So this is a question we get a lot. Investors don’t necessarily like the idea of having their money locked in for five years. I mentioned a few dings on REITs. While the big benefit of a REIT stock is you can sell it any day, any time that you want and you can get your cash, how quickly these investments are different. So you make an investment with us. And we estimate typically on every deal about a five year hold. Now, that doesn’t mean we’re going to sell in five years. We haven’t done that yet, but it could mean we do another recapitalization where we’re swapping in new investors with old investors and they’re coming at a new valuation. That’s what we tell our investors is, one, if you have an issue and you really need liquidity, call us. We will work with you. And we’ve accommodated that a dozen times. We can also create capital events to things like refinancings or recapitalization, where every three or four years some investors are saying, you know what, that’s it. We’ll start a whole new Fundrise at that point and we’ll just relaunch it. And we can do that effectively in perpetuity. Hopefully, as long as the buildings keep rising in value. We’re actually up to about thirteen hundred investors across our buildings at this point, which is a lot of management and administration. But it’s been really fun to listen to some of them, hear how they think. These are not unsophisticated folks. They understand investment. They may not totally get commercial real estate, but hearing how people think about it, how they think about the Florida market, St. Pete and Tampa cities has been really fun.
Joe Hamilton: So, you know, with this available to you now, and I think they’re even moving towards opening up accreditation to experts and they have the Reg CF now, which I think you end up to five million with even Non-accredited investors and they raise the individual is now the individual amount up to. But I think you can do up to five million with Non-accredited investors to Reg CF. Now, with with this attractive capital available to you, then how does that change your your your hopeful deal flow? Are you able to go out and be more aggressive?
Mack Feldman: And that’s a great question. So I wouldn’t say we’re more aggressive on deals. What we do really like about it, though, is now that we’ve gone through four of these crowdfunded real estate when we come to a seller of a piece of real estate, which we just did in Fort Lauderdale, we can more or less slam our fists on the table and say we can close on this. And here’s our track record for doing it. The first couple of deals that we do, a recapitalizations, we already own the building. We had a partner who understood the situation, was willing to be patient while we raised the money. We were skeptical of doing it for new acquisitions because when you buy a new building, you’ve got very specific deadlines by which you must perform. So we’ll put down an at risk deposit, and that’s family money, friends and family money that we’ll use to secure the building, take it off the market, and then we’ve got a due diligence period and then some period after that to close.
Mack Feldman: It’s typically 60 to 90 days. So in order to even get our deal listed on these online plans. Forms that will market them for us. We need to have a signed agreement ready to go so all these things are happening at the same time, which can create a lot of anxiety when you’re talking about a million, two million dollar deposit going up and you’re depending on investors you’ve never met from all over the world, actually funding the money timely. We’ve partnered with groups that provide equity to us in those situations. So if we only 15, 15 to 17 million, something like that, we have a partner who is committed to fund that two million. And then we can take a few months after that to backfill his dollars and pay him back out on that. So the answer to your question is yes, it has, but only more recently as we’ve become really credible and we can prove to these sellers, yes, we can close. This isn’t some crazy new fangled idea and it’s reliable.
Joe Hamilton: And if memory serves, the last one was oversubscribed. So you definitely didn’t have the gap equity need there.
Mack Feldman: Yeah. So that was a great deal. At First Central Tower, this building, we actually just recapitalized it in September, which I discovered. Right. We were pretty anxious about that. We put out feelers initially to some of our existing investors to see how people were thinking about office. What we found and what amazingly was actually tracked with market performance is that Florida office in particular, the downtowns in these boom cities like St. Pete Tampa are seeing plenty of occupancy. Rents, believe it or not, are still growing. There’s definitely still some stress. We’re still not totally out of the woods on things like work from home and hybrid. But we got enough comfort from those initial feelers that we could raise the money. We like you said, we actually oversubscribed that one at the height of covid, which we were very, very happy and pleasantly surprised by what’s great.
Joe Hamilton: So as you look across the state, we’ll just focus on Florida. How many other folks are doing this? And do you feel that there’ll be more, you know, more people utilizing this this method?
Mack Feldman: Yeah, to another good question. There are a couple other office owners locally who have used crowdfunding in the past. I do expect it to be probably the fastest growing a real estate equity fundraising out there. There’s been long standing tradition of using broker dealers. They typically charge five, six, seven percent fees on the initial capital raised. We don’t charge anything like that. There are traditional private equity groups. They have the control provisions. They may have their own promoted equity structure carried interest. Some people know it as it’s essentially it’s it’s a bonus that the operator gets if the property’s performance exceeds expectations. So we were actually getting a promote on our promote, which can make our lives a little bit more stressful, as you can imagine. So there are folks that are going to be shifting to this for various reasons.
Mack Feldman: The initial setup is not cheap and it takes a lot of legal advisory work, takes a lot of marketing dollars. We have spent a tremendous amount of time and energy on building up our online profile so that if you Google Cap rate commercial cap rate today, well, one of the first websites that show up on Google Cap rate is a valuation metric that’s very common in real estate. So we’ve put out articles, educational articles on real estate, defining certain terms that are unique to the industry, helping our investors to understand how to look at these investments, mix growing our online presence, getting all the legal side set up and then establishing ourselves on these platforms.
Mack Feldman: We’ve used a website called CrowdStreet repeatedly just building up a reputation that CrowdStreet pool of investors sees that we have been paying our dividends on all the deals that we’ve put up there. Building up that reputation over time has kind of a network effect where we’re seeing more confidence actually on the on the First Central Tower deal. What we saw in that one, which really, really amazed us, is while we were still doing the webinar before the deal was even live, we had an option to invest. We did the webinar for thirty minutes. The deal went live and we actually saw about four million dollars of investments come in before the webinar was even over. Now they had access to the offering materials. They could have read it in advance potentially. But what we interpreted that as, these are previous investors. They know us, they trust us. They saw the building, got a high level understanding and it’s decided to make the leap of faith based on that. So there’s kind of a growth aspect to this where you have to build yourself up reputation illegally on the marketing side
Joe Hamilton: And it just gets easier and easier with each deal. As you get more repeat.
Mack Feldman: That’s the hope.
Joe Hamilton: That’s the whole point. Think that that’s the point is and we’re we’re seeing a lot of that outside of real estate with seed funders… I actually have a meeting in a couple hours to on-board one of seed funders investees on a platform to start engine where they’re where they’re utilizing that Reg CF ability to go out and solicit the masses and their success rate is just like sniffing 100 percent, so it’s definitely the.
We’re not 100 percent, but goals…
Joe Hamilton: Cool. Well, I appreciate you sharing that information with us. It’s no surprise that that you and I are innovating. And thanks for making these these great buildings that that make these buildings great, I should say, because they do form the core of our of our business ecosystem here in St. Pete. And we have a good one. And that’s because we have a great place to operate out of.
Mack Feldman: Thank you so much. Great to be here.
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